Word on the street is that the repugnant Division 296 tax will become reality, despite the outcries from the SMSF Industry about taxing unrealised capital gains. The Coalition have said they will scrap the proposed tax if elected but who knows if they will be, and with a proposed 1 July 2025 start date, it is time to start preparing for the worst.
Of course, financial advisers are best placed to provide personal advice to SMSF’s who find themselves in the unenviable position of being subject to this proposed new tax, now or in future.
Part of their advice process might consider some of the practical administrative factors that will impact on the ease of calculation and the ability to plan for and ultimately pay this tax for those affected.
Calculating a Member’s Total Super Balance (TSB)
Members with multiple superannuation accounts are reliant on accessing their MyGov account to pinpoint their TSB. Each Fund reporting an account balance that makes up a Member’s TSB may be using different methodology to arrive at what they consider to be “market value”. Only in an SMSF will the Member have any control over how the valuation is arrived at and importantly what amount is reported.
Remembering that the SMSF Annual Return allows reporting under Item X1 and X2 whereby a member’s balance can be quantified as the actual amount that would be payable to them if they voluntarily ceased to be a member. This amount can factor in all the costs to remove the Member from the SMSF including realisation costs, exit and other fees. It is this reduced amount that is counted towards the Member’s Total Super Balance (noting the proposed new tax only applies if the Member’s TSB is above $3 million).
From an administrative perspective, it is worth having the financial adviser considering the merit of consolidating superannuation accounts (noting the potential impact on insurances, returns etc). Only having to reference the SMSF means that the Member’s TSB can be easily obtained, and importantly, it can be calculated and reported consistently.
Altering the basis of accounting
Another avenue where an SMSF provides greater control over the valuation of the Member’s interest for TSB purposes is the basis of accounting. Instead of preparing the accounts on a cash basis (and then calculating a reduce amount to report under X1 and X2 as noted above), the Trustee’s might instead adopt tax effect accounting whereby they take up the expected realisation costs and tax on unrealised gains in the annual financial accounts.
However, unlike the calculation of X1 and X2 (which isn’t audited), utilising a different basis of accounting means that these amounts are subject to audit scrutiny which may add unnecessary additional time and cost in explaining and supporting how the amounts were arrived at.
Understanding how different types of Member Accounts are impacted
For the purposes of the proposed Divisions 296 tax, reversionary pensions will be treated differently to non-reversionary pensions so it will be necessary to consider how this will impact SMSF clients.
What might now be considered convenient or favourable from a TSB perspective may not align with what is favourable from a Division 296 perspective.
In our experience, we encounter SMSFs that have Members with multiple pensions and multiple reversionary options adopted. This adds to the complexity for any financial adviser engaged to review the impact of the proposed Division 296 tax on the Member.
A financial adviser is best placed to assess whether multiple pension accounts should be consolidated ahead of 30 June 2025 (noting the potential impact on the tax-free percentage or Centrelink and other benefits).
They can also consider whether the adoption of reversionary or non-reversionary should be consistent across pension accounts retained for the Member.
Increased Audit Scrutiny
For those members with balances well in excess of $3 million, they will want to value their account as high as possible as at 30 June 2025 as the proposed new tax only applies to “earnings” (including unrealised gains) after 30 June 2025. It will be necessary to have sufficient documents to show the amount recorded is “market value”.
Property and unlisted investments will be obvious investments for the auditor and Australian Taxation Office (ATO) to scrutinise. It may be prudent to consider audit insurance to cover the cost involved in having the ATO audit an SMSF, particularly if the valuation as at 30 June 2025 is a substantial change from previous years.
It might also be a good time for the financial adviser, to consider SMSFs with difficult to value assets and the merit in keeping those investments held in the SMSF.
Keeping enough liquid assets
For those Members impacted, they will have the choice of paying the proposed new tax personally or via the SMSF. Either way, there needs to be liquid assets to make the payment.
In the SMSF, reviewing the Investment Strategy will be necessary for those impacted. It may be a matter of the financial adviser, re-balancing the portfolio to provide for sufficient liquid assets to cover the new tax or they may consider whether adding new contributing members is a sensible option.
Engaging Specialists
With a decreasing population of financial advisers and SMSF auditors, now is the time for SMSFs to engage with the specialists they need. Leaving it to the very last minute might mean they simply won’t have access to the knowledge and skills to best guide the outcome that is appropriate for them.
Even at an administrative level, utilising a service that is properly set up for SuperStream (that will administer the proposed new tax); that has software systems ready to utilise tax effect accounting or calculate X1 and X2; and that has data feeds set up so that Member balances are current and the new tax is properly paid and applied, will be a must.
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