While the government is insisting the new laws will only affect a small number of super fund members — some 80,000 all up — the reality is it will change life for a much broader cohort, particularly those who have put property or family farms into their funds.
Despite almost a year of the SMSF Association (and other groups such as the Tax Institute and Chartered Accountants Australia & New Zealand) raising concerns about the new tax regime — which will impose a 30 per cent tax rate on any increase in the value of a super fund above $3m over the financial year — the government has finally introduced the enabling legislation into the lower house.
While there are predictions the Greens might hold up the bill when it comes to the Senate, given their handling of the Housing Australia legislation, the law can be expected to pass after some political horsetrading.
Like some other groups, the Self Managed Super Fund Association had been hoping the government might reconsider its plans to introduce the new regime, which taxes unrealised gains and not just earned income, given the radical nature of the new approach.
The new tax regime will come into effect in the 2025-26 financial year, but anyone with any sizeable amount in super will need to start reviewing how it could affect them well ahead of then.
If they plan to take assets out of a fund to get it below $3m — which many people affected will do — they need to plan how they will do it and assess the different legal and tax implications of how.
SMSF Association chief executive Peter Burgess describes the bill as “a poorly constructed tax which will have many unintended consequences and inequitable outcomes”.
“By linking this tax to movements in investment markets, a member’s tax liability could vary by tens of thousands of dollars, and in some cases hundreds of thousands of dollars, each year — making liquidity management extremely difficult,” he says.
“The SMSF Association is making a last-ditch effort to head off or amend the legislation, urging Senate crossbenchers to reject it for being “complex and inequitable.
“Taxing unrealised capital gains is a tax on market movements and changes in asset values, not income — an alarming precedent as it represents a fundamental change in how tax policy is implemented in Australia,” Burgess says.
He warns the legislation could see someone who has a one-off spike in asset values in their fund, putting them over the $3m threshold, hit by the tax with no tax refund or adjustment available if their fund falls below the $3m level the next year.
The SMSF Association is also warning the fact the $3m cap is not indexed will mean an increasing number of people will be hit by the tax as their super grows. “We remain deeply concerned that the $3m cap will not be indexed, meaning the tax net will grow exponentially in the coming years,” Burgess says.
The new tax is expected to fall more heavily on the self-managed super sector, where members generally have higher balances.
At the moment there are more than 611,000 self-managed super funds in Australia held by some 1.1 million members with a total of $878bn in assets.
The Liberal-National Party Coalition is promising to scrap the tax but, with the next election not due until May 2025, those members affected, or the much broader group who are potentially affected, cannot hold their breath.
Even if the opposition did win the election, it would still have to have the support of the Senate to scrap the law — in short, a long shot and almost impossible to do before its start date of 1 July, 2025.
The SMSF Association is arguing there are other ways to raise more taxes from superannuation than the tax on all gains in the value of a fund over $3m. “There are levers, via existing caps and measures, in place now that will limit the growth of disproportionately large balances in the future and address existing large balances over time,” Burgess says.
“The tax now being proposed will simply add further complexity and red tape to a superannuation system overburdened already with regulation.”
But Burgess’s points have fallen on deaf ears, as the government clearly does want to impose an effective cap of $3m on super fund balances, backed by a Treasury which sees superannuation as a drain on the tax system.
The new tax regime will impose a much stricter compliance regime on many super funds, even if they are well below the threshold, given the potential for ATO scrutiny or of balances rising unexpectedly.
As we head into the next election, the question is what other super tax changes are ahead? And will politicians’ promises about no new adverse changes to super have any credibility at all?
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The $900bn self-managed superannuation sector is coming to terms with the fact the federal government plans to push ahead with its planned new tax regime on balances over $3m, regardless of its months of lobbying.