Danger of super members being taxed on unrealised earnings

Mike Taylor

Managing Editor/Publisher, Financial Newswire

3 March 2023

Having initially strongly opposed the Government’s proposals to cap the 15% tax concessionality of superannuation balances to those less than $3 million, the SMSF Association is now urging the Australian Taxation Office (ATO) to adopt a calculation based on notional earnings.

The association’s new chief executive, Petr Burgess said that to do otherwise would give rise to the highly unusual situation of some members paying tax on unrealised earnings.

In a formal statement dealing with the issue, Burgess said Treasury’s Fact Sheet explaining how the tax on earnings on balances exceeding $3 million will be calculated represented a mixed blessing for self-managed super funds.

“The good news in this Fact Sheet is that it means super funds, including SMSFs, will not be required to calculate the earnings attributable to the member’s balance above $3 million,” he said. “The ATO will use a prescribed formula to calculate the proportion of total earnings which will be subject to additional 15% tax. Negative earnings can be carried forward and offset against this tax in future year’s tax liabilities.”

“But on the debit side, the ATO will be using an individual’s total super balance to calculate their earnings, which means it will include all notional (unrealised) gains and losses. This essentially means some members will be paying tax on unrealised earnings which is highly unusual.”

Burgess said the SMSF Association’s preferred approach would be for the ATO to do a calculation of ‘notional earnings’ using a similar approach to the existing excess contributions tax regime.”

The Fact Sheet, which follows the Federal Government’s decision to tax superannuation earnings on balances above $3 million at 30% (currently 15%) from 2025 and is expected to affect 80,000 people, states that the ATO will use a set formula to calculate the earnings based on the information it receives from each super fund every year.

This formula will calculate the difference between the member’s total super balance for the current and previous financial year and adjust for net contributions (excluding contributions tax paid by the fund on behalf of the member) and withdrawals. The ATO already uses super fund reporting to calculate the total amount that individuals have in the super system.

Burgess said individuals will then be notified of a tax liability by the ATO and will have the choice of either paying the tax out-of-pocket or from their super fund. Individuals who hold multiple super fund accounts will be able to elect the fund that pays the tax.