In a recent article, SMSF Alliance principal David Busoli said while there has been a lot of contention surrounding Treasury’s proposed earnings tax calculation for the proposed $3 million threshold, there hasn’t been much focus on alternative strategies in the discussion.
Treasury released the details of its calculation for the threshold in a fact sheet earlier this month.
“Their methodology was not based on taxation principles at all. Instead, it applied an algorithm to a change in the member’s total super balance. This is not a tax, it’s a charge,” said Mr Busoli.
Discussion around the proposed calculation has been focused on the unreasonable taxation of unrealised gains, but there hasn’t been much analysis on whether alternative strategies would improve the end result, he noted.
“As the ATO is the only source of consolidated fund information and, in any case, the superannuation sector would not tolerate an additional administrative burden, the ATO has, quite rightly, been given the responsibility of administering this proposal,” explained Mr Busoli.
“This required Treasury to consider what the ATO was capable of, considering the data they hold. The ATO holds individual member total super balances, contribution and withdrawal information across multiple funds. They do not hold individual member investment or taxation information.”
Mr Busoli said this left Treasury with only two alternatives, creating an algorithm intended to emulate an additional tax, as they have, or adopt a deemed return method.
“Under an alternative deeming method, a rate would be applied to any member balance in excess of the $3 million cap. A 15 per cent tax would then be levied on the result. This method would justify the taxation label, but would it be better? It depends,” he stated.
The deeming rate used would significantly affect the outcome, he noted.
“My favoured rate is the 4.7 per cent Div 7A rate, but I suspect Treasury would prefer the much higher (10.46 per cent) GIC rate. Compared with the current algorithm, there would be winners and losers,” he stated.
“In a year of market downturns where the member’s total super balance would decrease (but still be over the cap) deeming would result in a tax bill in contrast to the proposed algorithm that would not. My own analysis of the differences leads me to believe that, in general, the current algorithm produces the more favourable result for the member.”
Mr Busoli noted that the proposed design still contains numerous shortfalls that need addressing.
“However, our discussion must focus on what is administratively possible as well as what is equitable,” he said.
Neither method is fair as unrealised gains would be included in both proposals.
The only fairER way for this “simple” approach to a new earnings surcharge to be calculated would be to keep the formula as designed by Treasury and discount the calculated notional earnings amount by, say, 50% prior to applying the additional 15% tax at member level. Under this approach, the unfairness is somewhat diluted and means, for now, no systems changes are required. (Systems changes will be required over time due to this new earnings surcharge growing like topsy and moving from being a fringe issue to becoming mainstream.)
Looking at what is reported by APRA Funds for members via the MATS system – there is no pension payment requirement listed. How is this fundamental aspect to the “simple” formula being accommodated for those members?
Note that the Div 7A interest rate will rise to 7.5% from 1 July.
Note that the Div 7A rate will rise to 7.5% from 1 July.