A Call for Fairness: Unraveling the Superannuation Puzzle
In a recent development, the SMSFA has voiced its concerns, stating that the revised draft legislation requires further refinement to achieve a fair and equitable outcome. Let's delve into the details and explore the potential implications.
The Quest for Simplicity: A Balancing Act
Treasury's pursuit of simplicity in the legislation is understandable, but as Peter Burgess highlights, it often comes at a cost. The current draft, according to the SMSFA, leans towards simplicity at the expense of fairness for a minority, and this imbalance needs addressing.
Unintended Consequences and Unfair Outcomes
The revised draft bill, while aiming for simplicity, has inadvertently created scenarios where individuals face unexpected tax liabilities. For instance, the association points out that the Division 296 tax could be imposed on individuals who are not direct beneficiaries of the superannuation benefit, leading to an unfair distribution of tax obligations. Furthermore, the attribution of inappropriate amounts of Div 296 earnings to in-scope members is another area of concern.
A Complex Web: CGT Adjustments and Cost Implications
The SMSFA's submission proposes a change to the CGT adjustment provisions, aiming to simplify their application. The association acknowledges that the decision impact analysis is pending, but it foresees substantial increases in implementation and ongoing costs for the superannuation industry. These costs, ultimately borne by all fund members, raise questions about the sustainability of Div 296, especially considering the expected revenue gain for the government.
Insurance Proceeds and Div 296: A Conundrum
The first concern raised by the SMSFA revolves around the total super balance reference amount and the impact of insurance proceeds. Individuals who have made structured settlement contributions are excluded from Div 296, but there is no such concession for those receiving TPD insurance proceeds via superannuation. The association suggests either excluding these individuals from Div 296 or adjusting their TSB value to account for the insurance proceeds received.
Unintended Consequences: Life Insurance and Death Benefits
The SMSFA's submission also highlights potential issues arising from life insurance policies within superannuation funds. When a member passes away, and life insurance proceeds are allocated to their account, it can lead to a significant increase in their balance. If the death benefit is not paid out before the end of the income year, it could result in an unexpected Div 296 tax liability. To prevent this, the association recommends adjusting the deceased member's TSB by the amount of life insurance proceeds received.
TSB Integrity Measure: A Potential Pitfall
The proposed use of the greater of the TSB opening and closing values in the TSB integrity measure could create unintended consequences, according to the SMSFA. Members who suffer losses due to external factors, as seen with Shield and First Guardian, would have their Div 296 tax liability calculated based on balances that have disappeared. Additionally, an individual with a temporary spike in their TSB at the 'wrong' time could be penalized twice.
A Case Study: Sarah's Story
Take the example of Sarah, whose TSB from the previous income year was $2.7 million. Due to a stock market rally just before the end of the income year, her TSB increased to $3.5 million, the figure on which she would be assessed for Div 296. However, a subsequent stock market correction reduced her TSB below $3 million. Despite her TSB being below the large superannuation balance threshold for most of the income year, Sarah would still be subject to Div 296 tax due to the temporary spike.
Equity and Fairness: A Missing Link?
While the SMSFA understands Treasury's intention to capture individuals who withdraw large amounts from superannuation in the same year as high fund earnings, the proposed approach lacks equity and fairness. The TSB measure, though imperfect, is the best available method, but it creates artificial elements that give rise to unintended consequences. The association questions the additional cost and complexity of this measure, especially considering the likely small increase in tax revenue.
A Call for Simplicity and Discretion
In the interest of simplicity and to avoid unintended consequences, the SMSFA recommends using a fixed TSB test time. Members who have not satisfied a full condition of release should not have their TSB determined as the greater of their opening and closing values. The association suggests giving the ATO Commissioner discretion to adjust a member's TSB calculation if the proposed approach leads to an outcome that contradicts the policy intent.
Final Thoughts and a Call to Action
The SMSFA's submission raises important questions about the fairness and sustainability of the proposed legislation. As we navigate these complex issues, it's crucial to consider the impact on individuals and the superannuation industry as a whole. What are your thoughts on these proposed changes? Do you agree that simplicity should not come at the cost of fairness? Feel free to share your insights and opinions in the comments below!
