The Federal Government is all but certain to re-introduce legislation in the new Parliament to increase the tax on superannuation balances above $3M from 15% to 30%.
The Labor Government tried to get this bill through the old parliament, but it was blocked in the Senate. Given the new Labor majority in the lower house and with support already indicated by the Greens senators, the likelihood of the government’s legislation getting passed unopposed is now causing increased anxiety.
The Controversial Taxing of Unrealised Capital Gains
While the headline increase in tax rate is significant, it is the proposal to tax unrealised capital gains within superannuation accounts that is causing the most concern. This would set a new precedent for tax policy in Australia.
A bedrock of accepted tax policy is a profit has to be realised before tax is liable to be paid, so facing a tax liability on ‘paper profits’ or unrealised capital gains is becoming increasingly controversial. Many commentators are now suggesting this could be the thin edge of the wedge, with Treasury eventually moving to target unrealised gains outside of superannuation, and from there the sky is the limit!
However speculative those suggestions are, taxing unrealised gains in superannuation is certainly a worrying development, although the government says this will only impact a small section of the community, estimated at around 80,000 people. With no intention to index the $3M threshold, over time a growing number of super accounts will be drawn into the new tax regime simply due to market appreciation and inflation.
Even more troubling is the possibility that a tax liability could be triggered by a short-term gain, where an account temporarily tips over the $3M threshold during a rising market, only to fall below it again if the market declines. Once the tax has been paid it may not be recouped. While the government has stated that losses may be carried forward to future years, the mechanism for this remains unclear, and the potential for permanent tax loss remains.
Impact on SMSFs and Investor Behaviour
The biggest impact from this new tax policy is likely to be on the Self-Managed Super Fund (SMSF) sector, where fund owners can choose the specific investments they hold. A concern among advisers and wealth managers is the owner of these funds will try to get ahead of the new tax policy and start shifting assets out of their super and into other investments, with early signs this is already beginning.
There is a concern that this could drive high-net-worth individuals towards the property market, potentially pushing prices higher. While this may boost the supply of rental stock, it risks worsening affordability for first-home buyers.
Borrowing and Investment at Risk
Another area of concern is the potential impact on SMSF borrowing. The Greens are pushing for a ban on SMSF lending as one of their demands to pass the tax legislation. If enacted, this could restrict SMSF investment strategies and limit capital flows into property.
Industry commentators have also pointed to funding for start-ups being severely curtailed as significant investment in new or high-growth businesses is provided by the SMSF sector.
Whatever the eventual outcome, this could trigger a seismic shift for the SMSF sector and for taxation of a growing pool of assets set aside for retirement.
The team at Acumentis can assist at any stage of the property process, we undertake valuations for taxation purposes and can assist with regular valuations for Self-Managed Superfund requirements. Reach out to your local Acumentis team to discuss your valuation requirements today.