Coming soon: new tax to hurt property investors, farmers

Draft legislation for a new super tax points to unprecedented tax outcomes for property investors and farmers.

An unprecedented move by the Albanese government to tax paper gains in superannuation is prompting consternation across the sector, where property investors and farmers look likely to be the first targets of the planned move.

After reviewing the draft legislation on the new extra 15 per cent tax to be applied on superfund earnings above $3m, industry leaders appear considerably more upset with the method of applying the new tax than the actual imposition of a higher tax bill.

Natasha Panagis, the head of superannuation and financial services at the Institute of Financial Professionals Australia, says no other country in the world taxes unrealised capital gains.

“It’s unfair and unnecessary. We don’t pay tax this way.”

Natasha Panagis, the head of superannuation and financial services at the Institute of Financial Professionals Australia.

It seems very few in super circles had anticipated investors could be taxed upfront for profits that might never be realised.

The recently released draft legislation for super changes from Treasury also confirmed that the tax on gains would be charged annually.

However, there will be no refunds for losses – rather the losses can only be offset against future gains, similar to the current rules around capital gains tax.

“The problem is that super is not like any other business, and the new tax is aimed at individuals -but an individual may not live long enough to ever access the offsets,” said Ms Panagis.

The prospect of tax losses marooned indefinitely inside the tax office is just one of a range of potential outcomes of the new tax that advisers say will hit investors who may have little idea of what is coming down the line.

Industry experts, such as Peter Burgess at the Self Managed Super Funds Association, suggests investors who have most of their money inside ‘illiquid assets’ such as farmers or property investors are among the most exposed.

The new tax will also hit anyone who borrowed funds to finance their retirement because it will be applied on a person’s total super balance – that balance includes borrowed funds.

Once the new tax is introduced in 2025 it will work in a manner similar to the so-called Division 293 tax today – that is, it will be applied immediately and directly on an individual. Division 293 applies where you have to refund some of the tax concessions you received on super contributions because your annual income went over $250,000.

The new extra super tax will be called Division 296.

Also in common with the existing Division 293 tax, the draft legislation says individuals would have the option of paying their extra super tax liability by either releasing amounts from their superannuation or using amounts outside the superannuation system.

Advisers suggest taxing unrealised gains flouts all basic tax principles and may trap investors who only temporarily transcend the $3m ‘cap’ such as those who might have struck it lucky in a small cap share which soars briefly before coming back to earth with a thud.

Separately, advisers warn that valuations among unlisted assets will be under review in relation to the tax along with unit prices at big super funds.

The new draft legislation also clarified the exemptions which will apply to the tax, including:

•Child recipients of superannuation income streams at the end of the income year.

•Individuals who died before the last day of the income year.

•Individuals who have a structured settlement contribution made in respect of them as a payment for a personal injury at the end of the income year, or any year prior.