Changes to the capital gains tax (CGT) regime should not result in funds holding units in managed investment trusts (MIT) being denied tax treatment that would be available if they made a direct investment in the same asset, the SMSF Association has told the government.
In a supplementary submission to Treasury in regards to tranche 2 of legislation that will make changes to the CGT and negative gearing regimes, the professional body noted the proposed CGT treatment of MITs – which include cash management trusts, unit trusts and managed funds – could result in an SMSF investing through one of the vehicles paying more tax than a directly held investment.
The submission noted this would occur through an interaction of the proposed capital-loss ordering, indexation and attribution rules in the legislation despite the government stating superannuation funds, including SMSFs, and many widely held trusts were excluded from the CGT reforms.
“Under existing law, a complying SMSF can generally apply capital losses against non-discount gains before discount-eligible gains, preserving the benefit of the one-third superannuation CGT discount,” the association stated.
“Where the same exposure is held through a MIT or attribution MIT, the trust calculates its gains and applies losses before amounts are distributed or attributed to investors.
“The proposed loss-ordering rules can therefore reduce the pool of discount-eligible gains before the SMSF receives its attributed amount. The SMSF cannot reverse that trust-level allocation.
“In a simple case, this can result in $15 of tax rather than $10 for each $100 of affected gain, despite the underlying economic investment being unchanged.
“This would create an unintended structural disadvantage for pooled investments and is inconsistent with the intended policy outcome.
“SMSFs commonly use managed funds to obtain diversified investment exposure. Their tax treatment should not turn on whether that exposure is held directly or through a pooled vehicle.”
As such, the submission called for the preservation of tax neutrality via amendments to the tranche 2 CGT provisions so a complying superannuation fund was not denied the CGT treatment available in a direct investment, as well as the removal of MITs from any loss-ordering rules that produced that outcome.
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason