In a recent study conducted by the International Centre for Financial Services (ICFS) at the University of Adelaide and commissioned by the SMSFA (Self-Managed Super Fund Association), concerning revelations have emerged regarding the Australian government’s proposed $3 million super tax. This tax, if implemented, could have significant implications for the country’s Self-Managed Super Fund (SMSF) members, potentially affecting up to 50,000 individuals.
The study, which is the first to shed light on the potential repercussions of this proposed tax change, utilizes data from over 722,000 SMSF members, making up two-thirds of the SMSF member population, for the financial years 2021-2022. The findings paint a concerning picture, with the mean additional tax liability expected to exceed $80,000 for the 2020-2021 and 2021-2022 financial years.
The most alarming revelation is that approximately 13.5% of the affected SMSF members are projected to face liquidity stress in meeting their new tax obligations. This stress is exacerbated by the inclusion of unrealized capital gains in the measurement of earnings, a departure from existing tax policies and a rarity in OECD pension systems.
The Implications of Taxing Unrealized Capital Gains
Professor Ralf Zurbruegg from the University of Adelaide highlights that taxing unrealized capital gains could have far-reaching consequences and urges legislators to reconsider the proposal. The report argues that the government might be missing out on potential tax revenue by not aligning the measurement of earnings with existing tax policy.
ICFS deputy director George Mihaylov explains that using a measurement of earnings that excludes unrealized capital gains would alleviate liquidity stress for some members in the short term while likely yielding more tax revenue for the government in the medium to long term. Under this alternative approach, the tax would still be levied on capital gains, but only when the underlying assets are eventually sold. This would expand the overall tax base over time.
Unpredictability and Inequity
One of the report’s key findings is the unpredictability and inequity of the proposed tax. Including unrealized capital gains means that year-on-year tax liabilities will be directly tied to the performance of investment markets. This added unpredictability makes it challenging for superannuants to plan their investments and manage liquidity effectively.
For asset-rich, income-poor SMSF members, covering the additional tax liability becomes an issue. As unrealized capital gains accrue over time, they may find it increasingly difficult to meet their tax obligations, especially as tax payments from previous years diminish their liquidity.
Moreover, the study points out that selling illiquid assets is associated with substantial transaction costs, market timing considerations, and other macroeconomic factors that could further exacerbate the potential losses incurred in meeting the new tax liability.
Impact on Small Business Owners and the Broader Community
The implications extend beyond SMSF members. Approximately one in four SMSFs affected by this tax change holds property. Many of these are small business operators and farmers who hold their premises and land within their SMSFs. The new tax could disrupt not only the SMSF sector but also have a ripple effect on small business operators and the broader community.
Peter Burgess, CEO of SMSFA, expressed concern, stating, “Clawing back the superannuation tax concessions for high balance superannuants was one thing, but taxing paper capital gains that may never be realized is something completely different.”
Explore Your Financial Options
In light of the potential impact of the proposed super tax changes, it’s crucial to consider your financial alternatives and plan wisely. If you have questions or need guidance on how these changes might affect you, don’t hesitate to reach out to Boa & Co
Contact us at 1300 952 286 or via email at info@boanco.com.au. For more details, visit our website at https://boanco.com.au.
Your financial future is important, and our team is here to provide you with the information and support you need to make informed decisions.