So, while some questions have been answered, the revelation has raised even more, leaving many to wonder what else they don’t know.
What we do know about the $3 Million balance and the additional 15% tax on earnings:
- The balance is based on the total super balance of a member and will be determined by the ATO thereby capturing all super balances you may have, including retail, industry funds and self-managed superfunds.
- It does include pension balances.
- The additional tax will be calculated on the members movements for a financial year, including any unrealised market movements/unrealised capital gains of investments, adding back withdrawals, and deducting after tax concessional contributions.
- The backing out of after-tax concessional contributions accounts for the fact that the fund will already pay 15% tax when receiving concessional contributions in addition to being subject the normal operation of Division 293 tax (that is, an additional 15% tax for those who are over the threshold: currently $250,000).
- Withdrawals will presumably capture income streams and lump sum payments.
- The $3 Million will not be indexed.
- If there is a reduction in the closing total super balance of a member because of a decline in market conditions, you can carry forward this loss to offset against any future tax liabilities (referred to as negative earnings). This will not be refunded.
- Similar to Division 293 tax, the member may pay the tax personally or complete a release authority and nominate a fund to release the monies.
- The superfund itself will still get franking credit refunds, which could help pay the additional tax if the member elects to have the superfund release the funds. Alternatively, the member will need to pay the tax bill personally.
What is unclear and has left many scratching their heads:
- When the proposal was first announced, the words ‘associated earnings’ were used. However unrealised capital gains have never been taxed or counted as ‘associated earnings’.
- The requirement for auditors and members to obtain market valuations of property and unlisted investments will now cause an administrative burden, costs, and delays. Auditors may require expensive formal market appraisals for private and unlisted investments or for property in order to determine the member’s closing balance?
- What happens to an investment that has substantially declined in value or is almost worthless? Will there be an ability for a refund or an amendment? Using cryptocurrency which has had volatile market movements as an example: An initial investment with a low capital outlay may have resulted in a very high unrealised capital gain in a financial year. However, the value may drop significantly in the following year. Therefore, the member would be required to pay tax on an unrealised gain and may be forced to sell the investment at the lower value in order to fund the tax bill.
- What happens once an investment is sold or is in liquidation which realises a capital loss? The member may have paid the additional 15% tax on the unrealised gains while the investment was being held. Will the proposal consider applying the previous tax paid to offset against the realised loss resulting in a refund of the overpaid tax? As it currently stands, this doesn’t appear to be the case as the realised gain/ loss is at the fund level whereas the tax on the unrealised gain is at the individual member level.
- What happens on death? In particular, when the last surviving member of the fund passes away, the member balance generally needs to be paid out of the fund. Therefore, what happens to any carried forward negative earnings that can’t be recouped – are they lost forever?
- Cash flow management will become even more critical for superfunds and its members. Investments that are low income producing or are mainly a capital return in nature will place undue pressure on an individual that has to have sufficient funds to pay the additional tax bill. Some investments may be illiquid, don’t have a realisable market to determine a market valuation or can’t be sold for a defined period. In other examples, where a fund has a property investment and the tenant has vacated, the fund may not have sufficient funds to pay the tax without selling the asset. To further exacerbate the issue, the member may require available cashflow to fund income stream payments.
- By the time the ATO issues an assessment for the additional tax, will they add an interest or a charge as they do for other assessments? For example, will interest be calculated from the beginning of the year that $3 million threshold has been exceeded until the date the assessment notice is issued?
- The $3 million cap not being indexed will most likely capture many more members in future as the value of investments increase over time.
- There is no ability for people who have not met a condition of release to withdraw monies or transfer assets out of the fund in order to get under the $3 million cap. This means that many people continue to be impacted without an avenue to address the issue.
It is prudent to remember that this still needs to get the support of voters in the next election and is currently only a proposal, not law. The devil will be in the detail, so watch this space.
We will keep you up to date on changes and announcements. At this stage like everyone else we seem to raise more questions than have answers, so will await the details which will be released in due course.
For more information, please contact: Sharon Gdanski