Legislation, Tax

Better Div 296 model is available

Division 296 Unrealised capital gains Earnings calculation Total superannuation balance

The government can implement an additional super earnings tax, but do so without taxing unrealised gains by adopting a simpler method of calculating earnings.

The federal government can still meet its aim of implementing targeted superannuation concessions without taxing unrealised capital gains by using actual taxable income as a measure of earnings, the Institute of Financial Professionals Australia (IFPA) has suggested.

In its submission to Treasury regarding the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023, which will introduce the Division 296 tax on super earnings of funds with balances above $3 million, IFPA said using actual taxable income was a simpler and more equitable solution that would work across the sector.

“This solution will not only avoid taxing unrealised gains, but it also rules out the need to calculate an individual’s modified TSB (total superannuation balance) by adding back withdrawals and reducing it by contributions received by the fund and eliminates the need to track carried-forward negative earnings,” it stated.

“For superannuation funds, such as SMSFs, that can already identify a member’s TSB and can calculate actual earnings for each member of a fund, these funds should be given the option to apply Division 296 tax to actual taxable income/earnings above $3 million.

“This would be a fair outcome considering Division 296 tax is expected to have a greater impact on SMSFs than on members of large Australian Prudential Regulation Authority (APRA)-regulated funds.

“Conversely, large APRA-regulated funds that cannot easily work out actual earnings for members could rely on an alternative method, such as the formula-based approach proposed by Treasury.”

The professional body noted while this would create a two-tier model in calculating the Division 296 tax, it would remove the taxation of unrealised gains that may apply to SMSF members.

“We already have different approaches for large and small funds, such as transfer balance account reporting and the pending legislation that aims to treat SMSFs differently to APRA-regulated funds when it comes to non-arm’s-length income provisions, so there is already precedence for having alternative approaches to achieve a policy-intent outcome,” it said.

“Provided the outcome delivers on the policy goal, then having two options as solutions for large and small funds should be permitted.”

IFPA’s submission repeated previous industry concerns about the lack of indexation of the $3 million threshold and also called for members to be able to draw their funds below that figure even if they had not met a condition of release.

The submission also noted the cap measure was ultimately unnecessary as the large balances were held by a small cohort of members and these sums would work their way out of the system as those members aged.

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