Meg's Musings - June 2023

For weeks now I’ve kept returning to this story in SMSF Adviser that talks about “fairness” in the context of the proposed new 15% tax on those with super balances of more than $3m. I’ve been trying to work out what bugs me about this issue.

It does raise a very interesting question about exactly what “fairness” means and when it’s important to be fair and when it’s not.

Actually, if you read the article carefully, the quotes from Treasury are not really about whether or not the proposed new tax itself is fair. They are about the fact that the calculation methodology is “sector neutral”. In other words, Treasury highlights two points that touch on different aspects of fairness – one, that the calculation methodology will be the same for both SMSFs and APRA funds and two, that it will have the same impact on all super fund members regardless of the type of super fund they use.

On this front, I actually agree with Treasury. (But I have much more to say, keep reading.)

The proposed calculation method doesn’t inherently penalise anyone for choosing one type of fund over another. In that respect it’s quite different to the great franking credit debate of the 2019 election campaign. Back then, proponents of the policy claimed that taking away franking credit refunds was fair to all super fund members because it would apply to all funds in the same way. But the critical point they chose to ignore was that the impact on a particular member would very much depend on the sort of super fund to which they belonged. Importantly, the impact on SMSF members would have been much greater than members of large funds. That’s simply because large funds pay so much tax (thanks to all the employer contributions they receive) that they don’t get tax refunds anyway. SMSFs (with only a few members who might not be making contributions) do. So saying that franking credits stay but they can’t be paid in the form of a refund (only as a reduction in tax) definitely penalises a member for having an SMSF but makes no difference to those in large funds. Fortunately, it didn’t happen.

But I digress.

The key point is that this proposed new tax is – in my view – sector neutral. It will tend to involve SMSF members more because they simply have more super, not because they happen to hold their super in an SMSF. They would be impacted in exactly the same way if their super was in a public fund.

But does that mean it’s fair?

Not on your life.

It might be entirely appropriate for people with large super balances to pay more tax. I wouldn’t argue with the Government on that point and I suspect there may be many people impacted by this proposal who feel the same.

But the method being defined by Treasury risks being fundamentally unfair to all super members – even those in large super funds.

For impacted members, the tax will be applied to anything related to their investments that causes their super balance to go up. The point that has so many advisers, accountants and trustees up in arms is that this will include unrealised capital gains (growth in assets that the fund hasn’t sold). Even worse, if those unrealised gains evaporate the next year (because the assets drop in value), the member won’t get a tax refund. Instead they will get a loss they can carry forward and they will have to hope they are able to use it in future. They can’t use it to reduce their normal income tax, it’s got to be used exclusively to reduce this proposed new tax.

THAT’S what isn’t fair.

So why is the Government going this way? It’s because the proposed method is simple. Apparently providing the data needed to do anything different would be a big reporting burden for large super funds. The argument is that it seems unreasonable to impose this cost on large funds just to put in place a method that feels fairer, particularly given this measure probably won’t impact many of their members.

In other words, we’re ignoring fairness in the interests of simplicity and minimising cost, largely because this is a minority problem.

That’s a really big statement. Imagine applying it to pretty much any other issue.

What’s particularly interesting is the sharp contrast between this approach and the stance the Government is taking with non arm’s length expenses (NALE). They are polar opposites.

Remember that back in 2018, the concern from Government was that some members were getting an unfair advantage because services were provided to their fund at artificially low rates, allowing them to keep more in super. Really egregious examples of this had already been stopped by earlier legislation and rulings. (For example, a builder carrying out substantial works on a property owned by his SMSF is already deemed to have made a contribution to the value of the improvement.) But new legislation introduced in 2018 caught up far more minor concerns such as accountants using the resources of their workplace to avoid paying accounting fees or large super funds where administration costs were subsidised by product providers or employer sponsors.

The final outcome after a lot of industry consultation can be summarised as : the whole thing will be ignored for large funds. SMSFs, on the other hand, will need to make sure all their expenses are at market rates or pay extra tax. That will apply even if the market rate isn’t obvious. It imposes extra costs in terms of ensuring the market rate is correct or actually using an external supplier simply because it’s easier to comply with the law that way.

In other words, in this case the Government decided that for SMSFs only it was absolutely vital to be “fair”, despite the fact that it was more complex, more costly and a minority issue.

It wouldn’t be such a powerful inconsistency if these very different approaches to fairness vs simplicity weren’t happening at exactly the same time.

Ignoring fairness in the interests of simplicity and minimising cost when something is a minority problem is a dangerous road. Unfortunately, whenever anyone makes this point, the rhetoric from Government, the media and sadly a lot of the population is pretty much that these terribly rich people with more than $3m in super can dry their tears with their million dollar bills. They’re missing the point. Paying more tax isn’t the problem. Paying it fairly is.

On a more positive note, it does seem there will be plenty to say about the actual operation of this tax at our Super Intensive Day coming up in August / September. I’m optimistic we’ll have draft legislation by then and we’re already putting our minds to modelling how different clients might respond to the change. Make sure you register your interest for either the virtual or in person event here with tickets going on sale very soon. Quite apart from our coverage of this issue there will be up to 15 hours of CPD on a range of other superannuation issues for only $715 (virtual) and $869 (in person).

This will be our last edition of Heffron Highlights for 2022/23. It seems incredible that the new financial year is only a few short weeks away. We look forward to seeing you on the other side and getting off to a great start in 2023/24.