Debate continues around the calculation method for the government’s proposed tax on accounts exceeding $3 million, but the SMSF Alliance has taken matters into its own hands.
SMSF body develops excess member balance tax calculator
The SMSF Alliance has developed a calculator that compares three potential methods for assessing the tax on member balances exceeding $3 million to show politicians what it involves.
SMSF specialist mentor for the alliance David Busoli said the modelling tool aimed to be educative.
“It has been sent to each Labor federal member and senator in the hope that they will understand that replacing one inequity with another is not equitable at all,” Mr Busoli said.
The calculation tool compares the methods used by Treasury’s proposal, deeming an additional 15 per cent tax on earnings on balances in excess of the cap and two possible alternative methods.
“Each method covers a 10-year period. The government proposal is that the cap is fixed,” he said.
“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.”
He said the government’s assessment of super balances will be made by the ATO from the member information it collects 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 proposed as an equity measure but has come under intense criticism following the release of its calculation methodology,” he said.
“The way that it would be applied to members of defined benefit funds has not yet been explained.”
Under the government’s proposal, the tax is based on the change in a member’s total super balance from year to year.
Mr Busoli said contrary to established taxation principles, it includes unrealised gains, and that raised issues such as the requirement to pay a tax on the increased value of assets where there is no cash available from a sale.
“This will cause hardship for those whose funds are heavily weighted towards a single asset,” he said.
“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.”
Additionally, 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,” Mr Busoli said.
The government proposal does also not take into consideration that life insurance proceeds that cause the member account balance to rise over the cap will be taxable at 15 per cent for the first time and the increase in total super balance caused by death benefit pensions will create a tax liability.
Some limited recourse borrowing arrangements are also counted towards a member’s total super balance, resulting in 15 per cent tax on a debt.
Mr Busoli said that under the deeming rate alternative proposal method, a deemed rate of return would apply to the level of a member’s balance in excess of the cap.
“Perhaps a suitable rate would be the general interest charge rate, currently 10.46 per cent,” he said.
“Another possible rate might be that applied to Division 7A loans — 7.5 per cent from 1 July 2023.”