Proposed Excess Member Balance Tax Calculator
Our submission was in line with, and supports, the position of the SMSF Association. The measure barely rated a mention in the 2023 federal budget. The government then released draft legislation for comment which closed on October 18th 2023. Disappointingly, they almost totally ignored the many objections to the unindexed limit and the methodology for calculating the tax. This was clearly evident when they even ignored the obvious drafting error which excluded members that died in a financial year from being subject to the tax for that year – provided they did not die on the 30th of June. The only chance I could see for some fairness to be introduced to this discussion is for the government to finally realise that they need to introduce so many special work arounds that their simple method is not simple at all. This should have caused them to rethink their preferred “tax” on unrealised gains methodology and, at least for SMSFs, revert to standard taxation principles. Full credit to the SMSF Association’s CEO, Peter Burgess, and Chairman, Scott Hay Bartlem for taking the argument down to the wire. They were meeting with politicians and Treasury officials in Canberra up to close of business on the 18th October. Subsequent to this, the government referred the draft Bill to a Senate committee.
I was profoundly disappointment that, on May 10th 2024, the government announced that they would be proceeding with the Bill unaltered. I find it difficult to recollect another instance where the government has treated a sector with such blatant contempt. Even the silly parts of this Bill remain unchanged. It remains to the senate to introduce some equity but I am not hopeful given that this debate will be occurring in Budget week when there are many significant issues that can overshadow it.
There is a possibility that this measure will be stopped in the Senate. More than likely it will proceed with some modification. We shall see. Currently the Government is sticking to their position that the Bill does not need any alteration and should be passed unaltered. The Greens disagree. They believe the cap is too high and that the bill should be even more severe. Clearly the Greens will support the bill as it stands. The Coalition reject the bill but do not have the numbers in the senate without the support of the minor parties and independents. Most of them are opposed to the bill in its current form but it is not yet clear if enough of them are. Interestingly, Labor party luminary, Paul Keating, has called for the limit to be increased to $5m or, at least be indexed (he has referred to the lack of indexation as unconscionable). He has also expressed his opposition to the taxing of unrealised gains. Incidentally, the Coalition has stated that they would reverse this measure, when next they are in power, but they would need to gain control both house of parliament to do so and that is a considerable hurdle. I am also reminded of the historical statement that “income tax is a temporary war time measure.”
This tool models the government’s intention and two possible alternative methods. Each method covers a 10 year period. The government’s intent is that the cap is fixed. This tool allows you to analyse the effect of this and the alternative if the cap is indexed. You may also trial an alternative cap. The text is dynamic and will alter as the debate progresses. It was last updated on 27th August 2024.
The Government’s Bill
The tax is based on the change in a member’s total super balance from year to year. Contrary to established taxation principles, it includes unrealised gains. Issues arising from this include
- The requirement to pay a tax on the increased value of assets where there is no cash available from a sale will cause hardship for those whose funds are heavily weighted towards a single asset. This structure has been adopted in line with known cash flow risks – except a new tax based on growth. The ability for a member to pay the tax external from the fund will be of little use to those who have little wealth external to superannuation.
- A tax payment is required if the member’s account increases in value but only a carried forward loss applies if it doesn’t. As retirement phase member accounts are intended to decrease over time it is probable that member accounts will accrue losses that will never be recouped after having previously paid tax on unrealised gains.
- Life insurance proceeds will be regarded as a contribution so will not be assessable in the year of receipt.
- The increase in total super balance caused by death benefit pensions will create a tax liability but not in the year of receipt.
- Some limited recourse borrowing arrangements are counted towards a member’s total super balance resulting in 15% tax on a debt. These may be excluded.
The Deeming Rate Alternative Proposal
Under this method a deemed rate of return would apply to the level of a member’s balance in excess of the cap. The SMSF Association have proposed the 90 day bank bill rate. Historical modelling has shown an overall tax decrease of around 10% using this method however it would mean that tax would be payable, even in a year where markets retreat, provided the member’s balance was still over the cap. The main advantage of deeming is its simplicity and understandability. It would also remove the assessment peaks and troughs, providing for more predictable cashflow requirements. I suggest it will be the SMSF Associations default preference as the best of a bad choice.
The Actual Income Proposal
This is based on what the government announced but uses an alternative calculation method. It has been decried due to it’s perceived complexity but this is overblown. Existing software systems calculate tax at the fund level and distribute the net amount to member accounts. Software modifications could calculate the attributable member share, before the application of pension exemptions, and populate a new member label in the fund returns. This is not rocket science. It would remove all of the contentious issues associated with either of the previous methods – except the level of the cap to be applied. It would also be equitable.
APRA funds would need expensive software modifications to comply if they were to provide this data for all members. This would not be feasible given that relatively few APRA fund members would be affected. Treasury already intend that the ATO will contact APRA funds to provide individual data on specific members and the APRA fund trustees I have spoken to agree that it would not be an onerous task to respond individually.
Non-Indexation of the Cap
Whatever cap is decided on, a lack of indexation will cause it to include a much larger cohort over time. This inequity is obvious and is a doubling of the superannuation tax rate by stealth. If we assume a 3.5% inflation rate, a 30 year old, at 1 July 2025, would be paying the extra tax from age 60 once they had a balance of $1.24m in today’s dollars. At age 70 it would be $915k. It is intended that this measure commence in 2 year’s time. At the current inflation rate the commencement value will already have been eroded to a present day value of $2.65m
There have been statements that indexation would cause an administrative mess akin to the personal transfer balance cap. This is not so as this cap applies to all.
The Cap Level – a Possible Compromise?
A $100m member receiving retirement tax benefits is clearly open to criticism but at what reduction does it cease to be so? Is $3m too low? Prior to the official announcement some government sources suggested $5m. It is interesting to note that, of the 80,000 members the government say will be impacted, 69,000 have between $3m and $5m. It is this cohort that will be most significantly affected as they will often hold all their wealth within their SMSF and be unable to access external monies to pay the tax if their fund investments predominantly comprise a single asset. This same cohort will hold most of the account based APRA fund exposure so their removal would significantly diminish the administration required by the ATO. Effectively, almost all of the additional work arounds required to correct the inequitable portions and unintended consequences of the proposal would be solved by adopting the actual income method with a $5m cap. Treasury have not provided any figures as to the revenue affect of raising the cap to $5m but from both an equity and operational viewpoint it would seem to be the obvious choice.
Why Bother?
The justification for this measure is, supposedly, equity. There has been a particular focus on a handful of superannuants with over $100m accounts. These account sizes have only been possible due to previous rules that no longer apply. The Turnbull government introduced pension caps and contribution limits which make it impossible to create such balances again. Furthermore, as each wealthy member dies, their benefits must be paid out of superannuation. This measure, therefore, brings forward the resolution of the matter – but at what cost?
The cost to confidence in the superannuation system is non quantifiable but there are dollar costs to the process of calculation and collection. Some, as the minutiae is being discussed, will include the increased cost of processes to remove inequities. The measure is estimated to raise $2 billion annually. A previous equity measure, the superannuation surcharge, was subsequently abandoned when it became clear that the cost of the process outweighed the tax collected. Could this measure be the same?
I’m happy to field comments – David Busoli, dbusoli@smsfalliance.com.au, 0499 778 584.