Super fund members face $80,000 tax hit under proposed Federal changes

A new report warns of ‘liquidity stress’ for some as 50,000 self-managed super fund members face a massive increase in annual taxes.

Some 50,000 members of self-managed super funds would have to pay an average of $80,000 more a year in taxes under the Federal Government’s proposed new superannuation taxes, according to a new report released on Wednesday.

The report warns that some 13.5 per cent of these fund members would face “liquidity stress” in finding the money to meet their higher tax obligations.

The report, by the International Centre for Financial Services (ICFS) at the University of Adelaide, which was commissioned by the Self Managed Super Fund Association, estimates the impact of the proposed tax on fund members using actual data on self managed super funds if it had applied in the past two financial years.

The Federal Government is planning to double the tax rate on super funds over $3m, with the higher tax rate applied to increases in the total balance of the fund over $3 million, and not just earned profits which is the basis of the income tax system.

The report is the first research looking at how the new proposed regime would affect self managed super fund members using actual data on funds, if the tax were applied in the 2021 and 2022 financial years.

The Federal Government has released draft legislation on the new tax which is set to go into operation from July 1, 2025.

The SMSF Association and other organisations have been critical of the proposed taxes, particularly their application to unrealised gains – the increase in the value of the fund over the financial year.

Commenting on the release of the study, Professor Ralf Zurbruegg from the University of Adelaide says the new taxes would see 13.5 per cent of those members affected facing “liquidity stress” to meet their new higher tax obligations.

“This liquidity stress has been exacerbated by the inclusion of unrealised capital gains in the measurement of earnings,” he said.

“Taxing unrealised capital gains is a somewhat radical departure from existing tax policy and extremely rare in OECD pension systems.”

“There are potentially far broader consequences than those already outlined, and we recommend that the legislators carefully reconsider the implications of this proposal in its current form.”

The University of Adelaide report finds that up to 50,000 members of self managed super funds in Australia would have been hit by the new tax if it applied in the 2021 and 2022 financial years.

It estimates that members would have had to pay an average of an extra $80,000 in tax in both these financial years had the tax been in effect at the time.

The Federal Government has estimated that the new tax regime could affect some 80,000 super fund members when it starts in 2025.

The majority of those affected are expected to have self managed super funds.

The Financial Services Council has estimated that the new tax will hit a much larger amount of people over time as their super fund balances rise.

The Federal Government has rejected calls to index the $3 million cap, which means it will apply to an increasing number of fund members over time.

SMSF Association chief executive, Peter Burgess, said applying the higher tax rate to unrealised capital gains meant tax liabilities would be directly related to the performance of investment markets, adding to the unpredictability and inequity of the proposed tax.

He said this would make it “extremely difficult” for super fund members to plan investments and manage liquidity.

“Asset rich, income poor SMSF members will find it difficult to cover their additional tax liability,” he said.

“This problem is likely to worsen over time as unrealised capital gains accrue, while tax payments from previous years diminish liquidity.”

The Association and others have warned that the new tax regime will see super fund members having to sell assets – including illiquid assets such as property – to pay their tax bills.

This will particularly affect farmers and small business people who have put property assets into their super funds.

The research argues that the real extra cost of the new tax regime will be higher on people who have to sell assets to pay it, given the transaction costs of selling and the potential for forced sales of assets regardless of the state of the market.

“Selling illiquid assets can involve substantial transaction costs, market timing considerations and other macro-economic factors which could further exacerbate the potential losses associated with having to meet the new tax liability,” Mr Burgess said.

“Other recent studies show around one in four SMSFs that will be affected by this tax change hold property,” Mr Burgess said.

“Given many will be small business operators and farmers who hold their premises and land in an SMSF, it’s easy to see how disruptive this new tax will be not only for the SMSF sector but for small business operators and the broader community.

“Clawing back the superannuation tax concessions for high balance superannuants was one thing, but taxing paper capital gains that may never be realised, is something completely different,” he said.

The report argues that the use of unrealised gains as the basis for the new tax will actually raise less revenue over the medium to longer term than imposing the higher tax on actual earnings.

ICFS deputy director George Mihaylov said using a measurement of earnings which aligned with existing tax policy – one that excludes unrealised capital gains-, would not only alleviate the liquidity stress for some members in the short term, but was also likely to yield more tax revenue for the Government over the medium to long term.

“That’s because this new tax will still be levied on capital gains, but only when the underlying assets are eventually sold,” he said.

“Under normal asset price appreciation over time, the overall tax base will be greater.”

The report says the treatment of unrealised capital gains and carried forward capital losses will also cause problems because of the nature of capital markets.

“It is common to see a string of bull market years followed by a sharp bear market decline,” it says.

“This means there is a strong possibility a member can effectively be cumulatively taxed on investments that make an overall loss, without any real recourse to recover their tax expense,” it says.