This is a can of worms

Superannuation tax and SMSF's

The Australian government's plan to impose an additional 15% tax on superannuants whose total super balance exceeds $3m will disproportionately affect SMSFs holding illiquid assets, such as property, potentially causing them to sell assets to pay the tax.

In my last editorial I informed you about the government’s intention to impose an additional 15 per cent tax on superannuants whose total super balance exceeds $3 million and I noted at the time there was a lot to unpack regarding the measure.

Well this month I’ll attempt to unpack a little more to demonstrate the significant impact it will have on SMSFs.

As you would expect, the more time that has elapsed since the announcement the more analysis has been performed on the policy and the more issues with it have been uncovered. These issues go a long way to demonstrate just how the nature of asset holdings will be changed by the new tax.

The one I would like to highlight is the plight of SMSFs holding illiquid assets such as property inside the fund portfolio – and let’s be honest, this would not be a rare occurrence.

Naturally the decision to invest in a property would be to have it appreciate over time. Given the recent historic performance of some markets, in particular Sydney, we know values have consistently climbed as even in ‘down periods’ prices have tended to plateau rather than dramatically fall.

It means SMSFs holding one or more significant properties will definitely be in the firing line of the proposed $3 million soft cap and the egregious approach to have unrealised capital gains on these properties taxed.

Situations such as this might mean the SMSF might be asset rich and cash poor and this is no crime. Let’s face it, if the members are all still in accumulation phase, why would the fund require any real working level of liquidity?

However, this will present a problem once this new tax is implemented as all funds caught in its net will have to maintain a level of liquidity to enable payment of any liability resulting from the proposed measure. And one way to create the necessary liquidity is to sell off assets and particularly the ones considered lumpy, and that means property.

Of course, individuals have the option to pay the tax either personally or through their super fund and I’ve had it said to me if an individual in accumulation phase has over $3 million in their SMSF, then you’d have to assume they have enough money outside of super to make the tax payment. But it is dangerous to make this assumption, particularly if they’d gone chips all in with super as it had been the most tax-effective savings vehicle.

So in effect people caught by the soft cap may have to sell off assets in order to pay the accompanying tax.

Further, if the sale of one type of asset reaches significant proportions, it will inevitably have an impact on market values at a macro level.

The example I’ve painted certainly will not be an isolated one, the management of which could significantly change the portfolio holdings of SMSFs. You have to wonder if that is really the outcome the government wants to achieve in an effort to raise an additional $2 billion in revenue to help the cause of budget deficit repair.


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