IFPA voices concerns over proposed super tax

The federal government announced at the end of February that individuals with superannuation balances surpassing $3 million will see their tax rate double to 30 per cent from 2025–26.

IFPA head of superannuation and financial services, Natasha Panagis, said that while the association wants the superannuation system to be fair and equitable for all Australians, the introduction of another “cap” is unnecessary. 

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According to IFPA, mechanisms already in place — such as contribution caps and the transfer balance cap on pensions — are adequate in addressing the issue that the government has deemed a problem.

“The obvious approach is for the extra 15 per cent tax to be applied to actual taxable income,” Ms Panagis said.

“Existing software programs already allow superannuation funds to report and calculate actual taxable income at the fund level and distribute the net amount to each member’s account.

“Only a slight modification would be required to break up the fund’s earnings into two components for each member, being taxable earnings and untaxed earnings (unrealised gains).

“This approach is the simplest way to tax actual earnings on member balances that are above $3 million as it is based on current tax law principles and will mean members will not be taxed on any unrealised gains.”

Taxing unrealised gains, according to Ms Panagis, is a major flaw in the proposed model.

“This issue has caused the most angst as this new tax is a fundamental shift from the way the existing Australian tax system works,” she said.

“It goes against the general tax principle of paying tax on income that has actually been derived or on actual realised capital gains.”

While the government has said that its proposal is the easiest to administer under existing reporting systems, which will keep compliance costs low, Ms Panagis said simplicity of reporting should not come before fairness.

“Taxing actual taxable income would effectively deliver the policy’s stated intention without all of the issues that come along with the proposed model,” she said.

“Should the government retain its proposed measure, we strongly recommend changes are made to make the proposal equitable and fair.”

Measures that Ms Panagis suggested include not taxing unrealised capital gains, enabling individuals to receive a refund of tax previously paid if their balance reduces to below $3 million in a subsequent year, ensuring the $3 million threshold is indexed to keep up with inflation, excluding certain amounts from a member’s total superannuation balance, and allowing members to remove the excess from their superannuation if they have not met a condition of release.

“We urge the government to strongly reconsider the proposed model as the main driver seems to be the need for an urgent tax grab to address the Commonwealth’s debt position that the government does not need to pay back if markets crash, with a more ‘equitable’ superannuation system running a distant second,” Ms Panagis concluded.