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Super tax might go down to the wire

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By John Beveridge - 
superannuation tax down to the wire
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We are approaching one of those interesting situations in which a controversial piece of legislation could go right down to the wire, leaving plenty of uncertainty in its wake.

The Federal Government’s planned big new tax on those with more than $3 million in superannuation has a starting date of July 1, 2025 but so far the bill has only passed through the House of Representatives, with the Senate remaining a potential stumbling block.

All of which means there is not a lot of wiggle room for the usual horse trading that goes on with minor parties to ensure the bill passes.

The looming Federal Election next year adds to the stakes here, so the backroom dealings will be particularly intense.

Plenty not to like

There is plenty not to like about this bill, even if you do think larger super balances should be hit with taxes – primarily the controversial proposal to apply the tax to unrealised gains within super funds.

That turns on its head the usual proposition that taxes on capital items only apply after assets have been sold and it will lead to plenty of complications including the need to sell assets to pay tax on the very assets the tax is being applied to.

It could be particularly problematic in situations in which illiquid properties are held within self-managed funds, particularly farms, with a simple re-valuation enough to trigger a liquidity issue and spark asset sales if avoiding the tax is a priority.

Another issue is the lack of indexation on the $3 million amount, which means the tax could creep up on a lot of super accounts over time and the fact that the tax could be payable on a paper gain but won’t be refunded should that paper gain later evaporate.

A clumsy and complex way to tax big super accounts

Of course, there is not a lot of sympathy for people with more than $3 million in super but it is hard to find too many experts who think that the way the Government is implementing this tax is anything other than clumsy and complex.

That ups the political stakes for the minor parties, which might want to add a tax to large super balances but are concerned about the design of the tax.

It also gives an escape clause for those such as the teal independents who don’t want to annoy the wealthy people in their electorates and can point to the poor design rather than the concept as being the reason why they can’t vote for it.

Don’t rush to act on this tax

Of course, the other issue is how you should react to the looming changes given they are not yet a certainty but are coming in relatively soon.

Firstly, if you are like the vast majority of people and your super is well below $3 million you can relax right up until the point when it approaches that level – if ever.

Secondly, if your super may be above that level, there is actually not a massive rush to make any changes to allow for the pending but not yet passed tax.

The reason for not being too hasty to react to this tax are – like the tax itself – complex and messy, but making a mistake could be quite costly so it is a good idea to be alert but not alarmed about what is going to be known as Division 296 tax.

Assessment date is a year afterwards

The most important reason is that while the tax is introduced at the start of the new financial year, that is not the date at which the tax will be assessed.

So, it doesn’t really matter if your super is above $3 million for almost the entire financial year, the tax will only be triggered if the balance is still above $3 million on July 30, 2026.

That allows for a lot of extra time to consider alternatives, depending on what eventuates out of the Senate.

That is a good thing because this is a complicated tax with lots of moving parts.

Some calculations by super experts show that for many, leaving the super in place and not withdrawing the amount above $3 million might still make sense, especially if selling an asset would result in a large capital gain within the fund.

Another consideration is the potential for the so called super “death tax”.

That tax could help to tip the scales on making a withdrawal, if it reduces future tax liabilities for non-dependent children.

For a full picture we will need to wait and see what eventuates and in many cases it will be a situation of getting professional advice about how to achieve the best outcome considering individual circumstances.