20 April 2023

The proposed additional 15% Superannuation Tax on member balances in excess of $3 million from 1 July 2025 has flagged concern for those individuals that will be impacted, estimated to be 80,000 or 0.5% of Australians. In this article we look at all of the various stakeholders and how this proposal will potentially impact them.

How the superannuation taxation is calculated

The proposed methodology per the Treasury Consultation paper for the calculation of the new Tax is anything but straightforward.

Commencing 1 July 2025, any individuals with total superannuation balances in excess of $3 million, will have an additional 15% tax levied on the portion of their earnings attributable to their balance in excess of 3 million.

For the purposes of administering the extra 15% tax, earnings will be calculated by subtracting a member’s total superannuation balance at the start of the financial year from their balance at the end of the respective financial year, with an adjustment for any withdrawals and contributions.

The tax is therefore intended to be applied to a portion of a member’s unrealised earnings on their total Superannuation balance.

Additional superannuation tax impacts

The calculation and application of the tax itself by predicating it on an unrealised gain appears to be an unnecessarily complex way of applying an extra tax. Unrealised gains as we know, are not an exact science, particularly where an SMSF has invested in unlisted assets.

The Auditor

Auditors will more than likely be obliged to place greater emphasis and scrutiny on Funds with member balances in excess of $3million. For the first time, the market value of a Fund’s net assets will now have a direct correlation to the amount of tax payable by an individual or their Fund.

It is not Funds which invest in cash and listed shares for example, that will test the Auditor’s mettle, but those Funds with unlisted investments where the underlying market value is not easily ascertainable.

Will the likely additional audit testing drive up Audit and Administration fees? What level of audit evidencing would be acceptable? Will the current market valuations being sourced by trustees for unlisted investments be sufficient for audit evidencing? Will the Auditor require formal market appraisals that come at a premium, for private and unlisted investments including property?

SMSF Trustees

The proposal suggests that a notice of assessment for the extra Superannuation Tax is to be issued to the individual who can elect to pay the tax personally or via Superannuation. Remember this is a tax on an increase in the market value of an asset that may not have been liquidated.

What if the individual and/or their SMSF are cash poor? What if there is a delay with the ATO notice getting issued? Would the individual need to maintain adequate cash reserves for several months until the assessment is issued? Will we start to see an increase in trustees requesting their SMSF Administrator to hold off lodging their SMSF Annual Return if they are cash flow poor?

Will we see a shift in an SMSF’s underlying investments in future years, and a move away from some of the asset classes outlined above due to the additional administrative burden, including costs and associated delays in the Audit process?

Will SMSF Trustees move away from investing in volatile or less liquid investments. An investment in volatile assets such as crypto currency for example, with an initial low capital outlay, could result in a large unrealised capital gain in a financial year. However, due to its volatility the value may drop significantly in the following year.

The SMSF Trustee may find themselves in an undesirable position of having to sell the asset at its lowest, in order to fund the tax bill, if the member has elected for the Fund to pay the additional 15% tax.

The Economy

The current proposal is based on a fixed date for calculating the extra Tax in its inaugural year i.e. 30 June 2026. Unless there is a relief mechanism (similar to when the CGT Relief provisions which were brought in circa 2017, when the Transfer Balance Cap was introduced), impacted members may consider liquidating their investments and where eligible, consider transferring some of their entitlements outside of the superannuation environment prior to 30 June 2026. What impact will this have on the greater economy leading up to 30 June 2026?

Death Benefit Taxes

Death benefit taxes are payable on the “taxable” component of a superannuation benefit where a death benefit is paid to a non-dependant for tax purposes (i.e., generally someone who is not a spouse, de-facto partner or child under the age of 18)

If this proposal is enacted in its current form, would some trustees with balances in excess of $3million, who have met a “condition of release”, consider withdrawing and bequeathing more of their superannuation entitlements to their adult children for example, in life instead of in death? An unintended consequence perhaps, resulting in less death benefit taxes ultimately payable to the ATO.

What next for these changes in Superannuation Tax?

I expect there to be some fine tuning in terms of how this new tax is implemented between now and when it is eventually enacted, if in fact it does get legislated in its current form.

What we can hope for, is a more practical application of any additional tax, instead of the current measure which proposes to tax a portion of the unrealised capital gains attributable to a member in a most convoluted manner.

To help make the most out of your tax and to understand how these changes in superannuation will impact you, get in touch with our SMSF Advisory team, or speak to a Findex Wealth Management adviser and ensure your retirement plan remains on track.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the thought or position of Findex (Aust) Pty Ltd ABN 84 006 466 351.

This article contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.