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Consultation Paper Response

31 March 2023

Director, Tax and Transfers Branch, Retirement, Advice and Investment Division

The Treasury, Langton Crescent, PARKES ACT 2600

Email: superannuation@treasury.gov.au

Dear Sir/Madam,

SUBMISSION – BETTER TARGETED SUPERANNUATION CONCESSIONS

Thank you for the opportunity to provide this submission in response to the Government’s consultation paper on the proposal to legislate the better targeting of superannuation concessions.

Overview

The current proposal was announced as a measure to restore equity to the superannuation system by taxing large balance members an additional 15% on the earnings of their excessive balance. The application of transfer balance caps and total super benefit limited contributions, from 1 July 2017, has made the issue of very large member balances a temporary one but the government wishes to bring forward the resolution by the imposition of an extra tax on members with large balances now.

The Non-Indexed Cap

Much has been said about the inappropriateness of providing retirement concessions to members with over $100m in benefits but the proposed cap has been set at $3m. This is manifestly inadequate, particularly when members with under $5m are usually the only superannuant of a couple with no ability to split the benefit with their partner. The measure is forecast to effect 80k members. A $5m cap would reduce that number to about 11k. Not only would this make the measure fit for purpose it would also provide the ATO and the sector with a much more manageable workload.

The absence of indexation not only increases the affected cohort over time, simply by virtue of bracket creep, but also enshrines yet another opportunity for ongoing political interference. Significantly, if the current inflation rate remains to the date of introduction, the real value of the proposed cap will already have reduced to $2.65m by then. It has been said that an unindexed cap is justifiable by virtue of the number that already exist. All unindexed caps are inequitable. Repeating a mistake does not make it less so.

This measure has been announced as an equity measure. It will not be so unless the cap is either set to $5m or indexed or both.

I will now turn to your specific questions.

  1. Do you consider any further modifications are required to the TSB calculation for the purposes of estimating earnings? If so, what modifications should be applied?

Contributions & Withdrawals

Appropriate allowance has already been announced for contributions and withdrawals.

Life Insurance

Life insurance proceeds should be treated in the same manner as contributions as already indicated by you. Due to the difficulty in planning the timing of life insurance payments, and pay outs, I propose they be treated concessionally for an appropriate period to cater for instances where a payment, intended to be paid from the fund, is received too close to the end of the financial year to be actioned in time. Twelve months from receipt of proceeds would be appropriate but, in the interests of simplicity, I suggest that concessional treatment of both the receipt of life insurance proceeds and the payment of a death benefit be extended to the end of the year following receipt of the payment.

Certain life insurance payments are triggered by structured settlement like events. I propose that life insurance proceeds for total and permanent disablement and terminal illness be treated similarly to Structured Settlements for total super balance purposes.

Reversionary Pensions

Reversionary pensions are currently treated differently for transfer balance and total super balance purposes. They are counted for transfer balance purposes one year after the primary pensioner’s death. This is reasonable as the event was not planned, the surviving beneficiary is in an emotionally challenging situation and the twelve months grace provides time to readjust their affairs in an ordered and appropriate manner. By way of contrast, reversionary pensions are counted against the beneficiary’s total super balance from the date of the primary pensioner’s death. This will likely cause the beneficiary to breach the cap. I propose that, for the same reasons that the transfer balance count is delayed for twelve months, the total super balance count should be similarly delayed. I understand that you are already agreeable to ignoring the tax liability generated by the deceased in the year of death, but this additional concession should be extended to the recipient to deal with timing issues.

Limited Recourse Borrowing

Certain types of limited recourse borrowings – related party loans and any loan once the member has triggered a condition of release – are counted against the member’s total super balance. This creates the inequitable position whereby a member will be subjected to a tax calculated, in part, on a debt. I understand that you are already amenable to excluding this from the total super balance calculation for the purposes of this proposal.

Cash Flow

Many SMSFs are heavily invested in a single asset, generally real estate, and will have issues with sourcing the additional tax. The option to pay from non-super sources will not be of benefit to many members with balances less than $5m as, typically, such members hold all their investments in superannuation. Member’s with over $5m will experience less of an issue as they, generally, hold significant non-superannuation assets as well. I understand that you are amenable to the establishment of a loan facility arrangement to defer the need to sell a property, possibly until the member’s death, at the expense of further complexity.

  1. What types of outflows (withdrawals) should be adjusted for and how?

Death benefit payouts should not be added back as withdrawals if they occur within twelve months of the date of death or until the end of the year following the year of death in keeping with the comments made previously concerning life insurance.

  1. What types of inflows (net contributions) should be adjusted for and how?

I have already covered the receipt of insurance proceeds and the addition of reversionary pension proceeds to a beneficiary’s member account.

  1. Do you have an alternative to the proposed method of calculating earnings on balances above $3 million?

SMSF members represent the bulk of affected account-based fund members. There will be APRA account-based fund members who will also have SMSFs or whose total super balance breaches the cap independently of any SMSF involvement. Finally, there will be defined benefit members.

The ATO will administer the process. Accordingly, they need to use readily available information. The Total Super Balance is an appropriate measure to identify relevant members but not an appropriate measure of taxable income. Indeed, its use for this purpose has been a major cause of opposition to the proposal due to the taxation of unrealised gains and the levying of tax without a sale to provide liquidity. In addition, though the proposed method is regarded favourably due to its perceived simplicity, the number of equity adjustments required introduce a great deal of unwanted complexity. The application of the additional tax to actual taxable income has been rejected due to its perceived complexity but its adoption would eliminate virtually all the unintended negative consequences, and compensatory measures, required within the current proposal.

SMSFs would only require minor system modifications to provide actual taxable income data to the ATO on a per member basis. APRA funds would require considerably more. As the vast majority of account-based APRA fund members will not be impacted, a system change to provide this for all members would be unwarranted. I understand, from discussions I have had with APRA fund trustees, that they would have little difficulty in providing actual taxable income data for individual fund members once identified.

Accordingly, I propose that the ATO:

  • utilise a member’s total super balance to identify affected members.
  • applies the additional tax to taxable income in accordance with the Prime Minister’s announcement.

The ATO will source taxable income data from:

  • SMSF members by requiring an additional label to be added to fund financials identifying each member’s share of taxable income.
  • APRA fund members by requiring APRA fund trustees
    • to automatically provide similar data, but only on any of their members they know will breach the cap
    • to provide data, on request, where the ATO determine that it is likely that the APRA fund member has breached the cap based on consolidated total super balance information.

What are the benefits and disadvantages of any alternatives proposed including a consideration of compliance costs, complexity and sector neutrality?

The current proposed method is a serious departure from established accounting principles. Increases in account balances are taxed without reference to taxable income. Further, as losses can only be carried forward and account balances will naturally decline over time, it is likely that many carried forward losses may never be utilised. The only equitable approach is for the tax to be levied on the member’s proportionate share of fund income.

The compliance cost would be minimised as system changes will primarily affect SMSFs. These changes are not onerous as the data is already utilised within SMSF administration software. It merely requires the population of an additional reporting field. APRA funds would not be required to make significant changes either. APRA trustees already know their member’s total super balance position and, I am informed, would have little difficulty in sourcing the required information on selected members as requested by the ATO.

The way the current proposal will be dealt with for defined benefit funds would likely require actuarial involvement which I believe will be required, under the current proposal, in any case. I expect this is a larger issue generally that I am not qualified to comment on.

Using actual income would automatically deal with contributions, withdrawals, life insurance, reversionary pensions, limited recourse borrowing and cash flow. In effect, all the issues requiring special treatment under the current proposal.

The actual income method would be both sector neutral and equitable.

As a further consideration, an adoption of a $5m cap, reducing the cohort from $80k to $11k, would significantly lower the administrative impact on all parties, including the ATO. I am not able to calculate the effect on costs or revenue, but you can. I believe this information should be publicly available if the $3m cap is preferred.

  1. What changes to reporting requirements by superannuation funds would be required to support the proposed calculation or any alternative calculation methods?

This has already been covered.

  1. Do you consider any modifications are required to the proposed proportioning method? If so, what modifications should be applied?

I believe they are appropriate for the total super balance tax calculation method.

  1. Do you have an alternative to the proposed proportioning method? What are the benefits and disadvantages to any alternatives, including a consideration of compliance costs, complexity and sector neutrality.

None that are as easy to implement as that proposed.

  1. Does the proposed methodology for determining the tax liability create any unintended consequences?

Yes. There is a focus on taxing unrealised gains, contrary to the general principles of taxation and at variance to the government’s announcement that the tax rate would be increased by 15% on returns on balances over the cap. The tax rate is considerably higher under this methodology, made more egregious by the unindexed cap of only $3m. It also introduces a number of consequences that require individual treatment, as discussed.

  1. Do the proposed options for paying liabilities create any unintended consequences?

SMSFs holding a large percentage of illiquid property assets may be forced to sell down their assets to pay the tax. I realise that the member can elect to pay it external to the fund but, often, most of the member’s wealth is held within the fund so external sources do not exist as mentioned above.

  1. Do the existing valuation methods for defined benefit interests in the pre-pension phase (under the existing TSB definition) work appropriately for the purpose of calculating superannuation balances over $3 million?

I believe that members of defined benefit funds are comparatively advantaged under the proposed methodology, but I am at a loss to offer an alternative.

  1. Do the existing valuation methods for defined benefit interests in the pension phase provide the appropriate value for calculating earnings under the proposed reforms?

I shall defer to others of a more actuarial bent to comment.

  1. Are there any alternative valuation methods that should be considered for either pre-pension or pension phase defined benefit interest

As for 11.

  1. Are there any preferred options in providing commensurate treatment for defined benefit interests?

As for 11.

  1. What are the benefits and disadvantages to any alternative

As for 11.

  1. What would be the most effective method for collecting the required information? What are the benefits and disadvantages for the method identified, including a consideration of compliance costs, complexity, and sector neutrality?

The ATO already has excellent reporting channels, including enforcement powers to encourage participation. I don’t believe there is anything more required.

Thank you for the opportunity to make this submission.

Regards

David Busoli

Practice Principal & SMSF Specialist Mentor

www.smsfalliance.com.au ~ E. dbusoli@smsfalliance.com.au

T. 1300 809 933   ~   F. 07 3319 6434   ~   M. 0499 778 584
P. PO Box 978, Coorparoo QLD 4151   ~  S. 433 Logan Road, Stones Corner QLD 4120