Div 296 – an inequitable avoidable mistake

Amid signs the Government is beginning to internally waver on elements of its Division 296 tax on superannuation changes, the Institute of Public Accountants (IPA) is urging it to reconsider the most problematic areas on equity grounds.

And primary amongst those equity issues is the taxation of unrealised capital gains and the absence of a mechanism for refunding negative earnings.

IPA Tax and Super Advisor, Letty Chen reinforced that the Government’s currently proposed approach represents a significant departure from accept tax orthodoxy and principle.

A fundamental tenet of Australian tax law is that income and gains should only be taxed once they’ve been earned or realised,” she said.

“This measure would tax unrealised gains, which will create serious cashflow issues for taxpayers, especially for small business owners and farmers who hold illiquid assets like real property in their self-managed super funds.”

Forcing the sale of these assets to pay tax liabilities could be disruptive and may happen at a time of depressed market values.

“There’s a strong possibility a member could be cumulatively taxed on investments that ultimately make an overall loss, with no real recourse to recover any tax previously paid.”

The IPA is calling on the Government to reconsider these elements and urges them to:

• limit the tax to realised earnings and capital gains
• implement transitional rules that allow affected taxpayers to restructure their affairs without penalty
• index the $3 million threshold annually to account for inflation and ensure the system remains fair and equitable over time

“For someone in their 20s or 30s today, $3 million when they near retirement might be equal to a fraction of that amount in today’s money due to inflation,” she said.

“The threshold must be indexed. Superannuation is designed for long-term saving, and policy should reflect long-term impacts and provide certainty.”

“Ultimately, reform of superannuation tax concessions must be considered holistically. Piecemeal measures such as the Division 296 tax introduce other inequities and greater complexity. Poorly considered changes will undermine confidence in superannuation.”