Analysis concedes SMSFs may need to sell assets to pay super tax

Ben Phillips, associate professor at POLIS: The Centre for Social Policy Research at the Australian National University, and Richard Webster, a senior research officer at POLIS, used data from the latest three ABS Survey of Income and Housing files (2015-16, 2017-18 and 2019-20) to better understand the ability of high-net-worth individuals and households to pay the additional impost of Division 296 tax.

“A concern raised by some relates mostly to the shift from taxation of realised capital gains to unrealised capital gains. The standard way in Australia to tax capital gains is taxing capital gains at the point of sale rather than taxing the estimated returns on an annual basis regardless of whether assets were sold or not,” the authors said.

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“A concern would be that some households may not be in a financial position to pay such a tax impost. The most likely households/persons adversely impacted would be those who have large superannuation balances (greater than $3 million) where the assets are illiquid and also have limited income or other assets to cover the new tax liability.”

The analysis provided a typical example of such an illiquid asset, which could be a superannuation account heavily invested in a family farm.

“This sort of arrangement would be more likely in an SMSF. To understand households with super balances over $3 million and estimate their vulnerability to large tax liabilities they may find difficult to pay, we consider the types of assets and total value of assets along with disposable income of such households,” it continued.

“Our interest is not just the wealth of the individual but that of the entire household. It is common for households to share resources, expenses and income. Of course, there will be exceptions to this but our interest in this report will cover the likely possibility that large superannuation account holders will share resources and expenses.”

It continued that tax liabilities can be covered not just by the one superannuation account but across a range of assets and income sources held by the account holder and other members of the household, in particular, a spouse.

The results of the analysis aligned closely with Treasury, with an initial estimate that the 30 per cent tax on superannuation income would impact around 87,000 persons, with total revenue expected to be around $1.95 billion per year from 1 July 2025.

However, the authors did qualify this is based on the assumption that there would be no behaviour changes from individuals with large super balances.

Based on data from the Australian Bureau of Statistics, the analysis revealed that “large super” individuals tend to live in very high wealth households, mostly in capital cities and are generally over the age of 65. It also found that a majority don’t work (54 per cent), and those who do mostly work in professional occupations.

The majority of large super individuals also own their house outright and their average and median wealth levels are 12 to 13 times that of the general population. The average and median disposable income levels are much higher (around three times) the national household average.

“The analysis cannot be definitive on the types of assets held within large superannuation accounts. It would be expected that like most superannuation accounts large accounts would be well managed with a reasonable spread of different asset types and enough liquidity to ensure liabilities can be met where required,” the authors said.

“With that said, it is likely that some superannuation accounts may not meet such an expectation (particularly in SMSFs) and it is possible that tax liabilities may pose some challenges to account holders, either meaning they need to find funds outside of their superannuation accounts or may need to take the more extreme step of selling non-liquid assets.”

The authors continued that, based on the crude stress test applied in the research, it would seem that even when excluding the large super account as a potential funding source, almost all of these households would have substantial funds elsewhere to cover potential tax liabilities incurred through “unrealised capital gains” in the large super account.

“The reality is that in almost all cases, a household with one large super account has other substantial sources of income and or wealth. The research undertaken focuses on a simple statistical summary of the financial position of households, particularly for households with superannuation balances over $3 million,” they added.

“The research does not attempt to critique the pros and cons of the proposed policy, however, it does provide evidence that the impact of the extra tax would likely be relatively easily absorbed by the vast majority of impacted households.”