Treasury released a Fact Sheet on Wednesday (1 March) explaining the details of how tax on earnings will be calculated.
SMSF Association chief executive Peter Burgess said the good news about the fact sheet is that it means super funds, including SMSFs, will not be required to calculate the earnings attributable to the member’s balance above $3 million.
“The ATO will use a prescribed formula to calculate the proportion of total earnings which will be subject to additional 15% tax,” explained Mr Burgess.
“Negative earnings can be carried forward and offset against this tax in future year’s tax liabilities,” he said.
However, on the debit side, the ATO will be using an individual’s total super balance to calculate their earnings, which means it will include all notional (unrealised) gains and losses.
“This essentially means some members will be paying tax on unrealised earnings which is highly unusual,” he said.
Mr Burgess said the Association’s preferred approach would have been for the ATO to do a calculation of ‘notional earnings’ using a similar approach to the existing excess contributions tax regime.
The fact sheet states that the ATO will use a set formula to calculate the earnings based on the information it receives from each super fund every year.
This formula will calculate the difference between the member’s total super balance for the current and previous financial year and adjust for net contributions (excluding contributions tax paid by the fund on behalf of the member) and withdrawals, it said.
The ATO already uses super fund reporting to calculate the total amount that individuals have in the super system.
Perhaps I am ‘underthinking’ how the additional tax will be calculated in practice but in my mind it could work in a similar vein to an actuarial certificate whereby the actuary provides you with a percentage of your average fund/member balance that is above $3m during the relevant financial year. The additional 15% tax is then levied in the annual return based on this percentage and allocated to the individual member statements accordingly.
Based on the articles I’ve seen it appears there is more to it but I guess we wait and see!
Unrealised earnings taxed at 30%. Corporations are taxed on realised earnings at 30%. Natural persons get a discount of half, so their tax on realised earnings is below 24%. In addition the 10% tax on realised Capital Gins inside Super still applies. Prohibitive to invest long term in Super if your balance is above or near $3 million. Even trading profits – ie realised Income is taxed twice – the normal 15% plus the net profit reinvested raises the balance so it is also taxed at 30%. So profits from short-term trading are taxed less in a Corporation. This looks deliberate. Any other OECD nation tax unearned income at 30%?
Once again, the government has allowed the economics “wonks” in Treasury to come up with a calculation. The “Fact Sheet” is littered with lies which creates a new definition of “earnings” which, according to the economists in Treasury, is the difference between total super balances a year apart. This obviously means that there are unrealised gains and losses incorporated within that calculation. (Don’t forget that for an economist, there is no difference between a $100k salary (paid) and an increase in one’s net worth by $100k). Bad mistake to leave this to economists! Also the very tricky issue of defined benefit schemes is left “for consultation” – good luck!
“Unusual” is an understatement! I can’t see unrealised capital gains forming part of this additional tax once it reaches its final form. Especially if taxpayers that don’t meet a condition of release have no way to exit the system.
I don’t think this aligns with the objective for superannuation. Everyone has their own version of what a ‘dignified retirement’ looks like financially and not everyone with a superannuation balance over $3 million is going to necessarily have other investments outside of the superannuation system to support their retirement.
Absolutely agree. This legislation must not go thru as is. It is inequitable to tax unrealised capital gains. What a broken promise! No wonder we all trust Politicians!!???????
Using a notional earnings calculation would appear to create the same issue. Some members will be paying tax on returns that their fund didn’t generate, (conversely others will be paying less tax on the earnings that their fund generated). Perhaps an idea to float at consultation is to defer the tax until the underlying asset is sold, with the deferred tax subject to SIC (or GIC). This is a similar concept to the deferral of Div 293 for those in defined benefit funds.