Draft super tax legislation riddled with unintended consequences

SMSF Association Media Release

Small business owners and farmers with their land or business premises owned by their SMSF are the big losers in the draft legislation on the Better Targeted Superannuation Concession, says SMSF Association CEO Peter Burgess.

In the Association’s 17-page submission to Treasury on the proposed legislation, Burgess says the research shows that it’s these two important business communities that are most likely to be adversely affected by this legislation with its proposal to tax unrealised capital gains.

The Association’s submission cites many unintended consequences and anomalies in the draft Bill, most of which can be traced to including unrealised capital gains in measuring earnings.

The submission provides three case studies to illustrate examples of “over-taxation” and a scenario where the so-called Division 296 tax would fail to “claw back” any of the superannuation tax concessions for individuals with very large super balances – the primary driver behind the better targeted superannuation concessions measure.

Burgess says: “These unintended consequences are exactly the reasons why we don’t tax unrealised capital gains, and why no other country in the world taxes unrealised capital gains – it involves taxing individuals on funds they haven’t received or may never receive.

“It has the potential to impose significant financial stress on individuals. Certainly, this is how it will play out in the SMSF sector, with many small business operators and farmers expected to bear the
brunt of the Division 296 tax.”

The Association rejects the notion that any liquidity stress caused by this new tax measure is a failing by SMSF trustees to properly formulate the fund’s investment strategy.

“In our view it is completely unreasonable to expect trustees to envisage future tax changes when formulating the fund’s investment strategy – particularly of the magnitude of the Division 296 tax.”
Burgess says that to ensure this measure achieves its stated objectives, while still being fair and equitable in its application across the entire superannuation sector, it is imperative that the measure
of “earnings” mirrors, as closely as possible, the traditional measure of taxable earnings.

The submission also bemoans the short two-week consultation period afforded to the exposure draft legislation.

The submission notes the changes proposed are significant, complex and in need of careful, detailed review. Further, elements of the proposed measures, such as how the Division 296 tax will be applied to Defined Benefit Funds and the proposal to remove the link between a member’s Total
Superannuation Balance and the Transfer Balance Cap, are heavily reliant upon regulations not released yet.

“This affects our ability to properly consider all aspects of the proposed measures.”

The submission also calls for the $3 million threshold to be indexed to the Consumer Price Index in increments of $100,000.

The Association is urging the Government to put the proposed Bill on hold while it further engages with stakeholders to ensure that the resulting policy and legislation delivers an outcome that is fair
and equitable across the entire superannuation system.

To view the SMSF Association’s Treasury submission (including the case studies), click here.