Angry chorus of disapproval greets $3m super tax

An angry chorus of disapproval from accountants has greeted the government’s proposal to double the levy on super balances above $3 million, alleging unfairness, discrimination, complexity and a departure from fundamental tax principles.

The NTAA, SMSF Association, IFPA and CA ANZ were unanimous in damning the proposal for a range of flaws from a lack of indexation to capacity to double-tax, from an inadequate treatment of losses to the calculation of the $3 million threshold.

The SMSF Association said the calculation method was designed to make life easy for APRA funds and discriminated against SMSFs.

“The proposed model has been designed for APRA regulated funds, yet three-quarters of the estimated 80,000 members being impacted are SMSF members,” CEO Peter Burgess said.

“It is unfair that SMSF members with balances above $3 million will be required to pay tax on unrealised gains because some APRA regulated funds may find it difficult to report the taxable earnings attributable to members.”

“The lack of equity and unintended consequences arising from the proposal are driven by a desire to placate the large APRA funds – a clear case of the ‘tail wagging the dog’.”

He said with minor system and reporting changes some APRA regulated funds could report a member’s actual taxable earnings.

“We are asking the government to give these funds the opportunity of reporting actual earnings rather than the proposed model which would calculate earnings based on the movement in the member’s total super balance and, which by definition, includes unrealised gains,” Mr Burgess said.

“Where a fund cannot or chooses not to report actual earnings attributable to a member, a default notional earning rate should apply.”

He said SMSFA members were increasingly concerned about the proposals and the limited consultation period, which ended this week, failed to allow sufficient time to properly consider the impacts.

The Institute of Financial Professionals Australia – formerly Tax & Super Australia – echoed many complaints by claiming an impost on unrealised gains was a “fundamental shift” in tax principles.

“The obvious approach is for the extra 15 per cent tax to be applied to actual taxable income,” head of superannuation and financial services Natasha Panagis said.

“Existing software programs already allow superannuation funds to report and calculate actual taxable income at the fund level and distribute the net amount to each member’s account. Only a slight modification would be required to break up the fund’s earnings into two components for each member, being taxable earnings and untaxed earnings (unrealised gains).”

“This issue has caused the most angst as this new tax is a fundamental shift from the way the existing Australian tax system works. It goes against the general tax principle of paying tax on income that has actually been derived or on actual realised capital gains.”

It said the proposal was an “urgent tax grab” and urged the government to make changes.

The CA ANZ submission said it had sought the views of its membership and given the proposals thumbs-down.

“On balance CA ANZ does not support this measure for a large number of reasons including:

• The complex design features of the policy which will add considerable cost to administer the whole superannuation system.
• It alters the tax mix for those saving for retirement which requires certainty.
• It creates uncertainty which will discourage many from making additional contributions towards their retirement.
• We question how much net revenue will be raised from this measure.
• We believe there may be better solutions available to the government.
• The current design of the policy taxes unrealised gains.”

CA ANZ said the large super balances cited to justify the measure were a result of inheritance, “significantly better investment returns” or previous policies, which until 2006 allowed individuals to contribute unlimited personal after-tax contributions.

“There is very little publicly available data on the profile of people with large superannuation balances. However we have good reason to believe that many of them are elderly, are fully retired and made large undeducted contributions before May 2006.”

It said the result would be an “incredibly complex measure” that cost more for fund members and the ATO to administer.

It also drew up a list of potential issues requiring clarification, including how the tax would treat structured settlement and personal injury contributions, death benefits, insurance payments, limited recourse borrowing arrangements, reserves, foreign super and defined benefit pensions.

“Fraud, dishonesty, bankruptcy and compensation payments all need to be considered,” it said.

The treatment of losses was another point of contention in submissions along with the potential for some funds to struggle to meet the tax liability due to insufficient cash flow.

“This is likely to arise with different types of real estate especially commercial, retail and rural properties,” CA ANZ said. “Many small to medium enterprises hold their business premises in a superannuation fund or related entity. This will have a large impact on this critical sector of the economy.”

In its broadside against the proposals the NTAA highlighted the need to change the rules so funds with balances above $3 million could restructure before the limit was imposed in two years.

“Individuals should be allowed to withdraw part or all of their excess super balances (i.e., above $3 million) without having to satisfy an existing condition of release,” the NTAA said.

“In this regard, the government could introduce an additional condition of release just for this purpose.”

“Any such withdrawals should be tax-free to the individual, irrespective of their age. Any asset disposals in a fund to facilitate such withdrawals should be exempt from CGT.”

The NTAA also pointed to many unintended consequences, including a “death tax” where a reversionary pension could push the recipient’s limit above the threshold.

Overall the proposal created “further uncertainty for Australians when it comes to making decisions about future investments in superannuation”.

“Changes that have the effect of reducing superannuation tax concessions create uncertainty about the scope for further changes being made. This has the potential to divert investment behaviour away from the superannuation environment.”