Former Westpac director of pricing, Kerry Gore, formulated the proposal, prompted by remarks that Prime Minister Anthony Albanese and Treasurer Jim Chalmers made in a June stand-up press interview that implied no other proposal to the controversial $3 million super tax had been received.
“A proposal that would also need to consider the sustainability of the budget (balancing it), the clarity of the taxing processes (reducing disputes or community complications), and the broadest perspective on equity and fairness,” Gore told SMSF Adviser.
Gore’s ‘Alternative 2 Division 296’ proposal uses a different approach to calculating interest compared with the stepped interest approach.
“Consider a term deposit at a bank. The interest rate mentioned is for the entire amount of the deposit; if the deposit is for a longer period of time or for a bigger amount, the interest rate may be different, but it will still apply to the entire amount,” he said.
“Just as a term deposit is a savings account backed by the bank’s asset investments, so too are superannuation balances backed by the superannuation assets. The whole interest on the entire earnings amount paid (realised) during the year is applied when taxes are levied on term deposit earnings, or interest.”
He said applying interest rates and calculating return on assets were key components of his more than 40 years in the financial services sector, and, in many respects, ‘Alternative 2 Division 296’ is simpler.
“It simplifies the actuality with mathematical clarity, lowers compliance expenses, and makes calculating variable assets less complicated.”
“Modelling improves the budget’s bottom line while streamlining the ATO and tax collecting procedures and improving just a small part of the budget’s sustainability.”
Gore said offering ‘Alternative 2 Division 296’ in July this year was only opportunistic, and a good way to address the claims that neither the Prime Minister nor the Treasurer had received an alternative proposal, implying that nothing submitted had produced the same or better results for the budget.
He added he is not expecting a formal response beyond the requests already made for further clarification and the offered modelling.
Gore said his proposal is not only simpler but would also enhance the ATO’s efficiency of tax collection.
“There are several simplification factors compared to the Division 296. One simplification is for APRA funds and SMSFs as the reporting of member balances and realised earnings would stay almost the same.”
“And the base rate (being a tax on the fund currently, and that stays) now coded at 15 per cent would be updated to an applying rate of 20 per cent. There would be no additional tax, taxed separately on the member for the added 15 per cent on realised and unrealised gains for balances above $3 million.”
Furthermore, he said, APRA funds and SMSFs have their ATO reporting timelines and already forward the tax on the funds to the Tax Office.
“The ATO is the central source of visibility of tax file numbers and the collation (addition) of numerous superannuation accounts, across multiple APRA and SMSFs for members by tax file number.”
“The discount would be calculated on realised earnings at the time of tax file completion for members (or by rules where no tax return is received) with aggregated balances under $3 million.
“Compared to a wider requirement to value unrealised assets and the complexity of valuation compliance, accounting and record keeping that would withstand scrutiny, the ‘Alternative 2 Division 296’ is neat, simple and clears red tape.”
The lack of indexation is one of the main concerns for many who oppose the current draft legislation, and Gore said his alternative proposal has addressed this issue.
“First off, before the CPI or other computations were used to estimate increases, the ‘Alternative 2 Division 296’ proposal had a more favourable budgetary impact than the Division 296 proposal.”
“Therefore, ‘Alternative 2 Division 296’ did a great job modelling even without indexing. The indexation analysis, which even compared the indexation that was already in place within the superannuation products, such as the indexing methods for Transfer Balance Caps and even deferring indexing caps for pension payments in certain superannuation products, showed that the budget’s revenue continued to increase proportionately.”
There are many different types of indexation models, and it makes sense to use “tried-and-true indexation techniques” from other superannuation products rather than developing brand-new ones.
“As stated in the methodology response, the modelled deferred indexation makes sense because it strikes a compromise by increasing when the aggregated annual CPI hits a trigger rather than ‘every’ year, which is already the case for superannuation products where indexation is applicable,” Gore said.
Reports in mainstream media earlier in the month suggested the Greens were actively looking at Gore’s proposal before meeting with the government to discuss the legislation. Those meetings were expected to take place this week.
“The Greens said they were considering the alternative, and I respect their determined integrity, independence of their own analysis when considering an alternative,” Gore said.
“The ‘Alternative 2 Division 296’ submission was late – out of time within due process – but submitted based on the claims that there was no other alternative that produced revenue collection and member fairness. It was submitted under those conditions.
“After a number of enquiries from the analysts evaluating the alternative, the explanation of the modelling was added to the previous 34-page summary, which was last week provided as a 57-page document to the Greens, the Labor party and the Liberal party.”
Gore added that as part of the alternative proposal, he had included analysis of the challenges the ATO and larger super funds may face if the legislation is passed without amendments.
“The first 20 pages of the ‘Alternative 2 Division 296’ started with such challenges. Understanding that ‘Alternative 2 Division 296’ continues the common practice of taxing realised earnings, excluding the taxing of unrealised earnings.”
“Taxing unrealised earnings introduces, without intending to be alarming, unanswered industry-wide complexity.”
The list of topics that would not carry forward if ‘Alternative 2 Division 296’ is incorporated includes:
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Considerations of continued treatment (ring fencing) of franking credits.
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An undefined treatment of capital gains tax when assets are sold as such asset may have already been taxed within a fund.
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Definitions of earnings and its widening implications.
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Unrealised asset valuation disputes.
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Liquidity profiles within smaller funds changing to provision for annual taxation (decreasing member returns).
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LRBA grossed-up reporting.
“This is just a short list of a long list. Although it is uncommon for policy input to be taken into consideration outside of the public consultation period, based on the consideration and present analysis over the last couple of weeks, a thorough examination (but no decision) of an alternative appears to be underway,” Gore said.
“Without any political bias, the current checking and validation by the supporting analysts and policy advisors is encouraging and demonstrates every effort to put forward the best option, whatever that conclusion may be. We respect the due process.”
I am so over the ignorance and blind following of people for the Labor party. They obviously do not understand the nuances of what is happening here. Otherwise, they just want to line their own pockets from the hard work and sacrifice of a few.
Fact – the top taxpayers pay most of the tax, enjoyed by the majority in handouts. I saw it reported on the weekend that more than 50% of Australians get more than half of their income from government handouts. This is not sustainable. The issue is government profligate spending which is not being addressed.
The proposed Division 296 is much simpler than this proposal. It just goes about it in a ham-fisted way by taxing unrealised market movement.
The ATO already receives member balance information, contribution and withdrawal data for every superannuation fund member in Australia, for both large and small funds (look yourself up on MYGOV). This has been the case for decades.
It’s obvious that some IT boffin in Treasury/ATO told the officials and politicians “yeah, we can do that easy on existing data” and everyone said “ok, let’s do that” and went home.
Taxing unrealised gains was just an unforeseen happenstance. But now they are stuck with it or risk losing face.
If the country is indeed in such bad shape as to need this, simply raise super fund tax from 15% to 17% or 19% for the next 5 years and be done with it.
If the intention of Division 296 is just about sticking it to the rich, and incentivising them to reduce their super to a reasonable level, then I don’t have a problem with it in its present form.
You can’t be serious Bruno “I don’t have a problem in it’s present form”?? Do you work in Chalmers office? Your the only one that thinks this. Either that or you are being sarcastic and I missed it.
Simply lower the limit to the TBC ($2m) which will be indexed, then make it on fund income (i.e. not unrealised gains) and everyone (almost) would likely support it. I would.
The only losers are the union funds as their antiquated master fund structure and poor IT systems can’t cope. As they sponsor the unions and the unions sponsor the Labor Party guess what’s not going to happen.
Like a lot of people, you are only thinking of SMSFs where taxable income is ascertainable. Remember, Div 296 is a personal tax, not a super fund tax. Net “fund income” is allocated to members in APRA funds and includes income received and unrealised gains, and this tax applies to Australians in big & small funds.
You can have $4M as a couple invested in pensions with tax free earnings. Anything over $2M is taxed at 15%. You are only entitled to a reasonable level of taxpayer funded retirement. I think that’s good enough for you.
Unlimited tax concessions are a cost the the taxpayer funded revenue and the country. If you don’t want to pay Div 296, take super out and invest it personally and pay 47% at personal marginal rates. That will be much better spent on hospitals, roads and bridges, than making you richer.
Is that you Jim?