OPINION | The imminent scrapping of capital gains tax relief for superannuation funds completing a merger is a mistake the government should fix in the May federal budget.
Temporary rollover relief, for super funds completing a successor fund transfer or merger, has been in place since 2009 and is scheduled to expire on July 1, 2017.
Given that the government and relevant regulators are all eager to encourage struggling super funds to consider mergers more seriously, to achieve long-term economies of scale for their members, the dumping of the CGT relief on rollovers is counterintuitive. It is also out of step with the comparable rules for corporations and makes no contribution to the government’s budgetary challenges.
The Turnbull Government has framed its approaches to reform around fee disclosure, governance and the default fund selection process as designed to encourage the industry to be as efficient and competitive as possible.
In this light, it remains somewhat bewildering the government has not seen fit to legislate permanent rollover relief for mergers of superannuation funds. Such relief would simply mean that no gains and losses would be recognised as a result of the transfer of investment assets in the merger. Such gains and losses would instead accrue when assets were sold in the ordinary course of business by the merged fund.
In its recent report into alternative models for default superannuation, the Productivity Commission noted a desire to “remove the fat tail of smaller funds”. Removing the temporary CGT relief on rollovers is clearly inconsistent with such aims.
Indeed, removing the relief for mergers is illogical on multiple levels:
- It is clearly an instance of tax settings being inconsistent with the broader agenda of the government and the Australian Prudential and Regulation Authority to encourage greater efficiency within the super industry.
- It costs Treasury revenue in the medium term. Key objectives for any merger include increasing returns, decreasing fees or both. If these objective are achieved, the merged fund should pay more tax than the two predecessor funds would have, as higher income or lower expenses both equal higher tax.
- Even where the tax costs are slight, some funds that prefer not to merge may point to the absence of CGT relief as part of their rationale.
- The government has provided equivalent relief for corporate mergers and restructures from the earliest days following the introduction of CGT in 1985, in recognition of the medium-term advantages that accrue to the entire Australian economy from regulatory settings that enhance efficiency and competition. Superannuation has grown to be a significant part of Australia’s economy and equivalent regulatory settings should apply.
Chance for good news
The present consensus view seems to be there will be few super tax changes or other super-related announcements in this year’s budget. An announcement for permanent CGT relief would seem to be a simple and sensible one.
The government could frame it as part of its overall effort to achieve greater efficiency and competitiveness in the super industry.
Provided it were measured over the medium term, the government could also frame it as having zero cost in the budget, or even as a positive contribution to medium-term tax revenues, as a more efficient superannuation industry pays more tax.
The Turnbull Government potentially faces pushback on other super initiatives this year, such as teething problems for its tax changes from July 1, and on other big-ticket items, like governance and default funds.
In this context, here is a chance for the government to get clear, positive comments from the super industry as part of this year’s budget. Given all of these pluses, it’s not clear what is holding it back.
Dana Fleming is head of wealth management and tax at KPMG Australia.