Superannuation, the ultimate government cash cow?

[divs4ever]

Edit: Found this. It's a doozy.

Div 296 will tax unrealised gains and more | Leading SMSF Law Firm​

The Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (Bill) proposes to insert new Division 296 (Div 296) into the Income Tax Assessment Act 1997 (Cth) (ITAA) to impose an extra 15% on certain member’s superannuation balances. Broadly, from 1 July 2025, the Div 296...
www.dbalawyers.com.au


wowee , i hope that legal opinion is wrong , even though it would not affect me currently , if it was correct

one would have to wonder what the next tweak to that would be

 

[divs4ever]

For the first case, it is only if the $3.2m notional value grows to, say, $3.3m, then the $100,000 growth is the earnings of the fund and attracts the tax. However, I think the notional value stays the same for the life of the pension, so no growth and no tax.

If the lucky guy's DB is indexed, maybe the notional value is recalculated when his 200k pa grows? Dunno.

For the second case, my understanding is that the tax is levied not directly on the $280k, but on the earnings of the $280k. Perhaps $28k to be taxed at 30%.

Maybe that is what you were saying. All I know is that my brain hurts.

looks to me like a good reason to revisit ( ASX-listed ) accounting firms , there might be extra business coming their way , and a potential bump in growth/profits

 

[Bellcose]

For the first case, it is only if the $3.2m notional value grows to, say, $3.3m, then the $100,000 growth is the earnings of the fund and attracts the tax. However, I think the notional value stays the same for the life of the pension, so no growth and no tax.

I think you may be incorrect. It is a tax on unrealised capital gains which is at the core of this legislation. It has no relationship at all with a person's Balance Cap which stays with you for life.

If the lucky guy's DB is indexed, maybe the notional value is recalculated when his 200k pa grows? Dunno.

DB pensions indexed by the CPI will eventually be caught by this legislation. DB pensions are like the undead. No matter how long the person is alive the notional value is always calculated by annual pension x 16

For the second case, my understanding is that the tax is levied not directly on the $280k, but on the earnings of the $280k. Perhaps $28k to be taxed at 30%.

Again, it is not on earnings, it is on change in capital value.

It's a bummer piece of legislation in my view.

 

[divs4ever]

Again, it is not on earnings, it is on change in capital value.

It's a bummer piece of legislation in my view.

and that is the kicker ( in the teeth ) , it would include values of property , art and other investments that would be comparatively illiquid ( in your SMSF )


very much a can of worms , if say your fine painting doubles in notional value ( because Sir Joe Blogs bought a painting by the same artist at an auction recently at inflated prices )

i mention art , specifically ,because a poster several years back on a different forum , held an art collection in his SMSF which he leased out to various corporations ( for their foyers/reception )

 

[Ferret]

I think you may be incorrect. It is a tax on unrealised capital gains which is at the core of this legislation. It has no relationship at all with a person's Balance Cap which stays with you for life.

My understanding is that it is a tax on earnings and the earnings may include unrealised capital gains. The earnings could all be unrealised capital gains, all dividends, interest rent etc or a combination of these.
I agree it has no relationship to the balance cap.

DB pensions indexed by the CPI will eventually be caught by this legislation. DB pensions are like the undead. No matter how long the person is alive the notional value is always calculated by annual pension x 16

I checked my total superannuation balance in my MyGov account. The component for defined benefit notional value hasn't changed since I started the DB pension in 2018. It has stayed at 16x the annualised DB pension I got in 2018, although my DB pension has increased by CPI every 6 months since then. Maybe this will change under Div 296, but I haven't heard of this happening yet.

Again, it is not on earnings, it is on change in capital value.

As per the first point, earnings is to include the change in capital value.

 

[divs4ever]

My understanding is that it is a tax on earnings and the earnings may include unrealised capital gains. The earnings could all be unrealised capital gains, all dividends, interest rent etc or a combination of these.
I agree it has no relationship to the balance cap.

aren't realized/crystallized capital gains already liable to tax , as well as income ( divs., interest and rent )

unrealized and uncrystallized should be inter-changeable here

say i was holding a stock that was up 20x and that 20x pushed me over the $3 million by a useful margin .. for the sake of an example Retiree bought CBA at the IPO and later put that holding into his/her SMSF ( that could easily be an investment property as well that has risen dramatically in notional value over the last 20 years in the SMSF , )

 

[Bellcose]

The component for defined benefit notional value hasn't changed since I started the DB pension in 2018

It hasn't because that is actually the calculated Balance Cap based on the pension when the Transfer Balance Cap was introduced in 2017 or when the pension commenced after that year which in your case is 2018. It doesn't change despite the DB increasing by CPI. For Div 296 it is proposed to include current annual DB pension multiplied by 16 as part of the $3m+ equation.

Say your initial pension in 2018 was $50k pa. Your Balance Cap is $50k x 16 = $800,000. That Balance Cap does not change for the rest of your life. In 2025, assume your pension has increased to $56k. It is that amount x 16 ($896,000) which will be included for the purposes of Div 296. As the DB is increased by CPI every year so in 2026FY if the pension is now $57k ($912,000) will be included for Div 296 calculations.

Unrealsied capital gains are not earnings. They are only the difference in a change in price.

Think in these terms. A person on 1 July holds a portfolio valued at $2.5m. Receives dividends and distributions and includes those in tax return but does not change the holdings; there are no buys, sales, withdraws or contributions. On 30 June the value of the holdings have increased to $3.1m. The ATO turns around and says "The value has increased by $100k over $3m so you owe tax on that $100k." That is - in simplified terms - what is being proposed to occur in superannuation.

That is a very simplified description as it is way more complicated and beyond my abilities but essentially it is proposed that there will be two separate calculations with superannuation:

(a) the present one we are familiar with - taxing earnings; and
(b) another to determine if the value is over $3m and subject to an additional tax.

If people have a DB pension as well as a superannuation fund, the notional annual value of the DB pension will also be included in the calculations.

I've reached my limited knowledge of how it's going to work and how nasty it could get for some.

 

[Dona Ferentes]

.

I've reached my limited knowledge of how it's going to work

doing a great job

and how nasty it could get for some.

and therein lies the sting.

 

[sptrawler]

Unrealised capital gains, will certainly make accounting by big super funds interesting, fudge factors will cost.

 

[Bellcose]

Unrealised capital gains, will certainly make accounting by big super funds interesting, fudge factors will cost.

Doubt it. I'll wager most industry funds do not have balances anywhere near $3m. This legislation is targeted at SMSFs.

 

[divs4ever]

now i know it has mentioned here already but ...

indexation of this new tax bracket

will it be indexed and how ?

one might assume it will be indexed against the CPI . if indexed at all ( in say the first three years )

now CPI is a lagging statistic so by the time that number comes out your super balance should have risen by at least the CPI ( assuming a half decent investment strategy ) but your indexation allowance will be probably 3-6 months behind the official data announcement , let's say a six month gap between the capital appreciation and any CPI indexation .

that will be messy enough

now if indexation is not allowed for in this current proposal ... one might think public pressure will increase to accommodate an indexation allowance , and that introduces the opportunity for new tweaks in the regulations/taxation , and it is less likely the new tweak(s ) will be simple one-liners

now you folks with SMSFs also have to have strategy tweaks ready ( already planned ) for possible future changes to give you the best transition into 'the new normal '

 

[Bellcose]

If some bothered to explore further rather than skim, they will realise the $3m will NOT be indexed under the proposed legislation.

 

[Bellcose]

By the way, members of SMSF's may be praying like heck as a result of this:

A majority vote is needed for a bill – a proposed law – to pass both the Senate and House of Representatives. Not all senators or members need to be present for the vote. The bill is passed if a majority – more than half of senators or members present in either the Senate or House – vote for it.

 

[Ferret]

It hasn't because that is actually the calculated Balance Cap based on the pension when the Transfer Balance Cap was introduced in 2017 or when the pension commenced after that year which in your case is 2018. It doesn't change despite the DB increasing by CPI. For Div 296 it is proposed to include current annual DB pension multiplied by 16 as part of the $3m+ equation.

Say your initial pension in 2018 was $50k pa. Your Balance Cap is $50k x 16 = $800,000. That Balance Cap does not change for the rest of your life. In 2025, assume your pension has increased to $56k. It is that amount x 16 ($896,000) which will be included for the purposes of Div 296. As the DB is increased by CPI every year so in 2026FY if the pension is now $57k ($912,000) will be included for Div 296 calculations.

I wasn't aware that under Div 296 the DB pension notional value will increase as you describe, but I haven't dived into all the depths of the Div 296 proposal. The example you give shows how they could bring in a few more dollars, so it doesn't surprise me if that is what they plan.

Another thought that came to mind is that they might say the DB pension amount is "earnings", even though it doesn't come from a fund. Even more for them to tax and that really would be double taxation. The tax could get as high as 45% + 2% + 15% (30%?) - 10% offset = 52% or 67%. Ouch!

Think in these terms. A person on 1 July holds a portfolio valued at $2.5m. Receives dividends and distributions and includes those in tax return but does not change the holdings; there are no buys, sales, withdraws or contributions. On 30 June the value of the holdings have increased to $3.1m. The ATO turns around and says "The value has increased by $100k over $3m so you owe tax on that $100k." That is - in simplified terms - what is being proposed to occur in superannuation.

Exactly.
Perhaps they were only thinking of super in industry type funds when they designed this. It is straight forward to compare a member's account balance on 30 June and a year later, calculate the difference, adjust it for contributions and withdrawls and call the result "earnings".

They are trying to apply this fairly simple approach to SMSFs, DB pensions etc and this is where the unrealised capital gains become a big issue and it all gets very messy.

They should say 'Oh, we hadn't thought of those problems. Let's just forget about the whole thing.' And pigs might fly.

 

[Dona Ferentes]

on a related challenge. stay with me now

Help! I still don’t understand how all the super caps work​

The super system features a range of limits designed to restrict tax advantages to levels parliament has deemed reasonable – and their interaction is complex.
John Wasiliev


Q: In answering a recent question about how transfer balance caps work and how the general transfer balance cap is used as a threshold to determine the non-concessional contributions cap, there was no explanation given on how this cap is determined if the super balance is less than the general cap. The reader was advised that if his super balance on June 30 in the previous year was less than the general cap, his non-concessional cap would be $120,000. I understand that if the account balance is greater than the general cap – currently $1.9 million – then the non-concessional cap with be $0. But what if the balance is only $50,000 short of the general cap, say $1.85 million? How can he still have a non-concessional cap of $120,000?

Also, just to clear things up, can you clarify how the proportion of “unused cap percentage” is calculated if you have used up some of your cap and wish to make further contributions. Mark.

A: When it comes to determining someone’s non-concessional contributions cap for a particular year, the rule is that their cap will be either $0 or equal to the standard non-concessional contributions cap – that is, $120,000 for both the 2024-25 and 2025-26 financial years. There is no in-between.

Leigh Mansell, director of SMSF technical and education services at Heffron, says the amount of their non-concessional contributions cap for a particular year is determined by their total super balance on the previous June 30.
Someone with a total balance of $1.85 million at June 30 last year – which is less than the general transfer balance cap of $1.9 million for the current 2024-25 financial year – has a non-concessional contributions cap of $120,000 for the 2024-25 financial year.

In fact, says Mansell, even if their total superannuation balance was just under $1.9 million at $1,899,999 on June 30, their non-concessional contributions cap for the 2024-25 financial year is still $120,000.
In contrast, someone with a total super balance equal to or greater than (again, even if only slightly over) the general transfer balance cap of $1.9 million for the 2024-25 financial year has a non-concessional contributions cap of $0 for the 2024-25 financial year.
Some people, however, are able to “bring forward” their non-concessional contributions cap for the following year, says Mansell, and perhaps the year after that too. Whether they can in a particular year depends on a few things, including their total super balance as of June 30 from the year before and their age (they need to be under 75). Moreover, they cannot be midway through an existing bring forward period.
To illustrate this, Mansell says that for the 2024-25 financial year, someone who had a total super balance of less than $1.66 million at June 30 last year could make non-concessional contributions of up to three times the general cap – that is, up to $360,000 – without exceeding their non-concessional contributions cap.

“The mechanics of working out the increase to your personal transfer balance cap are complicated.”

If their total super balance at June 30 last year was higher, say $1.66 million or more, but under $1.78 million, they could make non-concessional contributions of up to two times the general cap – up to $240,000 – without exceeding their non-concessional contributions cap.

Changing tack to the personal transfer balance cap rules that apply the limit on how much you can transfer into retirement phase pensions. For those who have never fully used all of their personal transfer balance cap, every time the general transfer balance cap increases, a proportion of that increase will be added to a person’s personal cap.
The mechanics of working out the increase to your personal transfer balance cap are complicated. Every time the general cap increases, you identify the highest amount you’ve ever had in your transfer balance and express that as a proportion of your personal cap at that time.
This proportion represents the amount you’ve “used” of your personal cap. The proportion is rounded down to the nearest whole number, and the “unused” percentage is simply the difference between 100 per cent and your highest ever “used” percentage.
To illustrate this, say a member’s personal cap was initially set at $1.6 million, equal to the general transfer balance cap between 2017-18 and 2020-21 and the highest amount they have ever had in their transfer balance was $871,000 (i.e. the value of their super when it moved into retirement phase).
Then $871,000 divided by $1.6 million is 54.44 per cent, but this is rounded down to 54 per cent and represents the “used” percentage. The “unused” percentage is then 46 per cent (that is 100 per cent minus 54 per cent).
Their personal cap would have increased to $1.646 million on 1 July 2021 (i.e. 46 per cent of the $100,000 increase in the general transfer balance cap), then increased to $1.738 million on 1 July 2023 (i.e. 46 per cent of the $200,000 increase in the general transfer balance cap).

Pulling it altogether​

Pulling these things together, say a member had a total balance of $1 million as of June 30 last year, and they wanted to make non-concessional contributions of $100,000 a year for the next three years. As long as their total super at the previous June 30 remains below the relevant general transfer cap threshold for the financial year in which they wish to make the contribution, then the $100,000 non-concessional contribution will be within their contributions cap.
If they made a $100,000 non-concessional contribution in the 2024-25 financial year, they could also commence a new account-based pension this financial year because they have plenty of room to do so in their personal transfer balance cap – they currently have a cap of $1.738 million, and they’ve only used $871,000 of it.
If they commenced a new account-based pension this financial year, the highest ever amount in their transfer balance would increase to $971,000. When the general cap increases by $100,000 from $1.9 million to $2 million on July 1 this year, their personal transfer balance cap will increase too.
Their $971,000 transfer balance will be divided by their existing $1.738 million personal transfer balance cap. This “used” percentage of 55.87 per cent will be rounded down to 55 per cent and their personal cap will rise by 45 per cent of the $100,000 increase in the general transfer balance cap – that is it will increase by $45,000 to $1.783 million on 1 July this year.
If their total super balance at 30 June this year was to remain below $2 million, they could make another $100,000 non-concessional contribution in the 2025-26 financial year. They could commence another new account-based pension next financial year because they still have plenty of room to do so in their personal transfer balance cap – they’d have a cap of $1.783 million and they’d have only used $971,000 of it.
And depending on their particular figures, the same process could be repeated in the following year.

 

[Bellcose]

Perhaps they were only thinking of super in industry type funds when they designed this.

No they weren't. It is as below

Doubt it. I'll wager most industry funds do not have balances anywhere near $3m. This legislation is targeted at SMSFs.

Mouthpieces on behalf of Government, and the Treasure, have for a couple of years been banging on about how outrageous it is some have $50m, $100m or more (one I think is over $500m) in super and how it's not a wealth creation vehicle for intergenerational transfer. These bigger piles of dosh are in SMSF's, not in industry funds. This legislation is aimed directly at SMSF's. The Government wants its pound of flesh out of them.

DB pensions seem to have been dragged in as a number of DB pensioners may have other super funds which could be reasonably large and when the notional value of the pension is added, they fall over the $3m line. Depending on the size of the Super fund and the amount of the DB pension, those in that situation would be wise to crunch the numbers to broadly see where they are at with this proposed legislation.

on a related challenge. stay with me now

Yep, and if (when) passed it is going to be another confusing addition to claim of simplifying superannuation. Remember that Government initiative of days gone bye?

I wont be on this earth to see what happens but when the Balance Cap reaches $3m what occurs then? Chalmers has said variations to the $3m under Div296 will be up to the Government of the day.

 

[Dona Ferentes]

I think the unrealised CG policy is pernicious .... BUT .... some venture capital funds get as much as 30 per cent of their funding from superannuation.

now all the venture capital crowd are piling in, "woe is me", I really don't think completely untaxed gains are fair. Call it windfall, wherever. You only have to look at the Top20 shareholders, especially at IPO, to see how these are structured.

It’s a tax on innovation. It’s a tax on creating the jobs of the future. It’s exactly the part of the economy we should not be taxing,” “It’s a disaster.”

“It will have an absolutely chilling effect on people who invest in start-up companies,” “I will never invest in a start-up company in my super fund again"

“It’s going to be harder to raise money. You have to wonder what will happen to all the innovation and the start-ups,”

and then there's the mums and dads argument:

the tax undermined efforts ...to encourage people to invest in start-ups, as retail investors would normally do this through their super because it was usually their second-biggest asset after their house.

... but, no it's the tax avoidance strategy that should get the blowtorch.

‘It will completely kill us’: VC sector slams super tax

Tech entrepreneur Leigh Jasper, equipment hire king Angus Kennard and angel investor Campbell Newman say Labor’s super tax will hit exactly the wrong target.

www.afr.com

 

[mullokintyre]

If some bothered to explore further rather than skim, they will realise the $3m will NOT be indexed under the proposed legislation.

Which then means that over time, an increasing number of industry funds members will reach the 3 million mark.
According to APRA, the average return on retail super funds is a tad over 7% a year.
It takes a bout 10 years to double the stake at that rate.
It may take some time, but it will happen.
Mick

 

[Bellcose]

Which then means that over time, an increasing number of industry funds members will reach the 3 million mark.
According to APRA, the average return on retail super funds is a tad over 7% a year.
It takes a bout 10 years to double the stake at that rate.
It may take some time, but it will happen.
Mick

That was a point raised sometime ago and it is a valid one. If Government really wanted to limit amounts in super, I don't consider it would be so difficult to legislate that no one can have more than the Balance Cap, which is indexed, but not as a lifetime one. Allow indexation to also apply after people retired but also prevent further contributions at that point. Only my view.

To me, the most irksome aspect about this proposed legislation is, aside from the operation of the Law of Envy, I would like someone to explicitly state what parts of the current legislation surrounding superannuation have been broken specifically regarding those with more than $3m in super. Keeping in mind that legislation was passed by Parliament and so in one way Parliament facilitated the situation.

Now, with the proposed legislation, Parliament may effectively punish those who didn't breach any laws currently in place.

I am not going to be impacted by this legislation, unless in the future it is extended to assets outside superannuation, but I consider it is unjust in many ways.

 

[JohnDe]

Which then means that over time, an increasing number of industry funds members will reach the 3 million mark.
According to APRA, the average return on retail super funds is a tad over 7% a year.
It takes a bout 10 years to double the stake at that rate.
It may take some time, but it will happen.
Mick

My good friend is semi-retired, and his skill base is finance and accounting, he went over the proposed changes and came up with pretty much what you have mentioned, and that most people think that it will not affect them because they'll never reach th $3m. And this morning I read this -

And when Jim Chalmers reels off the numbers with an easy smile, plenty of people are going to miss what he is saying. Especially those that aren’t engaged with financial advice.​

​

If their superannuation is in an industry or a retail fund, they don’t really have a reason to worry either. That’s because those funds don’t tend to sit on unrealised gains.​

​

The same is true of wealthy family offices and self-managed superannuation funds with good advisers. They might regularly rebalance their portfolios or adopt any number of sophisticated strategies to prepare for and deal with the new tax.​

​

That’s why you don’t hear too much from them about the tax. They treat it as a fact of life. They can work out the best strategies to manage it, just like they have done with all the other changes to superannuation over the years.​

​

But the people who will be cruelled by the tax are not sophisticated and they probably are not paying attention.​

Chalmers’ super tax is very smart, that’s why it’s so cruel
The cleverest thing about the proposed new tax on unrealised gains in high-balance superannuation accounts maybe the man selling it.

One of the clever things about Labor’s plan to tax unrealised gains in high-balance superannuation accounts is that, initially, at least, hardly anyone will be affected.

After all, if you want to fundamentally change the principles of how taxation works, it helps if people don’t notice at first.

It also helps to hide it behind something that might promote more outrage, like not indexing the rate at which the new $3 million cap (or maybe $2 million) will kick in.

But the really clever thing is that the people who will be hit hardest by it probably aren’t even aware it’s happening because their super balance is currently nowhere near that big-sounding $3 million mark.


The government is counting on Jim Chalmers’ charm to help sell its new tax on superannuation. Alex Ellinghausen

Cry me a river, they might be saying, anyone with that much in super is wealthy, so why shouldn’t they pay the tax? That’s what Jim Chalmers is banking on, anyway.

Which is another reason Chalmers is the one selling the tax to the public: he really is charming.

I’ve never been in the press gallery, but I have interviewed and spoken to my share of politicians over the years, and every one of them has had a certain amount of charm in real life – it’s why we elect them in the first place.

Even Barnaby Joyce, who at the time had the public persona of a deranged country bumpkin (or passionate defender of rural Australia, if we are being polite), was all reasonableness and calm when he was speaking off-record and wasn’t playing a part.

Some politicians play it angry in public, some play the technocrat, some play the guy on your side – but Chalmers oozes charm.

So when Chalmers, with a leprechaun twinkle in his eye, says less than 80,000 people (or 0.5 per cent of all super account holders) will be hit by the tax on unrealised gains, I don’t want to disbelieve him.

It’s just that he is talking about a number that is more than two years old – dating way back to February 2023. You’d have to think that inflation would have pushed a few more into the target zone since then. And on the government’s numbers, about 10 per cent of account holders will have to pay the tax by 2053.

And when he reels off the numbers with an easy smile, plenty of people are going to miss what he is saying. Especially those that aren’t engaged with financial advice.

If their superannuation is in an industry or a retail fund, they don’t really have a reason to worry either. That’s because those funds don’t tend to sit on unrealised gains.

The same is true of wealthy family offices and self-managed superannuation funds with good advisers. They might regularly rebalance their portfolios or adopt any number of sophisticated strategies to prepare for and deal with the new tax.

That’s why you don’t hear too much from them about the tax. They treat it as a fact of life. They can work out the best strategies to manage it, just like they have done with all the other changes to superannuation over the years.

But the people who will be cruelled by the tax are not sophisticated and they probably are not paying attention.

Take the farmer who only looks at her super every couple of years. She’s too busy.

Or the unadvised owner of small businesses who puts their Sydney premises into their superannuation.

Or the mid-30s couple that plan to buy a couple of apartments in their self-managed superannuation fund after a property seminar.

If those properties double in value every 10 or so year, a reasonable assumption given the performance of the real estate market over the past 30 years, that $1 million Sydney business premises will be worth $4 million in 20 years and those two Queensland apartments, bought for $600,000 each, will be worth $4.8 million.

If either of the people in the above scenarios were in their 30s, that means their super balances will be well north of $3 million by then, given their 12 per cent salary contributions.

And they are going to have to find the money by either selling that asset or digging in to their non-super earnings.

In this way, the tax on unrealised gains is a tax on unsophisticated investors because they may not know they are liable for it until they get the bill.

But readers of this paper needn’t worry. They have been warned.