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The government has outlined the direction it will take with non-arm’s length income and signalled the $3 million tax threshold is here to stay.
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Budget sheds light on 2 key issues for super
11 May 2023
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The budget contained little by way of surprises for the superannuation sector but did clarify the government’s position in two key areas, experts say.
Threshold design to stay the same
The budget confirmed the government will move ahead with its additional tax for individuals with a superannuation balance above $3 million from 2025–26 onwards.
“The fact that estimates of the tax revenue to be raised ($2.3 billion in the first full year) haven’t changed since these papers were released also suggests that the government hasn’t really wavered in the design despite significant criticism,” said Heffron managing director Meg Heffron.
Industry had been hopeful that the government would adjust the proposed method used to calculate the tax in order to avoid effectively taxing unrealised gains.
There has also been a push from the SMSF industry for the $3 million threshold to be indexed and to allow those who exceed the threshold to withdraw some of their super even if they hadn’t reached the age where this would normally be allowed.
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“It seems that won’t be happening now,” said Ms Heffron.
“We are still waiting for draft legislation explaining exactly how the measure will work so we are still guided by earlier Treasury papers on the subject.”
SMSF Association chief executive Peter Burgess said further consultation on the new tax is imperative so that the “the full impact on the small business and farming communities and others can be properly considered”.
“The previous consultation phase was only 18 days, including Easter, and that was simply insufficient time for the industry to fully identify all the issues. We understood the need to finalise things for the budget, but that should not come at the expense of rushing important legislation with unintended consequences,” said Mr Burgess.
“If the government proceeds with the taxation of unrealised gains as proposed in their consultation paper released in late March, given many small business premises and farms are owned by SMSFs, this new tax could drive up their costs substantially at a time of unprecedented cost of living increases. Therefore, it’s important the full impact on taxpayers, including small business owners and primary producers, is fully explored.”
Industry super fund Hesta supports the changes to tax concessions for earnings on account balances over $3 million but said the savings should be directed towards helping deliver a fair and more equitable super system.
NALE tweaks fall short of industry expectations
The government also provided a long-awaited update on its proposed amendments to the non-arm’s length expenditure rules.
The budget papers made it clear that if an SMSF’s general expenditure is lower than would be expected in an arm’s length situation, instead of all the fund’s income being taxed as NALI, the amount of NALI will be limited to twice the general expense shortfall.
While this is a reduction from the five-factor penalty that was initially proposed, it still fell short of the industry’s expectations.
CA ANZ superannuation and financial services leader Tony Negline said while the reduced penalty is appreciated, the government has “missed an opportunity” and should use a tailored compliance approach rather than a draconian tax penalty.
Smarter SMSF chief executive Aaron Dunn said it was staggering that after five years of trying to resolve these measures, the proposed outcome has resulted in an uneven playing field between APRA funds and SMSFs.
“All of the proposed approaches from a unified voice on this topic appears to have fallen on deaf ears,” Mr Dunn stated.
Heffron head of education and content Lyn Formica said that despite the government’s tweaks, there could still be a significant tax bill for SMSFs where a non-arm’s length expense breach arises.
“SMSF trustees and their advisers should review their expense arrangements before 30 June 2023,” said Ms Formica.
APRA-regulated funds will be exempt from the NALI provisions that apply to expenditure for general and specific expenses of the fund, as previously revealed in the Treasury consultation.
“The practical effect of the NALI amendment is that large APRA regulated superannuation funds can continue with existing service arrangements that are in the best financial interests of their members,” said ASFA deputy chief executive Glen McCrea.
“ASFA has long advocated for appropriate targeting of the NALI provisions and appreciates the government’s rigorous consultation and pragmatic decision."
Transfer balance cap indexation left untouched
Despite some of the speculation that the government might look to freeze the transfer balance cap to prevent the cap indexing from $1.7 million to $1.9 million on 1 July, there were no announcements in the budget.
SuperConcepts executive manager SMSF technical and private wealth Graeme Colley said it was positive to see there was no interference to the indexation of the total super balance cap and the transfer balance cap.
“This means that people can continue to plan with confidence for the remainder of this year and into the 2023–24 financial year when the caps increase to $1.9 million,” said Mr Colley.
Mr Colley said it was unfortunate that the budget did not contain any update on the proposed residency changes for SMSFs.
The measure would extend the period of temporary absence allowed from Australian for SMSF trustees.
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