The SMSF Auditors Association of Australia (SMSFAAA) has recommended Treasury apply its proposed new tax on member benefits over $3 million to net taxable investment earnings as opposed to the total super balance movement for a particular income year.
The suggestion was made as part of the professional body’s submission regarding the retirement savings taxation measure, with net taxable investment earnings being defined as taxable income, made up of investment earnings, such as dividends, rent and interest, and capital gains, less deductible expenses allocated to member accounts, such as administration charges, investment fees and insurance premiums.
The SMSFAAA listed several reasons as to why applying the proposed tax in this manner would be better for fund members, the first of which is it is based on normal Australian tax principles where tax payable is calculated on realised income rather than in part on unrealised gains.
“As the earnings are based on realised income, the SMSF would be more likely to have the funds to be able to pay any tax [liability],” it said.
The auditing body also noted any compliance costs associated with this calculation method would be minimal as “the information is already accounted for by the SMSF and a further amount would simply be needed to be added to the SMSF’s annual return to be able to report it to the Australian Taxation Office on an annual basis”.
Finally, it said this method of calculation would effectively make the tax sector neutral as it would not prejudice either SMSFs or Australian Prudential Regulation Authority (APRA)-regulated funds.
“The APRA-regulated funds also have to track net taxable investment earnings allocated to a member’s accounts during the financial year so it would also be very easy for them to report this information to the Australian Taxation Office on an annual basis. This information for APRA funds is in effect already disclosed in members’ annual statements,” it noted.
The industry organisation concluded it did not see how using this method to calculate the tax liability would result in any disadvantages.