First up, let me say that none of this is financial advice, and I’m not an accountant, nor am I a financial advisor. My perspective with this article is one where I am worried about the thin end of the wedge when it comes to governments passing legislation that has direct impacts on the everyday man and woman. And this is where the unrealised SMSF CGT is of concern.
So, you want the elevator pitch and not the fluff. Ok. Unrealised SMSF CGT draft legislation public comment closed yesterday. SMSF capital gains tax on assets that have NOT been sold presents very real risks to self-funded retirees, and those who will need to fund their own retirement in years to come.
But why do I see it that way?
The world of superannuation is no stranger to change. However, the recent draft legislation proposing a capital gains tax (CGT) on unrealised capital gains within Self-Managed Super Funds (SMSFs) has stirred significant debate.
While the intent behind the legislation might be to ensure a fair tax system, the potential ramifications for SMSFs are concerning.
In this article, we’ll delve deep into the intricacies of SMSF CGT, the current tax rate, and the risks posed by the proposed changes.
Keep in mind that as a self-funded retiree, your ability to participate in your own financial future includes standing up to attempts to undermine your wealth and your right to protect the fruits of your labour. This is your economic energy. Everyone has a right to be rich, but will they act on it?
What is Capital Gains Tax?
Capital Gains Tax, commonly referred to as CGT, is a tax levied on the profit made from selling an asset that has increased in value.
Traditionally, CGT is applied to “realised” gains, meaning it’s only due when the asset is sold and the gain is effectively realised.
The recent draft legislation, however, proposes a shift from this norm, targeting unrealised capital gains within SMSFs.
Yes, folks, that means you will owe taxes on the assessed uplift in the value of your assets even if you don’t sell them!
The Current SMSF CGT Tax Rate Explained
Currently, SMSFs enjoy a concessional tax rate on income and realised capital gains. This rate is designed to encourage long-term saving and investment for retirement.
The concessional rate acknowledges the unique nature of SMSFs and their role in providing Australians with control over their retirement savings.
However, the introduction of a CGT on unrealised capital gains threatens to disrupt this balance, and may well erode the asset base of those who are seeking to fund their own retirement, therefore taking pressure off the government and the welfare system.
Counterintuitive much? Or, is there something else at play here?
How Income and Realised Capital Gains in an SMSF Work
Within an SMSF, income can be derived from various sources, including rent, dividends, and interest. Additionally, when an asset within the fund is sold for a profit, this results in realised capital gains.
Both income and realised capital gains are currently taxed at the concessional SMSF rate. This system ensures that SMSFs are not penalised for making prudent investment decisions and rewards them for effectively managing their assets.
Since the early 1990s, the push has been on in Australia for people to look after themselves in their golden years. The question a lot of us found ourselves asking back then was; when I get to retirement age, will there be a pension available to me?
After a huge $400M show with the #voice and while we're all looking the other way, they submit draft legislation (https://t.co/e0eOrotcf3) to erode the financial future of Aussies with #SMSF plans for their retirement. Public comment closes TODAY!!! Disgusting! @nomadcapitalist— ₿ is╭∩╮( •̀_•́ )╭∩╮💰 (@un_tldr) October 17, 2023
Why ‘Realised Capital Gains Allocated Proportionately to Beneficiaries’ Matters
This may play an important part in the next few years, so study up!
In an SMSF, it’s essential to understand that beneficiaries might have both accumulation and pension accounts.
When an asset is sold, and a capital gain is realised, this gain is allocated proportionately between these accounts. This allocation ensures that the SMSF capital gains tax is applied fairly, reflecting the different tax statuses of accumulation and pension phases.
It’s a system that recognises the diverse nature of SMSF structures and the varied needs of its beneficiaries.
If the draft legislation becomes an Act of Parliament, you’ll want to be on the front foot from a risk reduction strategy perspective.
The Risks of the SMSF Unrealised Capital Gains Draft Legislation
From where I stand, the proposed SMSF CGT on unrealised capital gains presents several risks:
- Forced Liquidation
- As previously discussed, many SMSFs hold illiquid assets. The proposed tax could force these funds to sell assets prematurely, potentially at suboptimal prices, to meet tax obligations.
- Erosion of Retirement Savings
- By taxing unrealised capital gains, the legislation risks eroding the asset base of SMSFs, jeopardising the financial security of retirees.
- Economic Implications
- A forced sale of assets can depress market values, impacting the broader economy. And consider this, if retirees turn to public welfare systems due to financial strain, it places additional pressure on public resources.
- Complexity and Administrative Burden
- The proposed SMSF CGT adds a layer of complexity to the already intricate world of superannuation. Managing unrealised capital gains and ensuring compliance will increase the administrative burden on SMSFs.
My Public Comment Submission
Department of the Treasury
Re: Public Comment on Draft Legislation Concerning Taxation of Superannuation Balances Exceeding $3 Million
I am writing to express my concerns regarding the proposed draft legislation that seeks to tax unrealised capital gains on superannuation (SMSF) balances exceeding $3 million.
While I recognise the government’s intent to ensure a fair and equitable tax system, I believe this proposal may lead to unintended negative consequences, especially for self-funded retirees with investments in illiquid assets.
1. Illiquid Assets and Forced Liquidation:
Many self-funded retirees have strategically invested in illiquid assets, such as real estate or private equity, as part of their long-term retirement planning.
The proposed tax on unrealised gains could necessitate these retirees to liquidate a portion, if not all, of these assets to meet their tax obligations. Such forced liquidations can result in suboptimal sale prices, significantly eroding the asset base that retirees have painstakingly built for their financial security.
Add to that, the nature of many illiquid assets means they cannot be partially sold, which could lead to a disproportionate erosion of retirees’ asset bases, jeopardising their future and that of their families.
2. Rising Cost of Living:
The ever-increasing cost of living means that the purchasing power of today’s dollar will inevitably diminish in the future. The static $3 million threshold, while appearing substantial today, may not afford the same financial security in the years to come.
The absence of indexation for this threshold further magnifies this concern, potentially ensnaring an increasing number of retirees under this tax net as time progresses.
It’s worth noting that the methodologies underpinning CPI calculations are not static, and as such, even if indexed, it is unlikely to truly reflect the real-world financial challenges faced by retirees.
3. Erosion of Asset Base and Long-Term Sustainability:
As previously highlighted, the proposed legislation could significantly erode the asset base of retirees.
This, combined with the potential need to liquidate illiquid assets at less-than-ideal prices, poses a grave threat to the long-term financial sustainability of self-funded retirees.
The very foundation of an SMSF is to empower retirees with control over their financial destiny.
The government’s shift in the mid-1990s towards a self-funded retirement model was a recognition of the challenges posed by an ageing Australian population.
This draft legislation, in my view, undermines that very principle, penalising a segment of the population for their foresight and diligence in planning for their retirement.
4. Broader Economic Implications:
Beyond the individual, there are wider economic ramifications to consider. Forced asset liquidations can depress market values, affecting not just individual retirees but the broader economic landscape.
As a result, I can see a time that if under such circumstances retirees find themselves financially compromised due to an eroded asset base, they might turn to public welfare systems, placing undue strain on public coffers.
This scenario is antithetical to the very reason many worked diligently to ensure self-sufficiency in retirement.
While I comprehend the rationale behind the draft legislation, its potential ramifications for self-funded retirees are deeply concerning.
I implore the Treasury to re-evaluate the proposed measures, particularly the taxation of unrealised gains and the static nature of the $3 million threshold. It’s imperative to find a balance that ensures tax equity without undermining the financial stability of our retirees.
Thank you for considering my feedback. I trust that the final legislation will reflect the concerns of all stakeholders, ensuring a just and sustainable superannuation system for all Australians.
While the intent behind the draft legislation on SMSF CGT might be well-meaning (yeah, right – we know it is because the money printer goes ‘BRRRRRTT’), its potential implications are deeply concerning. Taxing unrealised capital gains within SMSFs threatens the very foundation of the self-managed superannuation system.
It’s crucial for stakeholders to understand these risks and advocate for a balanced approach that ensures tax fairness without compromising the financial stability of Australia’s retirees.
As we navigate these uncharted waters, one thing is clear: the proposed SMSF CGT on unrealised capital gains requires careful reconsideration at the very least. My honest opinion is that it would be one of the biggest financial mistakes ever made in a nation’s history.