Shortly after the Labor government announced a cap on generous arrangements for those with very high superannuation balances, opponents noted that some people may be forced to sell assets to pay their tax bills.
Experts say the fears are overblown.
What’s the issue?
When the new policy is implemented in 2025, there will be a cap on the tax rate of earnings in a super account at the $3m mark, jumping from 15% to 30%.
Importantly, those with large super balances only pay that higher rate generated from assets above that threshold. The changes will initially affect about 80,000 people.
This will particularly affect the self-managed super fund industry, where balances tend to be higher.
Self-managed funds typically use cash generated from the sale of an asset to pay tax. Under the new rules, tax will be liable for “unrealised gains and losses” every year, which theoretically could create cashflow issues.
One argument gaining prominence this week is that those with self-managed funds tend to have illiquid assets and would therefore be forced to liquidate investments to pay their tax bills. In other words, they are asset rich but cash poor.
Self-managed funds do allow for far more flexibility when it comes to investing, and some of those investments are hard to immediately cash in, with property, artwork, classic cars and even frozen semen from prized stallions among the assets held in such funds.
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But wealthy account holders also tend to hold a sizeable share of liquid assets, in part because many are retired and want cash on hand.
A new report by SuperConcepts shows that self-managed funds held more than 12% of their assets in cash and short-term deposits at the end of 2022. Another 10% was held in fixed-interest investments which generate cash, according to an analysis of accounts that use the company’s services.
The Grattan Institute notes that many affected fund members would hold substantial assets outside of super, which could be used to pay tax bills.
Given the policy will not take effect until 2025, people can also prepare for any liquidity issues and reorganise their super investments accordingly, it says.
Some advisory firms have raised concerns that the new tax treatment could pose a problem for people who hold farmland or commercial properties in self-managed accounts, often leased back to their own businesses.
Matt Grudnoff, a senior economist at thinktank the Australia Institute, says that those farms and other businesses presumably generate income that could go towards the tax bill. Besides, such leasing arrangements, while legal, aren’t what super is designed for, he says.
“From a public policy point of view the change in rules limits the ability to engage in tax avoidance – that is not a negative outcome,” says Grudnoff.
“You’ll pay a fairer tax.”
Is it equitable?
The changes have been described by the federal opposition as an attack on middle Australia because the $3m threshold is not indexed, which means more people will hit that limit in future years.
This is a point made by the Financial Services Council, an industry body, that says 500,000 current taxpayers will eventually hit the cap.
The council cites modelling that shows a 55-year-old dentist earning $220,000 a year, with a current super balance of $1.4m, would reach the $3m threshold by the time they retire at age 65.
Given super is designed to provide a dignified and comfortable retirement, the changes are unlikely to cause any threat to that goal, nor cause the hypothetical dentist financial distress.
The Deloitte partner Andrew Boal says the policy might need to be tweaked to make sure it is implemented fairly, even if its overarching idea will resonate with many.
“If someone has $3m in super, should the taxpayer be funding a tax concession on those investment earnings when they already have enough to live a dignified retirement?” he says.
“When you put it that way it looks like a reasonable policy approach to make the system more equitable and sustainable.”