SMSFs that fall under the proposed Division 296 impost are likely to de-risk their portfolios and move away from investing in the small company and venture capital space where they will face ongoing taxation of unrealised capital gains, according to Wilson Asset Management (WAM).
The investment firm, which publicly stated its opposition to the new impost in a discussion paper released in April, has issued a second paper focused on the impact the tax will have on small growth companies and the pipeline of investment that comes from SMSFs.
The new paper, titled “Taxing Aspiration and Innovation into Oblivion: How the Unrealised Gains Tax and the Failure to Index Will Decimate Australia’s Innovation”, released by WAM chair and chief investment officer Geoff Wilson, stated the Division 296 measure will create an “enforced shift in risk appetite”.
“SMSFs have long been recognised as a vital source of patient capital for Australia’s emerging companies, particularly in the small and venture capital space,” Wilson said.
“Their capacity to take a longer-term view and invest in less liquid, higher-growth-potential assets has been instrumental in fostering innovation.
“Faced with an annual tax on unrealised appreciation, SMSF trustees, particularly those with balances exceeding or approaching the $3 million non-indexed threshold, will have a strong incentive to de-risk their portfolios.
“This would lead to reallocating away from typically volatile small growth companies, where gains are typically unrealised for longer time horizons, and towards more stable, income-generating assets.
“This behavioural shift, while a rational response to a punitive tax, risks significantly reducing the $1.1 trillion pool of patient capital held in SMSFs that is critical to supporting innovation and emerging enterprise.”
He said the illiquid nature of investments in small growth companies and venture capital could create poorly timed sales of other more liquid assets or of the illiquid holding to pay the Division 296 tax, and erode value for an SMSF, but also destabilise the investee company by creating forced sellers in an illiquid market.
“Given that SMSF investments account for high ownership percentages of start-ups and unlisted companies, and 12 per cent of the ASX market capitalisation, widespread selling or reallocation by this segment would have material repercussions,” he added.
“This tax introduces what can be described as a perverse ‘success penalty’. The better a small company or start-up investment performs, the larger the unrealised gains, and consequently the greater the tax liability and liquidity pressure for the SMSF holder.
“This dynamic may force investors to exit high-performing assets prematurely, curtailing their long-term growth trajectory purely for tax management reasons.
“The collective de-risking by a substantial cohort of SMSFs would lead to a structural shallowing of the angel and early-stage capital pool in Australia.”
