University of Adelaide report finds super tax will have broader consequences

Media Releases

University of Adelaide report finds super tax will have broader consequences

SMSF Association Media Release

The Federal Government’s proposed new tax on superannuation balances exceeding $3 million could have a negative impact on up to 50,000 SMSF members, with the mean additional tax liability exceeding $80,000 in 2020-21 and 2021-22, according to a research report released today.

The report, by the International Centre for Financial Services (ICFS) at the University of Adelaide and commissioned by the SMSF Association, also found an estimated 13.5 per cent of affected SMSF members would have experienced liquidity stress in meeting the new tax obligations.

The research, which provides the first real glimpse of the potential impact of the proposed tax change on the SMSF sector, used data provided from more than 722,000 SMSF members (two thirds of the SMSF member population) for the 2021 and 2022 financial years.

Commenting on the release of the research study, Professor Ralf Zurbruegg from the University of Adelaide says this liquidity stress has been exacerbated by the inclusion of unrealised capital gains in the measurement of earnings.

“Taxing unrealised capital gains is a somewhat radical departure from existing tax policy and extremely rare in OECD pension systems.”

“There are potentially far broader consequences than those already outlined, and we recommend that the legislators carefully reconsider the implications of this proposal in its current form.”

The report also argues that the Government is potentially short-changing itself by taxing unrealised capital gains. ICFS Deputy Director George Mihaylov says it is important to highlight that using a measurement of earnings that aligns with existing tax policy (i.e., one that excludes unrealised capital gains), would not only alleviate the liquidity stress for some members in the short term, but is also likely to yield more tax revenue for the Government over the medium to long term.

“That’s because this new tax will still be levied on capital gains, but only when the underlying assets are eventually sold. Under normal asset price appreciation over time, the overall tax base will be greater.”

The report notes the treatment of unrealised capital gains and carried forward capital losses is highly problematic given the general nature of capital markets. It is common to see a string of bull market years followed by a sharp bear market decline. This means there is a strong possibility a member can effectively be cumulatively taxed on investments that make an overall loss without any real recourse to recover their tax expense.

SMSF Association CEO, Peter Burgess, says including unrealised capital gains means year-on-year tax liabilities will be directly related to the performance of investment markets, adding to the unpredictability and inequity of the proposed tax, and making it extremely difficult for superannuants to plan investments and manage liquidity.

“Asset rich, income poor SMSF members will find it difficult to cover their additional tax liability and this problem is likely to worsen over time as unrealised capital gains accrue while tax payments from previous years diminish liquidity.”

The research notes selling liquid assets is typically associated with substantial transaction costs, market timing considerations and other macro-economic factors that are likely to further exacerbate the potential losses associated with meeting the new tax liability.

“Other recent studies show around one in four SMSFs that will be affected by this tax change hold property and, given many will be small business operators and farmers who hold their premises and land in an SMSF, it’s easy to see how disruptive this new tax will be not only for the SMSF sector but for small business operators and the broader community.

“Clawing back the superannuation tax concessions for high balance superannuants was one thing, but taxing paper capital gains that may never be realised, is something completely different,” Burgess says.

The full research report and report summary can be downloaded here.