Last week, Treasury released a fact sheet explaining the details on how the earnings tax calculation would work for its proposed $3 million threshold.
Speaking to SMSF Adviser, IPA general manager, Tony Greco explained that one of the major issues with the proposed methodology behind the tax calculation is it treats income and unrealised capital gains equally.
It also doesn’t apply the CGT discount to unrealised capital gains, he added.
The worst aspect of the proposed calculation, he stated, is that there is no refund if unrealised gains reverse.
The proposed calculation only allows negative earnings to be carried forward and offset against the extra tax in future years’ tax liabilities.
“So you’re paying tax [on the unrealised gain] first but then in future years if the asset value goes the other way, you don’t get to claw that back. You have to wait for the investment value to recover before you get to see the benefit of that pre-payment,” Mr Greco explained.
While there is no detail yet on how the measure will work upon the death of a member, Mr Greco said this could potentially mean that if the member dies before the asset value recovers, the tax paid is essentially lost.
“If a member dies so does the tax paid. This may be a common scenario if asset values rise and never recover before the member dies,” he warned.
Mr Greco noted in some cases asset values can take a long time to recover.
“You could buy a property and then they build a freeway next to it. It might take 10 years before that property value recovers,” he said.
“The prepayment of tax based on an unrealised gain is almost like a casino where the house never loses.
“The government is grabbing its money first but doesn’t have to pay it back if it goes the other way. What better outcome from a government perspective could you wish for.”
BGL managing director Ron Lesh has also criticised the government’s measure this week, labelling it “super theft”.
In a release issued on Tuesday, Mr Lesh said the new tax appears to have been Labor’s intention before the election.
“It is unfair to hard-working Australians who have legally saved for their retirement and have accumulated balances through making contributions and smart investing. And just another example of the Albanese government’s total disregard for the financial well-being of Australians,” said Mr Lesh.
The number of Australians affected by the measure is likely to rise over time, he noted, with the Financial Services Council estimating it could climb to 500,000 over time.
“Limiting politicians, public servants and judge’s [sic] defined benefit pensions to what can be earned with the current $1.7 million balance transfer cap would be a much better way for the government to raise revenue”, added Lesh.
“Since the Albanese Government came into power, we’ve already seen huge increases in interest rates, electricity, gas, food and services. With this new tax, I’m deeply concerned Labor will soon come after Australians with changes to negative gearing, franking credits, capital gains tax, wealth or inheritance taxes, or even taxing the value of the family home,” says Lesh.
The reason for taxing unrealized gains is that Treasury said its the simplest way to implement the new tax .
Back it in that BGL could provide software to separate unrealized income and taxable income in the members report page in the Fund’s annual return
Whilst a single asset, single member could have the outcome where capital losses expire when the member passes, in a more diversified portfolio, the capital losses will be available against other capital gains, and even so on the death of a member. If you play this through (with the only option available at this stage) and utilise tax effect accounting, a fund is not only going to have to implement DITL but also, FITB in order to damp down this outrageous new tax. FITB will require audit evidence as to the market value so up go the admin and compliance costs for SMSFs. “Simple” public policy pushing the cost to the private sector as the implementation is complex and made more complex buy Treasury’s insistence on “simplicity” from their end. You have to remember they come from the position that this affects a small number, seems to be politically palatable, the APRA funds are content they are not updating systems etc, so why should they bother with grievances from the SMSF sector?
We all know that the correct process here should be for the SMSF Annual return to have an additional label added to the member data collection to distinguish unrealised gains (and unrealised losses) so the formula can then be updated to accommodate a better view of the member’s (taxable) earnings. But we get back to Treasury’s basic position, they don’t want this change to involve any systems changes and, remember, this “is only affecting a small number of folks” so they don’t see any cause for concern.
The lack of indexation is another screw tightening mechanism to make Treasury’s job easier. It has already been projected, this one feature of the new earnings surcharge regime, will be netting 10% of superannuants in just 10 years. And so it works on an exponential increase YOY so less casting about for Budget revenue sources.
But if there is one area that MUST change is including a transitional period for those less than 60 that are caught in this new earnings surcharge net to reduce their balance if they choose. The trapping of younger people in the super system, that has suddenly changed from when they planned their retirement strategy, is not only unfair, it takes away choice. In all the years I have not seen such as attack [u]on people’s confidence[/u] in a system designed to encourage retirement independence. It will change behaviour for more than those that are considered “wealthy” by these arbitrary measures.