Taxation of unrealised gains a dangerous precedent

If the Government sets a precedent in taxing unrealised capital gains in superannuation there is the risk of future Government extending that precedent to personal investment such as rental properties, according to the SMSF Association.

What is more, the SMSF Association has accused the Treasury of being misleading in suggesting that unrealised capital gains are already a feature of the Australian taxation regime.

In a submission filed with the Senate Economics Legislation Committee review of the legislation underpinning the $3 million superannuation tax concession cap, the Association said Treasury was being misleading because the only example within the Australian taxation system is the taxation of capital gains where an individual or a company ceases to be an Australian tax resident.

The SMSF Association has suggested that in all the circumstances and given the potential disruption likely to be generated by the legislation, the Government should pull the legislation and re-engage with stakeholders.

“The inclusion of unrealised gains in the measurement of earnings is not representative of actual taxable earnings within the superannuation fund,” it said. “Taxation on unrealised capital gains is rare among OECD countries, and rarer still in OECD pension systems.”

“Given both the benchmarking to other OECD nations and Australia’s own economic history, what is proposed is a radical departure from existing taxation policy, with potentially far broader consequences than just those outlined by Treasury”

“This model will impose financial stress on a meaningful number of SMSF members. Research conducted by the University of Adelaide shows clear evidence of the liquidity stresses this methodology will cause.

“Recent studies show a substantial number of SMSFs that will be affected by this tax change hold property and, given many will be small business operators and farmers who hold their premises and land in an SMSF, it is not difficult to see how disruptive this new measure will be not only for the SMSF sector but for small business operators and the broader community.”

The SMSF Association suggested that an alternative measurement of earnings which reduces uncertainty and the severity of including unrealised capital gains, is needed as a matter of priority.

“We therefore strongly encourage Government to cease the progress of the proposed amendments and instead continue to engage with stakeholders and industry to ensure that the resulting policy and legislation delivers the right outcomes, which are fair and equitable.”