In its nine-page submission, the SMSFA claimed the proposed legislation breaches tax principles, constitutes double taxation and will impact thousands of SMSFs who own primary production property and business real property.
It also provided simple amendments to address the most egregious aspect of the bill – the taxation of unrealised capital gains.
The association said it was vital that two crucial exposure draft regulations consultations that directly impact the operation of the measures contained in this bill be considered alongside it.
These were the Treasury Laws Amendment Instrument 2024: Better Targeted Superannuation Concessions and the Attorney-General’s Department consultation on the Family Law (Superannuation) Regulations 2024.
“The operation of this tax will impose an income tax liability on unrealised capital gains. This is not a feature of the Australian taxation system,” the submission stated.
“Unrealised gains are movements in the market value of an asset or investment. For superannuation funds, this is an important accounting entry, necessary to ensure that a member’s balance as closely as possible, represents its realisable value at a particular point in time. Unrealised gains do not represent actual income earned.”
The submission explained that the current capital gains tax laws operate to tax realised gains when the asset is sold.
“As a result, cash has been received by the fund. The fund will then make the necessary tax provisions and set aside the cash needed to pay any taxation liabilities that will arise. This is why liquidity is such a concern for SMSFs,” it stated.
“It is not a lack of preparedness or noncompliance with the statutory and fiduciary duties of an SMSF trustee. It is because of the volatile and lumpy nature of this tax and the fact that it is being applied to unearned income of the fund.”
The SMSFA added it is unreasonable to expect SMSF trustees, when formulating their investment strategies, to have to predict future tax changes, particularly changes that are a radical departure from existing tax law.
Citing research it commissioned from the University of Adelaide, the SMSFA said that given both the benchmarking to other OECD nations and Australia’s economic history, it interpreted the structure of the proposal as a radical departure from existing taxation policy, with potentially far broader consequences than just those outlined by Treasury in its consultation paper.
The SMSFA also raised the issue of defined benefit superannuation interest for Division 296 purposes and stated that although most defined benefit funds have alternative valuation methods approved by the minister, it does not have access to this information.
“While the valuation methods and factors in the Family Law Regulations will provide a default valuation method for the purposes of Division 296, the Family Law Regulations are due to sunset on 1 April 2025 and are currently being reviewed,” it stated.
“Therefore, it is difficult to form an opinion on the suitability of the valuation method, and whether or not they will provide commensurate treatment, as the relevant factors have not been published.”
It stated it would have been preferable for the calculations and methods for valuing a defined benefit superannuation interest to be contained in the primary legislation, and the fact it was released many months after the bill, and just before the Senate inquiry, made it very difficult for industry to properly consider the detail and likely impact of Division 296.
“One observation is that women will be required to pay more tax under this measure compared to a male counterpart. The Australian Bureau of Statistics’ life expectancy tables consistently show women’s life expectancies exceed that of men,” it stated.
On the issue of double taxation, the association said if the existing 15 per cent earnings tax and the new 15 per cent Division 296 tax were together as one tax, that is an effective 30 per cent tax on earnings, then there is no double taxation.
“However, we believe this approach is misguided. The existing 15 per cent earnings tax is a tax on the fund’s taxable income and the Division 296 tax is an individual member tax liability that will be applied to the increase in the impacted member’s total super balance for the income year,” it stated.
“They are fundamentally different taxes and should be regarded as separate taxes. In our view, the correct interpretation is to say an amount of earnings that constitutes taxable income (as defined in the Income Tax Assessment Act 1997 (Cth)) will be subject to two different taxes at two different points – once on the operation of the specialist liability rules for capital gains in chapter 3 of the Income Tax Assessment Act 1997 (Cth) and then again under Division 296.”
Finally, the submission addressed the ATO’s calculation used to estimate the number of SMSFs that hold primary production land and will be impacted by this tax, claiming that accurate data on this is not available.
“There are no labels on the SMSF annual return which would allow this source of income to be identified. It is not data that the ATO records or otherwise requires to be provided. Conclusive, or detailed ATO data is simply not available,” it stated.
“Similarly, any attempt to extrapolate this information from personal tax return data is likely to underestimate the number of SMSFs which hold primary production land.”
The association said statistical data provided by Australia’s largest specialist SMSF auditing firm, ASF Audits, shows 1,062 SMSFs audited by ASF Audits in 2021–22, out of a population of approximately 37,000 SMSFs, held primary production land and 20 per cent of those funds were likely to be impacted by this tax.
Extrapolated across the entire population of 610,000 SMSFs, this equates to more than 17,000 SMSFs in 2021–22 that held primary production land, with just over 3,500 SMSFs holding primary production land that were likely to be impacted by this tax.
“The statistical data provided by ASF Audits also shows 24 per cent of SMSFs audited by ASF Audits in 2021-22, and which will be impacted by this tax, owned business real property,” it stated.
“Extrapolated across the entire SMSF population this equates to more than 13,000 SMSFs which hold business real property who are likely to be impacted by this tax. This number will steadily increase as property values continue to rise. Further, this will impact couples whose balances currently fall below the threshold.”
Finally, the association stated many unintended and inequitable outcomes arise with a calculation of earnings that includes unrealised capital gains.
“These unintended consequences and inequitable outcomes could be avoided if the calculation of earnings was based on actual taxable earnings or if that is not possible, a measure of earnings that is a close proxy for actual taxable earnings,” it stated.
“If using actual taxable earnings is not a viable option, a close proxy for actual taxable earnings is the 90-day bank bill rate. Replacing the proposed calculation of earnings with an earning rate equal to the 90-day bank bill rate, would significantly simplify this new tax and substantially remove unrealised capital gains from the calculation of earnings.”
Curiously, not many are opposing paying more tax in super, even in retirement for larger value superannuation balances. We kept being told that we were having budget losses into the far future …(not evidenced in the last few years).
The uproar is in the formula being used which makes it particularly egregious and sets precedents of double-taxation and taxation on unrealised capital gains. All of the angst and wasted time spent on this proposal with deaf ears on the side of Treasury and politicians would have simply been avoided by a fair formula based on taxable income only. The large funds don’t want this so many more funds outside of these large funds and their members will be significantly impaired. As I understand it, the reason that the large funds don’t want this is because of having to update their software to accommodate this for superfund holders where they will need to know their taxable income for each and every super account that they own, which should automatically then populate on a tax return at the ATO end. Some of the larger funds can handle this already. So the question is, why are the larger funds being pandered too? Worst case scenario, the government could have given a subsidy to the funds in question for them to get their software updated. But no, that is too easy and government loves convolution (red tape and money down the drain on administering bad policy – more jobs for public servants meaning more smothering of inspiration and loss of productivity).
Like Isaac, I want to know also if this tax will be unconstitutional, especially given that Treasury are either lying or too simple to see the distortions within their formula. It is remarkable that given the number of well-respected organisations (including accounting/finance and tax bodies) pointing out these issues, that they have not stopped to understand why all the fuss? They have their head in the sand I feel as though they simply do not care. This in itself is outrageous of a body such as this. And if the Senate Committee themselves do not question this after all of the hearings, we have deeper issues at hand.
Lawyers? Is there a case that the taxing of unrealised capital gains is unconstitutional?