SMSFA CEO Peter Burgess said the draft legislation released yesterday confirms the government’s intention to measure earnings by calculating the difference in the market value of the member’s total super balance (TSB) at the end of the period compared with the TSB at the beginning of the period.
“Included in this measure of earnings are unrealised gains which means some taxpayers will pay tax on unrealised capital gains – a first for the Australian tax system,” he said.
“While the Association doesn’t support super members with excessively large balances receiving generous super tax concessions, taxing unrealised gains is not the answer.
“It will give rise to many unintended consequences, defies long-standing principles of our tax system, and will result in outcomes inconsistent with the stated objective of this new tax.
“The stated objective of clawing back tax concessions afforded to high-wealth superannuants is to reduce the revenue lost due to existing concessions.
“It shouldn’t be to impose a new tax which, for some, will not only claw back those concessions but result in more tax being paid than would have been the case if there were no concessions.
“For example, there will be scenarios where the inclusion of unrealised capital gains results in taxpayers paying an implicit rate of tax on taxable super earnings exceeding the highest marginal tax rate.”
Mr Burgess said the tragedy of the government persisting with this approach to tax unrealised capital gains is that it could be easily avoided and still achieve its stated objective.
“All that’s required is to simply remove unrealised capital gains from the calculation of earnings and use actual allocated taxable earnings as the measure of earnings,” he said.
“It would avoid the many unintended consequences and bizarre outcomes that will arise by combining two entirely different concepts of taxable income for the same entity.
“It would also avoid the complexities associated with having to exclude certain withdrawal and contribution transactions from the calculation of earnings and avoid the proposed convoluted system of carried forward negative earnings.
“Members of super funds that cannot or choose not to report actual taxable earnings for a member would have their Division 296 liability assessed by using a notional earning rate. This simple adjustment will remove the anomalies and ensure this new tax is consistent with its stated objective.”
Mr Burgess said while there were some wins for the industry in the draft legislation in terms of the adjustments made to the definition of TSB and the definition of a withdrawal and contribution for the purposes of this new tax, those adjustments have stopped short of what the sector was hoping for.
“The failure to exclude disability insurance benefits from an individual’s TSB in the same manner as compensation payments, and the add-back of amounts withdrawn as disability benefits or under a release authority for the payment of super related taxes are glaring examples,” he said.
“These are all issues we would like to raise with the Government and Treasury, but the short two-week consultation period, which means the legislation is likely to be introduced into Parliament before the end of this calendar year, will make that difficult.”
You all better hope that there is no major financial markets collapse before implementation as the government will get a windfall tax gain at your expense. This is because you won’t get an unrealised capital loss allowance if it happens prior to 1 July 2025. This government does not remember what happened in October 1987. They were all in nappies.
I just checked my past SMSF tax returns to see when we were last under that threshold as a couple. It was just 6 years ago. Since then it has more than doubled, mostly by unrealised capital gains. We live in Sydney and I can tell you that the $3m threshold is not an exhorbitant amount of life savings after working for 40 years and saving with the promise of delayed gratification by successive governments. Now its stick time for those that delayed their spend.
How to pay the tax on this kind of unrealised capital growth? Do the Maths and in our situation, it is not a doubling of tax in dollar terms, but more than a tripling of tax, more in line with the highest personal tax thresholds. After flattening of the personal tax rates, no one pays 47% tax. In super, we are just short of that for each of the 2 years that I tested this formula on.
I saw an ad yesterday for a 375sqm vacant block of land in Edmondson, 5 minutes from where I live in far south western Sydney. It is listed as $849k – of course, who knows how much it will sell for, but property in Sydney is crazy so no wonder at all that rents have gone up as well. I point this out only to emphasise that $3m is not a rich man’s savings anymore, not if you live in Sydney, anyhow.
Unfortunately, our country is made up of a number of different tiers of economy, such that a pension in one part of the country is adequate, but in another, it is not.
The claim that this legislation only affects 0.5 % might be true now. But, with no escalation of the $3,000,000 the following scenario presents itself.
Average Salary for Aussie is $95,576 in 2023
Super Balance for 40 year old $130,000
Current inflation rate 7%
Investment return CPI+5%
Balance at age 67 would be $2,947,639
So, in the next 27 years the average Aussie will have nearly $3,000,000 in Super simply based on SGC payments – no salary sacrifice – no non concessional contributions… Lets see if the decimal moves from 0.5% to 50%…
this is downright lazy politics. They want the tax grab but don’t want to spend on a system that would align the calculation with every other method of taxing income. I’ve not looked through the detail of this yet, but would I be right in saying that if you exceeded the $3M threshold in a year and also realised a capital gain, you would be liable for 2 forms of tax? Perhaps there is an adjustment in this scenario, but if not, it’s double taxation.
Yes. You will pay the usual 15% on “taxable income” of the super fund, and a supplementary tax on any change in balance to the member balance for any balance registered where the balance exceeds $3m on 30th June each year. The change in balance includes all “earnings” which also encompasses Unrealised Capital Gains, and the amount payable for this portion of the tax, because of the changed definition of “taxable income” to “earnings” will often mean more than a doubling of the original tax payable for the fund itself. The latter is billed to the individual members, who can elect to have the funds paid for from their super balance.
And then, to add insult to injury, as I understand it, you will still be taxed CGT on realisation of the capital gain, that is, when it is eventually sold, with no compensation for the tax already paid on this when it was unrealised income.
And yes, some people have been paying 30% tax instead of 15% tax on the extra monies that they have been saving into super. I am not sure if this will be accounted for somehow.
So triple or quadruple taxation? It is not a simple doubling of taxation as they would have people believe.
Yes, my partner and I will be one of those paying over 45% tax because of the inclusion of unrealised capital gains.
Based on the SMSF 2022 return, using the formula, our tax would have been 46.9% and for 2023 FY, the tax would have been 45.7%, more than a doubling of the current 15% rate, in fact, more than 3 times the tax we currently pay.
Of course, the assets have gone up markedly, which is a good thing I guess, but as we won’t have the cash to pay the tax, at least a lot of years sooner than we had envisioned, we will have to sell the assets which were planned to fund our retirement, hopefully into our 90s. That will not be the case now.
Our other option is to transfer assets out of super and pay a flat rate of 30% which is much better (the doubling of the tax rate which this tax was supposed to be) and we will have far less onerous responsibilities too. We will have to pay CGT tax (less if we hurry up and retire – note to all – we learnt something through all of this grief), but rather that, than pay this tax on unrealised capital gains taxes and still be hit with CGT later on top! Will this be the case I wonder, CGT on top of this tax on unrealised capital gains?
If more people did the Maths, I feel that many would see that they too would be paying much more than a simple doubling of tax within super. I urge everyone to do the figures for their circumstances. I also urge everyone to see how far $3m goes for their personal circumstances. We personally have huge living expenses and do not wish to move. Look at the effects of inflation on your cost of living and see how far $3m actually goes, especially for those living in Sydney. The $3m proposed way back in Feb this year already has significantly less buying power than it did 8 months ago with almost runaway inflation. Sadly, in Australia, we seem to have at least 2 maybe 3 tiers of economies running, where pensions and wages may be more than adequate in some places and sadly on the poverty line in others.
Pity those that are nowhere near retirement, and see themselves fast tracking to over $3m in super. We hoped that we would be in this position and worked towards it and yes, we made it through sheer hard work, sacrifice (delayed gratification) and some luck. Think outside super is my advice to you. There are far better and far less onerous ways outside of super to grow (and keep safe) wealth, assuming that this legislation passes.
Of course, moving money out of super may be just what the government wants, so their goal achieved! It will also help state governments with stamp duty etc in the short term and windfall CGT realised for the federal government, not to mention, extra work for lawyers, financial advisors and accountants.
By almost totally ignoring the sector’s submissions the government has shown that this is a simple tax grab designed, with its deliberate lack of indexation, to capture the wider Australian public’s super over time. The claim that this will only effect 0.5% of superannuants is a calculated deception whilst the previous “consultation” was, primarily, window dressing. Will the government consider indexing the $3m cap and allow the extra tax to be calculated, by SMSFs, according to standard taxation principles? I think not. It’s too easy to capitalise on half-truths to sell the cause of “fairness” at the next election when the Opposition is as impotent as it is. Keep up the good fight, Peter Burgess. Who knows? Real fairness may prevail eventually.