No compromise on original proposal

On Monday, 3 October 2023, Treasury released its draft Better Targeted Superannuation Concessions legislation, and invited submissions over a two-week consultation period. Not a lot has changed from the original proposal, although some of the technical aspects around the mechanics of the new tax have been tweaked.

It’s fair to say that there is general support for reducing the tax concessions available to super members with excessively large balances. However, there are three aspects of the proposal which remain controversial.

The new tax applies to unrealised gains.

The tax essentially treats income and unrealised gains in the same way. This represents a significant departure from the long-established principles of our tax system, whereby tax applies only to realised gains.

Furthermore, under the proposal, there will be no tax refund in years where earnings are negative; instead, these losses will be carried forward to offset future gains.

Depending on the asset mix, the new tax may present issues around liquidity to fund the liability. Consider, for example, a fund which owns real property as its main asset and the member doesn’t hold cash to fund the tax. On top of this, if a member wishes to sell assets to pay the tax liability, any actual capital gain will be crystallised as a result.

There is no provision for indexation of the $3m cap

There is no mention of indexing the new tax threshold. Having said this, there will be scope for the Treasurer – from whichever party is in power at the time – to change the ‘Large Superannuation Balance’ threshold as part of their Budget settings. If the threshold is not indexed or adjusted from time to time, the new tax will affect an increasing proportion of super members.

There is no new condition of release to allow members to remove super money

It would be risky to assume that anything in excess of the $3m cap is better off invested outside of super. Determining the best way of dealing with excess amounts  – either leaving them where they are, or moving them out of super – will require a case-by-case analysis.

If moving the money out of super gives the best outcome, this won’t be an issue for members who meet a condition of release, such as turning 65. But for younger members, there will be no mechanism to reduce their balance below the $3m cap.

Based on anecdotal evidence, the majority of super members who will be impacted by the new tax will already meet a condition of release, so the impact in terms of numbers of people affected, is likely to be small. But for these members, it seems there will be no “get out of jail” card.

What happens now?

The two-week consultation period concludes on 18 October 2023.

In the scheme of things, this is a very short window, which might suggest significant changes to the proposed legislation from this point are unlikely.

The proposed start date will be 1 July 2025, and the tax – tentatively called Division 296 Tax – will first apply to the 2025-2026 financial year.

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