A registered SMSF auditor has highlighted how severe and inequitable the application of the proposed Division 296 tax on unrealised capital gains would be in certain circumstances using a recent client experience to do so.
Tactical Super director Deanne Firth shared the situation involving an SMSF, which would have satisfied the Division 296 $3 million threshold, and where the trustee had invested in a mining stock that spiked in value on 30 June 2023, generating an unrealised gain of $7.7 million.
Firth said had the proposed new measure been implemented from 1 July 2022, the circumstances would have resulted in a tax liability of $1.1 million.
However, by the time the 2024 income year financial statements had been finalised and the Division 296 tax notice would have been issued had the measure already been introduced, the same stock had produced a $10 million loss.
Further, the member’s total super balance was only just over $3 million and the remaining assets in the fund, if sold, were not of sufficient value to cover the $1.1 million tax liability, while the offending stock was now of just about no value, Firth noted.
“So [to pay the tax debt the trustee] would have had to liquidate the rest of the super fund and there wouldn’t have been anything left in the SMSF. But that still wouldn’t have covered the $1.1 million tax [amount],” she told delegates at the Auditors Institute Auditors Day Melbourne last Friday.
“Because [the trustee would have been] personally liable and they’ve retired, their only asset outside of super is [the family home] so the house would have had to have been sold to pay the [Division 296] tax.
“Then in 2024 they’d now have a super fund that only has an asset in it that has crashed and a $10 million carry-forward loss that is actually worthless.”
Given this scenario and the potential implications it would have had for the SMSF members under the proposed Division 296 tax rules, she implored attendees to make their members of parliament aware of the severe outcomes the measure could bring about.
