‘Simplest and best way’: Treasurer defends plans to tax unrealised gains

Under the proposed calculation, the ATO will use an individual’s total super balance to calculate their earnings, which means it will include all notional (unrealised) gains and losses. This means members impacted by the measure will pay tax on unrealised earnings.

In a press conference on Sunday, Treasurer Jim Chalmers said the decision to include unrealised gains in the earnings calculation for the proposed $3 million threshold was on the advice of Treasury.

“That’s the advice of Treasury, working with other relevant agencies, that that is the most efficient, simplest and best way to go about it, and so that’s what we intend to do,” said Mr Chalmers.

Mr Chalmers said there would be some elements of the policy the government planned to consult on further, such as the treatment of defined benefits.

Technical experts have already identified concerns about the way the government intends to calculate earnings for the measure.

In a recent article, Smarter SMSF chief executive Aaron Dunn explained even where the increase in a member’s total super balance is purely from changes in the market value of assets in the fund, they will still have a tax liability to pay.

“[This is] in addition to the subsequent CGT on the disposal of the asset in the future which must be applied proportionately due to the disregarded small fund asset rules,” he noted.

The proposed measure could therefore impose a significant cash flow burden on many funds, he continued.

Heffron managing director Meg Heffron has also raised similar concerns about cash flow issues, particularly where there are large unrealised gains involved.

Ms Heffron gave an example of Brad whose earnings were $1 million for the financial year due to the skyrocketing value of a property. Brad has $5.5 million in super.

The proportion of his earnings that will be subject to the extra tax of 15 per cent would be 45.45 per cent, she noted.

The tax in this case would be: 45.45% x $1m x 15% = $68,000 approximately, she explained.

“What if Brad’s super fund was really only generating enough cash to pay his pension? The property is rented out and earns around $150,000 per annum but with expenses etc, there’s not a huge buffer over the pension payments,” she noted.

“Normally that’s not a problem – Brad’s fund only needs enough cash to pay his pension and (worst case) if the property is untenanted for a while or needs major repairs so cash really dries up, he’s allowed to switch off (commute) his pension so that the fund doesn’t need any cash flow for a while.

“However, this special extra tax will apply regardless, and if the fund doesn’t have the cash to pay it, Brad will have to.

“So in fact this extra tax could mean Brad’s retirement income is used to pay tax on growth in the value of his fund’s property.”

The Treasurer has also responded to concerns raised by accountants regarding the impact of the measure on farmers and small business owners that hold one lumpy asset in their SMSF.

“I don’t think that’s a legitimate concern that’s been raised. First of all, under the current arrangements in your superannuation fund, you’re supposed to have some liquidity to deal with changes in circumstance. You’re not supposed to have your whole account tied up in illiquid assets,” he stated.

“Number two, you can choose how you meet this liability. It doesn’t have to be paid out of the fund. So there are other ways you can meet the liability.”

Mr Chalmers also stated that with the measure not set to commence until July 2025, SMSF would have a couple of years to consider their arrangements.