While the SMSF Association has expressed cautious optimism, the Institute of Public Accountants said the government has “put the cart before the horse”.
Tony Greco, general manager technical policy for the Institute of Public Accountants, said even before the government finalises its objective for superannuation, it has decided to hack away at a select small group of individuals with retirement balances considered excessive.
“Changing the goal post for superannuation rules creates no confidence in the system which ideally should see changes as infrequently as possible,” he said.
“We have now seen the discussion paper which surfaced last Friday covering the proposed tax to apply on balances above $3m.
“It’s like peeling an onion, we now know a little more but there are still many uncertainties on the design which is now the subject of consultation.”
Mr Greco said of the things which has been revealed from the proposal is that the $3 million super tax can be applied to an opening balance of less than $3 million if the balance exceeds this amount at the end of the year.
“This will therefore catch more individuals into the net,” he said.
“For example, Tim has an SMSF with a TSB on 30 June 2025 of $2.8 million. He makes $10,000 of concessional contributions to his superannuation fund over the 2025–26 financial year.
“After the 15 per cent contributions tax, Tim’s net contributions are $8,500. Tim has some strong investments in his SMSF and his TSB increases to $3.2 million by 30 June 2026.
“Tim’s earnings are calculated by subtracting the value of his contributions after tax, from his closing TSB, then taking the difference between his opening and closing TSB. As Tim’s opening TSB is less than $3 million, for the earnings calculation this will be replaced with a $3 million value.
“Earnings = ($3.2 million – $8,500) – $3 million = $191,500.”
Mr Greco said taxing unrealised losses, and no CGT discount relief remain in the latest proposal and even more concerning is that there is no symmetry for years when the growth in the TSB goes negative.
“It stills look like any tax prepaid in a previous year is not refundable but can be used to offset a future positive increase in a members TSB,” he said.
“The Government takes your money with no assurances that the member or their nominated beneficiaries will ever receive this benefit.
“It’s akin to a casino when the house never loses, and the odds are stacked against you.”
He continued that taxing unrealised losses is a huge departure from established tax principles and asset rich, income poor individuals which will include small business owners who have their business assets in an SMSF.
“They somehow have to find the cash to fund the new impost which will displease impacted members given that there has been no actual realisation of the asset, that is cash,” he said.
Meanwhile, the SMSF Association said conveying a strong desire for a “simple” approach, the paper confirms the government’s preference to use a member’s total super balance (TSB) to calculate earnings for the purpose of the proposed new tax.
“We understand the attraction of this approach, however the fact remains there are various items included in a member’s TSB which, for reasons of fairness and equity and to avoid unintended consequences, should not be subject to this new tax – and top of the list is unrealised capital gains,” SMSF Association CEO, Peter Burgess said.
“In this regard, it is pleasing to see the consultation paper seeking feedback, on what modifications should be made to the TSB calculation for the purposes of estimating earnings.
“It is also pleasing to see the paper seeking feedback on alternative methods of calculating earnings on balances above $3 million – in our view there are alternative methods that could be considered, and it is important these are appropriately aired along with the advantages and disadvantages.”
Mr Burgess said that although the consultation paper states that this new tax should apply to SMSFs and large funds in the same way, including unrealised gains, it “unfairly targets” SMSFs considering their exposure to direct property assets.
“The paper notes the obligations for trustees to properly formulate an investment strategy, but it’s important to recognise that it’s not against the rules for an SMSF to hold most of its assets in a single investment,” he said.
“The legislation requires trustees to consider whether the fund is adequately diversified given the risk profile of members, the fund’s investment objective, and the cashflow and liquidity needs of the fund.
“Before the announcement of this new tax, it would not be fair or reasonable for the trustees to have envisaged the payment of this new tax, which, in some years, could be substantial. “It’s generally not possible to sell part of a farm, for example, so the imposition of this new tax may, in some cases, require the property to be sold causing business disruption and triggering what could be substantial transaction costs.”
He added, the SMSF Association has already seen some case studies where this would be the likely result.
“Given the Government’s desire for a simple approach, we believe there is an opportunity to revisit and fast track the previous Government’s announced, but not yet legislated, two-year amnesty period for the conversion of certain defined benefit pensions to more conventional style account-based pensions,” Mr Burgess said.
“For large funds, the Government is grappling with how to value these pensions and calculate earnings for the purposes of this new tax, however, similar issues apply to SMSFs with lifetime and life expectancy pensions. Allowing a two-year amnesty to convert these pensions to more traditional style pensions would simplify things at least for these members.”
I have used our last 2 tax returns to calculate what this tax would have been like for my husband and myself as an example. The combined tax adding in the SMSF tax on taxable income would have been 46.8% (as a share of taxable income, excluding unrealised CGT) – far more than the reported 30% being of course because of the expanded definition of earnings to include “unrealised capital gains”.
We are now close to retirement and all of our savings are in our SMSF other than our home. Once we start drawing a pension from our SMSF, we will soon run out of cash and be forced to start selling down assets.
This is a very harsh tax on a small group of people. I fail to see how by any measure that this is fair. I have been saving for my retirement since I was very young so that I could stay in my home, with (self-) paid help, and access to medical treatment if needed etc, without relying on anyone other than myself, and without having to sell my beloved family home unless or until I was ready. That will be in tatters now if this gets through in the current form.
I would think that many SMSFs could generally calculate the unrealised capital gains and can easily supply this information. Therefore, seeing as though it is mainly SMSFs that will be hit by this tax, why can’t we supply this information to be accounted for at the end of every tax year? It will be an onerous task to account for the tax on unrealised capital gains assuming that there will indeed even be an allowed credit on the CGT when the property is actually sold.
Jim Chalmers wanted a conversation on tax in Australia. He is getting his wish.
This is extremely stressful for myself and my husband. As most of our assets are in property, there is not a lot we can do, but retire ASAP and try to move property to a fairer system for taxation purposes instead of one that taxes us at almost 47%, paying capital gains sooner than we had anticipated in the process, but better that than the alternative. In that way, we also get more control over our own future as the government is making superannuation a very unattractive savings mechanism.
Surprisingly, some of the young Gen Y and Gen Z clients at my husband’s gym have been discussing this issue also. They are aspiring individuals hoping to one day be financially independent. They are seeing superannuation as a place only for employer contributions. They see the writing on the wall and do not want to put extra into super as they do not want to lock up funds and have the rules changed at the government’s whim.
I never dreamed of a situation where I would be paying a tax anywhere like this. Our fund has never had a loss year and every year we see unrealised capital gains. Partly why we have moved into this >$3m threshold, but it is also a lot of work. It is certainly not set and forget.
Thank you for your articles. They are generally always of interest to me.
The only proper way to introduce this new tax is for it to abide by established taxation principles. This means taxing taxable gains only. This would require changes to trustee software which Treasury wants to avoid for the sake of simplicity. The choice is to cater for simplicity now – and embed a permanent and major flaw – or do it right. Also, it is disturbing that Treasury seeks to justify an unindexed cap on the basis that other caps are unindexed. All caps should be indexed. A mistake doesn’t cease to be so simply because it’s been made before.