Superannuation, Tax

No comfort from deeming rate

Deeming rate

Using a deeming rate to calculate the 30 per cent charge on super balances over $3 million may not generate a better outcome for individuals.

An SMSF specialist mentor has questioned whether using a deeming rate to calculate the proposed additional charge on superannuation balances over $3 million, as opposed to it being based on the change in total super balances, would lead to a better outcome for fund members.

According to SMSF Alliance practice principal David Busoli, the adoption of a deeming method would mean a rate would be applied to any amounts over the $3 million threshold with a 15 per cent tax subsequently levied on that calculation.

Busoli pointed out, however, the basis of the deeming rate would significantly affect the outcome.

“My favoured rate is the 4.7 per cent Div 7A rate, but I suspect Treasury would prefer the much higher 10.46 per cent general interest charge rate. Compared with the current algorithm, there would be winners and losers. In a year of market downturns where the member’s total super balance would decrease, but still be over the cap, deeming would result in a tax bill in contrast to the proposed algorithm that would not,” he noted.

“My own analysis of the differences leads me to believe that, in general, the current algorithm produces the more favourable result for the member.

“This is not to say that it does not contain numerous shortfalls that need addressing, but our discussion must focus on what is administratively possible as well as what is equitable.”

He acknowledged from a fund administration perspective the government had few options but to give the responsibility of overseeing the measure to the ATO.

“As the ATO is the only source of consolidated fund information and, in any case, the superannuation sector would not tolerate an additional administrative burden, the ATO has, quite rightly, been given the responsibility of administering this proposal,” he said.

“This required Treasury to consider what the ATO was capable of, considering the data it holds. The ATO holds individual member total super balances, contribution and withdrawal information across multiple funds. It does not hold individual member investment or taxation information.”

According to Busoli, this left Treasury with two calculation options for the new liability, being the use of a deeming rate or the method it has ultimately chosen.

The government announced in February its intention to introduce a 30 per cent charge on member balances above $3 million.

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