‘Highly vocal and very politically sensitive:’ Exploring the Div 296 super tax backlash

Dr Natalie Peng, a lecturer in accounting at the University of Queensland who specialises in superannuation, has unpacked some of the common arguments against the Div 296 super tax.

One of the biggest concerns raised by industry stakeholders – that some fund holders may not have the liquid assets to cover a tax on unrealised gains – would most prominently affect SMSFs, Peng told Accounting Times.

“The idea is that people with more than $3 million in super may not have the liquid assets to actually pay the tax,” she said.

“I think that is most relevant to the self-managed super funds that are concentrated in property or other illiquid investments.

“Only I think 80,000 members are expected to be affected initially. But I would say only a minority of those would generally struggle with liquidity. So still I think this group is highly vocal and very politically sensitive.”

The idea of fairness is at the heart of the Div 296 super tax debate. Proponents have argued that super tax concessions are too generous in Australia, leaving wage earners to shoulder the lion’s share of the tax burden while wealthy Australians enjoy concessional tax treatment.

Treasurer Jim Chalmers, who first introduced the policy, argued that Div 296 was necessary to curb the "substantial tax breaks” given to large super balances, which disproportionately flowed to older, wealthier Australians.

At the same time, tax experts have warned that the Div 296 tax on unrealised gains was unfair in principle, as it taxed ‘paper profits’ which may never be realised if asset values were to fall.

“We absolutely support changes that make our tax system more equitable. No one is arguing against high-wealth individuals paying their fair share,” The Tax Institute’s head of tax and legal, Julie Abdalla, said.

“We are concerned that Treasury is introducing a legal precedent that says Australians can be taxed on money they do not have and may never have. There’s nothing equitable about that.”

For APRA-regulated super funds, Peng said that there was little material risk that fund holders would pay tax on gains that never eventuated, due to a lack of year-on-year volatility and the ability to carry forward losses as tax credits in future years.

“For diversified APRA regulated funds I'd say that's not a major risk. These funds don't usually see huge year to year swings and the design of the Division 296 allows losses to be carried forward as credits. So it helps smooth things over time,” she said.

“In practice, the number of people facing this in a material way I would say is relatively small. So this concern is more about … principle and fairness than about the actual and widespread financial harm.”

That being said, SMSFs, especially those that hold volatile assets, would face a greater risk of paying tax on ‘paper profits’ that never eventuated.

“The sharper risk is for self-managed performance concentrated in only a small number of volatile assets like a single property or a handful of shares,” Peng said.

“Those SMSF members could feel unfairly taxed if they pay on a gain that later disappears.”

The Tax Institute also warned that large and unforeseen economic losses, which exceed cumulative future gains – such as those resulting from a market crash or severe recession – could minimise taxpayers’ ability to fully recoup losses.

Peng added that the Div 296 super tax could affect the investment strategies of Australia’s super funds, which collectively control $3.920 billion in funds. This could have sizable economic flow-on effects.

“Because of the long-term locked-in nature of super, a lot of the funds now are able to invest into a lot of start-ups,” she noted.

“If the rules are changed, things can change too, like the asset allocation, and it changes our economy as well.”

Given the highly controversial nature of taxing unrealised gains, Peng gave a few possible explanations as to why the government remained staunchly attached to the policy.

“The first is revenue timing. So by taxing unrealised gains, the government gets money into the budget sooner, which helps with future estimates,” Peng explained.

“The second is probably administrative simplicity. So a flat rule based on balances is easier to apply than tracking realisation events across millions of accounts with different assets.

“And the third is equity. So, without some form of unrealised gains tax, very wealthy members could defer their tax indefinitely simply by never selling assets. So from the government's point of view, that undermines the fairness in the system.”

While taxing unrealised gains would make the proposed Div 296 tax easier for the government to apply, it would boost the compliance burden for super funds, Peng noted.

“Super funds would need to revalue diverse investments every year, from listed shares to property and private equity. This would add significant cost and compliance burdens for funds and for the Australian Taxation Office,” she wrote for The Conversation.

She added that under the Div 296 tax, wealthy super holders with illiquid assets could have to make some difficult decisions, including selling assets, drawing down on savings outside of super or restructuring investments to hold more liquid assets.

“None of these is painless.”

“I understand why the liquidity argument resonates so strongly in the debate and particularly among SMSF trustees who often see their super as a family wealth vehicle, not just retirement income.”

This mindset of viewing superannuation as a family wealth vehicle rather than individual retirement income could be precisely what the government is trying to change through the Div 296 super tax, Peng said.

“Very large [super] balances largely benefit older, wealthy Australians. Meanwhile, the younger taxpayers are the ones footing the bill for budget pressures.”

“Reforms like Division 296, however imperfect, are partly about sending the message that super is meant to provide retirement income, not to operate as a tax-free inheritance vehicle.”