The body representing advisers to the almost $1 trillion self-managed super fund sector remains optimistic that its proposed amendments to a superannuation tax bill that were voted down in the lower house can be saved in the Senate.
The Government proposed the new Division 296 in the Income Tax Assessment Act which would apply additional tax to super accounts that have a total superannuation balance (TSB) of greater than $3 million.
The SMSF Association sought an amendment to the draft bill that would see the $3 million cap indexed each year, but the amendment was voted down in the lower house.
The bill has now gone to the Senate where it will require the support of independent Senate crossbenchers, as Labor and the Greens do not have the numbers to pass the legislation.
SMSF Association chief executive Peter Burgess has been working to ensure the independents understand the consequences of the bill should it pass without amendments.
Burgess tells Professional Planner the SMSF Association’s strategy is “ongoing dialogue with the Senate crossbenchers, making sure they are aware of the unintended consequences and unfair outcomes that will arise”.
He says the association is informing the crossbenchers of the consequences of the $3 million cap not being indexed, and of taxing unrealised capital gains in funds where the TSB exceeds the cap.
“We are optimistic that we will see some amendments made to this bill to reduce the severity for those who are going to be impacted,” Burgess says.
“That’s purely based on the discussions we’ve had with the centre crossbenchers.”
Last month at Ignite, held by HUB24-owned SMSF administration service provider Class, Burgess told a panel that once the bill reaches the Senate things will “heat up” but that the situation was “encouraging”.
Burgess says the SMSF Association has put forward three amendments, to remove the unrealised gains tax, index the $3 million cap and fix the anomaly in the drafting of the legislation regarding taxation on the year of death.
However, Burgess says the amendment around removing taxation of unrealised gains is the most important as it is “a significant departure from existing tax principles in this country”.
“One of the big problems with the way they’ve designed this tax is that it’s going to be linked to movements in capital markets,” Burgess says.
“If prices are going up, you’re going to have to pay a lot of tax. It’s very volatile, very erratic. If you have a tax like this that is linked to movements in capital markets, it’s very difficult to manage your liquidity, because you just will not know what tax you want for the next year.”
Burgress says the tax is going to have “a detrimental impact” on long term investment performance, because rather than that money being invested, it will be held in cash.
The unpredictability of the proposed taxation of unrealised gains has been cause of concern among the independents, according to Burgess.
“Based on the discussions we’ve had with the Senate crossbenchers, we’ve met with all 10 of them over the last few months, they’re all concerned about the taxation of unrealised gains.”
Burgess explains taxation of unrealised gains will cause serious issues for small businesses and property owners such as farmers.
The SMSF Association has an ally in the National Farmers Federation, which this week issued a media release expressing concern about the impact of the new tax on “thousands of family farms and small businesses”.
“Thousands of farms across Australia are currently held in a self-managed superannuation fund and are often leased to the next generation, providing both retirement income as well as an opportunity for the next generation to take over the business,” NFF president David Jonke said in the release.
“The farm sector is particularly worried that the taxation of ‘unrealised gains’ may force primary producers to sell their land assets in order to pay off their new tax bill.”
Amendments to the proposed Division 296 are not universally supported across the superannuation industry. Super Consumers Australia director Xavier O’Halloran supports the tax reform and argues criticisms of the tax changes “appear to be more rooted in the financial self-interest, rather than a desire to create an equitable and sustainable superannuation system”.
“It is high time that government support is directed where it is needed most,” he says.
“Everybody agrees that the objective of the super system is fundamentally about delivering retirement incomes, and that an equitable and sustainable system is what we need. To get there, steps are needed like tax reform.”
However, O’Halloran adds that people on lower incomes, retired renters and many other groups “continue to experience the highest rates of financial stress in retirement”. “The revenue generated by the tax changes must be directed towards addressing the retirement needs of these groups, for example, by raising Commonwealth Rent Assistance to a liveable rate,” he says.
The Association of Superannuation Funds of Australia wants to see revenue raised from the new tax used to make the superannuation system fairer to low-income earners.
Chief executive Mary Delahunty said in a media release in August that “Division 296 and Division 293 aren’t just measures aimed removing tax concessions for those with high super balances – [they are] an opportunity to make society fairer and provide low-income workers with a more dignified and secure retirement”.
Super Members Council, formed after the merger of Industry Super Australia and the Australian Institute of Superannuation Trustees to create the peak body representing profit-for-member funds with, collectively, 11 million members and assets of $1.5 trillion, says it supports the superannuation tax as “a good step towards ensuring tax concessions in super are fair and well-targeted”.
SMC general manager of strategy Matt Linden says “some tax caps in super are indexed, others are not – that’s a matter for Government or the Parliament”.
“But Government should periodically review all tax caps inside super and their relationships to each other to ensure their policy objectives are being met,” he says.
