The Institute of Public Accountants (IPA) in its submission to Treasury in relation to the $3 million super tax proposal said this forced asset liquidation may distort economic decision-making, as affected taxpayers may be realising assets without regard to market conditions or prevailing asset pricing.
“In the case of superannuation funds that hold illiquid assets that cannot be fractionally realised (such as real estate), to fund tax liabilities, taxpayers may need to arrange alternative funding or place reliance on third-party lenders, which may prove practically difficult where a taxpayers’ assets are consolidated in a superannuation fund, given the inability to pledge superannuation fund assets as security for debt,” the IPA said in its submission.
“These funding and cash-flow challenges will be amplified considerably for small-to-medium sized business owners, who very often hold real property that is used in the course of carrying out their business in a self-managed superannuation fund; in such a case, realising real property assets used in carrying on a business will not be a feasible option and taking on expensive third-party debt will add a significant cash-flow burden and place pressure on operating margins in their business.”
The IPA urged Treasury to allow taxpayers who would be affected by the Proposed Reforms the choice and opportunity to restructure their affairs in a way that would minimise the compliance burden and complexity that would arise if the Proposed Reforms are implemented as currently reformed.
“The IPA considers that this would be fair and reasonable, given that superannuation balances have been accumulated in compliance with historical contribution rules and taxpayers have acted in good faith,” it stated.
It said that most significantly, if the Proposed Reforms are implemented as currently proposed, taxpayers affected by the Proposed Reforms will be subject to tax on a basis that no other Australian taxpayer is presently: tax on unrealised income.
“We respectfully submit that this is an unfair and inequitable distortion of Australian tax law and jurisprudence,” it stated.
“Moreover, it disproportionately affects a segment of the Australian tax-paying population, who have not engaged in egregious or aggressive tax planning behaviour, but rather have acted in compliance with historical superannuation contribution rules.”
In 2015 – 50% of all income tax in Australia is paid by 10% of the working population.“ – Federal Treasurer Joe Hockey, interview with Fran Kelly on ABC RN Breakfast, July 27, 2015.
A fact check organisation put the figure at 52% of all income tax being paid by just 10% of earners. That 10% referred to is the top 10%.
“In 2019/20, 30 per cent of the benefit (Super concessions) went to people in the top 10 per cent of income earners”.By business reporter Nassim Khadem Posted Tue 28 Feb 2023 at 4:45pm (ABC)
It sort of makes perfectly logical sense to me then that 30% of the benefit of super concessions goes to the top 10% of income earners….
Don’t forget that their 15% tax paid in DOLLAR amounts, is huge. It may be the same rate of tax, but it is absolutely huge in dollar terms.
But tax free income of some pension accounts seems to be a big cause of the issues. This is being addressed with the introduction of the TSB caps somewhat…. maybe we need to allow enough time for this to have its affect before trying to play with the system again with new taxes on unrealised capital gains.
My understanding of CGT concessions was they they are a hedge against inflation. This is in lay terms (so sorry about this), but if I purchased a building 20 years ago, if there are no CGT concessions or very small concessions, how could I sell that building, and for simplicity, assuming that it was fully paid for at purchase date, pay all the CGT with no concessions, and then purchase a like for like with some kind of possibility? Short answer, I couldn’t? Property generally goes up in value, its not like a deprecating car. With inflation and often above inflation appreciation of the property, it would be impossible to buy anything remotely similar as the hedge against inflation is lost…..
Weren’t these CGT concessions granted in view of curbing this inflationary effect? And brought in to encourage investment in property?
Obviously, no encouragement required anymore?
Or the hanging fruit is just too tempting.
Sorry for the simplistic discussion.
If we are personally liable for the tax on unrealised gains in a super fund, how does that work given if the smsf owns the property itself and not the member? The unrealised gain does not necessarily take into account the costs of sales of any assets, so somehow, this needs to be taken into account as well if we are being forced personally to pay tax on a number based on valuations only, not after legal fees, agents commissions and capital gains tax deductions? Shouldn’t the valuers of property within super funds then have an obligation to take this into account as well for the annual end of year valuations? But then how complicated is that every year, and also the huge compliance costs in doing that and who will regulate it?
Sounds like another lot of red tape to me and a lot of extra expense so poorer returns.
And who has enough savings outside of super to pay this tax? In my case it is potentially more than 3 times the current tax payable taking into account unrealised gains (at least for me based on my last 2 years SMSF tax returns and member balances). Who would have dreamed of an investment/retirement plan with 47% tax payable in retirement on pension funds? I didn’t…. I have no choice but to liquidate once we start our forthcoming pension if this goes ahead.
My super was funded unlike the defined benefits schemes for judges and politicians. Now, if this tax gets through, I will not be able to support my pension which is almost nigh. Reason being the more than 3 times tax I will now have to pay – yes, that’s over 47% tax on the current definition of earnings, higher than the highest personal tax bracket if this gets through based on my last 2 year’s smsf tax returns.
Will those on defined benefits schemes also have this tax applied? Otherwise, it is not fair – rules for some and not others. As it is, it already will be rules for some and not others. There is absolutely no incentive for us now to have superannuation, but after 40 years of savings the rules are potentially changing as the pension period was about to commence for us – of course, I should have known…
As the tax payable on our smsf funds and members combined will be more than THREE times what the smsf currently pays, we will run out of cash sooner rather than later, once our pensions are being drawn.
Seeing as though I will be forced to liquidate to pay this tax, I may as well liquidate beforehand, to get the assets in an environment where I am not paying 47% tax, which this new tax will mean to us because of the expanded definition of “earnings”. Most people that I speak to have not realised that the definition of earnings has changed.
I refuse to liquidate my home instead of my super assets – how would this be in anyone’s definition of “dignity”. All of my savings are in super, and I have sacrificed to be able to do things in retirement that I was unable to do in my working life because of commitments to my employees and business.
Can anyone let me know what will be happening with defined benefits schemes of public servants please? How will they be affected by this proposed tax please?
Thank you for your articles.
I have written to my local (labor) member to ask this question. Not surprisingly, they don’t have an answer. She has written to the Treasurer on my behalf. Still waiting for a reply.
If a fund cannot pay for its ongoing liabilities then perhaps the assets in the fund are not fit for purpose
The point is that tax on unrealised gains has never been a liability. It would be a tough argument to sustain that appreciating assets aren’t fit for SMSF inclusion…
SMSFs may distinguish between realised and unrealised gains but for the millions of members in public offer funds no such distinction is made.
This new charge is not an income tax. It is a wealth tax on high sperannuation balances..
No, tax law distinguishes between realised and unrealised gains.
Phillip, your argument makes no sense. If we are to have a wealth tax, which is presently NOT the case, why are we targeting only superannuation assets? Secondly, in the entirety of the taxation system NOWHERE are unrealised gains taxed, only realised. Based on your logic everyone that owns an investment property needs to pay the tax now (I won’t ask you to suggest where they get the money from – only to say you think this is an inappropriate investment too?).
I’m all for a reasonable debate on taxation but it must be fair and across the board, not just on selected assets and selected investment structures. A fairer argument might be tax free pensions after 60 after a rebate (just like John Howard cancelled), removal of rebatable franking credits, death tax on personal residence CGT after a threshold. All of these would be hotly debated no doubt but the current proposal by the government smacks of big end of town (banks and union funds), holding sway yet again with the government whilst the little people are abused and ignored.
Unrealized profits are caught up in the proposed taxing method because Treasury said it was ” the simplest way ” to process the tax . Financial statements for SMSFs already distinguish between realized and unrealized profits so it seems to me the ” simple ” answer would be to insert a separate line in the annual tax return to segregate and exclude unrealized gains from the tax calculation .