SMSF TAX CHANGES
The TBA Office Building - typical of the small commercial buildings that may be caught in the new Super Fund tax.
The Government has announced changes in the tax treatment of gains in Superannuation funds, the most controversial of which is the $3 million super rule. But what is the rule?
The change effectively imposes a 15% tax on super earnings equal to the percentage of an individual member's 'Total Superannuation Balance' exceeding $3 million for an income year. By applying the measure to TSBs, it captures both the accumulation and pension phases of super but also has the impact of taxing gains, whether they are realised or unrealised.
The government has justified this on the basis that superannuation funds, in particular Self Managed Superannuation Funds, are being used as tax shelters as opposed to retirement savings plans, something which was not intended under the government policies that established the super fund system initially.
Whatever the truth of that, it remains equally true that taxes that target unrealised gains can cause significant problems for the entity that is being taxed on this basis. Whilst a gain may well have accrued, if it is unrealised and the fund does not have sufficient divisible, liquid assets, taxing this gain may require that the asset or assets of the fund be sold to meet a tax at a time that is less than optimal. An example of this may be a SMSF that has, as its principle asset, a leveraged commercial building (often the premises of the SMSF’s members). It is not hard to imagine a scenario wherein the gain on the value of the fund, taxed at 15%, may exceed the value of cash available to the fund. Would that then require that the fund sell the premises? We will have to wait to find out.
Taxes should be designed in such a way that they do not impede the economic activity on which they are levied, or do it with as little impact as possible at any rate. The Total Superannuation Balance tax policy does not, at least on its first reading, appear to meet this criteria.
We would hope that this policy will be revisited and changes made to allow for circumstances where the tax and liquidity of the fund are misaligned. We would also hope that any changes do not add to the already Byzantine complexity of the tax rules generally, as the complexity of these rules is without doubt already a significant drag on economic activity in Australia.
In the meantime, SMSF trustees should work with their financial advisors to ensure that their investment strategies allow for sufficient liquid or near liquid assets to be available to the trustee to meet any expected liabilities that may arise for these new tax rules.
As always, TBA would be happy to provide advice on the taxation and accounting side of your SMSF queries.