Better targeted Superannuation Concessions before Senate Committee

Tax law can be complex and poorly designed law can compound that complexity. As advocates for the tax community, The Tax Institute makes dozens of submissions each year, frequently participates in consultation with government, and amplifies the voice of our members in consultative forums.

Our goal? Advocate for a tax system that is robust, fair and simple, for all Australians.

We previously provided a submission on the topic, outlining the issues we see with the newly proposed Division 296, particularly concerning the taxation of unrealised gains.

Along with our comments on Division 296, we recommended the Government should consider making key changes to the draft Bill to better ensure equitable outcomes, including:

• Indexing the proposed threshold of $3 million
• Introducing a loss carry-back mechanism to allow individuals to recognise unrealised losses, as the proposed approach may result in some instances where taxpayers will never have the opportunity to use losses carried forward, or could be placed under significant hardship
• Amending the adjusted total superannuation balance (ATSB) to account for the disproportionate impact on SMSFs
• Allowing for payment of the Division 296 tax on unrealised gains to be deferred until the gain on the relevant asset(s) is realised by the superannuation fund — this would better align the operation of Division 296 with Australia’s current approach to CGT
• Excluding amounts withdrawn to pay a superannuation tax liability being added back into the ATSB and therefore being subject to Division 296 tax
• Aligning the treatment of certain disability and injury payments with the proposed treatment of structured settlements
• Undertaking further consultation on the appropriate treatment of proceeds and payments relating to family law splits

Julie gave the opening statement. She said:

On behalf of The Tax Institute and our members, we thank the Senate Standing Committee on Economics (Committee) for inviting us to appear as a public witness regarding its inquiry and report on the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 (Bill) and the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023 (Imposition Bill).

Schedules 1 to 3 to the Bill propose to insert new Division 296 into the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) to give effect to the Government’s announcement to introduce an additional 15% tax on earnings on superannuation balances above $3 million (Division 296 tax). Our feedback is aimed at ensuring that the measure is appropriately designed and implemented to achieve the intended policy objective, within the principles of good law design.

Taxation of unrealised gains

If legislated, the measure will tax unrealised capital gains, an approach that is contrary to the well-established approach under the Australian tax system which brings to tax capital gains when they are realised. The Tax Institute is of the view that the practical and financial burden of taxing unrealised gains far outweighs any perceived macroeconomic benefits and sets a dangerous precedent for our taxation and superannuation systems.

Taxing unrealised gains places taxpayers under significant financial pressure due to the mismatch between the tax liability arising from the capital gain and the cash flow associated with the disposal of the asset. Although the measure proposes to allow taxpayers who are subject to Division 296 tax the option to source funds from their superannuation fund, this undermines the overarching objective of our superannuation system and self-funded retirement.

This approach can also give rise to significant transaction costs. Taxpayers may be required to sell illiquid assets below market values to ensure timely payment, while also incurring the cost of re-investing the funds into a new investment strategy. Older taxpayers who have designed their retirement strategy based on historical announcements that encouraged the growth of superannuation balances and the law as it stood at the time are most likely to be adversely impacted by these costs. It is, in our view, unreasonable to cause taxpayers to restructure their business and asset-holding arrangements that were set up based on the law that applied at the time, in order to fund the payment of a new tax liability.

The Tax Institute is strongly of the view that the taxation of unrealised gains should not form part of this measure. However, if the Government intends to proceed with the taxation of unrealised gains, we consider that the approach should be limited to this measure and clearly stated in the objects clause provision in proposed section 296-5. Further, we consider that proposed Division 296 should be amended as set out below to better ensure that it operates equitably and efficiently, reducing the adverse impacts of the adoption of taxing unrealised gains.

We noted in our submission alternative approaches that should be considered to reduce the scope of taxing unrealised gains and complexity in the design of the Division 296 tax.

Need for loss carry-back mechanism

Although the measure proposes to allow negative superannuation earnings to be carried forward, there are many instances where carried forward losses may not be able to be utilised due to the taxpayer’s circumstances. Examples of these circumstances include the death of the taxpayer or significant market downturns following payment of a Division 296 tax liability relating to an earlier income year. Preventing taxpayers from utilising negative earnings while still collecting taxes creates asymmetrical tax outcomes and is also inconsistent with the general economic principles of taxing unrealised gains which should allow for timely recognition for losses.

The Tax Institute is of the view that the Committee should consider allowing refunds of Division 296 tax paid in prior income years to the extent the taxpayer has ‘unapplied transferrable negative earnings’ for the relevant income year. Under our suggested approach, taxpayers would be able to utilise their current year’s losses only to the extent they have paid Division 296 tax in a prior income year. This would promote a fairer, more efficient, and effective tax system by removing unintended and punitive timing consequences that result from a decline in asset values and the taxpayer’s circumstances. Alternatively, a refundable credit should be made available if the taxpayer or their estate is in a position where they will not be able to utilise all their carry-forward losses.

Deferral mechanism

The Tax Institute is of the view that taxpayers should be provided with an option to defer the payment of the Division 296 liability up to a maximum period of five years. This would ensure that taxpayers who do not have the required cash or sufficient liquid assets in the superannuation account to pay their Division 296 liability are still able to fairly meet their tax obligations. Without a deferral mechanism, taxpayers may face a significant financial burden to source the funds to pay the tax, exacerbating the impact of the cash flow mismatch. Again, this is contrary to the overarching objective of our superannuation system and self-funded retirement.

Indexation of the threshold

The Government’s announcement on 23 February 2023 stated that the proposed measure will subject 0.5% of all Australians to Division 296 tax. However, the current threshold of $3 million is not proposed to be indexed. This will result in effective bracket creep whereby a larger number of taxpayers will be impacted over time.

To prevent this outcome, we consider that the proposed $3 million threshold for the application of Division 296 tax should be indexed. It may be possible to commence indexation of the proposed $3 million threshold in line with the transfer balance cap (TBC) once the TBC (currently $1.9 million) reaches $3 million.

Death of taxpayer on 30 June 2023

Proposed section 296-30 has the effect of subjecting only taxpayers who die on 30 June in an income year to Division 296 tax for that income year provided the other conditions are met. Taxpayers who die on any other day of that income year will not be subject to Division 296 tax for that year. The policy rationale for this outcome is unclear and inequitably results in some taxpayers being subject to Division 296 tax while others who died earlier in the same income year (i.e. before 30 June) are exempt solely by virtue of the day on which they died. We consider this to be an anomalous outcome and recommend that this section be amended to exempt all taxpayers from liability to Division 296 tax for the income year in which they die.

Further exclusions from withdrawals

Broadly, withdrawals are added back to the adjusted total superannuation balance (ATSB) to prevent taxpayers from avoiding a Division 296 tax liability by simply withdrawing funds from their superannuation account. However, proposed subsection 296-50(4) lists amounts that are proposed to be excluded from being added back to the ATSB.

The Tax Institute considers that exemptions to the withdrawals added back should generally reflect all circumstances where the funds are not used to support the taxpayer’s lifestyle or otherwise made deliberately. To this effect, we consider that proposed subsection 296-50(4) should also include amounts that are withdrawn from the TSB through a release request to pay a tax liability incurred as a result of:

• the application of Division 293 of the ITAA 1997;
• exceeding the concessional or non-concessional contributions cap; and
• the operation of Division 296.

Treatment of disability, medical and related insurance payments

We consider that payments received in a year relating to a superannuant’s total and permanent disability (TPD), and payments from insurance proceeds relating to a terminal medical condition (TMC) should be removed from the scope of Division 296 tax. Currently, TPD and TMC payments are excluded from the calculation of the ATSB only in the year that they are made. TPD and TMC payments will be subject to Division 296 tax in subsequent years, including any unrealised gains made from those payments. Meanwhile, structured settlement payments will always be excluded and will not be subject to Division 296 tax at any stage.

We consider that there is no policy justification for this difference in treatment and do not consider it appropriate to include TPD and TMC payments within the scope of Division 296 while excluding structured settlements. The process for receiving all these payments include high levels of scrutiny and independent verification, such as checks by doctors. All these payments are used to support the needs of the superannuant’s lifestyle after an adverse and life-altering incident.

Administrative considerations

To ensure that Division 296 tax is administered in a fair and efficient manner, we consider that the information used by the Commissioner to calculate a superannuant’s Division 296 tax liability should be made readily available to taxpayers and their advisers. Without this information, a significant and unnecessary cost and time burden will be imposed on taxpayers to verify their Division 296 tax liability.

Further, taxpayers who do not agree with the Commissioner’s decision to assess Division 296 tax should be able to access in the first instance a streamlined review of the calculations. It is important to ensure disputes can be resolved on a fair and timely basis rather than requiring taxpayers to undergo a costly and resource-intensive formal review or appeal process.

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