The noisy political war over the Labor’s new super tax is raging again, seen as test for how the government will treat the haves and have-nots in difficult times. But a quieter battle is being fought for ways to beat them.
The new tax laws started hitting headlines two years ago when Labor first announced them. Since then, little has happened with them and they failed to pass parliament before the last election.
However, with Labor returning to power with an historic landslide victory and 94 seats in the lower house, the election completely overhauled the dynamics of parliament. It looks likely that Labor will back for a second go at passing the laws if it can strike a deal with one or more of its opponents.
In short, the laws seek to make those with larger super balances pay more tax. However, one of the methods it’s proposing undermines taxation principles some see as economically sacred: taxing money that individuals are yet to be paid.
The government’s new super tax will include the value of any assets in a super fund when calculating its balance even if they are yet to be sold for their cash value.
Rarely have tax experts been given a bigger opportunity to showcase their strategic chops.
If you have any concerns or questions about Labor’s new super laws, we can help. We believe we have the optimal solution. It involves a simple restructure that can cut down red tape and allows the possibility of recouping the tax at a future time.
Some suggest that those who can access their money should move it into other structures like investment companies, but for many this could increase negative impacts. The obvious move for under-60s who can’t access their money is to change their asset mix, removing direct property ownership and speculative shares out in favour of fixed income investments; bonds, dividend stocks, and so on.
More extreme measures include gifting money to grandkids and relatives, splitting fund balances across spouses to lower them overall and moving money offshore.
However, first we need to discuss what set the hares running in the first place.
Currently, the government charges a 15 per cent tax on super contributions and any money earned by a fund. Labor is raising the tax on super fund earnings to 30 per cent for individuals with balances exceeding $3 million dollars. However, it only applies to the proportion of their super balance that exceeds the threshold at the end a financial year.
For a simple example, take an individual with a super balance of more than $3 million that also receives regular contributions from an employer.
The contributions will continue to be taxed at 15 per cent but any earnings by their fund (calculated over a financial year) will attract a 30 per cent tax fractionally calculated by the amount their fund exceeds the threshold.
If their super balance is $4 million at the end of the year after earnings, it will have exceeded the threshold by one quarter. Accordingly, they will only pay the extra 15 per cent tax on a quarter of any earnings during the year with losses able to be carried forward.
However, the way super balances are calculated under the new laws are generating by far the most controversy. It will include the value of any assets (for example, a house or property) it holds at the end of the financial year. The tax office will give no regard to whether the value has been realised as a capital gain by the sale of the assets.
This is what the pundits are talking about when they say that the laws are a tax on “unrealised” capital gains; a diabolical affront in the eyes of those who will be assessed personally.
The scaremongering campaigns are also already well advanced with some raising concerns that it could lead to taxes on unrealised asset gains beyond super.
Labor and the new laws’ supporters say that it will impact a limited number of individuals. The with most common estimate is around 80,000 mostly wealthy SMSF holders. However, asset valuations might bump the value of many super funds that would otherwise be spared the extra tax above the $3 million threshold. Critics also point out that the laws may affect more funds in the future because threshold hasn’t been indexed for inflation.
The laws might also hit some sectors disproportionately. Farmers have been singled out as one of the groups most likely to be affected with many placing their properties into SMSFs to minimise tax.
(Watch this space, as it’s rumoured one political party is seeking to have the threshold lowered to $2 million).
It’s natural for those fortunate enough to be impacted to feel entitled to outrage about an extra 15 per cent tax on their super fund’s profits, especially when they’re yet to actually received them.
However, after the arithmetic is done, it’s likely that lack of liquidity will only prevent a super fund or individual paying the tax in a very small number of cases.
Is it a problem? Is the added 15 per cent unfair?
Is it fair that at retirement phase superannuation contributions attract zero tax? Equally, should income stream or lump sums derived from super be treated the same way?
Contrast the situation to those relying on the government age pension. Is the fact that those earning even the most modest amounts to supplement their income pay tax if their income exceeds certain thresholds justified? And is it right that they risk reducing their pension as part of the deal?
After all, at a market cash rate of 5 per cent, a balance of $3 million (or more) can net a fund $150,000 per year without the member having to lift a finger, leaving a relatively modest tax bill of $36,838.
We’ll leave it to others decide these questions.
We’ve been focusing our intellectual exertions on strategies to deal with the tax and we believe we have the optimal solution. It involves a simple restructure that can cut down red tape and allows the possibility of recouping the tax at a future time.
If you would like to know more about our approach, please reach out to us via our contact page.