The knock-on ripple effect of the proposed $3 million super tax on the broader community is going to considerable especially in sectors such as small business, farming and even health, according to the peak association.
According to the latest ATO statistics, as at 31 March 2023, SMSFs held $88 billion in “non-residential property” which represents just under 10 per cent of all SMSF assets.
“Included in this figure would be farms, and business premises held by vets, chiropractors, physios, surgeons, GPs and pharmacists, just to name a few,” said SMSF Association CEO Peter Burgess.
“So the knock-on or ripple effect of this new tax on the broader community could be considerable and is yet to be quantified.
“It’s not difficult to envisage small business operators having to pass on the cost of this tax to consumers or having to sell their business premises.”
The sentiment is supported by the National Farmers’ Federation which warned that superannuation changes could cool investment in agriculture unless the detail is worked through with farmers.
“For many farmers, their farm is their superannuation, and it’s not uncommon to hold land assets in superannuation – particularly as the next generation enters the business,” said National Farmers’ Federation CEO Tony Mahar.
Mr Mahar said the uncertainty created by this proposal risked chilling investment in an industry crying out for capital.
“Research from AgriFutures Australia shows that Australian agriculture needs an additional $3 billion in capital investment each year to reach our target of $100 billion in farm gate output by 2030.
“Now is not the time to dampen investment in one of Australia’s growth industries that creates jobs in regional Australia and plays a central role in our transition to a low carbon economy.”
And those working directly with clients are finding there is a lot of concern about what the future may hold for their businesses, their farms, or even their spouses.
Chris Smith, director of VISIS Private Wealth, said the belief that the new tax will only affect a small percentage of people is misguided.
“They [the government] aren’t talking about personal circumstances, they’re only talking about account balances,” he said.
“It’s easy for people to say on twitter or social media, ‘they’ve got $ 3 million, you have to pay’.
“It’s a terrible tax and it is breaking a promise but it also tells you where the Government is going with their policy.
“Although it’s at least 18 months away before the first of the new proposed taxes kick in we’ve already started thinking about it.
“We’ve got some clients that are going to be impacted by this and for different reasons. Some of them may have more than $3 million in their super but not one of them is exploiting society – they shouldn’t be judged by their balances.
“We have started building some financial modelling but the lack of detail from the government and what finally makes it into legislation may be different.
“The mechanism is so unclear and some clients are already thinking about moving their assets outside of super, but for farmers that will incur stamp duty as well as CGT and is forcing people into a situation they shouldn’t be in.
“Clients are concerned, not fearful, as we don’t yet know exactly what we will be dealing with, but they are starting to worry about what this means. We have clients with commercial properties and those with an LRBA loan agreement who need cashflow to help with loan repayments. If you throw in another tax on top, they may be forced to sell assets and look at wind-up strategies.”
Lyn Formica, head of education and content at Heffron, said when she is having conversations with accountants, they may not consider someone with a $3 million super balance an “ordinary” SMSF member.
“But they are people who have done well for themselves and are potentially being penalised for that,” she said.
Ms Formica said she believes the sector will have to divide clients into two categories – those who have made good wealth in SMSF and have already grown a lot in value who may not be impacted so much by the proposed tax, and those clients who are expecting future growth in their assets, such as small businesses or farmers.
“It’s these clients that will most definitely be hit hard by the proposed tax,” she said.
“They can’t take the money out unless they have met conditions of release such as if they are retired and if a lot of their SMSF is tied up in assets they are potentially a bit stuck.
“If a property they may own goes up in value even though they may not have a tenant, they will be taxed on the that growth and that is more borne out with farming properties.
“They can skyrocket in value without an increase in income yield. It is the liquidity that is the biggest problem with this tax and people being forced to pay tax on a gain they haven’t yet made.”
Ms Formica said in conversations with Treasury over the proposal, the industry and associations had raised the issue of allowing SMSFs to build up a debt in account as an alternative but said there has been no response as yet.
“We already have system for it with Division 293 and the proposed tax is modelled on this – it is the same concept,” she said.
“Once we have the draft legislation then we can start doing forward planning to find a better tax structure for this money and changing the tax structure in regards to estate planning outcomes.
“We have lots of queries from clients coming as well as from accountants and advisers. All we can say is that it will take some time to do that planning and for the moment let’s sit on assets we do have inside super.
“All the conversations I have had with clients is that they are quite happy to pay extra tax just not on unrealised gain. They are happy to do their fair share it’s just the method the government is using they are opposed to.”
This proposal is something that our SMSF is very concerned and worried about. Based on the last 2 tax returns for us, it will mean paying more than 3 times the current 15% that we paid last year. This is because of the changed definition of “income” to include unrealised gains.
I am guessing that the government may prefer these funds outside of the super system, which is fine, but to get the funds out will be impossible for some, and will require a lot of very complex negotiating for others that are able to access their superannuation.
Obviously, if paying more than 300% tax than we presently do, it behoves us to do something if we can, as the tax is punitive and even in our own names, the tax rates are more advantageous than under this proposal, remembering that there is a flattening of the rates, and that the income tax rates will be adjusted for bracket creep in 13 month’s time.
But until the changes are legislated, there is really not that much that can be done except to go through trust deeds of relevant entities and look at options and prepare for the worst, hope for the best.
I agree that most seem to accept that 30% tax on realised income seems to be acceptable. What is not acceptable is the tax on unrealised gains, which are based on pie-in-the-sky valuations for one day of the year, not taking into account legal fees, agency fees, capital gains tax etc. The valuation is in no way reflecting the true valuation of cash in the bank once assets have been liquidated.
My common sense brain says that the proposal is fraught with so many issues and can’t get through on equity or fairness grounds, but we are talking about a government that sees superannuation as easy offerings for the picking. We can’t access it unless we are retired, but with this legislation, the government can raid it, and raid it they will.
For many, this will mean a lot of unwinding for an orderly exit. Yes, we are in limbo and time will be of the essence if it is passed. The government obviously doesn’t care and is probably taking great delight in the angst that this has caused.
For those unable to move assets, this is robbery – the government encouraged us to save, had the savings locked in and now can raid it as they wish.
Can I also point out that the $3m threshold that was announced on 28th Feb to come into play on 30th June 2026, if this goes ahead, is already worth a lot less than it was just 3 months ago. With our current inflation, imagine what it will be worth in real terms in just over 3 years time. So many people will be caught up in this mess.
Thank you for your article.