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A controversial new bill that would tax unrealised capital gains in larger superannuation funds is being debated in Parliament.
The federal government is currently debating whether to introduce the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023, which would introduce an increased super tax to certain funds.
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The bill proposes that earnings from super funds that exceed $3 million should be taxed at a rate of up to 30 per cent, compared to the current rate of 15 per cent. (Super funds valued at less than $3 million will continue to have earnings taxed at 15 per cent.)
The rate is subject to change, depending on the overall earnings of the super fund in the financial year.
The bill would come into effect from 1 July 2026.
However, there has been contention surrounding the government’s proposed method of calculating the earnings on a super fund. The contention largely focuses on the fact that the bill would tax assets held in the super fund on unrealised capital gains in the super fund’s earnings – a first for the Australian tax system.
If the super fund exceeds $3 million, this would result in the holder being subject to an increased tax rate.
Critics have said it is unreasonable to expect taxpayers to fund a tax liability in respect of the appreciation in value of an asset when they have not sold the asset and received money with which to pay the tax. Indeed, it may have the perverse outcome of resulting in investors having to sell assets that appreciate in order to fund this tax liability.
Moreover, if the asset decreases in value, the tax is not refundable (though the difference may be used for future tax rebates), thereby reducing the cash flow of the investor.
According to Peter Burgess, chief executive of the SMSF Association, the bill would “set a dangerous precedent for tax change in this country”.
Burgess stated: “This new tax turns existing tax policy on its head by treating the increase in the price of an asset as income received during the income year.
“Furthermore, when the asset is eventually sold, the capital gain may be subject to capital gains tax, subjecting taxpayers to double taxation.”
Imposing the increased tax on unrealised capital gains would “require investors to call on cash reserves to pay the tax”, according to Burgess.
The bill stated that if the superannuation fund had negative earnings in a financial year, the government would allow the loss to be carried forward and used to reduce the amount of super earnings subject to the tax in future years.
Burgess said: “We are always open to work with Government on measures to improve the superannuation system but making it more complex and costly to administer by purporting to address inequities in one area while introducing inequities in another, is not the right approach.
“By any measure, taxing individuals on amounts they have not received, or may never receive, is a radical departure from existing tax principles and a crude method of addressing super wealth and wealth inequality.
“It is important, not only for those who will be unfairly impacted by this new tax now, but also for future tax changes, to stand against this approach.
“This should send a shiver down the spine of all investors. It is not difficult to see how this approach could be applied to claw back perceived inequities in other areas of the tax system, including negative gearing.
“It could be one way the government tempers the tax benefits without amending the rules that underpin negative gearing.”
The government has reinforced that the increased tax rate would only apply to 0.5 per cent of super fund holders.
According to the bill, less than 5 per cent of SMSFs with a balance of more than $3 million had more than 80 per cent of their assets in non-residential retail property.
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