The Federal government’s plan to double the tax rates of the earnings of Australians with superannuation accounts of over $3 million will raise key operational issues including the calculation of unit pricing, leading to increased cost to members.
Under the proposal changes, future earnings above the $3 million threshold during the accumulation phase will be taxed at 30 per cent from FY26. However, funds below the $3 million threshold will continue to be taxed at a concessional 15 per cent. The proposed changes will affect around 80,000 people and generate around $2 billion in tax revenue.
“The proposed changes will add more complexity for member administration and also for the Australian Taxation Office as this is a new way to apply tax,” David Braga, principal at consultant Jefferson & Shea Group who advises on custody matters tells Investment Magazine.
“This will lead to higher costs to initially upgrade the system and then ongoing maintenance for the upgrade.”
In a media release on Tuesday, financial services minister Stephen Jones explained the high government debt and growing spending on defence, health, aged care and NDIS meant “we need to make responsible budget choices to ensure generous superannuation tax breaks are better targeted and sustainable”.
However, Braga believes the new tax proposal could be workable across both SMSFs and super funds if the earnings are taxed at a personal level. He explains under Division 293, the ATO would need to apply a new earnings calculator to account for the higher 30 per cent rate to a relevant member’s annual assessable income.
“The issue is when people have more than one account and how the individual member earnings will be calculated compared to the funds taxable income,” he says.
While the Financial Services Council acknowledged the certainty the changes afforded to Australians with high super balances, it highlighted issues around the long-term impact of the non-indexation of these high balances, the interaction with the transfer balance cap and how investment earnings are calculated.
Many super funds Investment Magazine contacted declined to comment as they were still working out the policy and how it would apply in their administration services.
Unit price at risk
The change will potentially create a two-tier tax regime for earnings in super, making it difficult for funds to work out some of the earnings for a certain cohort of members when assets are pooled.
“Working out how to segregate some of the earnings for a specific member when assets are pooled across potentially millions of members will be a challenge,” a senior industry fund executive says, who declined to be named due to the sensitive nature of the matter.
Another source also had similar concerns. “Combining unit prices which incorporate accrued tax is necessary to ensure member equity, however having multiple tax rates based on balance is akin to mixing water with oil,” he says.
“On first reflection, there is no obvious way existing unit pricing processes can be adjusted to account for multiple taxation rates without creating member equity issues or introducing significant degrees of complexity.”
