SMSF Association: unrealised capital gains should be excluded from new tax

Oksana Patron

4 April 2023

Although the SMSF Association has expressed ‘cautious optimism’ regarding the Government’s proposed reduction of super tax concessions for individuals with super balances over $3 million, it said ‘various items’  included in a member’s total super balance (TSB) should not be subject to the new tax.

The association noted that the Government’s preference to use a member’s TSB to calculate earnings for the purpose of the proposed new tax however, it said, “various items included in a member’s TSB which, for reasons of fairness and equity and to avoid unintended consequences, should not be subject to this new tax – and top of the list is unrealised capital gains”.

“In this regard, it is pleasing to see the consultation paper seeking feedback, on what modifications should be made to the TSB calculation for the purposes of estimating earnings,” the SMSF Association’s chief executive, Peter Burgess, said.

“It is also pleasing to see the paper seeking feedback on alternative methods of calculating earnings on balances above $3 million – in our view there are alternative methods that could be considered, and it is important these are appropriately aired along with the advantages and disadvantages.”

At the same time, the association said that new tax should apply to self-managed superannuation funds (SMSFs) and large funds in the same way, including unrealised gains “unfairly targets” SMSFs considering their exposure to direct property assets.

“The paper notes the obligations for trustees to properly formulate an investment strategy, but it’s important to recognise that it’s not against the rules for an SMSF to hold most of its assets in a single investment,” Burgess added.

“The legislation requires trustees to consider whether the fund is adequately diversified given the risk profile of members, the fund’s investment objective, and the cashflow and liquidity needs of the fund.”

In conclusion, the SMSF Association confirmed it believed in “revisiting and fast tracking” the previous Government’s announced, but not yet legislated, two-year amnesty period for the conversion of certain defined benefit pensions to more conventional style account-based pensions.

“For large funds, the Government is grappling with how to value these pensions and calculate earnings for the purposes of this new tax, however similar issues apply to SMSFs with lifetime and life expectancy pensions.”

“Allowing a two-year amnesty to convert these pensions to more traditional style pensions would simplify things at least for these members.”