Legislation, SMSFA, Tax

Unrealised gains tax a dangerous precedent

SMSF Association Unrealised capital gains Division 296 tax

Taxing unrealised capital gains as part of the Division 296 impost could set a risky precedent, potentially causing significant ripple effects throughout Australia's tax system.

The SMSF Association (SMSFA) has warned the taxation of unrealised capital gains, proposed as part of the Division 296 impost on superannuation balances exceeding $3 million, could establish a precedent with broader implications, even for those who are unaffected by the tax.

SMSFA chief executive Peter Burgess acknowledged the measure was unusual in the Australian taxation system and raised concerns the concept could be applied to areas outside of superannuation if the bill, as currently proposed, passes through parliament.

“This new tax turns existing tax policy on its head by treating the increase in the price of an asset as income received during the income year. Furthermore, when the asset is eventually sold, the capital gain maybe subject to capital gains tax, subjecting taxpayers to double taxation,” Burgess noted.

“To impose tax annually on the ‘paper increase’ in the value of an asset would involve taxing investors on amounts they haven’t received, so would require investors to call on cash reserves to pay the tax. And what if asset prices go up in one year and down in the next? A complex system of tax credits and carried forward unrealised capital losses would be required to ensure equity.

“This should send a shiver down the spine of all investors. If allowed to be implemented as proposed, it would set a dangerous precedent for tax change in this country.

“It is not difficult to see how this approach could be applied to claw back perceived inequities in other areas of the tax system, including negative gearing. It could be one way the government tempers the tax benefits without amending the rules that underpin negative gearing.”

As such, he again appealed to the government to reconsider the need to tax unrealised gains and issued a call to action to industry and the wider community to oppose the introduction of the measure.

“We are always open to work with government on measures to improve the superannuation system, but making it more complex and costly to administer by purporting to address inequities in one area while introducing inequities in another is not the right approach,” he stated.

“By any measure, taxing individuals on amounts they have not received, or may never receive, is a radical departure from existing tax principles and a crude method of addressing super wealth and wealth inequality.

“It is important not only for those who will be unfairly impacted by this new tax now, but also for future tax changes to stand against this approach.”

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