Opinion piece written by Peter Burgess, CEO, SMSF Association
First published in Financial Review on 26 April 2023. Licensed by Copyright Agency.
Capital gains tax liabilities and a sudden surge in asset prices just before June 20 are just two of them.
It’s the year 2026 and Joan, a chartered accountant, has just retired from her mid-tier accounting firm. She never considered herself a smart investor, but she was a patient one, always prepared to take good advice. In the 22 years since establishing her self-managed super fund, she has accumulated a tidy sum that slightly exceeds $3 million. Once she has cleared her mortgage, a comfortable retirement beckons.
As a long-term investor, her fund (which includes property and shares) has substantial unrealised capital gains. A property bought for $300,000 is valued at $970,000. The portfolio of shares includes bank shares acquired at IPO for $5.40 which are trading at $110, as well as mining shares acquired at listing for $0.01 and now worth $26.
The government’s proposal to increase the tax on earnings for funds with more than $3 million (realised and unrealised), which became law in 2025, means Joan’s super balance is in the crosshairs of the new tax.
As she has retired, Joan has started an account-based pension using her full transfer balance cap ($1.9 million). Accounting for her new pension will include book entries known as deferred tax liabilities, which during her time in the accumulation phase includes a provision for capital gains tax liabilities. For Joan, this adds $80,000 to her member account.
This deferred tax liability, as well as the growth in asset values and fund income, will be included in any future earnings calculation based on her total superannuation balance (TSB) – irrespective of whether a single share has been sold.
What Joan’s example highlights is that the proposed Treasury model promotes simplicity over equity, and is counter to both vertical and horizontal equity taxation principles.
When the various distortions that will arise and exceptions that will need to be addressed surface, the outcome will be far from simple or equitable, as the use of an individual’s TSB for calculating tax liabilities highlights. It will also snare taxpayers whose actual member account balances sit below the proposed threshold but are captured through the operation of current TSB rules.
Four critical issues
When examining Treasury’s proposed methodology as it relates to the TSB, four critical issues emerge. First, a fund member’s TSB is merely a point-in-time measure. Any changes in valuation of fund assets that occur at the end of a financial year may significantly affect a person’s tax liability under the proposed measures. A sharp spike in the share market just before June 30 is a good example.
Second, capital gains tax is levied on realised gains when an asset is sold. Unrealised gains are not taxable income. Indeed, for some assets their value will be arbitrary as their true values cannot be accurately determined until they are sold.
Third, income tax or goods and services taxes (GST) are not subject to taxation. Tax refunds represent a return of overpaid tax, not income – as such, they are excluded from the calculation of assessable income. They are, however, included in the calculation of a member’s TSB. Taxes will therefore be included in calculating earnings.
The last issue is non-taxable accounting adjustments and book entries that directly affect a member’s TSB. Where a future cost to the fund is material, it is appropriate for trustees to account for the liability in the accounts. This ensures that the fund has appropriately accounted for its liabilities and more accurately represents the value of the underlying member account balances.
Once actual costs incurred have been reconciled, any amounts remaining are added back. The adding back of a provision for a liability will have the effect of increasing the value of member’s interests in the fund – and potential tax liability.
Remember, too, that APRA funds and many SMSFs make provisions in the fund accounts for future capital gains tax liabilities that would arise if the assets were sold today. This ensures that the member’s interests represent, as close as is reasonably practicable, the actual realisable value of the member’s interest in the fund.
When starting a pension, the deferred tax liabilities relating to the assets supporting the pension interest are added back (remember Joan). This adjustment is necessary as the earnings on those assets are now tax-free, so the provision for capital gains tax is no longer needed. Adding back deferred tax liabilities can be material, particularly for funds that have experienced long-term capital growth on fund assets.
As this adjustment is made at retirement, large unrealised gains accrued over time are not uncommon. The inclusion of deferred tax liabilities would have the effect of taxing an accounting book entry that was a provision for potential future taxation on realisation of the asset. The result is a tax being applied on prudent trustee accounting policies. It also adds an element of retrospectivity to the proposed tax.
The government is not aiming to introduce this tax until 2025. Yet in the short space of time since it was announced, the proposed model has been exposed as complex, lacking equity and likely to trigger a range of unjust outcomes. Given the lengthy timeframe, there is room to get the model and legislative framework right.