$3m super tax will thump thousands of SMSF members with $80k bill
More than one in eight will experience “liquidity stress” trying to meet the tax obligations, a report by Adelaide Uni says.
The proposed $3 million super tax would hit around 50,000 SMSF members with an average extra tax bill exceeding $80,000 in the years 2020–22, according to research by the University of Adelaide.
It also found that 13.5 per cent of affected SMSF members would experience liquidity stress in meeting the increased obligations in what the SMSF Association (SMSFA) described as the “first real glimpse of the potential impact” of the tax on the sector.
The report, which was commissioned by the SMSFA from the International Centre for Financial Services at the University of Adelaide, examined data from more than 722,000 SMSF members – two-thirds of the SMSF member population – for FY21 and FY22.
Adelaide Business School chair of finance and business analytics Professor Ralf Zurbrugg said the liquidity stress in the findings was exacerbated by the inclusion of unrealised capital gains in the measurement of earnings.
“Taxing unrealised capital gains is a somewhat radical departure from existing tax policy and extremely rare in OECD pension systems,” he said.
“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 report said the average additional tax liability of $80,000 per member concealed a highly skewed distribution across individuals.
“In 2021, we estimate a mean added liability of almost $89,000 per member, versus a median added liability of approximately $28,000,” it said. “In 2022, we estimate a mean added liability of just over $83,000 per member, versus a median added liability of around $9,000.”
It said the nature of capital markets meant the treatment of unrealised capital gains and carried forward capital losses was highly problematic. It was common to see a string of bull market years followed by a sharp bear market decline, which meant there was a strong possibility a member could be cumulatively taxed on investments that made an overall loss without any real recourse to recover their tax expense.
The report also argued that the government was potentially short-changing itself by taxing unrealised capital gains.
ICFS deputy director George Mihaylov said if the government used an earnings measure that aligned with existing tax policy, it would alleviate liquidity stress in the short term and yield more revenue 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.”
SMSFA CEO Peter Burgess said including unrealised capital gains meant tax liabilities would be directly related to the performance of investment markets.
That made the proposed tax unpredictable and inequitable, as well as making it extremely difficult for superannuants to plan investments and manage liquidity.
“Asset-rich, income-poor SMSF members will find it difficult to cover their additional tax liability and this problem is likely to worsen over time as unrealised capital gains accrue while tax payments from previous years diminish liquidity,” he said.
The research said selling illiquid assets was typically associated with substantial transaction costs, market timing considerations and other macroeconomic factors that were likely to exacerbate potential losses.
“Other recent studies show around one in four SMSFs that will be affected by this tax change hold property and, 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,” Mr Burgess said.
The report said its 50,000 estimate of the number of SMSFs affected by the tax was “conservative” because “the data did not capture the non-SMSF superannuation assets that would also be included in an SMSF member’s TSB [total superannuation balance]”.
