Taxing Unrealised Gains: How Proposed Legislation Impacts Your SMSF

Taxing Unrealised Gains: How Proposed Legislation Impacts Your SMSF

17 Oct, 2024 | Market Insight, SMSF

Self-managed super funds (SMSFs) have long been a popular choice for Australians seeking greater control over their retirement savings. Recent government proposals, particularly the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023, introduce new considerations for SMSF administrators, trustees, and the broader investment community. The proposed changes, especially the taxation of unrealised gains, could significantly alter how SMSFs are managed.

As the debate over this legislation intensifies, it is essential for SMSF trustees to stay informed and proactive. By understanding the key aspects of the bill and preparing for potential impacts, SMSF administrators can ensure continued compliance and optimise the performance of their funds. This article explores the major components of the proposed legislation and their implications for SMSFs, providing valuable insights for investors as they navigate the evolving superannuation landscape.

Division 296: A Game-Changer for SMSFs?

A major element of the proposed legislation is the Division 296 tax, which introduces a tax on unrealised capital gains for individuals with superannuation balances exceeding $3 million. For SMSFs, which often manage a diverse range of assets directly, this represents a significant change in the tax landscape. Historically, SMSFs have been favoured for their flexibility in asset allocation, whether in property, equities, or other investments. The introduction of a tax on unrealised gains adds a new layer of complexity for trustees to navigate.

This proposed tax has generated significant discussion across the industry, as it marks a departure from the traditional approach of taxing capital gains only when assets are sold. While this shift presents challenges, it also offers an opportunity for SMSF trustees to reassess their strategies, ensuring their funds are well-structured to meet future obligations. Trustees will need to evaluate whether their investment approaches remain suitable in light of the new tax regime and consider strategies to mitigate potential tax liabilities.

Why Are SMSFs Affected?

The proposed changes impact SMSFs because of their ability to directly invest in various asset classes, including property and shares, which can experience significant fluctuations in value. Under the new tax regime, trustees may face tax liabilities on assets that have appreciated in value, even if these assets haven’t been sold or converted to cash. Essentially, trustees could find themselves paying tax on “paper gains”—the increase in an asset’s value that has not been realised through an actual sale.

The SMSF Association has been vocal about the challenges posed by taxing unrealised gains. Peter Burgess, the Association’s CEO, has called on members to oppose the bill, citing concerns about unintended consequences. According to Burgess, the new tax could disproportionately impact small businesses, family enterprises, and primary producers who rely on SMSF assets for their retirement security. The legislation may force some trustees to sell assets prematurely to cover tax obligations, potentially undermining long-term investment strategies and diminishing retirement savings.

The $3 Million Threshold: Who’s Affected?

A key aspect of the proposed legislation is the tax on superannuation balances exceeding $3 million. This threshold has been a focal point of criticism, particularly regarding its lack of indexation. Over time, as inflation and asset values rise, more SMSFs are likely to find themselves subject to the new tax, even if the actual wealth of members has not significantly increased in real terms.

The government’s intention behind the $3 million threshold is to ensure that superannuation funds are used primarily for retirement savings, rather than becoming wealth accumulation vehicles for Australia’s wealthiest individuals. However, the reality is that many SMSFs, especially those holding substantial property or equity portfolios, could easily surpass this threshold. With property prices and equity markets continuing to climb, an increasing number of Australians nearing retirement may be affected.

For SMSF administrators, this development underscores the importance of keeping clients informed about how future asset value growth could affect their tax liabilities. Trustees may need to revisit their asset allocation strategies and assess whether their current investment mix aligns with long-term retirement objectives, given the potential tax implications associated with crossing the $3 million threshold.

Taxing Unrealised Gains: Why This Matters

The taxation of unrealised gains is perhaps the most contentious aspect of the proposed bill. Traditionally, capital gains tax (CGT) in Australia is applied only when an asset is sold, which allows the taxpayer to use the proceeds from the sale to cover the tax liability. The new legislation, however, would impose tax based on the increase in an asset’s value, regardless of whether it has been sold. This change could create significant cash flow issues for SMSFs holding illiquid assets, such as property, since the tax liability would arise without the corresponding liquidity to pay it.

The potential impact on SMSFs could be profound. Trustees may be forced to sell assets to meet their tax obligations, which could disrupt carefully planned investment strategies. Selling assets prematurely could also result in lower long-term returns, particularly if the market conditions at the time of sale are unfavourable. Additionally, trustees could face increased administrative complexity, as they would need to accurately calculate and report unrealised gains, a process that may not be straightforward for SMSFs that are not set up to differentiate between realised and unrealised gains in the same manner as larger, APRA-regulated superannuation funds.

The Administrative Burden on SMSF Trustees

For SMSF administrators, the proposed legislation introduces additional layers of complexity, requiring more sophisticated reporting and potentially higher compliance costs. Unlike large APRA-regulated funds, many SMSFs lack the systems in place to routinely track unrealised versus realised gains. This gap in capability could lead to increased administrative burdens for trustees who rely on external administrators or accountants to manage their funds.

Industry groups, including the SMSF Association, as well as independent politicians like Kylea Tink and Allegra Spender, have raised concerns that SMSFs may be unfairly penalised under the new regime. Despite having more transparent access to their financial data, SMSFs could face complex tax liabilities that make the administration of these funds more challenging and costly. The additional compliance requirements could discourage some individuals from using SMSFs altogether, potentially reducing the appeal of self-managed funds as a retirement savings vehicle.

The Senate’s Role: What Happens Next?

As the bill moves through the legislative process, the focus is shifting to the Senate, where the government’s confidence in securing the necessary votes will be tested. To pass the bill, the government will need the support of all 11 Greens senators and at least three other crossbenchers. This presents a critical moment for SMSF trustees and administrators to voice their concerns and advocate for significant amendments.

Opponents of the bill are calling on the Senate to consider the disproportionate impact these changes could have on small business owners, primary producers, and other constituents who may be affected by the new tax on unrealised gains. If the legislation passes without major revisions, many SMSF trustees will need to reassess their investment strategies, account for the tax implications of holding illiquid assets, and potentially face increased administrative burdens as they adapt to the new requirements.

The TAMIM Takeaway

The proposed changes to superannuation tax law present significant considerations for SMSFs, particularly regarding the taxation of unrealised capital gains and the $3 million threshold. While the legislation aims to better target superannuation concessions, it could inadvertently impose substantial burdens on SMSF trustees, forcing them to rethink their investment strategies and compliance processes.

Now is an opportune time for SMSF trustees to review their investment portfolios and understand the potential implications of the proposed changes. It is advisable to consult with an accountant to evaluate asset valuations and explore options for optimising the structure of the SMSF before 30 June 2025. By taking these proactive steps, trustees can ensure their funds remain compliant, resilient, and well-prepared to navigate any future legislative shifts.