A bold statement: The revised legislation is not yet ready for implementation, and here's why it needs further refinement.
Unfair Scenarios and Unintended Consequences
Peter Burgess, in an interview with SMSF Adviser, expressed his concerns about the revised draft bills. He believes that while simplicity is a desirable goal, it should not come at the cost of unfair outcomes for certain individuals. The current legislation, as it stands, fails to strike the right balance between simplicity and equity.
There are numerous scenarios that could lead to unintended and unfair consequences. For instance, the imposition of Division 296 tax on individuals who may not directly benefit from the superannuation earnings that triggered the tax liability is a cause for concern. Additionally, attributing inappropriate amounts of Div 296 earnings to certain members is another issue that needs addressing.
A More Efficient Approach?
The association's submission to Treasury highlights potential alternatives that could be more cost-effective and less complex. They argue that the practical changes proposed in October 2025, while providing a better method for calculating superannuation earnings, still require further consideration to ensure fairness.
The Impact of Insurance Proceeds
One of the key concerns raised by the SMSFA is the treatment of insurance proceeds. Individuals who have made structured settlement contributions are excluded from Div 296, but there is no such concession for those who receive TPD insurance proceeds via superannuation. These proceeds often represent substantial amounts needed for ongoing medical and care expenses.
The SMSFA proposes either excluding impacted individuals from Div 296 altogether or adjusting their total super balance (TSB) value to account for the insurance proceeds received. This ensures fairness and prevents unintended tax liabilities.
Unintended Consequences of the TSB Integrity Measure
The association's submission also highlights potential issues with the proposed TSB integrity measure. Using the greater of the TSB opening and closing values could lead to unintended consequences in various scenarios.
For example, members who suffer losses due to external factors, such as the Shield and First Guardian cases, would have their Div 296 tax liability calculated based on balances that have disappeared. This is an unfair outcome and goes against the intended policy.
Furthermore, an individual who experiences a temporary spike in their TSB at the 'wrong' time could be penalized twice, which is an unintended and undesirable consequence.
A Case Study: Sarah's Situation
To illustrate this point, let's consider Sarah's case. Her TSB from the previous income year was $2.7 million, but due to a stock market rally just before the end of the income year, her TSB increased to $3.5 million. This higher figure is used to assess her for Div 296.
However, shortly after the new income year began, there was a stock market correction, reducing her TSB below $3 million. By the end of the income year, her TSB had decreased to $2.5 million. Despite this, Sarah is still subject to Div 296 tax because her TSB just before the start of the income year was $3.5 million. This is an unfair outcome as her TSB was below the large superannuation balance threshold for most of the income year.
Equity and Fairness: A Delicate Balance
The association understands Treasury's intention to capture individuals who withdraw large amounts from superannuation in the same year their fund's Div 296 earnings are high. However, the proposed approach lacks equity and fairness. The TSB measure, while imperfect, is the best available method, but it should not create artificial elements that lead to unintended consequences.
A Simpler Solution?
The SMSFA questions the additional cost and complexity of this measure, especially considering the likely small increase in tax revenue. They recommend using a fixed TSB test time to increase simplicity and avoid unintended consequences. 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 also suggests giving the ATO Commissioner discretion to adjust a member's TSB calculation if the proposed approach results in an outcome that contradicts the policy's intent. This ensures fairness and aligns with the intended policy goals.
Final Thoughts and a Call for Discussion
The revised legislation aims to simplify superannuation earnings calculations, but it still requires refinement to ensure fairness and equity. The association's submission provides valuable insights and potential alternatives to consider. 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 opinions and engage in a constructive discussion in the comments below!
