Deanne Firth, director of Tactical Super, said a recent SMSF audit “perfectly illustrates” the severe financial risks the controversial tax could impose if passed through the Senate with no amendments.
The Senate sits next week and according to a preliminary schedule, the legislation is expected to be debated in the first week of the last session of Parliament for this year.
Firth’s example of how the tax will impact an SMSF involves a fund that held a stake in a mining company. She explained that if the Div 296 tax was already in play, this investment choice would have cost the client not only his superannuation but also his house due to the unfortunate timing of a large unrealised gain followed by a massive unrealised loss.
Firth explained that the member’s balance had grown and was sitting comfortably above $3 million on 1 July 2022 due to the mining investment’s performance.
“Under the Div 296 rules, if they had applied at this point, the member would have been subject to the additional tax, given their balance exceeded the legislated threshold,” she said.
By 30 June 2023, the mining stock value spiked and the SMSF’s unrealised gains were more than $7.7 million. However, by 2024 the stock’s value had plummeted, leading to an unrealised loss of $10 million in the fund.
“The timing was what truly turned this into a nightmare scenario. By the time the fund’s financials for 2023 were finalised, and the Div 296 tax notice issued, the stock value would have returned closer to its original levels,” she said.
“Despite this, the Div 296 tax would still be due — effectively representing 40 per cent of the remaining balance of the SMSF.”
To pay this tax, Firth said, the fund would have been forced to liquidate most of its assets, with the mining shares at the core of the issue potentially unsellable due to their sharply declining value.
She added that the other assets in the fund would not have covered the Div 296 liability.
“Here’s where it gets particularly concerning: Div 296 tax is a personal liability for the trustee. In this case, the member, already retired, doesn’t have an extra $1.1 million in personal assets to cover the tax.”
“This leaves them with a single option — selling their family home to cover the balance of the tax.”
Firth said if the proposed Div 296 tax was in place in 2023, the member would now face an unsettling outcome: zero super, no family home, and a worthless carry-forward loss of $10 million in an SMSF with an empty balance.
“They would be left with no choice but to rely on the government for pension and rental support, all due to the timing of an unrealistic stock price spike.”
“This case illustrates just how unfair the proposed Div 296 legislation can be and why taxing unrealised gains is not appropriate. It highlights the pressing need to remove unrealised gains from Div 296 tax as temporary market swings can leave members and trustees financially stranded by short-lived gains.”
Treasury’s ego may be at play but good leadership recognises issues and corrects for badly designed plans. That is how good business works.
This formula and proposal is fraught with so many issues and has been called out from the start. How we are still here, some 19 months later with barely any changes, and created just to suit the large super funds, beggars belief. If egos are the issue here, these people should not have the power that they have, and they should be removed, and long ago. They have been arrogant about this since before it was announced using examples of perceived unfairness to justify the taxing of paper profits on far smaller lifes’ savings for Mum and Dad investors. As realised capital gains are already taxed, why is Treasury intent to tax paper profits?
Treasury is obviously desperate which is a worry in itself.
BTW – capital gains tax relief was initiated to make up for inflationary effects. Like for like, if you purchased a property 20 years ago, and want to swap it out for a similar property of similar growth over the same period you will be far worse off, taking into account stamp duties paid and capital gains tax paid.
I don’t think anyone has made a cogent argument that $3m is enough at 15% rate of tax and higher tax on very high balances is generally agreed as being ok. The government and treasury though have simply lost the plot on how to tax it.
It’s simple stupid, just tax the actual income. We all know this is due to large funds, especially industry/union funds, don’t have the accounting systems to manage to tax actual asset income in their master trust structures. Hence the dumb idea that results in taxing unrealised gains.
Therefore if members have over $3m, they can be forewarned and simply role their money out to an SMSF or APRA regulated fund and the actual member income can be determined. We’d have to send out at 5 letters to people in an industry fund that have over $3m let’s be honest!!
No tens of millions on software up and no ruining people who are otherwise doing the right thing.
Why does the government and treasury have to be so belligerent on this blatantly unfair legislation?
Every single professional body has spoken out against the current draft legislation yet government knows best! 1984 is starting to become an all too, and not welcome, number these days – with apologies George Orwell.
There will be so many ore of these examples coming forward over the next few years. Hopefully the legislators are listening!
Perhaps we should take a step back and look at the investment which is being undertaken and its appropriateness in a tax privileged superannuation environment. If the super is intended to be about supporting a person in retirement then a prudent response to the very large gain should have been to cash out and take the gain and reset to a more conservative investment approach having secured a comfortable retirement, rather than letting it ride in the hope of making even further gains.
I appreciate that others may not agree with this approach but just presenting a “pub test” view.
Totally agree – is it an “appropriate investment”? Depends on members age I suppose – which wasn’t advised. Should have taken the huge capital gain when it presented. Greed is a powerful motivator and hindsight is wonderful.
There at least should be a provision to claim back tax paid when values drop.
Maybe an averaging shceme that creative artists and farmers are able to access is the answer.
https://agsc.org.au/resource-income-averaging/
https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/primary-producers/in-detail/tax-averaging-for-primary-producers
I think there can be a happy medium. It not so much that unrealised gains are taxed that is the issue in Deanne’s example, rather it is the fact that subsequent losses are just carried forward. Similar to previously used loss carry back rules in companies it would be reasonable to suggest that if Div 296 was paid in a prior year, and then a loss occurs in a subsequent year then a carry back capped at the amount of Div 296 previously paid be available.
This risk has been obvious to those likely to be affected from the time that div. 296 was first proposed, so must be obvious to the mps who introduced it and the advisors who concocted it. Would have to be quite limited technically to miss it, which I hope is not the case with our current parliamentary representatives. The alternative, where they have noted this and continue to forge ahead regardless, would make them even less suited to be in a position where they have any influence over people’s life savings, however.
Thanks Deanne for bringing this example forward. Treasury was keen to see real examples of implications and this seems like the perfect scenario. Whilst it could be argued that a lumpy investment strategy is to blame here, there are no laws to prevent the trustee selecting their preferred asset allocation providing they have laid it out a considered investment strategy. And the key here is that investment strategies in place are based on the law as it stands. The introduction of this new law that will see the taxing of unrealised capital gains may see trustees rethink their strategies in the future. It has been said that there is the potential for SMSFs to become more risk adverse and choose a more defensive asset allocation over growth as a result of this new tax. The unintended consequences for a SMSF are real and well understood. This should be enough for a Treasury re-write. However, this is unlikely to happen. The premise of the design of Div 296 is that APRA funds can manage it without significant systems build etc. And, although they hold the bulk of superannuation members, these members are likely to be the least affected by the new tax. It is the defined benefit fund members and SMSFs that are on the front line with Div 296. Defined benefit fund members received a Regulation to carve out some aspects of this design, SMSF also need Regulations. Treasury’s ego is in play and (for them) the design of the formula needs to stay in tact. So, let’s take the side-step and build Regulations to accommodate SMSFs. The accounting methods and the closely held nature of SMSFs are the perfect settings to allow for some manual adjustments to arrive at the correct tax base for the Div 296 imposition. And it will be up to the trustee whether they are prepared to absorb the additional compliance costs to arrive at a taxable income for the additional tax. I am sure if the SMSF trustee in Deanne’s example had been asked, the answer would have been a very clear – do what needs to be done!
Wow. That’s a compelling example of why this bill should not proceed.