Wealthy property investors prepare to flee super funds

As tax leaders scramble to stave off the government’s plan to introduce tax on unrealised gains in super, advisers are now privately conceding that property investors will flee super in the months ahead.

Last-minute attempts to convince the government of an alternative method for bringing in the new 15 per cent tax – set to cut in above $3m – have so far fallen on deaf ears.

Tax experts are up in arms about the tax – not because it hits very wealthy super investors with more tax but rather because it breaks existing tax principles in taxing unrealised (or paper) gains.

Among the alternatives put forward are:

A PLAN to simply introduce the tax on the existing annual fund returns put through each year. A University of Adelaide study looking at SMSFs showed that such a proposal would yield similar results as the controversial new method proposed by Treasury;

A SEPARATE proposal from The Tax Institute to allow deferrals of the tax so that holders of illiquid assets – such as property – do not face paying the tax until liquidity has been achieved through the sale of the asset. Advisers suggest that property owners, farmers and other investors – where substantial illiquid assets are held in super – will be first hit.

According to the government, more than 80,000 investors will be affected by the tax. Industry analysts say the vast majority of this group will be self-managed super fund operators who will now commence moves to get properties out of their funds.

With the tax due to commence on July 1, 2025, advisers say a considerably larger number of investors than the 80,000 suggested by the government will be taking a long-term view on super investing, knowing that the tax lies ahead. Most property investors operate on a five to 10-years basis.

There is also no plan to index the $3m cap, so more investors will be brought into the tax net each year. “It’s going to be a form of bracket creep,” says Robyn Jacobson of The Tax Institute.

A further concern is that the tax is levied on individuals. Under the planned arrangement the individual member of the fund is hit with the bill; the bill can be paid by the individual or by the individual’s super fund.

Similar arrangements have been in place for high-income super earners exposed to so-called Division 293 tax that kicks in against super contributions for those earning more than $250,000 a year.

The new super tax, which is another 15 per cent tax on earnings above $3m, is to be called Divisions 296. The tax is paid on a formula based on the changed total balance of the individual each year.

Individuals with more than $1.9m in super are already taxed at 15 per cent on their earnings above that cap.

SMSF operators are also upset that there will not be any refund on the new tax if super funds make a loss. Instead, tax losses will be carried forward in a similar fashion to how losses are carried forward against future gains in the CGT system.

The official consultation process on the planned legislation closed on October 18. On the parliamentary front the only potential blockage to surface so far has been suggestions the Greens may hold up the legislation in pursuit of other outcomes in the same manner the minor party has held up housing legislation.