Tax Institute tells Senate changes needed to super tax proposal

In her presentation to the committee, Abdalla reiterated the concerns raised in the institute’s previous submission regarding the newly proposed Division 296 tax and the taxation of unrealised gains.

She also made several other recommendations including indexing the proposed threshold of $3 million, introducing a loss carry-back mechanism to allow individuals to recognise unrealised losses, and amending the adjusted total superannuation balance (ATSB) to account for the disproportionate impact on SMSFs.

Additionally, the institute urged the government to consider aligning the treatment of certain disability and injury payments with the proposed treatment of structured settlements, and to undertake further consultation on the appropriate treatment of proceeds and payments relating to family law splits.

“Our feedback is aimed at ensuring that the measure is appropriately designed and implemented to achieve the intended policy objective, within the principles of good law design,” she said.

“If legislated, the measure will tax unrealised capital gains, an approach that is contrary to the well-established approach under the Australian tax system which brings to tax capital gains when they are realised. The Tax Institute is of the view that the practical and financial burden of taxing unrealised gains far outweighs any perceived macroeconomic benefits and sets a dangerous precedent for our taxation and superannuation systems.”

Abdalla continued that if the government intends to proceed with the taxation of unrealised gains, it should limit its approach to this measure and recommended the proposed Division 296 tax should be amended to better ensure that it operates equitably and efficiently, reducing the adverse impacts of the adoption of taxing unrealised gains.

She said there is a need for a loss carry-back mechanism and although the measure proposes to allow negative superannuation earnings to be carried forward, there are many instances where carried forward losses may not be able to be utilised due to the taxpayer’s circumstances.

“Examples of these circumstances include the death of the taxpayer or significant market downturns following payment of a Division 296 tax liability relating to an earlier income year,” Abdalla said.

“Preventing taxpayers from utilising negative earnings while still collecting taxes creates asymmetrical tax outcomes and is also inconsistent with the general economic principles of taxing unrealised gains which should allow for timely recognition for losses.”

She added the Tax Institute believes the committee should consider allowing refunds of Division 296 tax paid in prior income years to the extent the taxpayer has “unapplied transferrable negative earnings” for the relevant income year.

“Under our suggested approach, taxpayers would be able to utilise their current year’s losses only to the extent they have paid Division 296 tax in a prior income year,” she said.

“This would promote a fairer, more efficient, and effective tax system by removing unintended and punitive timing consequences that result from a decline in asset values and the taxpayer’s circumstances. Alternatively, a refundable credit should be made available if the taxpayer or their estate is in a position where they will not be able to utilise all their carry-forward losses.”

Regarding the controversial issue of the death benefit payment, Abdalla said the proposed section 296-30 has the effect of subjecting only taxpayers who die on 30 June in an income year to Division 296 tax for that income year provided the other conditions are met.

“Taxpayers who die on any other day of that income year will not be subject to Division 296 tax for that year,” she said.

“The policy rationale for this outcome is unclear and inequitably results in some taxpayers being subject to Division 296 tax while others who died earlier in the same income year are exempt solely by virtue of the day on which they died. We consider this to be an anomalous outcome and recommend that this section be amended to exempt all taxpayers from liability to Division 296 tax for the income year in which they die.”