Alternatives and unintended consequences to be aired

Media Releases

Alternatives and unintended consequences to be aired

SMSF Association Media Release

The SMSF Association has expressed cautious optimism following the release of the Government’s consultation paper, on the proposed reduction of super tax concessions for individuals with super balances exceeding $3 million.

Conveying a strong desire for a “simple” approach, the paper confirms the Government’s preference to use a member’s total super balance (TSB) to calculate earnings for the purpose of the proposed new tax.

SMSF Association CEO, Peter Burgess, says we understand the attraction of this approach, however the fact remains there are various items included in a member’s TSB which, for reasons of fairness and equity and to avoid unintended consequences, should not be subject to this new tax – and top of the list is unrealised capital gains.

“In this regard, it is pleasing to see the consultation paper seeking feedback, on what modifications should be made to the TSB calculation for the purposes of estimating earnings.

It is also pleasing to see the paper seeking feedback on alternative methods of calculating earnings on balances above $3 million – in our view there are alternative methods that could be considered, and it is important these are appropriately aired along with the advantages and disadvantages.”

Burgess says that although the consultation paper states that this new tax should apply to SMSFs and large funds in the same way, including unrealised gains “unfairly targets” SMSFs considering
their exposure to direct property assets.

“The paper notes the obligations for trustees to properly formulate an investment strategy, but it’s important to recognise that it’s not against the rules for an SMSF to hold most of its assets in a single

“The legislation requires trustees to consider whether the fund is adequately diversified given the risk profile of members, the fund’s investment objective, and the cashflow and liquidity needs of the

“Before the announcement of this new tax, it would not be fair or reasonable for the trustees to have envisaged the payment of this new tax, which, in some years, could be substantial.

“It’s generally not possible to sell part of a farm, for example, so the imposition of this new tax may, in some cases, require the property to be sold causing business disruption and triggering what could
be substantial transaction costs.”

He adds, we have already seen some case studies where this would be the likely result.

“Given the Government’s desire for a simple approach, we believe there is an opportunity to revisit and fast track the previous Government’s announced, but not yet legislated, two-year amnesty period for the conversion of certain defined benefit pensions to more conventional style account-based pensions, Burgess says.

“For large funds, the Government is grappling with how to value these pensions and calculate earnings for the purposes of this new tax, however similar issues apply to SMSFs with lifetime and life expectancy pensions. Allowing a two-year amnesty to convert these pensions to more traditional style pensions would simplify things at least for these members.”