Capital gains tax relief for super funds with balances over $3 million

Investments held before July 2025 would likely benefit from the CGT reduction until the departure date, but future price appreciation of assets in the fund would be taxed at up to 30% per annum.

Financial Services Council chief executive Blake Briggs said he was consulting with the industry on how the government’s unusual formula for calculating the tax affected super funds.

“The current CGT tax rate for assets held for more than one year in a super fund is 10%, which means there is a CGT reduction of 33.33%,” he said. declared.

“If the formula results in a higher effective tax rate on capital gains than currently applies, this could create a strong incentive for fund members with balances greater than $3 million to move their assets outside the pension system or to never place them in the system.”

Treasurer Jim Chalmers said the proposal to tax unrealized gains was the result of the Treasury’s advice that it was best to put a hard cap of $3 million on super accounts like others the had proposed.

Dr Chalmers said he was unconvinced by arguments that self-managed super funds holding farms and other illiquid assets would be hurt by the taxation of unrealized gains.

He said the funds were supposed to have cash, people could consider restructuring their portfolios before the new regime begins in July 2025, and they could pay the tax bill with money from outside.

Dr Chalmers said it was a “modest” change that only affected 0.5% of people with super accounts and would help make super tax concessions and the budget sustainable in the future.

“It makes the very concessional tax arrangements a little less for people with more than $3 million in their retirement accounts,” he said.

“These are the tough but simple choices we have to make as a country.”

Regarding the Labor Party’s decision not to index the $3 million threshold, Dr Chalmers said that when the Morrison government lowered the threshold from $300,000 to $250,000 (for combined income and super contributions) to which the Division 293 excess contribution tax applied, the Coalition did not index it either. .

Liquidity problems ‘may be real’

Grattan Institute economic policy program director Brendan Coates said the Treasury’s proposal treats income and capital gains equally for account balances over $3 million.

He pointed to the tax review by former Treasury Secretary Ken Henry in 2009, raising the prospect of moving to taxing unrealized gains on an accrual basis.

“There are conceptual reasons for taxing unrealized gains, because it stops SMSF tax deferral, which is essentially an interest-free loan from the government,” Coates said.

“But cash flow issues to fund the tax may be real.”

Workplace Relations Minister Tony Burke said there were other, more complicated ways to calculate the higher tax, but the super funds already provided the Australian Taxation Office with the required data on balances pension funds every year.

“There are more complicated ways to do it, but the easiest way and what the Treasury advises us is to look at the growth of the account holder’s account balance, you look at the growth of that balance each year, and c That’s how you work out what would be applicable above $3 million,” Burke said.

Industry sources said that instead of taxing unrealized gains, the government could consider assuming an annual rate of return for funds with higher balances and taxing them accordingly – in the same way as rates. of presumption for the criterion of the age of retirement assets.

A senior industry super fund executive says a hard cap of $3 million on super balances would have been easier to administer than the new 30% tax on fund balances above the $3 million threshold. of dollars.

Typically, super fund members pay no tax on unrealized gains, and assets are often held for decades.

When a fund member switches funds or asset allocation, large super funds regulated by the Australian Prudential Regulation Authority charge a notional amount of CGT to the member to ensure tax is shared evenly across members over time.

Mr Briggs said: “The impact of the tax formula on a fund and an individual member will depend on the underlying investment structure, with some APRA funds applying a tax at the individual level, for example, a pension envelope.

“Alternatively, master trusts that provide an interest in the common ownership of assets will accrue tax in the unit price.”

Separately, Professor Ralston, director of the SMSF Association and the Future Fund, said the current pension tax system was “unfair in that people on higher incomes benefit much more from the super tax breaks”.

“The proposal to increase profits tax on balances over $3 million directly addresses this issue,” she said in an opinion piece for The Australian Financial Review.

“Although these balances represent less than 1% of all Super Accounts, it is safe to say that these amounts greatly exceed what is needed for retirement income.

“Over the next two decades, existing contribution limits will prohibit such large balances, but in the meantime, reducing the cost of tax breaks could improve fiscal sustainability and reduce the burden on young taxpayers.”

But Professor Ralston questioned the Treasury’s reporting of tax expenditures using a ‘foregone revenue’ method, comparing the concessional tax rate of 15% to the top marginal rate of 45%.

“These estimates also do not take into account withdrawals from the system or behaviors such as the diversion of income to other tax-preferred activities such as negative gearing.

“Therefore, the current cost of concessions and the expected savings of $2 billion in the first year of the new policy may well be overstated.”

The Treasury said the proposed system would be the easiest to administer under the existing system and the information provided by funds to the ATO, which would keep compliance costs low.

“As the overwhelming majority of superannuation members are unaffected by this measure, the government’s implementation approach aims to avoid imposing large (and potentially costly) systems and signaling changes that could indirectly affect other members,” the Treasury noted.

“The proposed approach is based on existing fund reporting requirements.

“Noting that the funds do not currently report (or generally calculate) taxable income at an individual member level, the calculation uses an alternative method to identify the taxable income of members with balances greater than $3 million.”