$3 million cap advocacy update – join our roundtable sessions
Last week, Association chair, Scott Hay-Bartlem, and I travelled to Canberra to meet with politicians and Treasury officials. The topic of discussion was the proposed new tax on super balances above $3 million and the growing number of unintended consequences and anomalies your Association has uncovered in the exposure draft legislation.
Our meetings were very productive. It was clear from our discussions with politicians, including the Teals and members of the Senate crossbench, that there was genuine concern about the consequences of taxing unrealised capital gains and not indexing the $3 million threshold.
While we expect legislation to be introduced into Parliament before the end of 2023, we remain optimistic that Parliament will support amendments that remove unintended consequences and improve fairness and equity.
In our view, to avoid unintended consequences, it is imperative that the measure of “earnings” mirrors, as closely as possible, the traditional measure of taxable earnings. This means reverting to a measurement of earnings that only includes ordinary (excluding contributions), exempt, and statutory income allocated to a member’s superannuation account during the income year.
However, the limitations that some funds have in recording and reporting actual taxable earnings attributable to a member during the income year means a precise measure of taxable earnings, for Division 296 purposes, which is comparable to traditional measures of taxable earnings, is beyond reach.
With this in mind, we believe a methodology that calculates a member’s earnings for Division 296 purposes by multiplying the member’s Total Super Balance (TSB) at the end of the previous income year by a “deemed earning rate” would avoid many of the unintended consequences in the exposure draft legislation.
Once a member’s deemed earnings have been calculated, the proposed provisions in the exposure draft legislation would continue to apply to ensure only the proportion of those earnings that relate to the amount above the $3 million threshold would be subject to Division 296 tax.
Critical to the success of this alternative calculation is to carefully select a deemed rate. We believe a rate slightly above the official cash rate (for instance, the 3-month average nominal 90-day bank accepted bill rate published by the Reserve Bank plus one percentage point), would be appropriate.
Although the exposure draft approach adjusts for negative earnings and provides for negative earnings to be carried forward to offset a Division 296 tax liability in a future income year, this treatment of hypothetical losses is only an attempt to counterbalance the taxation of unrealised capital gains.
By contrast, under a deemed earning rate approach, there is no need to build in layers of complexity to compensate for theoretical capital losses. In the event of a notional loss during the income year, any Division 296 tax for the subsequent year will be diminished as the member will start the year with a reduced TSB.
On the flip side, when investment markets are rising, the calculation of earnings under the approach outlined in the exposure draft will be inflated by unrealised capital gains, meaning impacted members will incur Division 296 tax on imaginary wealth (i.e. they are taxed on amounts they have not received or may never receive).
The exposure draft approach links the measurement of earnings to movements in capital markets. This means a member’s Division 296 tax liability could vary significantly from one year to the next, making liquidity management extremely difficult. On the other hand, a deemed earning rate would provide more predictable and consistent outcomes and avoid extreme outlier scenarios that could arise in periods of investment market volatility.
We consider a deemed earning rate would be a substantially simpler approach and reduce the compliance burden on regulators and industry alike. For instance, this approach would not require the calculation of a member’s adjusted TSB or the recording and carrying forward of negative earnings – enabling the removal of numerous sections of the exposure draft legislation.
To assist us in our advocacy efforts, we would like to invite you to join one of our virtual round table discussions being held on Wednesday 1 November and Thursday 2 November.
The purpose of the roundtable will be to discuss the calculation of earnings for proposed Division 296 and identify the approach that delivers the most equitable outcome for your clients.
If you are not able to attend one of the roundtable discussions, I invite you to email your thoughts and suggestions to
