The impact of the taxation of unrealised capital gains under the proposed Division 296 measure will be exacerbated for SMSFs holding volatile assets, highlighting the unfair nature of the impost, an SMSF administrator has noted.
“Volatility [of assets] is the scary thing about the Division 296 tax. This idea that you pay the tax as assets grow and then if they tank, you don’t get a refund, how bad is that? That’s one of the most egregious parts of the whole tax,” Heffron managing director Meg Heffron noted at Class Ignite 2024 in Sydney today.
“If the government’s going to take your money on the way up, they should give it back if you don’t ever get that gain, but no, you get a loss to carry forward, which is all well and good, but only if you can use it.
“If you exit the system before using the carry forward because you die or because you take all your money out of super or if your balance never really recovers and you never get above $3 million again, that loss is useless. Taxing gains would be far more palatable if they were going to give a refund for losses, but they’re not.”
To illustrate her point, Heffron presented two scenarios under the tax. In the first, an SMSF trustee experiences a large capital gain in the first year followed by a major loss in the second due to the volatile nature of the assets they hold in the fund.
Despite the loss, the trustee will face a large liability in the first year the tax is implemented without a refund, only a loss carry forward that may never be used if their assets do not recover.
In the second scenario, the loss happens first, then the gain, resulting in a much lower liability. To that end, Heffron noted the order and timing of gains and losses could lead to very different outcomes under the tax, despite both scenarios ending with the same value of assets.
“We can completely reframe the conversation [we have with clients]. We need to talk about volatility because if you’ve got a lot of highly volatile assets in your super fund, that’s where the Division 296 tax might actually hurt you,” she said.
