Regulation, Superannuation, Tax

Ring-fence unrealised gains tax

Unrealised gains tax

The taxation of unrealised gains in superannuation should be ring-fenced to the proposed $3 million balance tax if the government presses ahead with its plans.

The government proposal to include unrealised gains within superannuation as part of its plans to impose an additional tax on balances above $3 million should be confined to the new measure by law, according to The Tax Institute.

The taxation policy and lobbying group stated it “does not support the taxation of unrealised gains as a principle that should be used in Australia’s taxation and superannuation systems” and the proposed additional tax on super earnings should be applied in a way that does not tax unrealised gains.

The institute made the statements as part of its submission in response to Treasury’s “Better Targeted Superannuation Concessions” consultation paper released in early March, adding the taxation on unrealised gains had to be limited to this proposal only.

“If implemented, the additional tax could set an unwanted and precarious precedent regarding the taxation of unrealised gains,” the submission stated.

“However, if the additional tax is legislated as proposed, we are of the strong opinion that the concept of taxing unrealised gains must be confined (and quarantined) to this measure.

“It should not be used as a model for taxing other unrealised capital gains in the future. This principle should be clearly articulated in the objects of the provision.”

The submission also called for retirement-phase capital up to the level of an individual’s transfer balance cap (TBC) to be excluded when calculating the additional tax and the $3 million threshold.

“The benefit of tax-free earnings on capital up to the TBC is not upheld by the proposed measure, which will subject earnings on capital over $3 million to the additional tax, having no regard to the TBC,” it said.

“Under this alternative [to the proposed formula], retirement-phase earnings would remain entirely tax-free up to the TBC and the additional tax would instead apply only to earnings on capital that exceeds a threshold that is lowered by the TBC.

“This approach would ensure that every individual, regardless of their superannuation balance, benefits from completely tax-free retirement-phase earnings up to their TBC.”

The institute added this approach also meant no add-backs would be required for pension drawings and Australian Prudential Regulation Authority-regulated funds would not need to report individual member pension drawings, which would also reduce complexity for defined benefit interests as the transfer balance account entry would not require additional calculations.

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