Letty Chen, Tax & Super Advisor, IPA
The Institute of Public Accountants (IPA) is urging the Government to reconsider problematic areas with the proposed Division 296 tax on superannuation. While the IPA supports sensible reforms to make the superannuation concessions more equitable, it believes the current proposal will create inequitable outcomes and practical compliance challenges for affected taxpayers.
The IPA’s primary objections to the proposed tax centre on four key areas:
- the inclusion of unrealised capital gains in the calculation of earnings
- the lack of a refund mechanism for negative earnings
- the absence of indexation for the $3 million threshold
- the lack of optionality for funds to use established tax principles to calculate earnings on a member-by-member basis.
Letty Chen, Tax & Super Advisor at the IPA, said that the proposed methodology represents a significant departure from accepted tax orthodoxy and principle.
“A fundamental tenet of Australian tax law is that income and gains should only be taxed once they’ve been earned or realised,” she said.
“This measure would tax unrealised gains, which will create serious cashflow issues for taxpayers, especially for small business owners and farmers who hold illiquid assets like real property in their self-managed super funds.”
Forcing the sale of these assets to pay tax liabilities could be disruptive and may happen at a time of depressed market values.
“There’s a strong possibility a member could be cumulatively taxed on investments that ultimately make an overall loss, with no real recourse to recover any tax previously paid.”
The IPA is calling on the Government to reconsider these elements and urges them to:
- limit the tax to realised earnings and capital gains
- implement transitional rules that allow affected taxpayers to restructure their affairs without penalty
- index the $3 million threshold annually to account for inflation and ensure the system remains fair and equitable over time
“For someone in their 20s or 30s today, $3 million when they near retirement might be equal to a fraction of that amount in today’s money due to inflation,” she said.
“The threshold must be indexed. Superannuation is designed for long-term saving, and policy should reflect long-term impacts and provide certainty.”
“Ultimately, reform of superannuation tax concessions must be considered holistically. Piecemeal measures such as the Division 296 tax introduce other inequities and greater complexity. Poorly considered changes will undermine confidence in superannuation.”
