The Institute of Financial Professionals Australia (IFPA) has used its submission to the government’s upcoming Economic Reform Roundtable to call for a “complete rethink” of the $3 million super tax.
Calling the roundtable a “pivotal opportunity to rebalance our tax mix and strengthen the superannuation system without undermining public trust,” IFPA head of technical services Natasha Panagis outlined an alternative approach to limiting tax concessions on large super balances.
“Taxing unrealised gains is a dangerous precedent that could seriously damage trust in the system,” Panagis said.
“There are fairer, more effective ways to limit concessions on large balances without disrupting the retirement plans of everyday Australians.”
The main alternative the IFPA put forward to reduce tax concessions for individuals with high superannuation balances in a “more effective and principled” way is through compulsory cashing of excessive balances.
According to the IFPA, this proposal would maintain the original policy rationale of targeting the minority of “mega” superannuation balances.
“We propose that individuals with high balances be required to either withdraw the excess from the superannuation system or convert it into a pension by a certain age,” the IFPA said in its submission.
“As only $2 million can currently be used to commence a retirement phase pension, a separate class of pension could be introduced for the excess amount. This would apply to amounts exceeding a member’s transfer balance cap (TBC), allowing those excess funds to be placed into a separate pension structure without there being a limit on balance size.”
According to the IFPA, this approach would not only ensure large balances begin exiting the super environment in a “gradual, controlled manner” but also enable the application of different rules to excess pensions, such as higher minimum drawdown rates or distinct tax treatment.
“For instance, the government could apply an additional 15 per cent tax on investment earnings in the pension phase for balances exceeding $3 million,” the submission said.
“This would align with the existing treatment of transition to retirement income streams (TRIS), where earnings are taxed at up to 15 per cent for individuals under 65 who have not yet retired.
“Creating a separate class of pension – distinct from standard retirement phase pensions – would help limit the benefits flowing to very large balances, while preserving concessional treatment for the vast majority of retirees.”
While the IFPA argued this method represents a “fairer, more sustainable alternative to taxing unrealised gains”, it also offered up two additional alternatives: taxing withdrawals above $3 million and simplifying superannuation thresholds and caps.
The first of these, it said, would apply a flat 15 per cent tax on the taxable component of withdrawals made from the accumulation phase for individuals with TSBs above $3 million, regardless of their age.
In terms of simplifying caps and thresholds, the IFPA argued that given the complexity of the current system, adding yet another threshold through Div 296 is counterproductive.
“We propose consolidating and streamlining these rules, potentially by aligning the TBC with the $3 million threshold (indexed) while retaining contribution caps but removing multiple overlapping TSB thresholds,” it said.
“This would simplify retirement planning and reduce compliance burdens.”
Panagis added: “We need a tax and super system that delivers certainty and confidence, not just for the next Budget, but for generations to come.”
The IFPA submission has to be the most balanced proposal I have read.
No side can argue that it is unfair or fails to uphold the underlying purpose of the Super system.
The missing link is potentially to amend the definition of commercial property going forward to exclude farm property, while “grandfathering” any existing SMSF farm asset arrangements.
Compulsory cashing hurts farmers and small business owners the same… how do you cash part of a property?
Its simple….. Ask super funds to split their reporting on income per member as taxable/non-taxable.
Then you can apply the 15% tax. OR you could add to their personal income like excess contributions at their marginal rate.
The funds hold all the data on income per member, a simple change in reporting allows us to tax higher balances, but only on TAXABLE income not unrealised gains.
Quite easy really. Say up until 67 keep the property/business in super and then move it into a more appropriate vehicle for tax or estate planning purposes.
But I agree with your premise that unrealised gains SHOULD not be taxed. Next we will start taxing money the government thinks you should have. This whole fiasco has arisen because the funds said they couldn’t provide the reports. That is simply ridiculous. They are required to report members income each year. How else do members know what their balance is and how much of it came from contributions and how much from fund income.
But then that’s a realised gain to the SMSF, which incurs a (potentially) significant tax liability. Where does that cash come from?
Great thought leadership
I have always thought that superannuation policy should be designed by the experts in the field rather than by dumb politicians and their advisors with no experience in super or business.
The fundamental problem with both the transfer balance cap and the new Div 296 mess is that it only applies to a small minority of people, but requires that systems and reporting processes be put in place for everyone (and which costs everyone real dollars to create and maintain). So, in reality, everyone IS paying a “tax” by being subjected to these extra costs. The very definition of poor policy design.
And the whole reason for Div 296 as per Chalmers was to save the big industry funds from having to change software and in effect having to pass on costs to their members. Treasury insisted that this was not going to affect these big funds after they consulted (with only them by the way). What an absolute mess. Of course, anything government turns into a mess and a whole lot of red tape. Happy days as per usual!
The whole reason is to raise revenue now while setting a precedent for taxing other assets before realisation. Anything else is a smokescreen.