The Australian government has recently announced its decision regarding the introduction of a $3 million cap for superannuation tax concessions.
This means that any earnings generated from superannuation balances exceeding $3 million will be subject to a concessional tax rate of 30% - instead of the usual 15%. The purpose of this change is to enhance the sustainability of the superannuation system while also contributing approximately $900 million to the government's budget in the short term, and around $2 billion annually in the long term.
The implementation of this new rule is scheduled to take effect from July 1, 2025, following the next Federal election. However, certain considerations and concerns have been raised regarding the potential implications for individuals who possess single-member funds with balances surpassing $3 million, especially when distributing benefits to non-dependent beneficiaries (someone who isn't their dependent). This aspect has drawn comparisons to the notion of a "death tax" in some discussions.
It's worth mentioning that the successful execution of this policy involves addressing various challenges. These challenges include data capture and management, updating the Australian Taxation Office's systems to accommodate the new tax rules, and addressing any existing delays in the submission of superannuation information, particularly in self-managed super funds (SMSFs).
Implications with the SMSF Cap
Understanding the SMSF Cap Increase
The SMSF cap refers to the maximum amount an individual can contribute to their superannuation fund while still enjoying the concessional tax rate. Prior to the recent changes, the SMSF cap was set at $1.6 million. However, the Australian government recognized the need to adjust this cap to keep pace with inflation and changing economic conditions, leading to the new cap of $3 million.
Additional Tax on Unrealized Gains
Under the new cap, SMSF members may be required to pay additional tax if unrealized gains push their total superannuation balance above $3 million. This differs from how pooled superannuation funds operate and has raised concerns among SMSF members.
Impact on Existing Superannuation Pension Members
The majority of individuals affected by the cap will be existing superannuation pension members. This has caused significant concern, particularly regarding the treatment of unrealized gains. Pooled superannuation funds determine member balances based on the pool's daily unit price, while individual investments held by SMSF members may be valued differently.
Valuation of Unlisted Assets
There is growing discussion regarding the valuation of unlisted assets held by pooled superannuation funds. If these assets are forced to be priced more uniformly, it could have a significant impact on the application of the new cap.
Legislation is not being 'grandfathered'
'Grandfathering' in legislation allows existing individuals or entities to be exempted from new regulations or requirements if they were already in compliance before the new law was enacted. It provides continuity and fairness by allowing them to continue their activities or enjoy certain benefits without being subject to the new rules.
Unfortunately the new $3 million SMSF cap legislation is not being grandfathered, meaning any exiting individuals with SMSFs will be susceptible to the $3 million cap and increased taxes on amounts exceeding this threshold.
For Property Valuations:
The increase in the SMSF cap brings about several notable implications for property valuations within SMSFs:
Regulatory Considerations
While the SMSF cap increase offers more flexibility, it is crucial for SMSF members to understand and comply with existing regulatory audit requirements. Property valuations within SMSFs must be conducted in accordance with the Australian Taxation Office (ATO) guidelines, which we strictly follow. Valuations should be conducted by independent and qualified professionals such as Acumentis, to ensure compliance with the Superannuation Industry (Supervision) Act and related regulations. It is advisable for SMSF members to seek expert advice to navigate these regulatory considerations.
It is important to ensure regular valuations are undertaken to take stock as to where your portfolio sits, and if you are near or going to exceed the $3 mil cap. This will become increasingly relevant as the July 1 2025 effective date approaches.
Having these insights will give you the intel to speak to your financial or SMSF specialist on how this impacts you, and how to strategize to find the best way forwards for you.
If you found this article helpful, recommend Acumentis when chatting to your SMSF advisor, our team of experts are ready to assist.