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The government is facing renewed calls to consider alternative calculation methods for its Division 296 tax.
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$3m super tax to ‘disrupt’ small business and farmers, warns SMSFA
25 March 2024
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The proposed measures for the implementation of a new tax on super balances above $3 million are complex, costly, and will lead to unintended outcomes not just for SMSFs but for small business operators also, says the SMSF Association.
SMSF Association chief executive Peter Burgess said the government has rushed the policy design for the proposed tax measure and has failed to consider any alternative design models in the consultation process.
“Legislative drafting errors and deficiencies in the policy design were identified during the consultation process remain in the Bills tabled,” Burgess stated in a recently published letter to the Senate.
“This is despite these issues being raised with Treasury through both direct engagement and the formal consultation processes.”
Burgess also said the policy fails to consider a person’s home ownership status, the combined balances of a couple or the level of wealth held outside of super.
“It will impact many small business owners and farmers who have invested in their businesses through property acquisitions,” he said.
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Recent research conducted by the University of Adelaide shows clear evidence of the liquidity stresses this methodology will cause.
A recent research study undertaken by the University of Adelaide found over 13 per cent of SMSF members affected by Division 296 would not have had sufficient liquidity in their funds to cover the tax liability if Division 296, had been introduced on 1 July 2020.
“Recent studies show a substantial number of SMSFs that will be affected by this tax change hold property. Given that many will be small business operators and farmers who hold their premises and land in an SMSF, it is not difficult to see how disruptive this new measure will be not only for the SMSF sector but for small business operators and the broader community,” he said.
The SMSF Association warned that this problem is only likely to worsen over time, as unrealised capital gains accrue while tax payments from previous years diminish liquidity.
“While affected members will have the option of funding a Division 296 tax liability with funds external to their superannuation fund, this is unlikely to be possible for all affected members,” it said.
“An individual’s superannuation balance may not be indicative, or an accurate proxy, of their personal wealth. Farmers and small business operators with land and business premises owned by their SMSF may encounter significant liquidity pressures. Changes in property values do not automatically correlate to an increase in leasing income or rental yields. Market forces driving property prices differ to those driving yield.”
The association also said it did not subscribe to the view that liquidity stress brought on by the introduction of Division 296 is a failing of the SMSF trustees to properly formulate the fund’s investment strategy.
“In our view it is unreasonable to expect SMSF trustee to envisage future tax changes when formulating the fund’s investment strategy – particularly of the magnitude of the Division 296 tax increases which, for affected members, could result in an average annual tax liability exceeding $80,000,” it said.
“An alternative measurement of earnings which reduces uncertainty and the severity of including unrealised capital gains is needed as a matter of priority.”
The SMSF Association said it is encouraging the government to cease progress on the proposed amendments and instead continue to engage with stakeholders and industry to ensure that the resulting policy and legislation deliver the right outcomes, which are fair and equitable.
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