Treasury has released a consultation paper on the proposed superannuation earnings tax where a total super balance (TSB) is more than $3 million, revealing the government has made few changes to its already stated position and leading to the SMSF Association (SMSFA) stating it would not support the current model.
The consultation paper, released on 31 March, is consistent with the previously released fact sheet with a minor modification that applies where a superannuation fund member’s TSB was less than $3 million in the previous financial year, but had since passed that threshold. The modification will ensure the additional 15 per cent tax is only applied to earnings above $3 million.
The paper also shows insurance benefit payments from policies held within superannuation will be counted as a contribution and not as earnings, while payment splits from a spouse will also not be counted as earnings.
Despite these changes, the SMSFA highlighted the problems with using the TSB to calculate the tax, but did note the consultation paper left the door to alternative methods of calculating the charge.
SMSFA chief executive Peter Burgess said: “We understand the attraction of this approach, however, the fact remains there are various items included in a member’s TSB which, for reasons of fairness and equity and to avoid unintended consequences, should not be subject to this new tax – and top of the list is unrealised capital gains.
“In this regard, it is pleasing to see the consultation paper seeking feedback on what modifications should be made to the TSB calculation for the purposes of estimating earnings.
“It is also pleasing to see the paper seeking feedback on alternative methods of calculating earnings on balances above $3 million – in our view there are alternative methods that could be considered and it is important these are appropriately aired along with the advantages and disadvantages.”
Burgess added that while the additional tax would apply to SMSFs and to Australian Prudential Regulation Authority-regulated funds in the same way, the inclusion of unrealised gains had a greater impact on SMSFs with exposure to direct property assets.
He said it was not against the rules for an SMSF to hold a majority of its investments in a single asset if it was consistent with the fund’s investment strategy, but the proposed new tax would create difficulties for those unable to break that asset apart to meet their tax obligations.
“Before the announcement of this new tax, it would not be fair or reasonable for the trustees to have envisaged the payment of this new tax, which, in some years, could be substantial,” he said.
“It’s generally not possible to sell part of a farm, for example, so the imposition of this new tax may, in some cases, require the property to be sold, causing business disruption and triggering what could be substantial transaction costs.”
