Study finds super tax proposal will affect up to 50k SMSF members

The report, by the International Centre for Financial Services (ICFS) at the University of Adelaide and commissioned by the SMSFA, also found an estimated 13.5 per cent of affected SMSF members would experience liquidity stress in meeting the new tax obligations.

The research provides the first real glimpse of the potential impact of the proposed tax change on the SMSF sector, using data from more than 722,000 SMSF members – two-thirds of the SMSF member population – for the 2021 and 2022 financial years.

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Professor Ralf Zurbruegg from the University of Adelaide said this liquidity stress has been exacerbated by the inclusion of unrealised capital gains in the measurement of earnings.

“Taxing unrealised capital gains is a somewhat radical departure from existing tax policy and extremely rare in OECD pension systems,” he said.

“There are potentially far broader consequences than those already outlined, and we recommend that the legislators carefully reconsider the implications of this proposal in its current form.”

The report also argues the government is potentially short-changing itself by taxing unrealised capital gains.

ICFS deputy director George Mihaylov said it is important to highlight that using a measurement of earnings that aligns with existing tax policy – one that excludes unrealised capital gains – would not only alleviate the liquidity stress for some members in the short term but is also likely to yield more tax revenue for the Government over the medium to long term.

“That’s because this new tax will still be levied on capital gains, but only when the underlying assets are eventually sold. Under normal asset price appreciation over time, the overall tax base will be greater,” he said.

The report notes the treatment of unrealised capital gains and carried forward capital losses is highly problematic given the general nature of capital markets.

It is common to see a string of bull market years followed by a sharp bear market decline. This means there is a strong possibility a member can effectively be cumulatively taxed on investments that make an overall loss without any real recourse to recover their tax expense.

SMSFA CEO, Peter Burgess, said including unrealised capital gains means year-on-year tax liabilities will be directly related to the performance of investment markets, adding to the unpredictability and inequity of the proposed tax and making it difficult for superannuants to plan investments and manage liquidity.

“Asset-rich, income-poor SMSF members will find it difficult to cover their additional tax liability and this problem is likely to worsen over time as unrealised capital gains accrue while tax payments from previous years diminish liquidity,” he said.

The research notes that selling illiquid assets is typically associated with substantial transaction costs, market timing considerations and other macroeconomic factors that are likely to further exacerbate the potential losses associated with meeting the new tax liability.

“Other recent studies show around one in four SMSFs that will be affected by this tax change hold property and, given many will be small business operators and farmers who hold their premises and land in an SMSF, it’s easy to see how disruptive this new tax will be not only for the SMSF sector but for small business operators and the broader community,” Mr Burgess said.

“Clawing back the superannuation tax concessions for high balance superannuants was one thing, but taxing paper capital gains that may never be realised, is something completely different.”