Proposed Excess Member Balance Tax Calculator
Important Update
The bill has not been voted on in the senate and, as there may not be another Senate sitting before the next election, it looks likely that it will not be voted on. Its shelving is indicative of serious concerns, held even by those in favour of its stated underlying objective, due to its fundamentally flawed design. There was little about this matter that reflects favourably on the government.
It was announced as an equity measure targeting members with $80m in super but released with a $3m, unindexed target. It demanded a second consultation period after the first was so demonstrably inadequate but virtually all recommendations were arrogantly ignored, even those concerning fundamental drafting errors. The tax on unrealised gains, a measure fraught with unintended consequences incorporated to cater for inadequate APRA fund administration systems, was absurd. The acknowledgement by one government minister that this would mean that some farms held in SMSFs may need to be sold, simply due to market movements, was appalling.
It remains to be seen if the Parliament sits again in February or whether we will face an early election. In any case, I am hopeful that sanity will prevail and that this measure will be abandoned or, at least, significantly altered as currently it is nothing like an equity measure.
Overview
This page provides an overview of Div 296 and an analysis tool to compare various scenarios over time but, if you’d just like a quick calculation, click here.
The government wishes to levy an additional 15% super tax on members with a total super balance of more than $3m. The assessment will be made by the ATO from the member information they collect from all super funds. The member can elect to pay the tax from a super account or personally. Intended to be implemented from 1 July 2025, it has been justified as an equity measure but has come under intense criticism following the release of its calculation methodology. The way that it would be applied to members of defined benefit funds has not yet been explained. Treasury released a consultation paper and invited submissions until April 17th 2023. Disturbingly, though the paper asked many questions, it did so in the context that the $3m unindexed cap is already decided upon. I realise the analogy is a little over the top but It was a bit like the government deciding to build a nuclear reactor to lower electricity costs and announcing the site, design and technology but, realising that such a decision would be questioned if it did not involve a process of consultation, provided a few weeks for all the best minds in the sector to comment on specific items of concern namely, how big should the car park be and what colour should we paint the building. In short, the consultation was, almost totally, to fulfil a procedural obligation.
Our submission was in line with, and supports, the position of the SMSF Association. The measure barely rated a mention in the 2023 federal budget. The government then released draft legislation for comment which closed on October 18th 2023. Disappointingly, they almost totally ignored the many objections to the unindexed limit and the methodology for calculating the tax. This was clearly evident when they even ignored the obvious drafting error which excluded members that died in a financial year from being subject to the tax for that year – provided they did not die on the 30th of June. The only chance I could see for some fairness to be introduced to this discussion is for the government to finally realise that they need to introduce so many special work arounds that their simple method is not simple at all. This should have caused them to rethink their preferred “tax” on unrealised gains methodology and, at least for SMSFs, revert to standard taxation principles. Full credit to the SMSF Association’s CEO, Peter Burgess, and Chairman, Scott Hay Bartlem for taking the argument down to the wire. They were meeting with politicians and Treasury officials in Canberra up to close of business on the 18th October. Subsequent to this, the government referred the draft Bill to a Senate committee.
I was profoundly disappointment that, on May 10th 2024, the government announced that they would be proceeding with the Bill unaltered. I find it difficult to recollect another instance where the government has treated a sector with such blatant contempt. Even the silly parts of this Bill remain unchanged. It remains to the senate to introduce some equity but I am not hopeful given that this debate will be occurring in Budget week when there are many significant issues that can overshadow it.
In early October 2024, the bill finally came before the House of Representatives. The SMSF Association sponsored amendment – indexing the $3m cap – was quickly voted down. This is not surprising as Labor and the Greens hold a majority. There were a couple of other important amendments but these have been voted down as well. This is just a prelude to the important vote. Once this measure passes through the House of Representatives it will move to the Senate. This is where it gets interesting as Labor and the Greens do not have the numbers, without the support of independents, to get this legislation over the line. The SMSF Association’s Peter Burgess has spent considerable time in Canberra ensuring that the independents are given every opportunity to consider the ramifications of this Bill. Other associations, such as the CAANZ, have also been active. The result still hangs in the balance and the government will likely attempt to negotiate individual deals to win the necessary votes.
Comments by the assistant treasurer, Stephen Jones, in supporting the government’s position were disturbing. “For a matter of context, the average balance on retirement today is somewhere between $150,000 and $200,000 – that’s a long way south of the $3 million threshold that has been set in the bill before the house, and it’s for that reason that we’re confident that less than 0.5 per cent of all fund members will be caught by the new provision.” This completely ignores the reason for this particular amendment. There is no doubt that the number of individuals currently affected will be relatively small. Without indexation, a 3.5% inflation rate would ensure that a 30-year-old now would be subjected to the tax if they had $1.24m, at today’s value, at age 60. To leave indexation in the hands of the government of the day has proved problematic in so many areas where indexation should be the norm. The government is clearly comfortable in adding one more. Do they feel that a retirement balance of $200,000 is reasonable and $1.24m excessive? Probably. Or are they simply using forward revenue projections to pad the budget? – Interestingly this has already been included in forward revenue projections in the expectation that this Bill will pass.
The measure has failed to be voted on in the Senate as it was not included in the schedule of business. (See Important Update above) The Government stuck to their position that the Bill did not need any alteration and should be passed unaltered. The Greens disagreed. They believe the cap is too high and that the bill should be even more severe – so they would have supported the Bill, rather than oppose it. The Coalition rejected the measures but would have required the support of the minor parties and independents. Most of them were opposed to the bill in its current form which would be why the government removed it from further consideration – they believed it would fail. Even Labor party luminary, Paul Keating, called for the limit to be increased to $5m or, at least be indexed (he referred to the lack of indexation as unconscionable). He has also expressed his opposition to the taxing of unrealised gains
It is possible the Senate will sit again in February however it is more likely that an early election will be called. Either way, we haven’t heard the end of this and await further developments.
This tool models the government’s intention and two possible alternative methods. Each method covers a 10 year period. The government’s intent is that the cap is fixed. This tool allows you to analyse the effect of this and the alternative if the cap is indexed. You may also trial an alternative cap. The text is dynamic and will alter as the debate progresses. It was last updated on 3rd December 2024.
The Government’s Bill
The tax is based on the change in a member’s total super balance from year to year. Contrary to established taxation principles, it includes unrealised gains. Issues arising from this include
- The requirement to pay a tax on the increased value of assets where there is no cash available from a sale will cause hardship for those whose funds are heavily weighted towards a single asset. This structure has been adopted in line with known cash flow risks – except a new tax based on growth. The ability for a member to pay the tax external from the fund will be of little use to those who have little wealth external to superannuation.
- A tax payment is required if the member’s account increases in value but only a carried forward loss applies if it doesn’t. As retirement phase member accounts are intended to decrease over time it is probable that member accounts will accrue losses that will never be recouped after having previously paid tax on unrealised gains.
- Life insurance proceeds will be regarded as a contribution so will not be assessable in the year of receipt.
- The increase in total super balance caused by death benefit pensions will create a tax liability but not in the year of receipt.
- Some limited recourse borrowing arrangements are counted towards a member’s total super balance resulting in 15% tax on a debt. These may be excluded.
The Deeming Rate Alternative Proposal
Under this method a deemed rate of return would apply to the level of a member’s balance in excess of the cap. The SMSF Association have proposed the 90 day bank bill rate. Historical modelling has shown an overall tax decrease of around 10% using this method however it would mean that tax would be payable, even in a year where markets retreat, provided the member’s balance was still over the cap. The main advantage of deeming is its simplicity and understandability. It would also remove the assessment peaks and troughs, providing for more predictable cashflow requirements. I suggest it will be the SMSF Associations default preference as the best of a bad choice.
The Actual Income Proposal
This is based on what the government announced but uses an alternative calculation method. It has been decried due to it’s perceived complexity but this is overblown. Existing software systems calculate tax at the fund level and distribute the net amount to member accounts. Software modifications could calculate the attributable member share, before the application of pension exemptions, and populate a new member label in the fund returns. This is not rocket science. It would remove all of the contentious issues associated with either of the previous methods – except the level of the cap to be applied. It would also be equitable.
APRA funds would need expensive software modifications to comply if they were to provide this data for all members. This would not be feasible given that relatively few APRA fund members would be affected. Treasury already intend that the ATO will contact APRA funds to provide individual data on specific members and the APRA fund trustees I have spoken to agree that it would not be an onerous task to respond individually.
Non-Indexation of the Cap
Whatever cap is decided on, a lack of indexation will cause it to include a much larger cohort over time. This inequity is obvious and is a doubling of the superannuation tax rate by stealth. If we assume a 3.5% inflation rate, a 30 year old, at 1 July 2025, would be paying the extra tax from age 60 once they had a balance of $1.24m in today’s dollars. At age 70 it would be $915k. It is intended that this measure commence in 2 year’s time. At the current inflation rate the commencement value will already have been eroded to a present day value of $2.65m
There have been statements that indexation would cause an administrative mess akin to the personal transfer balance cap. This is not so as this cap applies to all.
The Cap Level – a Possible Compromise?
A $100m member receiving retirement tax benefits is clearly open to criticism but at what reduction does it cease to be so? Is $3m too low? Prior to the official announcement some government sources suggested $5m. It is interesting to note that, of the 80,000 members the government say will be impacted, 69,000 have between $3m and $5m. It is this cohort that will be most significantly affected as they will often hold all their wealth within their SMSF and be unable to access external monies to pay the tax if their fund investments predominantly comprise a single asset. This same cohort will hold most of the account based APRA fund exposure so their removal would significantly diminish the administration required by the ATO. Effectively, almost all of the additional work arounds required to correct the inequitable portions and unintended consequences of the proposal would be solved by adopting the actual income method with a $5m cap. Treasury have not provided any figures as to the revenue affect of raising the cap to $5m but from both an equity and operational viewpoint it would seem to be the obvious choice.
Why Bother?
The justification for this measure is, supposedly, equity. There has been a particular focus on a handful of superannuants with over $100m accounts. These account sizes have only been possible due to previous rules that no longer apply. The Turnbull government introduced pension caps and contribution limits which make it impossible to create such balances again. Furthermore, as each wealthy member dies, their benefits must be paid out of superannuation. This measure, therefore, brings forward the resolution of the matter – but at what cost?
The cost to confidence in the superannuation system is non quantifiable but there are dollar costs to the process of calculation and collection. Some, as the minutiae is being discussed, will include the increased cost of processes to remove inequities. The measure is estimated to raise $2 billion annually. A previous equity measure, the superannuation surcharge, was subsequently abandoned when it became clear that the cost of the process outweighed the tax collected. Could this measure be the same?
I’m happy to field comments – David Busoli, dbusoli@smsfalliance.com.au, 0499 778 584.