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Implementation of pension earnings tax unlikely

The federal government’s proposed tax on pension earnings over $100,000 is unlikely to be implemented due to its complexity, according to an SMSF sector expert.

In particular, the ability of unitised superannuation funds, more so than SMSFs, to deal with the proposed legislation would make the introduction of the changes impractical, AMP SMSF head of policy and technical Peter Burgess said.

The difficulty stems from the definition of earnings to be used as part of the new rules.

“Basically in our discussions with Treasury we believe they are going to be using the tax definition of earnings, which means we include realised capital gains. We will not use the accounting definition of income or earnings, which means we don’t have to include unrealised capital gains,” Burgess told delegates at the 2013 SMSF Professionals’ Association of Australia State Technical Conference.

“This makes unitised funds interesting. Think about unitised super funds out there where a unit price could include realised capital gains. Treasury’s solution to that is that funds will need to calculate a separate unit price that strips out the unrealised gain.

So we could have a scenario where a unitised fund has to calculate two unit prices. Now imagine the reaction of the superannuation industry when they hear about it.

“So it’s for that reason that I think regardless of which political party is in power it’s unlikely this tax will see the light of day.”

While the definition of earnings was a major problem with the proposed legislation, it was not the only area of concern, he said.

“How should earnings be attributed to individual members? Based on our discussions with Treasury, we understand what they’ll be looking to do here is to impose rules on funds as to how earnings will be considered to have been allocated for the purpose of this tax,” he said.

“And those rules will have no regard to the actual allocation of earnings. They’re going to overlay some allocation rules on funds.”

The tax was one of a number of proposed changes to superannuation announced by the government on 5 April.

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