Labor’s move to double tax on balance earnings above $3 million throws up a problem with unrealised capital gains.
Super tax increase ‘raises retrospective CGT issues’
The government should provide CGT relief for those impacted by the $3 million superannuation threshold to prevent capital gains being taxed retrospectively, says an SMSF Association policy expert.
The Treasurer’s announcement that it would double – to 30 per cent – the tax on super earnings above $3 million from 2025 left government with a couple of implementation options, said head of policy and advocacy Tracey Scotchbrook.
“One is through an actuarial certificate system. The other path they could go down is a Commissioner determination model not too dissimilar to the Division 293 assessment,” Ms Scotchbrook told the SMSF Association National Conference before the announcement.
The introduction of a threshold meant there would be a “tiered tax approach”, she said.
There was a zero tax rate for earnings on amounts in pension phase below the transfer balance cap, a 15 per cent tax rate for those with balances above the transfer balance cap but below the $3 million soft cap, and a 30 per cent tax rate for earnings on amounts above the $3 million.
This raised important issues for how unrealised capital gains would be treated, she continued.
“This is an interesting question because if you change the tax rate and you’re leaving those funds within super, then you’ve effectively made those tax measures retrospective.”
“Capital gains that have accumulated on an asset that’s been sitting there for 20 years are now going to be taxed differently to when those gains have been earned.
“That’s not an ideal scenario at all.”
But Ms Scotchbrook said there was a precedent with the fair and sustainable super reforms.
“You’ll remember the headache of people trying to restructure their pensions and then looking at the CGT concessions that applied depending on people’s scenarios.”
“We think there’s an opportunity if this is where they’re going to go to allow for a deemed disposal in a similar fashion to what happened there to make sure that underlying 15 per cent tax rate is locked in, we get the asset cost base reset and then we can move forward.”
Alternatively, Ms Scotchbrook said there could be a new calculation that gets factored into the ultimate disposal achieving a similar outcome.