If we assume that Div 296 will become law, the best we can do is to focus on what we might be able to change. Trying to deal with too many items just results in inaction so let’s assume that a non-indexed $3m cap will apply. That just leaves the calculation of the tax. The method needs to be as simple as possible whilst being equitable. The current proposal satisfies the first but not the second. Let’s see what we can achieve by tweaking it.

The formula is comprised of 3 calculations:

1. the proportion of earnings that will be taxable
2. the earnings
3. the tax

I propose a change to part 2. Let’s consider this

Part 1 – Calculating the Proportion of Taxable Earnings

The proportion is calculated as:

Proportion of earnings = (TSB at end of financial year – large balance threshold) ÷ TSB at end of financial year

For the sake of simplicity, the ATO could use the current proposed methodology. It utilises a measure of unrealised gains but is, in my opinion, an acceptable compromise.

Part 2- Calculating the “Earnings”

Under the current proposal the ATO gather the member’s data from each fund, amalgamate it and apply this formula.

Earnings = Adjusted TSB at end of financial year – TSB at start of financial year

What I propose is that this be the default position where the member is not in a fund capable of providing actual income data at the member level. Where they can, then the Earnings for such a member is Actual Income which is defined as income, including realised capital gains less the effects of concessional contributions and pension exempt income. This could cater for members in both fund types using the formula:

Earnings = Adjusted TSB at end of financial year for members in funds that don’t report actual income – TSB at start of financial year for members in funds that don’t report actual income + Actual Income for members in funds that can report actual income.

Part 3 – Calculating the Tax

A flat tax rate of 15 per cent is applied to the proportion of earnings attributable to the member’s balance over $3m in the same way as the present proposal.

Result

This change caters for several competing interests.

• It removes the highly unpopular tax on unrealised gains for those funds that can report actual income.
• For those funds that cannot report on that basis, they have until 30 June 2026 to get their reporting in order, if they choose to do so. Undoubtedly there will be one off costs associated with system changes. Given the demographics of some APRA funds, they may choose not to implement them. The cost of implementation to the SMSF sector would be modest given that the reporting required is already largely catered for.
• The government has already booked the revenue raised so they will not wish to delay the introduction of the tax. This methodology would still allow the tax to commence from 1 July 2025.
• The government is concerned that such a system may be manipulated by SMSF trustees who choose to segregate their assets, but asset segregation for tax purposes is already prohibited.
• The government is concerned at the amount of additional data that dealing with taxable income would entail but this could be filtered to exclude all individuals with a zero taxable proportion, thus removing most member data from consideration. A second filter would be applied to those members unable to provide individual data.

Notably, the Bill includes a consideration of the actual income method, but it lacks the simplicity that I propose. Also, though it was regarded as being too expensive to implement, page 206 of the Bill admits that it was not costed.

Undoubtedly my proposal will be regarded, in some quarters, as unworthy of consideration but it is necessary to consider alternatives to this significantly flawed Bill before it is too late. The alternative is to bin it, and that is not going to happen.