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New tax gives incentive to move money out of super

At the end of February 2023, the Government announced plans to introduce a new tax on superannuation account balances above $3 million. This threshold will not to be indexed for inflation, so it will impact more savers every year through bracket creep alone. Inflation is likely to remain above target for many years and inflation has historically been the largest component of share prices gains in Australia. However, there is an even more important impact of inflation with this tax, as we outline below.

Taxing unrealised capital gains is a profound change

This new tax captures unrealised gains from any rises in the value of shares or property or other assets every year, even if they are not sold. It is an extraordinary departure from the existing tax system in Australia. People with super balances above the threshold will be better off holding the same assets outside super, paying tax at the top personal marginal tax rate of 47%, than leaving them in super paying the new tax.

How can this be correct?

The reason is that the current tax regime in Australia only taxes capital gains when they are realised, that is, sold for more than the cost base. But under this new tax, a return ( 'Earnings') is defined as any increase in the super fund balances from the start to the end of each year (after adjusting for contributions in and payments out). 

As most of the gains from shares and real estate are from inflation, fund members will pay tax every year due simply to rising prices. Governments create inflation by printing money and deficit spending, and now a tax on assets in super will arise from the resultant price inflation. Inflation is already a tax on the purchasing power of money but paying this tax  will further erode purchasing power.

For assets with publicly-available prices (shares, managed funds, LICs, listed bonds, etc), the unrealised gains will be easy to track and tax each year. The ATO has kindly offered to do this. For unlisted assets like direct real estate, private assets and collectables, valuations will depend on the frequency, the basis and the valuer involved. Where an unlisted asset (like a property) is the main asset, a member may need to sell the asset if they can’t come up with cash from other sources to pay the tax every year.

Marginal personal rates versus the new tax

Let's return to the issue of how holding assets outside super and paying tax at the top personal marginal tax rate of 47% can incur less tax than holding the same assets in the new superannuation regime (taxable income at 15% plus 'Earnings' at 15% including unrealised gains).

Australian shares are the most common asset class in most super funds. Since the start of 2000, the broad Australian share market has generated total returns (ie share prices gains plus dividends) averaging 7.9% pa excluding franking credits and a grossed-up total return of 9.3% pa including franking credits for Australian shareholders.

Where did these returns come from? Nearly half (4.3% pa) came from dividends, nearly one third (2.8% pa) was CPI-inflation lifting share prices, one sixth (1.4% pa) was from franking credits, and less than one tenth of the total returns (0.9% pa) was from real growth in share prices above inflation. It is important to break down the returns into these components because each component has different tax implications.

While these were the average nominal total returns, the after-tax return varies in the hands of different types of entities. We look at four ways of holding the same basket of shares:

A. Pension accounts

Currently, super accounts in pension phase are effectively tax-free. However, because of the tax benefit of franking credits which refunds the taxes that the dividend-paying companies already paid on their profits, the after-tax total return was 9.3% pa, which is higher than the 7.9% pre-tax return. This amounts to an effective tax rate of minus 18% on the original 7.9% nominal total return from the share market since 2000 (the negative tax rate is due to the impact of franking credits).

B. Accumulation accounts

Currently, super accounts in accumulation phase pay 15% tax and realised gains are taxed at 15% (less 33% discount for sold assets that were held for more than 12 months). Assuming 10% portfolio turnover each year, taxes reduce the after-tax return to 8.5% (For this estimate, we need to assume some portfolio turnover as it creates taxable capital gains. Such turnover occurs even in relatively passive long-term funds.) This equates to an effective tax rate of minus 6% on the original 7.9% nominal total return. 

C. Personal (non-super) accounts 

An individual holding the same portfolio outside super and paying tax at the top personal marginal tax rate pays 47% tax on dividends and franking credits and realised gains are also taxed at 47% (less a 50% discount for sold assets that were held for more than 12 months). Again assuming a 10% portfolio turnover each year, taxes reduce the after-tax return to 6.6%. This equates to an effective tax rate of 17%, which is a lower overall tax rate than the new 30% super tax.

D. Super above the new threshold

Super accounts above the new threshold will incur an additional tax, the existing 15% plus 15% on the balance above $3 million, with the expanded definition of ‘Earnings’ applied. There is no discount for inflation or assets held more than 12 months. Despite the 15% plus 15% headline tax rates, the effective tax rate is actually 18% due to the impact of franking credits.

[Note that D applies to investors in the top marginal tax rate. However for people in lower tax brackets, the position is even more favourable outside super as they can earn up to $170,000 pa before their average tax rate is more than 30%, and importantly, taxable income outside super does not include unrealised gains.]

This chart shows the components of returns from the broad Australian share market from 2000 to 2022, and also shows the effective tax rates in the four tax scenarios:

The set of purple bars in the middle show the average after-tax real (ie after inflation) total returns for each entity. This the most important number for building long-term portfolios that aim to generate cashflows that keep rising for inflation, and also keep the capital base (after withdrawals) rising so that future incomes also grow for inflation. Retirement funds need to generate at least CPI+4% and most of this comes from shares. We can see here that this is not achieved in scenarios C and D.

It is similar with other types of long-term assets. Foreign shares are even more favourable outside of super when the new tax hits because less of the total return pie comes from dividends and more comes from capital gains.

Impact of eventual sale and realising capital gains

It is true that, if or when the asset is eventually sold, capital gains tax would be paid at that time, but there would be several benefits of doing this outside of super:

  • the tax on the increase in capital value would be deferred until the eventual sale, instead of being taxed each year of unrealised capital growth.
  • the capital gains tax would be reduced by the 50% discount on sold assets held for more than one year.
  • the sale could be done at a time when the owner s marginal tax bracket is much lower (eg in retirement), reducing the tax further.
  • Holding inside super may result in having to sell other assets to pay the yearly tax on unrealised gains, but if holding outside of super, you only pay tax when you have the cash from the eventual sale.

The new tax punishes investments that rely on capital gains

As most of the gains from long-term investment assets come from long-term value gains (most of which is simply inflation), rather than cashflows (rent, dividends, etc), this new super tax amounts to a heavy tax on long-term  investment. But savings is the source of capital for investment, which creates jobs, funds innovation, which is the source of increased productivity and living standards for the whole nation.

This is only draft legislation at this stage, although it does spell out the plan to tax unrealised gains for the first time, with worked examples to show how it will operate. Once the broader implications are fully understood, it will struggle in parliament. If it gets through, it is likely to add complexity. This, and other mooted plans for super, like commandeering super funds to invest in government agendas like renewables and social housing (however well-intentioned), would appear depart further from the goal of simplifying super. 

To share your views on the merit of the new super tax, please see our current Reader Survey.

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information purposes only and does not consider the circumstances of any individual, and is based on an understanding of the current proposal to change the way large balances in superannuation are taxed.

 

58 Comments
Ruth
March 22, 2023

We have been in a relatively low inflation environment for the last 40 years. That has changed. History suggests the next 40 years are likely to be the other way around. The $3 m is not indexed and is designed to capture more and more people via bracket creep. It is not a matter of just withdrawing the excess. They are attempting to define the purpose of superannuation (retrospectively; their attempts don't capture what my recollection was); note that their definition may preclude lump sum withdrawals. I still think that within 20 years workers will demand that they should not have to make contributions as they will see little benefit. The system is being destroyed.

Former Treasury policy maker
March 28, 2023

What's the basis for your statement, Ruth? The inflation history that I see (eg in this article from the St Louis Fed, https://www.stlouisfed.org/publications/regional-economist/second-quarter-2017/a-short-history-of-prices-inflation-since-founding-of-us) shows nothing inevitable about where inflation goes from here. History has also had periods of disinflation that were feared a few years ago, but didn't eventuate as policy fought tooth and nail to prevent that. Periods of high inflation are actually fairly rare.

And to be a little pedantic, we got on top of our high inflation in the early 1990's which was 30 years ago, not 40.

Joseph
March 19, 2023

This takes me back to the time when we all used to get company share options, which were eventually taxed when we received them, even though no gain was made at the time and we were unable to sell them. Today its restricted stock units, but the same deal, we can't sell them, but we get taxed on the 'capital gain'. I think the reality is that successive governments have become more greedy and less inclined to look for savings. Its a disgrace.

Wildcat
March 19, 2023

The problem with this is that it is being sold to hit the ‘super wealthy’. These people often more assets than just their super.

They often have trusts, bucket companies etc to lower their overall rates.

More Australians not in the super wealthy bracket are likely to be hit. One simply because there are simply more of them. Two as one partner dies and balances combine.

All of this manageable though.

What is grossly unfair is unrealised gains issue. We think we have audit/valuation problems now for property. How is this going to escalate when you actually pay tax on it. And as some have pointed out if you have a crash you end up paying tax on losses.

It is non sensical and stupid policy. But Jim liked it!! Let’s hope he has another portfolio after the election if they win. Someone with rudimentary financial understanding and who takes the time to model through the impacts and just doesn’t parrot treasury. Noting it is this same treasury ‘experts’ who are about to give us 301 transfer balance caps!!

Simpler super. Bah.

RedMagpie
March 22, 2023

I think when we get the final legislation the tax on unrealised gains will have been dropped. Treasury have wanted to introduce a tax on unrealised gains for years, the howls will get louder once the bill is introduced.

Just an average Jo
March 19, 2023

As a 60 year old who has been paying into super for over 30 years and who now has a balance of about $450,000, these changes are never, ever, EVER going to affect me, even if the threshold is not indexed to inflation. I only WISH I could rail against the injustice of how it would be better from me to keep that proportion of my money over $3 MILLION DOLLARS outside of super. Oh to know the burdens of being a multi-millionaire. This article just shows how the rich, or at least their financial advisors, can be entitled cry-babies.

Alex
March 19, 2023

Calling people 'cry-babies' without even knowing their circumstances just show how mature you are, average Jo.

BJ
March 23, 2023

Spot on

Dudley
March 19, 2023

"60 year old ... paying into super for over 30 years ... balance of about $450,000":

Oh lucky man.

Contributions:
= PMT(8%, 30, 0, 450000) / (1 - 15%)
= -$4,673.35 / y

Contributed just enough to be fully entitled at age 67 to capital free, tax free, inflation indexed, government guaranteed Age Pension and enough spare play money for dozens of gold watches or whatever while being paid 7.8% by government on spending the play money to reduce Assessable Assets to $419,000.

Near perfect glide path. Cry hallelujah.

David
March 19, 2023

As Dudley has calculated for you, Average Jo, when you "retire" you should get a full pension, paid for in part by the taxes of the people you are calling "entitled cry-babies" who, in order to get to the enviable position of having $3M in super in the first place, will have paid absolute bucketloads of income tax along the way - by far, most likely, dwarfing the income tax contributions of someone whose super account contains only $450,000 in 30 years of SG contributions, I expect.

Feel like reconsidering your language?

danm
March 20, 2023

What a fascinating and thought-provoking thread to celebrated the 500th edition.

Taxy
March 27, 2023

Well said average Joe... Hope we can share a scotch finger bikky and a coffee someday.

Denial
April 26, 2023

Joe you're missing the bigger picture completely. Your own super fund will have members that are above the new threshold that will also be forced to sell down their account balance/units each year to able pay this extra tax. It impacts the underlying assets held by your fund and FITB (future income tax benefits) associated with it. The investment manager of your fund will be increasing reluctant to hold certain assets as they'll know they'll be constantly asked to sell them down to pay for the members redemptions. BUT more importantly it's fundamental for any investor looking to self-fund their retirement to be able to hold long term investments as it reduces risk and allows compounding to occur. Otherwise as already noted there is a need to have to sell them each year once the tax man calls. Your super fund returns will definitely suffer long term with this poorly conceived policy. I have no doubt this is the brain kid of one of the preferred ALP senior bureaucrats that typically have very limited actual understanding of how it all fits together.

Mark
March 19, 2023

Ultimately we have to wait for the final legislation is passed so we know exactly what we are dealing with.

Then decisions can be made on how best to to deal with it.

Indexation of the $3M

No tax on unrealised gains

Access to amounts over TSB for those under preservation age

These are the 3 main things I'd like to see.

Lyn
March 19, 2023

Mark, Agree, youngster with 37 yrs to retiremment scared silly re no indexation, isn't Indexation now catchphrase of current life? Why would we alienate very young 47%-rate taxpayers who pay most tax? We need more 47% taxpayers. Let's not go to how much 15% contribution tax to Govt will be lost if we alienate young people from saving via super as $3mill is nothing to them today. This could be fixed via proportionately higher concessional contribution tax for high income earners and leave lower income earners left in boat of 15% Contns tax for them. If not, there is no incentive to be a 47% taxpayer & it is they we need.

James
March 19, 2023

Clearly Labor has decided that <=$3M is enough in superannuation for retirement and concessional taxation treatment. Putting any additional personal contributions into super is no longer advisable, given previous, present and future moving of the goal posts! The young aren't really being alienated, as mandatory contributions are still required, rising to 12% over the next few years.

If anything this change has done them a favour and opened their eyes to the fact that government cannot be trusted with superannuation and one is better off not locking the money away for decades at the mercy of capricious politicians.

Find another way to build wealth for the future, whilst still using super as one of those vehicles, realising that governments will keep raiding it!

Lyn
March 23, 2023

James, point missed, alienate young no indexing 3mill as reply to Mark as 1 of his points, alienates saving max.current allowed concessional (only 1.237mill over 45yr work life ) and top up non-concessional as includes both types for new tax, high earners will have reason to look other investment as you said & agree with you, won't lock away maximums a) no indexation b) having paid 47% on after-tax contributions won't want ongoing new tax eating at excess of 3mill for yrs after reach 3mill. It tosses incentive to compulsorily save where not touchable til preservation age. Should be sweetener for all - level taxpayers to reach more if it comes to pass or not. Current max. concessional 27,500p.a. not encourage save enough for 45yrs time to level which eliminates age pension, isn't point super for own pension & no Govt pension? Govt want less future pensions, don't do enough to happen as Dudley's calc shows on19/3 for someone's 450,000 after 30 odd years then almost full pension, if higher contr tax for high earners with high contributions plus some extra contr from a few lower earners it hustles things along a bit to receive more cons tax. See 2022 ATO transparency, a drop in ocean. Takes finding but all tax receipt shown.Govt got it back to front, should do all to collect up front end not on back end in 20 - 45yrs time as 3mil reached when now less likely re new tax, catch larger cohort front end than taxing the back end yrs away on a daft scramble. Any business owner knows money up front better or go down drain which after all is what Govt has done even if exclude lockdown cost. eg.on easy figures,
150,000x20%tax x 20000 pers=600,000,000M & if100,000x15% for others x10,000pers=150,000,000M.
750,000,000p.a.x Yr's 23,24 & 25= 2.25Bill & >more later yrs if coaxed save lot in super, mooted 2B raising is peanuts compared future Govt pension savings. Canberra alone could fill above example each yr! Some will say less inc. tax as result but not looking 10 - 45yrs time pensions as Dudley's calc shows with $450,000 who may live 22 +yrs retirement, Pension 23000 (?) x 22yr 506,000, 2bill. just 3952 annual pensions so their method not fill gap fast, about 2,500,000 received govt part/full support Yr2021, no $ found only recipients but stab in dark 50% full pensions $28.75 bill.p.a, over 500 bill. tax collected 2022, other than Jobkeeper, Covid testing,Defence & CPS pensions where did it go, hospitals & schools say underfunded so not those then? Need an independent Finance Manager---the person who says yes or no as evidently their own in-house can't.

James
March 23, 2023

@Lyn. Governments will keep changing super, to benefit them not us. Fact. Alienation doesn't really matter to them, as a certain level of contributions are compulsory. However desirable that their "attitude" was different it doesn't change the fact that they will keep raiding super when they want to.

Ergo, don't pay in extra because past performance is the best indicator of the future, which would indicate that you'll be angry and disappointed in the future too. Do something different.

Governments do stupid, hypocritical often paradoxical things all the time, because they don't really have a viable good long term plan. The electoral cycle, leader and governing party changes and the changing desires and whims of the people all factor into this worst, best form of government that we call democracy!

Harry
March 22, 2023

Agreed. Also those in pension phase remain on no tax. I would not make rushed decisions as this has a way to play out. The whole thing has scared people from tucking away any extra in super. It is very poorly thought out legislation especially as governments, bankers, accountants, advisors have been openly encouraging people to tuck a bit extra away for the future. Yeah right, so as a future careless government who is adept at lying can get their grubby hands on it. The example of the gentleman who put away just enough to qualify for the full pension seems to be in the best situation. He would have paid off his home, spent his money and now has a gold plated pension, tax free, indexed, health benefits, seniors card, and still pull a bit out of super to live it up.

Investor
March 19, 2023

In the chart in the article is the assumptions box showing C and D the wrong way around?

Jason
March 18, 2023

It is a shame that we can't talk about reintroducing death taxes on concessionally or untaxed assets including PPOR. Much simpler. However possibly more lumpy and less reliable as tax revenue. Sure, retirees could gift away but could have stricter rules on that. Say a 15 year rule instead of 5. And retirees could ramp up their personal spending further which would pump up the economy and increase tax revenue, surely better than hoarding wealth. However doing unnecessary renovations would only benefit them while alive in terms of nicer fittings and not necessarily translate into tax free capital gain on death. Even wealthy retirees are conscientious of longevity risk and will be at ease as their is more guarantee that their lifestyle and need for top class care can be maintained whilst alive. Intergeneral inequality is very corrosive in so many ways and so damn unAustralian.

Tony Dillon
March 18, 2023

Some quick calcs picking up on assumptions in the article.

Assume a starting year super balance of $4.0m, plus 9.3% total return = end year balance of $4.372m (there are no contributions or withdrawals).

10% portfolio turnover = $400k. Assume the stocks turned over were held for 5 years on average, so that the capital gain on turnover = 20% approx. (i.e: 2.8% CPI inflation p.a. + 0.9% real growth p.a. = 19.92% gain over 5 years).

Therefore realised capital gains = $400k - $400k/1.2 = $66.7k.

Dividend income = (4.3% + 1.4%) x $4m = $228k

Tax liability prior to the new surcharge = 15% x (2/3 x $66.7k + $228k) = $41k (i.e: one third CGT discount)

Surcharge = 15% x $1.372m/$4.372m x $372k = $17.5k

Total tax liability = $41k + $17.5k = $58.5k, effective tax rate on income = $58.5k / ($66.7k + $228k) = 19.9%

Now assume funds are moved out of super at the start of the year such that there is an expected end year super balance of $3m. With a 9.3% total return, that would imply a start balance of $2.75m, with the excess $1.25m invested outside super earning the same 9.3% total return and taxed at 47%.

As before, super tax liability = 15% x (2/3 x $45.8k + $156.8k) = $28.1k (check: $28.1k = $2.75m/$4m x $41k)

Personal tax liability = 47% x (1/2 x $20.8k + $71.3k) = $38.4k (i.e: 50% CGT discount)

Total tax liability = $28.1k + $38.4k = $66.5k, effective tax rate on income = $66.5k / ($66.7k + $228k) = 22.6%

In this instance, it is still more tax effective to keep all funds in super.

Dudley
March 18, 2023

"more tax effective to keep all funds in super":

True, but more tax efficient than either super or personal is stuff in home.
With property tax ~0.3% / y, stuffing ($4M - $2M) = $2M, tax = $6,000 / y.

Stuff all but $419,000 and claiming full Age Pension is yet more tax efficient.

Mark
March 18, 2023

Investing purely for tax efficiency is stupid though.

A single person should not buy a $5M+ home for the tax purposes of no CGT and getting a single persons pension and having a measly sum of cash on hand.

Genuinely wealthy people don't do this, because it is stupid and an inefficient use of wealth and resources. Only a financially illiterate person would even consider it.

If you're income/assets puts you around the getting, not getting the pension, then for sure sort your affairs out to take advantage.

If you're wealthy, don't bother.

Dudley
March 18, 2023

"A single person should not buy a $5M+ home for the tax purposes of no CGT and getting a single persons pension":
Better for two singles ($53,378.00 / y) or couple ($40,237.60 / y) sharing.

"having a measly sum of cash on hand":
Bank nominal 4%, inflation 8%, to 87 from 67:
= PMT((1 + 4%) / (1 + 8%) - 1, (87 - 67), -419000, 0)
= $13,767.32 / y
Pays for rates, tucker, insurance, +.
Leaves Age Pension to blow on pokies or ponies.

"stupid and an inefficient use of wealth and resources":
That and simple too. No concern to, or for, the retiree.

Tony Smith
March 21, 2023

Neat calculation, but I think that most individuals with high super balances became that way, because they have been contributing for a long time and have put their assets into super... ie they're older, retired, little or no external wage/income, so not on the 47% tax rate. I haven't done the maths, but I suspect that at all other marginal tax rates one would pay less tax by withdrawing balance $>3m even if it was then put into the same asset class (and of course you'd look at asset(=income) splitting, trust,etc.).
As ALWAYS, Treasury expected revenue gain will will be wrong.

Tony Dillon
March 18, 2023

I see where this piece is coming from, but it over-complicates the franking credits effect. An effective tax rate can never be negative. An effective tax rate is based on gross income, and in this example in scenarios A to D, the gross rate of income is the same, being 9.3% (albeit a portion is withheld until tax time, the franking credit). So that as per the net rates of income arrived at in the calcs, the respective effective tax rates for scenarios A to D are: 0%, 8.6%, 29%, and 30.5%. Not: -18%, -6%, 17%, and 18%.

Mark B
March 18, 2023

Totally agree Tony. I know in my financial statements for the SMSF I record the franking credits as income which just goes out to the ATO first before being returned back to my fund through a tax return. In accumulation it was taxed at 15% (as with the rest of income) with the balance returned and in pension it will be refunded in full.

We need to stop inferring that franking credits are not anything but a PAYG tax advance to the ATO.

Richard Lyon
March 18, 2023

Four points:

First, can we please agree that those with very large super balances really DO NOT need a subsidy for what they hold above a certain amount (though, of course, they'd be happy to have one)? We can argue about the amount (is it $3M, or more/less?), but the principle should be uncontroversial.

Secondly, can we ditch the "30% tax rate" language? This surcharge [would be a better name than "tax", I think] is calculated as 15% of a PROPORTION of what is effectively the net earnings allocated to the member's account(s). Yes, those earnings include unrealised gains, but they are also net of expenses and the provisions for income tax and deferred tax. Meanwhile, tax will also be paid on the member's fund(s) under current rules. It is highly likely that the effective rate of that tax will be lower than 15%. And the base will not be the same, since it will exclude unrealised gains but will be gross of tax provisions. Adding one rate to the other is an apples and oranges exercise. There is no point to it.

Thirdly, the question of having the cash to pay the surcharge is a total furphy in almost every case. Take someone with $4M in a single illiquid asset in super, who has the good fortune to see that asset appreciate by 25% ($1M) AFTER allowance for deferred tax, taking their balance to $5M. For simplicity, assume that there were no contributions or withdrawals and that the asset generates no income. Then the surcharge payable will be 15% x (5 - 3) / 5 x 1M = $60k. This is an extreme example for what is only a little below the median of balances in the famous 80,000. And yes, $60k is a lot of money to find. But who has a single $4M illiquid asset generating no cash and has no spare cash? Probably someone who is about to sue their financial advisor...

Finally, if this surcharge drives excess funds out of super, it has achieved its objective, since this is about being able to demonstrate that the concessional super tax system doesn't give too much to those who don't need it. But do your sums before you move your money. And don't expect the non-super rorts to be around forever, either.

danm
March 18, 2023

You're right of course Richard. All this indignation is crass. Let's talk about ways to pay down defecits that don't unfairly impact the homeless and those who may now never afford a home and will never live an a household with potential $6m in Superannuation, totally untaxed.

Mark B
March 18, 2023

Agreed Richard that something had to be done, however what they are doing is not right either for lots of reasons that have already been identified so I won't repeat.

Reality is that they should have just increased the tax rate on accumulation funds to 30% once you trigger the TBC (through the TBAR) to put funds into pension mode or when you hit 65 whichever comes first. It won't be long before those pension accounts are getting close to $3M anyway if people take out the minimum withdrawal rates. the TBC is also indexed so would require no further action by future Govts. It would also align Super for providing for retirement in a much clearer/fairer way.

Tony Smith
March 18, 2023

Could you explain your maths? In your eg a fund starts the year with $4M (ie 1/4 is above the threshold). It's capital gain for the year is $1M so wouldn't the extra 15% tax/surcharge apply to 1/4 of that capital gain ie 15% x $250000 = $37500 ?

Richard Lyon
March 19, 2023

The formula uses the end of year total super balance (TSB), which penalises a growing fund and benefits a declining one.
I would argue for some kind of average approach (e.g average of proportions calculated with start and end balances), recognising that a sensible rule is required to deal with the position when the TSB is below $3M at one of those two points.

Barry
March 19, 2023

Nobody seems to have asked this yet.

If this new 15% tax is not a tax, but a surcharge, or a levy instead, does that mean that it will be tax deductible like the SMSF supervisory levy, like state government land tax, like fringe benefits tax, and like all the other so-called "taxes" that are tax deductible?

Mark
March 19, 2023

Nobody has needed to ask that as Chalmers and the ATO have clearly stated it will be an additional tax.

Taxy
March 27, 2023

I'm in complete and utter agreement Richard. If we all agree on your first point, then I'm yet to hear anyone come up with a solution that achieves the outcome. Forcing withdrawal from super would be a nightmare, anything that is based on individual earnings will be impossible for large funds. This seems to be a reasonable balance. When one looks at the proportion of earnings bit which is often overlooked, this surcharge is really not that bad. When one considers it can be paid from the super fund or personally, one also must wonder where the indignity of not having cash flow comes from.

Jon Kalkman
March 17, 2023

This article perpetuates the myth that franking credits are a tax refund and that refund applies only to taxpayers on low marginal rates. Franking credits are primarily additional income. The CBA recently announced a dividend of $2.10. If you owned 1000 shares, your additional taxable income is not $2,100, but $3,000 because the $900 the company pre paid as tax (30% of $3,000) before you received that dividend is also part of your taxable income. That’s why you need to “gross up” the dividend in your personal tax return. Because this additional taxable income is held by the ATO, you have to pay tax on income you never received. Because it is held by the ATO, it becomes a tax credit when you complete your own tax return. Because it is a tax credit, you can use it to pay some or all of your personal tax. If your tax obligations is lower than the tax credit, the ATO is holding some of your income on which no tax is payable - you get a tax refund, just like an employee whose employer has overpaid their tax obligation. A franking credit refund is NOT a refund of tax never paid, it is a refund of income never received. At present we have a myth that a zero-tax pension fund collects $2.10 in dividend from CBA but also a tax refund of 90 cents ($3.00 altogether) even though it has paid no tax. It would be more honest if the income derived from shares were quoted as a pre-tax distribution (in this case $3.00, not $2.10) because that applies to all other investments and makes comparisons more valid. In that case it would be obvious that a zero-tax pension fund received $3.00 per share in income - because it pays tax on its income at a zero marginal rate. And if dividend income was quoted as pre-tax basis, it would be obvious that everyone else was also paying tax on their dividend income at their personal marginal tax rate - as they do now!

Tony
March 17, 2023

What I read from this article is that SMSFs will be taxed the same as pooled funds, good outcome.
I also read that franking credit refunds are a bastardisation of the franking system and should be abolished.
I also read that direct property has no place in an SMSF due to illiquidity.
As for the maths, we can make numbers do whatever we want, so I take most of these conclusions and recommendations with a large grain of salt.
Fact is, nothing beats superannuation!

Geoff R
March 17, 2023

The more I think about this new surcharge tax, the more I want to avoid it. And I am sure I am not the only one. There is a real risk of paying tax on paper profits which may never eventuate. You might have a stellar year where your balance skyrockets followed by a crash a year or two later. This would seem to encourage "safe" low risk, low return investments like money in the bank rather than risk having a volatile portfolio. Generally higher volatility equals higher long term return (but you need to have the stomach to ride out the large drawdowns). I have saved hard into Super for three decades (and yes have therefore sacrificed a lot) and have just retired but am now considering taking much of it out to avoid the worry of this. If I drip feed it (at say $110k a year) into each of my kids' Super maybe they will retire around the time I die and so will effectively get their inheritance that way. But am I then just cruelly forcing them into the same unsafe system where their money is locked up for decades and the rules can change like this at the drop of a hat? Perhaps it is better to just give it to them now to reduce or pay off their house mortgages. Of course this implies a confidence that they can be trusted not to spend it all before their retirement! Then again, maybe it doesn't matter if they do spend it having the lifestyle I have eschewed. Or perhaps I am not too old to change my thrifty ways and live it up a bit!

Dudley
March 17, 2023

Family compound / mansion - no mortgages.

Difficulty for Age Pension age retiree couple is finding a home expensive enough to soak up > ($3,000,000 - $419,000) = $2,581,000 but cheap enough that maintenance and other costs of living plus entertainment does not exceed Age Pension of 26 f * $1,547.60 / f = $40,237.60 / y for which they would be eligible should Assessable Assets be $419,000 or less.

However, should an extended family happily share a compound or mansion then the problem is more easily solved.

Geoff R
March 17, 2023

Hi Dudley,


A bigger house would result in more rates, insurance and maintenance costs as you note. And more stamp duty to buy it and perhaps more land tax in the future if they stop exempting the family home (PPOR). I am certainly not trying to get the pension - one reason for saving so much in Super was to be financially independant in my dotage and to not be a burden on society by claiming welfare. Still if the government decided to do a NZ style universal pension (as you often advocate) with no assets or incomes tests then sure I would happily accept it! But that seems most unlikely in my lifetime. I don't mind paying a fair amount of tax but paying on unrealised gains doesn't seem "fair". I see farmers are objecting too.

Brad Lonergan
March 17, 2023

Geoff, There are other alternatives for transition of wealth from one generation to the next that can avoid the new tax implications and allow you to control from the grave when your 'non-dependant recipients' receive the funds. It does require planning though. 

Al
March 17, 2023

The obvious asset that you should not have in SMSF would be real estate. A single property could easily end up hitting the limit...

Mick
March 17, 2023

Quite a few of us who receive a public service related defined benefit pension have also set up an SMSF. Little has been said about how the former will be capitalised and whether it will be included in the new $3M limit. They are taxed already, being 'unfunded' (turning a blind eye to the future fund) although there is a rebate, 10% from memory?

SN
March 17, 2023

Incentive to move money is NOT for under 60 ?
let us be Clear that if you are under preservation age, you can't withdraw !
Many under 60 will simply have to cop the extra Tax.
Yes unfair and in 10 years time many many will join $ 3 million class.
SMSF with two members and when one passing away will be another avenue to increase $ 3 million class.

Rhod Cook
March 17, 2023

Thank you for this illuminating article, and some sensible comments. I may well have missed it, but could you please tell me if the tax on unrealised profits will apply to all member accounts or only to those over $3m.
In other words, will any account under $3m be treated as now?
Thank you.

Graham Hand
March 17, 2023

Hi Rhod, it's not measured by the size of any 'account under $3m' but by the sum of all super held by an individual. But yes, if at the EOFY, an individual holds less than $3m across all super, no impact.

Denial
March 17, 2023

Yes I've come conclusion. Any assets help above $3M is likely to be better off outside of super.

The impact on how you implement your investment strategy is massive given you're now required to pay tax on unrealised gains. In effect it requires you to sell the asset to fund the tax bill and has significant consequences on what you can now invest into given your hold period may become <12 months. Whether the ATO would also then start watching tax loss harvesting prior to year end is a unknown (but future risk for trustees). A complete disaster for wealth accumulation via a rational buy and hold strategy.

Laurie
March 16, 2023

I need to do the sums, but it seems to me that withdrawing the excess and using it to negatively gear the purchase of property is the most cost advantageous thing to do. No tax paid now and only 24% or so when you eventually sell. This will put these funds into non-productive assets and help drive up the price of property. Another unintended consequence.

Geoff R
March 17, 2023

yes you really want to move it into assets where you control the timing of tax on capital gains. ie. tax when a gain is actually realised not on some intangible paper gain that might evaporate in subsequent years. Of course the 50% discount on CGT outside super may not last but good chance you would be safe as earlier purchases are likely to be grandfathered.

>This will put these funds into non-productive assets and help drive up the price of property.

I personally would avoid property with all the land taxes, rates, insurance, tenant problems, creeping government regulation and so on. Not to mention the transaction costs (stamp duty on purchase, real estate agents fees on sale) and the inability to sell a small portion of it as you can with other more liquid investments. I can sell a few bluechip shares today and have the money in a couple of working days. But each to their own!

Taxy
March 27, 2023

Surely any such comment requires consideration of the additional risk associated with gearing. This comment is like comparing apples to oranges. Please.

Geoff Booth
March 16, 2023

Thank you, Ashley for this informative overview of a “clear? & present?” financial "exocet" (sorry about the mixed metaphors!)
Many years ago, I set up my SMSF such that when I pass, the greater majority of funds will go to an iconic Australian organization.
Even though I am elderly, I have always chosen an appropriate "growth" strategy so as to maximize the final amount available to give to this organization.
So, as you point out, I will (potentially) soon face a difficult cash-flow situation in terms of paying tax on unrealized gains within my SMSF.
Are there any other considerations you might have re this situation, which appears to be a growing trend within Australia - viz, people bequeathing their Super Funds to Charity.
Thank you,
Geoff.

Stiggyyabass
March 16, 2023

Perhaps I’m mistaken but this is surely not the first time that unrealised gains have been taxed. I paid a large wodge of tax on shares held in my employee share scheme when I was working even though the actual value of my holding was not known until the shares vested three years later…

ashley owen
March 17, 2023

You are correct - employee share / option schemes have been taxed on grant, based on estimate of future value on vesting. But that is a rare exception. (You could get around this by holding in a company name. But that locks it up at the corporate tax rate with no tax-free threshold, but at least no tax on unrealised gains. (I have a bunch of these - outside super, thankfully!).
I also personally paid $18k and $23k tax in the two years of Bob Carr's owner-occupier land tax on primary residences before he was tossed out. Property/wealth taxes are on the way back!
Cheers
Ashley

Taxy
March 16, 2023

Can we please stop calling this a new 30% tax rate...

If super at these levels is no longer as attractive then as you say there will be other strategy considerations to be looked at. But doesn't that fit in with the policy intention of this change. The concessions provided to super are being limited. If you can find a better structure once you hit $3M then good for you.

PS it is not even draft legislation yet - it's only a media release and a short fact sheet.

Mark
March 16, 2023

If you're under preservation age, you can't move your money over the TSB limit and have to cop the changes on the chin.

Tax earnings only, not unrealised gains
Indexation of the limit
Allow anyone, regardless of preservation age or not to withdraw excess amount over limit if they choose to.
Most early release options are taxed currently so realistically this would be as well, still needs to be an open option for fund members to have.

michael
March 16, 2023

Moving the excess out of super may be a good thing, in general. People have a choice of spending it now, adding to the economy. Or reinvesting.
To make this a good experience, the withdrawing of excess funds needs to be simple, efficient & cheap. It should feel like a success (we have so much super, we can start collecting now) rather than some disaster due to unfair taxation.
Likewise, I have heard nothing of superannuation guarantee payments for those with large balances. The earner should have a choice how to receive this, rather than mindlessly payed into a highly taxed fund.

Denial
April 26, 2023

Michael its all about being "progressive" and targeting those that are perceived as being able to pay extra. You now get clipped 30% on the way in and up to an artificially derived 30% each and every year. Nevertheless, it's a poorly targeted money spinner as most if not all will avoid paying any extra tax if it can be logically avoided. Note also they don't have to ever pay it outside the system if they simply just hold.

The limited brain power within the policy division needs to now reconsider the merits of this policy and likely unintended consequences. Be brave and try taxing the pension side (but only realised income/gains) if you really want a progressive and sustainable system.

 

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