We all know about the well-known "Death and taxes" idiom that signifies the inevitability of these two things in life. What seems to have become just as inevitable is Labor's proposed super tax. So how will it work? Here's the most succinct explanation yet:
A person has a super balance of $4 million at the beginning of the year and $4.5 million at the end of the year, a $500,000 increase.
Of that increase, $25,000 is a new contribution made by the person or their employer, which was taxed at 15 per cent.
Subtracting that amount, the person has $475,000 in earnings.
These earnings are already subject to the existing 15 per cent earnings tax.
But because the person has a super balance above $3 million, they will also pay the new additional 15 per cent super tax.
This does not apply to the full amount — it is scaled by the fraction of the person's super balance that is above the threshold.
In this case, one-third of the person's $4.5 million super balance is above $3 million. That means they pay the extra 15 per cent tax on one-third of $475,000 — a tax of $23,750.
A main criticism against this tax is that it would apply not just to "realised" earnings like dividends or interest income, as is now the case, but also to "unrealised" increases in the value of assets like property. If a house, a painting or a farm is held in someone's self-managed super fund and it becomes more valuable, they would today only pay tax when that value is realised upon sale, but under the new arrangements that would change for those with over $3 million. The person in the example above, who has $4 million in super and then "earns" $500,000, would have to pay $25,000 in tax even if the "earnings" come from the unrealised increase in value of a house or some other asset that is not liquid.
It seems it is the super industry itself that is driving this because it is easier for them to implement the tax this way. Large super funds "pool" the money of their members and invest it as one, earning dividends and interest at the fund level. Under current arrangements, they pay 15 per cent tax on behalf of all their members whenever they realise a gain. But they say applying a higher rate to a small proportion of members every time would be complicated, whereas applying the new rate once a year based on members' total fund balances is easy.
Apart from that technical reason, Labor argues it is fair for the small minority of people who put millions' worth of assets into their self-managed super funds to pay more tax. They would say that, because they haven't got the guts to make the fairest tax change of them all: increase the GST from 10% to 15%
P.S. If you need help with your SMSF, check out SuperHelp Australia. I've been with them since 2008, and in 17 years they've never let me down!
