Taxing actual rather than unrealised super gains would mean ‘significant' costs for millions of Australians, Treasury says

The Guardian

a day ago

Treasury says taxing actual instead of unrealised gains would have meant millions of super fund members were hit with 'significant' compliance costs as part of a policy aimed at trimming concessions for just 80,000 of the country's wealthiest savers.
Labor's proposal will put an extra 15% tax on earnings generated from super balances over $3m in an effort to make the super system more equitable and sustainable.
The Coalition and interest groups have attacked the policy's method of taxing changes in the value of super assets (unrealised gains), rather than on cash profit (realised gains), saying it transgresses tax norms.
Nationals senator Matt Canavan vowed earlier this month to 'fight to the death' against the proposed change, arguing that taxing unrealised gains was 'incredibly unfair'.
In its impact analysis document released in 2023, Treasury concluded that taxing cash profits 'would be the most accurate method for determining taxable earnings'.
However, the trade-off would be imposing an unacceptably high compliance and regulatory burden on the large super funds which manage the super accounts of millions of Australians with smaller benefits, and who would not be affected by the tax change.
Super funds currently calculate and report taxable income at the fund level and not at the member level, Treasury noted.
As such, taxing cash earnings would 'involve a substantial burden on the superannuation industry to implement as it would involve developing and maintaining a complex new accounting and reporting regime to calculate taxable income at a member level,' the policy document says.
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'These significant compliance costs would be borne across all funds and all members, including the 99.5 per cent of account holders who are not impacted by this policy, despite this proposal impacting only approximately 30,000 high balance members with accounts in APRA [Australian Prudential Regulation Authority]-regulated funds.'
David Knox, one of the country's leading actuaries and a former senior partner at Mercer, said it was more appropriate to think of the proposed additional levy as a tax on wealth, rather than income.
Knox said the approach of taxing unrealised gains was not as radical as some have suggested, saying it was similar to the way council rates (a cash levy) increased with the market value of the land.
He also pointed to the fact that pension payments were reduced when a pensioner's home value went up.
In both cases, an individual paid in cash – either through higher rates or lower pension payments – for what is a change in notional wealth.
The super industry is split into two 'subsystems': Apra-regulated funds – including the big industry and for-profit funds such as AustralianSuper and AMP, respectively – and self-managed super funds.
The Apra-regulated funds account for about 94%, or 16m of the 17m Australians with super accounts – but only 76% of the more than $4tn in the super system.
There are about 1.1 million people in SMSFs, but this 6% share accounts for 24% of total assets.
The Self-Managed Super Fund Association has been among the loudest opponents of the bill.
It has highlighted the risk that SMSFs with big holdings in illiquid assets could be forced to sell in order to raise the cash to pay for the notional change in the value of their balances.
Treasury's policy document noted that 'some stakeholders have noted that as a result of the changes, there may be a greater focus on investing in income generating assets, such as shares and bonds, as opposed to property and other more illiquid assets'.
'This could represent a positive shift as it would better align with the intention of superannuation to provide income in retirement.'
The Treasury documents show that this risk applies to a sliver of those likely to be caught up in the new tax.
Fewer than 5% of the estimated 77,400 Australians who will be affected by the changes – or fewer than 4,000 people – have more than 80% of their retirement savings in non-residential retail property, such as farms.
Bob Breunig, the director of the ANU's Tax and Transfer Policy Institute, had previously said: 'Running businesses and property portfolios inside super, they shouldn't be doing that, that's not what it's for.'