King & Wood Mallesons says changes to super run the risk of double taxation

A top law firms says the government has failed to consider the taxation of unrealised gains in its legislation to increase the grab from super balances above $3m.

Industry wants the federal government to redesign legislation that doubles the tax rate on superannuation balances above $3m, saying that existing plan raises significant concerns and runs the risk of double taxation on ­unrealised gains.

One of the country’s largest law firms, King & Wood Mallesons, has accused the government of failing to consider issues raised by industry following the release of draft legislation last week.

The firm has “significant concerns” around the taxation of unrealised gains in superannuation funds, and the tax treatment – including any risk of double taxation – once those gains are ­realised.

“Industry raised a number of concerns including unrealised gains and these concerns have not been addressed in the exposure draft,” King & Wood Mallesons partner Justin Rossetto said.

“There’s no commentary or guidance as to why they weren’t addressed now.”

Under the changes, announced earlier this year and detailed in draft legislation last week, a 30 per cent tax would apply to the increase in the annual value of super funds over $3m during the financial year. The tax will be imposed in ­respect of earnings ­attributable to an individual’s Total Superannuation Balance (TSB) – savings held in regular super funds, self-managed and public sector schemes.

King & Wood Mallesons partner Justin Rossetto.

Mr Rossetto said that the tax would be imposed directly on the individual, who would have 84 days to pay the tax bill, and not the super fund, which could result in someone being forced to sell shares to fund the tax bill.

“While there is provision for individuals to have amounts released from certain superannuation funds to facilitate payment of this tax, this may not be a feasible option where the ‘earnings’ are attributable to unrealised gains on illiquid assets,” he said.

“It is currently unclear how illiquid assets should be valued when calculating an individual’s TSB, which may result in significant variances between a taxpayer’s and the Commissioner’s valuation of particular assets.”

Mr Rossetto said there may be situations where “individuals who are asset-rich but cash-poor are going to struggle to satisfy this new tax liability”.

King & Wood Mallesons has highlighted that while it may be feasible for those who have retired to avoid being taxed on unrealised gains by withdrawing funds from their superannuation accounts, there is currently no provision for individuals who are yet to retire to withdraw amounts from their superannuation and thereby reduce their TSB below the $3m threshold.

“The implications for a particular individual are really going to depend on their individual circumstances. Someone who is in the retirement phase may be able to take assets out of a fund without any adverse tax implications as opposed to someone who’s much younger,” Mr Rossetto said.

The measures are due to take effect from July 1, 2025, and according to Treasury estimates will affect 80,000 people. The Financial Services Council has argued though that more than 500,000 existing super fund members, including more than 200,000 now under the age of 30, will be adversely affected.

It has also criticised the government’s refusal to index the $3m threshold for the tax structure as being unfair to future generations of super members.

Mr Rossetto said that the lack of indexation would mean that more people would end up being taxed more and would likely result in people considering how they structure their super.

King & Wood Mallesons, which is preparing to submit a response to the draft legislation has called on Treasury to sit down with industry groups to work out to hear their concerns and to take that into account with the legislation. “It would be in everyone’s interest for Treasury and the industry to sit down and consult and hear everyone’s concern,” Mr Rossetto said.