A number of major anomalies in the Federal Government’s proposed new tax on total super balances over $3m have become apparent with the release of draft legislation. We have summarised a number below for the information of clients.
Negative earnings cannot be carried back
The combination of including unrealised gains in the calculation of “earnings” in one year and the inability to carry back negative earnings from a later year can produce arbitrary and unjust results. For example, a member may have a total super balance greater than $3m at the end of year one and be liable for the tax due to an unrealised capital gain on a super fund asset, then incur a loss in year two if the gain reverses, but never be able to use the loss if their total super balance never exceeds $3m again. They have in effect paid tax on a gain that was never realised.
A member who has received a “structured settlement contribution” (a compensation payment for personal injury paid under a court decision) at any time in the past is not liable to pay Div 296 tax at all. This is intended to recognise that these contributions are usually large payments that can provide the funds for ongoing medical and care expenses resulting from serious injury and income loss. However, a member whose super fund receives a total and permanent disability (TPD) insurance payment does not enjoy this concession. Under the proposed legislation the receipt of a TPD insurance payment by the fund is excluded from the new tax by including it in the total of “contributions” subtracted in the calculation of “earnings” in the year it is received, but any earnings in later years arising from the investment of the TPD payment will be subject to the new tax. There seems to be an assumption that an insurance payout is more easily obtained and somehow less worthy of a major concession than a payment from a court verdict.
The estate of a member who dies “before the last year of the year” is not liable to the new tax. But the member’s estate is still liable if the member dies on 30 June. We have not seen an explanation of this odd inconsistency.
Under the current rules, the total super balance of an SMSF member can include a share of certain limited recourse borrowing arrangements (LRBAs) entered into by the SMSF. This applies to LRBAs entered into on or after 1 July 2018, if either the LRBA is between the fund and an associate of the fund, or the member concerned has met a condition of release with a nil cashing restriction. These conditions of release are retirement, terminal medical condition, permanent incapacity and reaching 65 years of age.
When introduced, the increase in total super balance where the LRBA is with an associate was said to address the risk that the terms of the LRBA were not on arm’s length terms. The increase in total super balance where a member has met a condition of release with a nil cashing restriction was said to address the risk of LRBAs being used to facilitate a recontribution strategy to overcome the restrictions of contribution caps. This would involve withdrawing an amount from the fund then arranging for an LRBA to inject funds instead of making a contribution. It should be said that neither expressed justification makes sense.
For the purposes of calculating the member’s total super balance for the purposes of the new tax, this adjustment arising from an LRBA is disregarded. It is a pity that the Government did not take the opportunity to repeal the adjustment entirely.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.