17 April 2023
Director Tax and Transfers Branch
Retirement, Advice and Investment Division
The Treasury
Langton Crescent PARKES ACT 2600
By Email: superannuation@treasury.gov.auDear Sir/Madam
BETTER TARGETED SUPERANNUATION CONCESSIONS
1. Thank you for the opportunity to provide comments to the Treasury in relation to the consultation paper titled Better targeted superannuation concessions (“Consultation Paper”).
2. Pitcher Partners specialises in advising taxpayers in what is commonly referred to as the middle market. Accordingly, we service many clients that may be impacted by any changes to superannuation.
3. For the reasons explained, we do not support the proposed approach to implement the Government’s policy of taxing the superannuation earnings of individuals with over $3 million in superannuation at a 30% rate.
4. The Treasurer and Assistant Treasurer’s joint media release of 28 February 2023 first publicly announcing the policy stated that:
The concessional tax rate applied to future earnings for balances above $3 million will be 30 per cent.
5. Additionally, the Consultation Paper (at page 4), states that:
This reform is intended to bring the headline tax rate to 30 per cent, up from 15 per cent, for earnings corresponding to the proportion of an individual’s superannuation balance that is greater than $3 million.
6. However, instead of modifying the tax rate paid by complying superannuation entities, the Consultation Paper’s proposed “Method for calculating tax liability” seeks to use the movements in an individual’s Total Superannuation Balance for an income year as a proxy for earnings.
7. This is not consistent with the stated policy which indicated that the new tax would apply to taxable income of a superannuation fund at an increased rate with respect to some individuals.
8. In our view, adjusting the tax rate applicable to a proportion of taxable income of a superannuation fund that is attributable to members with larger superannuation balances would better align with the Government’s stated policy.
9. Instead, the method in the Consultation Paper effectively seeks to introduce a separate tax on an entirely new tax base. Taxing (a proportion of) the change to net wealth held by an individual in superannuation at 15% is a significant departure from the current income tax system which has developed the concepts underpinning the longstanding concept of taxable income.
10. For complying superannuation entities in particular, specific taxation rules have been developed in Division 295 of the Income Tax Assessment Act 1997 including making Capital Gains Tax (“CGT”) the primary code for calculating certain gains and losses. 1 Specific guidance has also been developed on how taxable income is determined for superannuation funds in particular, such as is set out in the Commissioner of Taxation’s Taxation Rulings TR 93/17 and TR 2006/7.
11. Imposing an additional tax on those with high superannuation balances by doing away with taxable income entirely and replacing it with a simple formula (under the guise of saving compliance costs) sets a dangerous precedent for the taxation of income going forward more broadly and will result in a significant number of unknown and unintended consequence including:
11.1. the taxation of income before it is ordinarily derived;
11.2. the taxation of capital gains before they are realised;
11.3. a reduction in tax for realised and unrealised capital losses which would otherwise not reduce taxable income;
11.4. the total disregard of whether a gain is on revenue account or capital account such that the CGT discount and the quarantining of capital losses against capital gains serves no purpose;
11.5. no consideration of any specific rules that make an amount assessable, nonassessable, deductible or non-deductible; and
11.6. the taxation of non-arm’s length income (“NALI”), which has no concessional status, at 60% as the proposed rules do not consider if changes in earnings consist of NALI.
12. Further, the cost of complying with the measure may exceed revenue raised, particularly for self-managed superannuation funds which would bear a disproportionate share of any such costs (i.e., the cost of annual valuations and additional work anticipated to confirm valuations are reliable).
13. The measure, in its current form, may also distort investment decisions by superannuation funds if long-term capital investments are taxed on an accelerated (unrealised) basis with no CGT discount.
14. Instead, proper public consultation needs to be undertaken to develop an appropriate method of increasing the income tax rate on the superannuation earnings of certain individuals. Given that the measure is set to apply from 1 July 2025, there is sufficient time to undertake such a consultation with no need to rush this measure through.
15. The measure to tax the earnings of the 0.5 per cent of Australians with large superannuation balances should be designed such that:
15.1. any additional tax should only be applied to the real income or earnings attributable to taxpayers in scope;
15.2. notional market value increases (and decreases) as a tax base cannot be supported and should not be pursued as it should be possible to remove unrealised market value movements from the earnings subject to the additional tax as part of any policy design; and
15.3. the threshold be increased from $3 million and instead start at $5 million and should be indexed as non-indexation of this amount increases the reach of the measure beyond its stated scope over time and is inconsistent with similar measures that have sought to limit superannuation tax concessions
16. We also note that a substantial number of taxpayers that would be subject to the proposed new tax are unable to change their superannuation arrangements as they are not eligible to access super. The application of the additional tax on this cohort would be particularly unfair for those whose superannuation is preserved in a tax environment that may be more punitive than that applying to individuals. For example, capital gains may effectively be taxed at 25% under the new measure (i.e. 10% in the fund and 15% under the new tax). This is a higher tax rate than that applying to residents paying the top marginal rate of tax (i.e. currently 23.5% on discounted capital gains).
17. A rule should be included such that individuals unable to restructure their superannuation affairs are exempt from the additional tax until access is available under the law.
18. We provide further comment on specific issues raised in the Consultation Paper at Annexure 1 of this document.
If you would like to discuss any aspect of this submission, please contact either Bradley Twentyman on (03) 8610 5540 or me on (03) 8610 5327.
Yours sincerely
A T DAVIDSON Executive DirectorANNEXURE 1
1. Do you consider any further modifications are required to the TSB calculation for the purposes of estimating earnings? If so, what modifications should be applied?
Any additional tax should only be applied on realised income or earnings attributable to taxpayers in scope. It should be possible to remove unrealised market value movements from the earnings subject to the additional tax as part of the policy design. We recognise the better approach would require some adjustment to current reporting by superannuation funds, however in our view these system changes would be incremental to the system changes necessary under the policy proposal anyway.
An additional modification to exclude non-arm’s length income should also be made as non-arm’s length income has no concessional tax status.
2. What types of outflows (withdrawals) should be adjusted for and how?
We recommend further consideration and clarification be given in respect of how superannuation death benefits will be treated under the policy. The additional tax proposed should not apply to a superannuation member who has died.
3. What types of inflows (net contributions) should be adjusted for and how?
We recommend insurance proceeds are not included in either the earnings or proportion of earnings calculations
Further consideration and clarification should be given to superannuation rollovers and foreign fund transfers, both of which should be excluded from the earnings calculation.
4. Do you have an alternative to the proposed method of calculating earnings on balances above $3 million? What are the benefits and disadvant ages of any alternatives proposed including a consideration of compliance costs, complexity and sector neutrality?
Please refer to our response under question 1 and question 2.
5. What changes to reporting requirements by superannuation funds would be required to support the proposed calculation or any alternative calculation methods?
There will be system changes required to exclude unrealised market value movements from the earnings calculation. In our view, these system changes would be incremental to the system changes necessary under the policy proposal anyway
6. Do you consider any modifications are required to the proposed proportioning method? If so, what modifications should be applied?
The threshold over which additional tax would apply should be increased from $3 million and instead start at $5 million and should be indexed as non- indexation of this amount increases the reach of the measure beyond its stated scope over time
7. Do you have an alternative to the proposed proportioning method? What are the benefits and disadvantages to any alternatives, including a consideration of compliance costs, complexity and sector neutrality?
Please refer to our responses noted above.
8. Does the proposed methodology for determining the tax liability create any unintended consequences?
The proposed methodology would likely distort investment decisions by superannuation funds as long-term capital investments would be taxed on an accelerated (unrealised) basis with no CGT discount. This would make growth investments in superannuation sub-optimal to alternative structures.
The proposed methodology would likely result in some superannuation funds being required to sell assets to fund the additional tax liability. For example, a superannuation fund which holds a single property asset where the member is not able to afford the tax liability personally would be required to sell that asset to pay the additional tax.
Further, losses in a year must give rise to a tax refund to prevent tax being payable on gains that may never be received by a taxpayer.
We have also noted that some taxpayers that would be subject to the proposed new tax are unable to change their superannuation arrangements as they are not eligible to access super. The application of the additional tax on this cohort would be particularly unfair. For example, capital gains may effectively be taxed at 25% under the new measure (i.e. 10% in the fund and 15% under the new tax) which is a higher tax rate than that applying to residents paying the top marginal rate of tax (i.e. currently 23.5% on discounted capital gains).
In addition, it is likely that this cohort would be compelled to continue to contribute to superannuation under the Superannuation Guarantee legislation despite the fact they may be better off not doing so.
For these reasons, a rule should be included such that individuals unable to restructure their superannuation affairs are exempt from the additional tax until access is available under the law.
9. Do the proposed options for paying liabilities create any unintended consequences?
Please refer to our response under question 8.
We have not commented specifically on consultation questions dealing with defined benefit interests as it is not a common situation that we see within our client base Broadly, the law should operate to ensure that the tax outcome is the same irrespective of the nature of the underlying superannuation interest.