Govt’s earnings calculation discriminates against SMSFs

Oksana Patron

20 April 2023

The Government’s proposed $3 million tax threshold discriminates against self-managed super funds (SMSFs), according to the SMSF Association.

Further to that, the Association said in its submission to the Treasury consultation paper that funds should be given the option of reporting actual earnings and where a fund cannot or chooses not to report actual earnings attributable to a member, a default notional earning rate should apply.

“We caution against setting what is a dangerous and concerning precedent,” Association’s chief executive Peter Burgess, said.

Positioning in this manner is counter to vertical and horizontal equity taxation principles. When we consider the various distortions that arise and exceptions that will need to be addressed, the outcome is far from simple or equitable.”

According to the Association’s submission, certain amounts will need to be excluded from an individual’s total super balance to avoid ‘earnings’ being overstated under the proposed model.

The consultation paper also dismissed the option of using actual earnings to calculate the new tax because it presents significant challenges for APRA regulated funds.

“The proposed model has been designed for APRA regulated funds, yet three-quarters of the estimated 80,000 members being impacted are SMSF members,” Burgess said.

“The lack of equity and unintended consequences arising from the proposal are driven by a desire to placate the large APRA funds – a clear case of the ‘tail wagging the dog’. Given its significance for SMSFs, and the distortions already arising, any model must be considered in an SMSF context.

“It is unfair that SMSF members with balances above $3 million will be required to pay tax on unrealised gains because some APRA regulated funds may find it difficult to report the taxable earnings attributable to members.”

In its submission the Association also took aim at the extremely short consultation period on the proposed model.

“Through engagement with our members, stakeholders, and other industry groups we are seeing new concerns arise daily, and the limited consultation period has not allowed sufficient time to properly consider the impacts and identify the unintended consequences.”

The process has the appearance of a tick-a-box exercise that risks detrimental outcomes for many individuals affected by the proposal, Burgess said.