“This is all about making sure that it’s still concessional treatment. It’s the value at the start versus the value at the end allowing for withdrawals and contributions. And, again, this calculation is made elsewhere in the superannuation system, the way that a number of the funds have to report makes this calculation. So the calculation is not new. And if you make a loss you can carry the loss forward. There’s a whole bunch of appropriate arrangements made in the calculation.”

Peter Burgess, CEO of the SMSF Association, said “with all due respects to the Treasurer”, these are disturbing and somewhat puzzling statements.

“Large super funds will be required to make changes to their systems to enable, among other things, the annual valuation of defined benefit pensions and to report the required transactions to the ATO so they can calculate earnings for the purposes of this tax,” he told SMSF Adviser.

“Even if the latter only occurs on an exception basis these costs will be borne by all members of the fund and not just those with balances over $3 million.

“To think the best option is a new tax that requires the recording and tracking on unapplied carried forward tax losses, defined benefit pensions to be valued annually, the ATO to undertake complex calculation of earnings and unrealised capital gains to be included, once again illustrates the absences of any genuine consultation with industry.”

He added that on several occasions during the consultation phase, the SMSFA put forward alternative options which are much simpler and cost effective for the ATO and the industry to implement and would require straightforward amendments to the bill.

One of those options was based on the deeming rate and SMSFA developed calculators and spreadsheets to model this tax to demonstrate how the 90-day bank bill rate works in comparison to the government's proposed approach to calculating earnings.

The models show that the accumulated tax after 30 years would require funds to pay considerably less.

Burgess said there will be “winners and losers” with deeming but by a process of elimination the association can't see any other way of dealing with the issue of taxing unrealised capital gains.

“Our support for a deeming rate approach would only be on the basis that it's pitched at the official cash rate. We don't think a rate any more than that would work,” he said

He added from the association’s initial calculations that if the deeming rate is at the 90-day bank bill rate, most clients will pay less tax under this approach compared to the Treasury's proposed approach.

“And deeming would have the other added benefit of being much simpler to apply so we wouldn't have to worry about carrying forward negative losses,” he said.

“It would be more predictable in terms of the outcomes which we think is a big problem with the government's proposed approach because they are linking the tax to performance in investment markets and the liability could be very different from one year to the next.”

David Busoli, principal of SMSF Alliance, also proposed an alternative method of calculation which he believes would be simpler and fairer.

“Under the current proposal the ATO gathers the member’s data from each fund, amalgamates it and applies this formula – Earnings = Adjusted TSB at end of financial year – TSB at start of financial year,” he said.
“What I propose is that this be the default position where the member is not in a fund capable of providing actual income data at the member level. Where they can, then the earnings for such a member is actual income which is defined as income, including realised capital gains less the effects of concessional contributions and pension exempt income.”

Busoli said this could cater for members in both fund types using the formula:
Earnings = Adjusted TSB at end of financial year for members in funds that don’t report actual income – TSB at start of financial year for members in funds that don’t report actual income + Actual Income for members in funds that can report actual income.

“A flat tax rate of 15 per cent is applied to the proportion of earnings attributable to the member’s balance over $3 million in the same way as the present proposal,” he said.

“This change caters for several competing interests. Firstly, it removes the highly unpopular tax on unrealised gains for those funds that can report actual income. And for those funds that cannot report on that basis, they have until 30 June 2026 to get their reporting in order, if they choose to do so.”

He continued that undoubtedly there will be one-off costs associated with system changes.

“Given the demographics of some APRA funds, they may choose not to implement them. The cost of implementation to the SMSF sector would be modest given that the reporting required is already largely catered for,” Busoli said.

Additionally, he said the government has already booked the revenue raised so they will not wish to delay the introduction of the tax and this methodology would still allow the tax to commence from 1 July 2025.

“The government is concerned that such a system may be manipulated by SMSF trustees who choose to segregate their assets, but asset segregation for tax purposes is already prohibited,” he said.

“As well, the government is concerned at the amount of additional data that dealing with taxable income would entail but this could be filtered to exclude all individuals with a zero taxable proportion, thus removing most member data from consideration. A second filter would be applied to those members unable to provide individual data.”