Administration, Legislation, SMSF, SMSFA, Superannuation, Tax

$3m soft cap liquidity risk proven

$3 milliom superannuation earnings tax liquidity SMSFA

New SMSF Association-commissioned research has indicated the tax on super balances over $3 million will result in liquidity risk.

Research commissioned by the SMSF Association into the proposed new tax on total super balances above $3 million has found of the forecast 80,000 individuals the measure has been predicted to impact, 50,000 of them will be SMSF members and that a good proportion of this cohort will experience associated liquidity issues.

The International Centre for Financial Services (ICFS) at the University of Adelaide performed the study, which analysed the potential effect the new tax would have had if implemented for the 2021 and 2022 financial years and revealed a resulting $80,000 of tax liabilities for superannuants.

Further, the report showed an estimated 13.5 per cent of SMSF members captured by the new tax would have suffered from liquidity stress in their ability to fund their tax obligations over these two income years.

University of Adelaide Professor Ralf Zurbruegg attributes this finding directly to the fact the revenue calculation for the new tax includes unrealised capital gains.

“Taxing unrealised capital gains is a somewhat radical departure from existing tax policy and extremely rare in OECD (Organisation for Economic Co-operation and Development) pension systems,” Zurbruegg noted.

“There are potentially far broader consequences than those already outlined and we recommend that the legislators carefully reconsider the implications of this proposal in its current form.”

ICFS deputy director George Mihaylov argued not aligning the revenue calculation for the measure with the existing taxation system will also limit the amount of revenue the government could possibly generate from this course of action.

“That’s because this new tax will still be levied on capital gains, but only when the underlying assets are eventually sold. Under normal asset price appreciation over time, the overall tax base will be greater,” Mihaylov noted.

SMSF Association chief executive Peter Burgess pointed out including unrealised capital gains in determining revenue for the tax would exacerbate market fluctuations. This is due to the fact individuals would potentially have to fund their tax liability, incurred during bull market runs, when subsequent corrections take place.

“Asset-rich, income-poor SMSF members will find it difficult to cover their additional tax liability and this problem is likely to worsen over time as unrealised capital gains accrue while tax payments from previous years diminish liquidity,” Burgess said.

According to the research, SMSF members forced to sell assets to pay their liabilities under the new tax will suffer greater losses as they would not be disposing of them at the optimal time.

“Other recent studies show around one in four SMSFs that will be affected by this tax change hold property and, given many will be small business operators and farmers who hold their premises and land in an SMSF, it’s easy to see how disruptive this new tax will be not only for the SMSF sector, but for small business operators and the broader community,” Burgess said.

“Clawing back the superannuation tax concessions for high-balance superannuants was one thing, but taxing paper capital gains that may never be realised is something completely different.”

The report collated responses from over than 722,000 SMSF members or two-thirds of the SMSF member population.

The draft bills for the measure were released earlier this month.

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