An alternative method of calculating the earnings within a superannuation fund that would be assessable under the Division 296 tax could be applied to all funds and resolve the issue of unrealised capital gains without stalling the commencement of the new impost.
SMSF Alliance principal David Busoli said given the proposed tax was likely to become law, efforts to introduce change should focus on its calculations and specifically those used for earnings.
Busoli stated the calculation of the proportion of earnings that will be taxable should remain as the total super balance (TSB) at end of financial year (EOFY) minus the $3 million threshold, with that figure divided by the EOFY TSB.
He added the change to calculating earnings should split out funds that can accurately report their actual earnings compared to those that cannot.
“Under the current proposal the ATO gather the member’s data from each fund, amalgamate it and apply the formula [where] earnings are [equal to] the adjusted EOFY TSB minus the TSB at start of financial year,” he said in a communication to his clients.
“What I propose is that this be the default position where the member is not in a fund capable of providing actual income data at the member level.
“Where they can, then the earnings for such a member is actual income, which is defined as income including realised capital gains less the effects of concessional contributions and pension-exempt income.”
He pointed out this method would work for members in any type of super fund. It would use the formula of earnings being equal to adjusted EOFY TSB for members in funds that do not report actual income, minus the TSB at start of financial year for members in funds that do not report actual income, plus actual income for members in funds that can report actual income.
“A flat tax rate of 15 per cent is applied to the proportion of earnings attributable to the member’s balance over $3 million in the same way as the present proposal,” he said.
“This change caters for several competing interests. It removes the highly unpopular tax on unrealised gains for those funds that can report actual income.
“For those funds that cannot report on that basis, they have until 30 June 2026 to get their reporting in order, if they choose to do so.”
He pointed out this change in calculation would not delay the introduction of the tax and it could still commence on 1 July, and a similar model was considered by the government.
“Notably, the bill includes a consideration of the actual income method, but it lacks the simplicity that I propose. Though it was regarded as being too expensive to implement, page 206 of the bill admits that it was not costed,” he said.
