By Hannah Wootton and Aleks Vickovich


Investors and experts have criticised the government’s proposal to tax unrealised gains in $3 million-plus super accounts as “highly discriminatory”, warning the move could force retirees to sell shares at a loss.

Fund manager Geoff Wilson, who led the campaign against Labor’s proposed ban on franking credits at the 2019 federal election, said the way Treasury proposed to calculate the new super tax was a “massive overreach”.

“Taxing unrealised gains in super is the same as taxing unrealised gain on your house when you still own it,” he said.

The Albanese government decided on Tuesday to double the tax rate from 15 per cent to 30 per cent for earnings on super fund balances above $3 million. The change means capital gains that push the value of the a fund over $3 million would be taxed in the same way as dividends or assets that were sold.

Deloitte partner Andrew Boal said the methodology for calculating earnings, including unrealised gains, could cause serious cash flow problems for self-managed super funds with high allocations to illiquid assets such as property.

“Unrealised gains don’t actually produce any cash flow from which to pay the tax,” he said. “You could be forcing the sale of some assets to produce the cash necessary to pay the tax on unrealised gains.”

Actuary Michael Rice said the government’s process was “bizarre”, saying it would be better to consult with experts and stakeholders before proposing a calculation methodology.

“It looks like something written quickly on the back of an envelope to get it out of the newspapers,” Mr Rice said. It is understood the proposal will be opened for consultation.

Mr Wilson said the change would turn people off from taking risks in their investments because they could be stung with high tax bills because of the volatility involved in doing so.

“It will discourage anyone with larger pools of capital from taking significant risk which is actually what you’d want them to do.

“You want to encourage risk taking in smaller or medium-sized companies in Australia, that’s how companies like Atlassian are born. That’s how we get some of the great technology companies we have in Australia, that’s how the great companies of tomorrow get created.

“But if you’re going to be taxed on your unrealised profit, you can’t have a portfolio that has significant concentration and significant risk, and it will actually push people back to investing in mature companies that pay fully franked dividend and have less growth potential.”

Mr Wilson said this also contradicted the fact superannuation focussed on long-term returns, so could take on more risk than investment vehicles focussed on short-term returns.

Shadow minister for financial services Stuart Robert warned there was “red hot anger” among voters about the proposal to tax unrealised profits.

“It goes to the whole smoke and mirrors process the Labor government has been undertaking to break their election promise to not touch super,” he said.

Industry fund advantage

Deloitte’s Mr Boal said the decision to calculate the tax based on a person’s total super balance at the end of the year could “not great news” for investors who only crossed the $3 million threshold due to a market rally in the weeks before the deadline.

A “better approach” would be to pro-rate the tax owed based on the proportion of the year someone was actually over the threshold.

Mr Rice said the decision to tax unrealised gains was “not that unusual” given SMSFs were already required to calculate losses and report them to the Tax Office.

Super funds regulated by the Australian Prudential Regulation Authority already calculate members’ annual interests as including unrealised earnings, but their valuations of unlisted assets are often controversial and currently under scrutiny from the watchdog.

The change brings taxation of self-managed funds into line with APRA-regulated funds, however, which already pay tax based on this calculation of annual earnings which include unrealised gains.

But one adviser warned it would discriminate against their clients with SMSFs compared to APRA-managed industry and retail funds anyway.

“This will most significantly affect SMSF members who invest predominately in listed assets, such as shares, whose prices are valued daily,” Anne-Marie Tassoni, a partner at private wealth managers Cameron Harrison, said.

“On the other hand, APRA funds tend to hold a large proportion of unlisted assets whose values are not priced on an open exchange; if those assets are not revalued upwards to market at 30 June each year, then APRA-regulated fund members will not be stung by the same tax on unrealised asset performance.

“This is highly discriminatory, favouring the industry super funds.”

The SMSF Association urged the government to instead calculate these ‘notional earnings’ using a similar approach to the existing excess contributions tax regime. The ATO effectively estimates the earnings using a set interest rate when assessing tax owed on excess contributions.

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