The Institute of Financial Professionals Australia (IFPA) has once again raised its strong objections to the proposed Division 296 tax to be levied on total super balances of $3 million and above and recommended some better approaches to achieve the government’s desired outcome.
In a letter to members of parliament sent 10 days ago, the industry body reiterated its concerns over several aspects of the measure, including the proposed taxation of unrealised capital gains, the omission of an indexation component, the cash-flow and liquidity issues that will result and the inequitable nature of the carry-forward-loss feature.
Further, IFPA criticised the proposed policy due to the fact it did not reflect any superannuation sector neutrality.
To this end, the institute stated: “If legislated, there will be horizontal inequities across all types of superannuation funds as we will have three regimes. For example, there are constitutionally protected funds where members don’t pay tax, followed by defined benefit fund members that will pay Division 296 tax under a complex formula which will be deferred until the tax is crystallised upon payment time, and lastly that leaves everyone else who will pay tax annually on an unrealised gains model.”
The correspondence also included two recommendations, one of which was to adopt a methodology based on targeting actual taxable income above the $3 million threshold.
In addition, it suggested the taxation of withdrawals over $3 million would be a more prudent approach.
“Rather than applying Division 296 tax on a proportion of earnings over $3 million, which includes taxing unrealised gains, an alternative option is to apply a 15 per cent tax on all taxable component withdrawals from accumulation phase for those with balances greater than $3 million, regardless of a member’s age,” it said.
Another suggestion was for the reintroduction of a compulsory cashing obligation for members where individuals were forced to drawdown money from their retirement savings at a specified age, an impost that existed before 2017.
“This could be done via revisiting the tax concessions on pensions. Currently, the pension transfer balance cap (TBC) of $1.9 million limits how much a person can move into a tax-free pension, but perhaps a second class of pension could be introduced that does not receive the same tax-free status that ‘retirement-phase pensions’ receive,” it noted.
According to IFPA, another class of pension could operate in a similar way to current transition-to-retirement income streams for people below age 65 who have not retired.
“In the end, compulsory cashing is about forcing members who reach a certain age to start drawing down on their superannuation either as a lump sum or a pension (or both). This approach is easy enough to apply to every type of superannuation fund and tax will only be paid by those members with a high balance when they are removing money out of the system. This would be a simpler system rather than having to worry about unrealised capital gains, losses and so on that may occur during the year,” it said.
Finally, the member body repeated its criticism of the inadequate consultation process associated with the bill that will introduce the new tax.
