Since the federal election was decided, the focus has quickly shifted to policy for the government, keen to capitalise on its renewed mandate.
Written By Tony D’Agostino – Director
One of these policies is generating significant debate and concern in some quarters, not only for its immediate impact but also its implications.
Proposed Division 296 or the tax on wealthy superannuants, seeks to impose an additional tax of 15% on the earnings of super balances greater than $3 million.
Whilst this move of itself seems uncontroversial, one aspect is the extra 15% will apply to all income including unrealised capital gains.
Yes, you read correctly – unrealised capital gains!
Never before in our tax system has this been done. In no other area is an unrealised gain taxed. Our system is based around income realised or earned.
The concept raises a number of questions and implications:
How will the tax be funded if I have no asset sale?
Consider this – you have a property in the fund which appreciates $200,000 over the next 12 months. Without having sold the asset, the ATO will assess you with tax of $60,000. 15% plus a further 15% of the gain which you have not yet pocketed and is left in the asset at this time. Where does the $60,000 come from? Cash reserves in the fund? Further contributions?
Will I get a refund of the tax if the asset falls?
Unlikely – the current system generally does not refund but rather carries forward losses to future years. Much like carry forward losses in companies and trusts.
There are many assets in a super fund which may experience this. Think listed shares, but perhaps also shares or investments in startup enterprises whose fortunes can turn very quickly.
Losses are small consolation for having to finance a tax in a previous year.
Will this open the door to more unrealised gains taxes?
Maybe…Possibly…
Will it end with super or will it extend to investments held personally and in other entities such as trust and companies?
I am not in the mind of regulators, so I don’t ultimately know, but the fear is that once the Pandora’s box of unrealised gains is opened, it won’t be closed, and this government or future governments will look to tax other areas such as investment properties and perhaps even the home in such a manner.
Another issue with this legislation is the fact the $3 million threshold is not indexed as currently proposed.
This is a quiet killer, like bracket creep, inflation will bring more and more taxpayers into this net over time. If the true intention of the legislation is to tax the very rich and only them, indexation is a must. Whilst $3 million of super is a lot now, in 10 years not so much.
If the legislation was reworked to instil indexation and remove untaxing of gains, it may be workable and perhaps capable of hitting the mark of removing the incentive for big super accumulation.
Lastly, it is worth noting that if those changes were made and the super rules kept as they are with respect to contributions, fewer and fewer people would be in this bracket.
Unlike other assets, super is not something that can be handed to the next generation intact in every case. For most people, when they pass, their super balance will be paid out and moved out of the super system. This, combined with restrictive contribution rules, fewer and fewer people will be able to amass these very large balances.
As it is, this is dangerous legislation which, if passed, will cause a number of people to rethink super and ask, is it really worth it?
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