Superannuation shake-up: What division 296 means for you - talkBIG podcast | Season 3 Episode 11

Division 296, ongoing delays to tax legislation

Andrew Sykes (00:00)

There's been considerable media attention focused on the government's proposed Division 296 tax legislation, which would impose an additional tax on earnings from superannuation balances exceeding $3m. For anyone with a self-managed super fund or a balance over $3m, this change can affect you or will affect you and may cause you to rethink your retirement strategy.

There's certainly been a work in progress with the legislation first being announced in February 2023, and it's drawn a lot of speculation since then. So, we're going to have a bit of a talk about it today. Welcome to the RSM talkBIG podcast. My name's Andrew Sykes . I'm joined by Katie Timms, our super expert. 

How are you, Katie?

Katie Timms (00:48)

Very well, thanks, Andrew.

Andrew Sykes (00:50)

Yeah, and just fresh back in from a trip to Africa.

Katie Timms (00:54)

Bush back into everything full on at the moment now that Parliament's back in.

Andrew Sykes (00:59)

Back to Division 296. So Division 296, do we actually have law yet?

Katie Timms (01:07)

Would you believe it, we still don't have law. The government made a lot of commitments after winning the election: "That's it, we are proceeding with this tax. We're not intending to negotiate, we're not intending to change any of the terms." And yet here we are looking at another looming stalling of this legislation through parliament because they still don't quite have the support for it that they need.

Taxing unrealised gains

Andrew Sykes (01:28)

And the biggest conjecture and the hardest thing I think for people to understand is, this is actually a tax on unrealised gains. And generally in taxation legislation, we actually have to make a profit, don't we? Or a gain.

Katie Timms (01:42)

That's the issue that people have with this tax. The irony is most of the people I talk to about this that are impacted actually don't have a problem with paying more tax. They understand and acknowledge that our superannuation system is so concessionally taxed that maybe we've had it a little bit too good for a little bit too long. But the idea or the concept of paying tax on money that we've not actually earned is the thing that is really frustrating for people. And it is—despite the government saying that this does exist in other formats—this is probably the first time we've seen it really applied in this measure.

Andrew Sykes (02:14)

Yeah, and look, that's a lot of the commentary I get and questioning I get is that, hey, it doesn't apply to me, but is this the thin edge of the wedge? Are we going to see this and then this becomes normal in terms of capital gains? It's a real risk, isn't it?

Katie Timms (02:24)

Hmm. And it's the principle behind it that is the concern. People don't have problems paying tax when they've earned something. They don't have problems paying capital gains tax. But paying tax on money that is—it's hypothetical, right? You know, we've seen markets fluctuate, we don't know where the markets are going to go. We don't know what's going to happen in the property market. 

All of these things have an impact on this. So the idea that you're paying tax on money that is maybe not real to you, it's a big change for how our parliament has previously addressed tax issues.

Andrew Sykes (03:02)

Particularly when you see some very volatile asset classes such as listed shares, for example, which can go through some extremes of movements.

Katie Timms (03:11)

Absolutely, and you know we're seeing more of that, the impact of tariffs and all of those things. We are seeing markets move more. We talk a lot about how this impacts farmers, and property assets, but I've also had quite a lot of people that do like to, when they are younger, they're looking to invest for the longer term. They're willing to take more risks. They're kind of now thinking, well, I don't really want to take that risk in my super fund because I'm investing in an asset that is risky. It may pay off, which is fabulous for my retirement, but it also means that I might be paying a lot more tax than I should.

What is Division 296?

Andrew Sykes (03:41)

Yeah. So can you take us, just give us a brief overview of what exactly is this tax and how will it apply?

Katie Timms (03:49)

Look, so essentially what they're planning to do or what they've proposed to do in the draft legislation we've seen is they've said if you have a total superannuation balance of more than three million dollars, and so that means all superannuation accounts—so, you know, if people have more than one we have to add them all up—if that total is more than three million dollars, then what they're intending to do is to look at, well, how much has your balance moved over a 12 month period? We'll adjust for contributions and pensions, and then you'll pay tax on that market movement at the end of the year. Now, the one thing that is really important for people to remember is that it's not just a flat 15% that you pay on that. So let's say that your balance goes from $3m to $3.2m. That doesn't mean that you just pay a flat 15% tax on that $200,000. They then do another calculation to say, well, what proportion of your balance is over that $3 million cap? It's a little bit of a complicated calculation system, but it's important to note that if this isn't just a flat 30% tax on super anymore, there's a separate calculation that you have to apply in addition to your normal super tax.

Andrew Sykes (04:58)

So if my super balance went up—and I suppose clarifying as well because one of the number one questions I get is what if there's two members in the fund? Now that's per member balance, isn't it? So you could have mum and dad in a super fund, they've got two million dollars each, that won't apply.

Katie Timms (05:13)

Yep. Right, it is per member until one of them passes away and if the death benefit passes... so that's probably the other space where we're a little bit concerned, I guess. Because this three million dollars per member, I mean that's a big number let's be honest, it's a lovely number that you'd love to have in your retirement balance. But if you've got two members that say have one and a half million dollars each—which interestingly enough is actually the government's basis of $1.6m for a reasonable retirement—two people that have that. If one of them passes away and then the survivor inherits the balance, all of a sudden you're going to be subject to this tax. So there's a lot of people that maybe are going to be captured that hadn't thought about it.

Andrew Sykes (05:50)

Okay, so if we go back to your example there, so my super fund's gone up from $3m to $3.2m. How much am I going to pay in tax? What's that going to cost?

Katie Timms (06:03)

Look, yeah, the reality is not a lot. So the principle that I'm sort of trying to explain to people is the closer your balance is to $3m, the smaller proportion you're going to pay in tax because, they basically say you're $200,000 over the 3.2 million and then apply that proportion for the tax. So if you have a $6 million fund, well, the tax you're going to pay is a lot more versus a fund that maybe is just over the balance.

Andrew Sykes (06:22)

Okay. And that's because three million of your balance is over that $3m. So that's 50% of your super fund balance. So you're going to pay more of that movement.

Katie Timms (06:35)

Correct. Yes.

Is div 296 adding complexity to superannuation without increasing tax revenue?

Andrew Sykes (06:38)

So what this is doing is adding another layer of complexity onto a very complex system.

Katie Timms (06:46)

Yes, yes, I've been working in this industry for more than 20 years now and I can tell you it's never been more complex than it is right now. You know, the fact that we've got multiple caps that we're trying to deal with. We've got a total super balance, which is, the balance that you've got for multiple caps. You've got your pension cap, your transfer balance cap, you've got division 293 tax, you're now going to have division 296 tax. It is more complexity. Potentially maybe for less benefit than they think.

Andrew Sykes (07:13)

Okay, yeah, so it's not going to generate as much in tax revenue as was initially feared. And that's because of that proportional approach. So just to make it clear to everyone, it's really just going to be that proportion of your super fund that goes up, that is over the three million. You're not all of a sudden going to be taxable on all of it. And then only a portion of that gain over that three million.

Katie Timms (07:45)

One of the concerns that everyone had initially was that is there a better way to do this? Because if you were applying that calculation to an actual income number, people actually would have no issue with it. It's the fact we're applying it to a number that is really made up in an essence, you know, it's not a profit, as you said.

Addressing misconceptions: This is not a 30% Tax

Andrew Sykes (08:01)

Yeah. So why are people calling it a 30% tax then?

Katie Timms (08:05)

Look, let's be honest, there's a lot of media that is talking about this. I mean, it's great media, let's be honest, but they're looking at it as a, you're already paying 15% tax on earnings in your super fund. And those are earnings according to traditional methodology, which is on actual profit, actual income. And then this is an additional 15% tax.

It is not a 30% tax. It's not, that if you're over that balance, all of a sudden your income tax percentage for super is 30%. They are two very different taxes. And interestingly enough, it's also really important to remember, this tax is a personal tax liability. So while it is calculated on your superannuation balance, it actually is payable by you personally, not necessarily by your super fund.

Andrew Sykes (08:51)

Okay, so you'll get an additional tax assessment outside of your super fund. So that takes away that objection. Well, what if my super fund doesn't have the cash to pay?

Katie Timms (09:01)

Yeah, look, it does to an extent. Now this operates similar to the Division 293 tax, which is the tax on higher income earners' contributions, in that you can elect for your super fund to pay it. So if you get the tax liability in your own name, you don't have the cash to pay for it, you can apply for your super fund to pay for it for you. The problem arises is that if the cash also isn't there. If the cash is not in the super fund, the cash is not in your own name, then what do you do? And that's where you sort of start to run into problems.

Farmers are disproportionately impacted

Andrew Sykes (09:30)

Well, hopefully not have to sell assets to fund the tax.

Katie Timms (09:33)

Well, hopefully, I mean, we've spoken to quite a lot of farmers about this issue because these are people who are probably disproportionately impacted, I think. You know, farmlands tend to jump in value, but we don't see the same rental yield increases. So the cash coming in doesn't necessarily reflect what the market movement is doing. And that's really the area where we've seen the most concern is that, well, what happens if there's not the cash? What happens if that assessment comes in in a year where there was a drought?

Andrew Sykes (09:40)

Mmm.

Katie Timms (10:01)

Or where grain prices have dropped or where something has happened and the farm doesn't have the income, the super fund doesn't have the income, what do you do in that instance?

Andrew Sykes (10:09)

So you would say that's the main objection to the tax would be...

No indexation on $3m cap

Katie Timms (10:13)

That's probably one of the two. The other objection we've got is that it's not indexed. So that number of $3 million at the moment, it's just a flat $3 million cap. There's no room in the legislation to increase it. Look, we've heard a lot of the responses from parliament to be, well, we'll just change the legislation to make that happen. Would we? Are they going to? It just requires someone to proactively do that. And I think it's easier to not.

Andrew Sykes (10:18)

Mmm. Yay.

Katie Timms (10:40)

To not do it. So that's probably where we're concerned as well.

Andrew Sykes (10:43)

Seems a really clunky way to do it though, to have the parliament regularly maintain it rather than having it indexing. So we will see some creep there as super balances go up and asset values go up with inflation. We could see a lot more people affected.

Katie Timms (10:46)

Exactly. Absolutely. I mean, if we look at the transfer balance cap, so that is one of our other wonderful caps that we've got that sit in super land. That's the limit to how much you can start a pension with. Now in 2016, that number started at $1.6 million. This year, that's now gone up to $2 million. So over that time period, that has actually gone up, by $400,000 because it has indexation built into the cap. That wouldn't be the case for this Division 296 tax, that number would still be at 3 million, where maybe it should actually be at 3.5, 3.6. And that's a really live example of how bracket creep can happen.

Andrew Sykes (11:38)

Yeah, and that's really interesting too, because if we apply the rule of 72, divide 72 by your return to work out how long it'll take to double your investment, we're only talking about 12 years at 6% for a super fund to double in value. So this could impact, while there is a lot of talk at the moment saying it's only a very small proportion of the population that impacts.

Katie Timms (11:43)

Exactly.

Andrew Sykes (12:00)

There definitely seems to be some room there to capture a lot more of us, doesn't there?

Katie Timms (12:06)

Absolutely.

Will the Greens force a change in the div 296 legislation?

Andrew Sykes (12:07)

So do you think that will change? Do you think we'll see some indexation? I mean, just in general, because we did note before that we've had a delay of two weeks starting this legislation. This is further discussion between the government and the Greens. What is that discussion on? Is it on indexation?

Katie Timms (12:24)

So indexation is one of the measures. So the Greens currently have two changes they would like to make to this. One is, yes, they think it should be indexed, but the second one is they think the cap should be two million, not three million. Now that would absolutely open this up to a much bigger number of people. So that's concerning in itself because we're now, it's the 28th of July, this was supposed to start on the 1st of July. So we're already almost a month retrospective.

Andrew Sykes (12:38)

Mm.

Katie Timms (12:52)

We're not going to talk about it for another two weeks. It does seem like both groups are sort of sitting pretty hard line on this. How long is it going to take for us to actually get an idea of what it's actually going to look like? Because we're back in this unsettled position.

Andrew Sykes (13:03)

Mm. Okay, so if we see $2 million that will certainly change it. Do you think, where do you think it's going to land? Do you really think we're going to see...

Katie Timms (13:21)

Honestly? I probably had more questions about this the first time it was, you know, because it was presented to Parliament last year. And it does sort of seem like both sides are really sitting firm to what they want to see. Last year, the Greens also said they wanted to see limited recourse borrowing arrangements scrapped for super funds. So they said, in addition to this, we want this as well. That seems to have dropped off at the moment from that conversation. But both sides seem to be sitting really firm on what they believe with no negotiation.

Andrew Sykes (13:37)

Hmm.

Katie Timms (13:48)

Now to me, that means it's not gonna go anywhere, which means both sides are gonna miss out on this and we may end up back at the drawing board as to well, how do we actually make this a fairer super tax system, which might be a good thing because it might mean more consultation. I suspect one side is going to wiggle. I suspect that might be the Greens and we may see no indexation with $3 million, but I will remain hopeful that we get at least indexation brought in.

Example: Carrying forward a loss

Andrew Sykes (14:15)

Okay, so assuming that that comes in and we've got this tax, a couple of questions from me. So one year I have a good year and my, it's been a massive year in the share market. My speculative shares have finally come home and my super is valued at gone from $3 million to $4 million. I'll pay a proportion of tax on that unrealised gain.

Katie Timms (14:25)

Thanks.

Andrew Sykes (14:39)

What happens in the next year when my spec shares fall back down again?

Katie Timms (14:43)

Yeah, so the way the system is proposed to work is that it's treated almost like a capital loss. So you don't lose it, but you don't get a tax refund for the tax you've already paid. So in essence, what it means is that they'll say, well, this is how much of a loss you've got. We'll carry that forward until hopefully your spec shares go back up again, and then you can use up that loss so you're not paying that tax again. The downside to that, of course, is that if you've had an amazing speculative year and then they fall and then recover you've paid tax on the way up you've got a wonderful carrying forward loss but do you ever get a chance to use that again?

Andrew Sykes (15:19)

Yeah, and that's really tough because I did read a statistic over the weekend preparing for this podcast that 70% of listed shares suffer a 40% price decline at some point, a permanent price decline in their listed history. So that's a really rough one. I will say it's a really good, what that says to me is go and see those good people at RSM Financial Services and invest, invest my super fund a little bit better.

Added complexity, compliance burden and pressure on auditors

Andrew Sykes (15:46)

So how's this going to work in practice? I mean, we do know that we have to get to a compliance process with our super funds and they're audited. How is there any detail on how we're actually going to value the assets? When they're going to be valued? What does this all look like from an actual compliance perspective?

Katie Timms (15:54)

Mm-hmm. Yeah, this is one of the, I guess, unintended consequences a little bit of this. And maybe leading from the fact that, you know, some of the consultation that was done initially maybe wasn't done with actual practitioners who have to deal with this sort of thing day to day. So there is law currently that says your super fund assets have to be valued at market value every single year. So that has been in law and that's been in law for quite a long time. However, for some assets, it is a little bit difficult to kind of go well what actually is value if you've got unlisted companies, if you've got property trusts and these sort of things, it's a little bit hard sometimes to get a value. And in addition to that, then add on property values, which, to get valuers to do we have to get real estate agents to do there is still quite a high standard on how you prove the value. I suspect with this legislation coming in, we're going to be seeing a lot more pressure put on the quality of those valuations that are being provided and the pressure that on auditors, because it's really up to the auditor is to say, well, does this valuation comply with the ATO law? I think there's going to be a lot more pressure on them and on valuers as well to make sure that the values they're providing are going to stack up because obviously, the ATO is expecting mischief in this area, they're expecting us to sort of, you know, for those people, do they want a high value?

Andrew Sykes (16:57)

Mmm.

Katie Timms (17:20)

Do they want to lower value? I just think we're going to see a lot more pressure in that space. And there's limited people already in SMSF audit. There are limited property valuers out there. I just think it's going to create more complication and more compliance issues for trustees who just trying to plan for their retirement.

Andrew Sykes (17:35)

Yeah, so it will certainly add a lot more burden on an auditor, won't it? Because the auditor will have to express an opinion as to whether the evaluation is reasonable or not.

Katie Timms (17:41)

Absolutely. Correct. And I suspect there's just going to be a lot of auditors that kind of say, well, I can't tell. I'm going to qualify for a market value breach and let the ATO deal with this as they want to, because they're not going to want to have to take that responsibility on themselves if something goes wrong.

How will this impact investment strategies for retirement?

Andrew Sykes (18:01)

Yeah. So do you think this will lead to a change in how people are investing for their retirement? So for example, spend more on my house that I live in with the view to downsize later on rather than saving and super.

Katie Timms (18:08)

Yeah, look, quite possibly. We've already seen over the last probably 10 years, some frustrations with people around the constant tweaking and changing of the super system. There is a real feeling out there of we're encouraged to put money into super for our retirement, but you keep changing the rules on us and you keep doing all of.... we've made decisions based on that law. Now you've changed it again. There's no stability. There's no ability for us to, make long-term decisions. So I think we've already had that feeling with this tax and there's a lot of frustration out there from people and I do think it is putting people off the superannuation system. I think people are saying well then I'll invest outside of super I will leave my money in my primary place of residence and then at some point in future sell that and that's where I'll get my retirement money from. So yes, I absolutely think there's going to be changes in behaviour.

I don't necessarily think they're the right changes in behaviour, but I think, putting those things together, people are just going to say, enough is enough. I'm tired of not knowing what's coming next. I just want to know that I'm going to have money left over for the future.

Andrew Sykes (19:06)

Haha. Yeah, and it's certainly for those more moderate super fund balances, five hundred thousand a million or one and half million where where there is a zero tax rate once you're in pension phase. Certainly a really attractive investment. It gets less attractive as it goes up, doesn't it?

Superannuation death benefits tax

Katie Timms (19:34)

Yeah, absolutely. And is still one of the few places we have a death tax in Australia. And that's the thing that probably really may drive more behaviour changes in the future. There's a lot of people that probably aren't aware of what that number actually looks like, is that it's wonderful while you're alive. Leave it to your kids and maybe you've got a looming tax problem there.

Andrew Sykes (19:57)

I'll just explain that first, Katie.

Katie Timms (19:59)

Yeah, so at the moment, superannuation, when it's left to a spouse, completely tax free. But if you want to leave your superannuation to an adult child, there's a tax liability on, and I don't want to get too technical in this, but on the amount that makes up the taxable components. So there's two amounts that make up your super balance. And those amounts are determined by how the money went into super. So for a lot of us, our super balance is made up of what our employer has kicked in, what we've claimed tax deductions for. That's all the bit

Andrew Sykes (20:15)

Hmm.

Katie Timms (20:28)

that your kids are going to pay tax on at 15% when they inherit it down the track. So that tax is a revenue raiser for the government. But this, I suspect, is going to force more people to take money out of super earlier than death. And maybe they're going to be hamstringing themselves on that tax revenue in the future.

Andrew Sykes (20:36)

Mmm. Yeah, so if you had a parent who really only ever contributed to their super through their employment, they reach a balance of say a million dollars on passing, that comes with a $150,000 tax liability on it.

Katie Timms (21:02)

Absolutely, yep, when it's paid out to your kids. And again, that's where our super goes. It goes to a spouse, it goes to a kid, or a non-dependent. So a parent, a nephew, whoever it is that's gonna inherit.

Deadline for taking funds out of super is June 30 2026

Andrew Sykes (21:15)

Yeah. So, okay. Yeah. Well, that's another reason to carefully manage your super as well as this looming div 296 tax. Now, I have read that there are people now pulling and there is, if you took that out of your super now, it still applies, doesn't it? Or do we, there is an up and coming deadline, I think, of 30 June 26, is it?

Katie Timms (21:21)

Yeah, absolutely.

Andrew Sykes (21:45)

Take it out. Can you explain how that component works?

Katie Timms (21:53)

In on 1 July 2025, that's the date that matters. It's actually not. 30 June 2026 is our key deadline as to when they're first going to say what is your closing balance and are you captured by this tax. So I know there's a lot of people that at the moment, look we've already seen people taking money out. Taking assets out, I always caution people on that because it can be time sensitive. It's not legislated yet. And as you know, as we've seen, we're stalled again. So, you know, we're still probably not quite there. But 30 June 2026 is really the key deadline as to how much do you have in super at that point in time. For a lot of people, it's really about making sure that you've got good valuations for your 30 June 2025 numbers so that that number stacks up. You've got enough support for that.

Andrew Sykes (22:18)

Hmm.

Katie Timms (22:38)

But then 30 June 2026 is when we're going to say, am I captured by the system and what does that movement number actually look like? And do we want to take out before? And the answer to that is it depends. That there's no easy response for people on that one.

Capital Gains Tax, double taxation and equity

Andrew Sykes (22:53)

But it's something to look at before then. So we've really got up until the end of this financial year to have a look at it. If we go back to the mechanics of it again, because I'm intrigued by this. So say I have a single asset fund. I bought the building that I run my small business in and it goes up and it goes up over a period of time. So after two or three or four, five years of this,

Katie Timms (23:04)

huh.

Andrew Sykes (23:18)

I'll be paying a little bit of tax as I go up. Does that mean when I sell it, I don't pay capital gains tax on that building?

Katie Timms (23:28)

No, different tax system! Of course you pay tax.

Andrew Sykes (23:29)

Okay.

Katie Timms (23:33)

Remember, this tax is a personal tax. The capital gains tax that's payable is payable by the super fund itself. So you don't get any credit for the fact that you've kind of been paying this little increment along the way. Whatever capital gains tax is due at the end is due at the end. Now it may be that that's not 15%, you might get your one third discount if that still exists, knock on wood. If part of your super fund is in pension, that part of it will also be tax free.

Andrew Sykes (23:56)

Mm.

Katie Timms (23:57)

You get no credit for any of the taxes that you've paid along the year, that's a separate tax payable by you. So there is also kind of this feeling of double taxation on some of these things as well.

Andrew Sykes (24:10)

Yeah, very much so because as I was thinking, that's why I said a single asset fund versus a blended one. Do you track it or how do you manage it? But no, it's div 296 tax and then you pay capital gains tax at the end of it. Seems a little harsh.

Katie Timms (24:15)

Mmm. Yeah, it does. And I guess that the main issue that a lot of us have -- particularly those of us that are in the SMSF industry, that Treasury came out with a comment, "We want simplicity, not equity." We're kind of, hang on a minute. That means that you're just trying to simplify it without worrying about whether or not it's fair. And paying double tax on something doesn't exactly seem fair.

Andrew Sykes (24:42)

Yeah, because it is essentially capital gain because until you realise it, certainly it's not income and then you are getting hit with it again. So you're going to have an interesting year coming up. How are you and the team going to manage the challenge?

The Government needs to make a decision

Katie Timms (25:10)

Make a call, let's deal with this as it is. If it's going ahead, then at least it gives us time to actually sit down with clients who are impacted and work through it. The reality is that there's no, this isn't a simple thing where you can say it's a yes or no. Yes, leave it in there, no, take it out. Everyone's circumstances are different. Everyone has different considerations. Taxes aren't always the decision that we have to.

Andrew Sykes (25:24)

Hmm.

Katie Timms (25:33)

think about we have to think about estate planning, we have to think about succession, if we take that asset, your business premises, if we take that out of super, where do we put it? Are we exposing it to different risks outside of super, we're going to be paying more tax in the future. It's quite a complex situation. So we're really at the moment just in a very irritating holding pattern, waiting for the government to make a call in the background, got

Andrew Sykes (25:33)

Mm.

Katie Timms (25:58)

could not be talking about a tax more than I am at this one at the moment. All of our team are making sure they're really going through a lot of technical training to understand how it's going to apply. We're lucky enough that we have one of our corporate finance teams who build amazing models. They're busy building their model at the moment so that we can work out how this tax is going to impact different people. But until we get legislation passed, we're still stuck before we can actually pull the trigger.

Andrew Sykes (26:16)

Yep.

Katie Timms (26:22)

Or risk pulling the trigger on a transaction that might actually not be the best decision.

Andrew Sykes (26:28)

Yeah, because it's really hard because generally we're making taxation decisions on a year by year basis. But what we're looking at here is assets that could be held for 10, 15, 20 plus years and looking to see how a tax impacts that versus your capital gains at the end and all of those other issues.

Katie Timms (26:47)

Well, how long are we going to hold the asset for? Well, we don't know. You have to—you're trying to make a decision now or next year, based on something that might happen in 10 or 20 years. And that's probably, making it more difficult for people because you just don't know what's going to happen. And you're having to make a decision based on the best evidence and information you've got. And undoubtedly, things are going to change. And undoubtedly, some of those decisions won't be the right one because things will change. 

Unfortunately, it's that or we pay tax on money that we don't have.

Avoid reactive financial decisions - speak to an adviser

Andrew Sykes (27:18)

Yeah. So look, I think it doesn't get around. First basic rule of superannuation is invest wisely and plan and try and do it really well. And generally we say don't be driven by tax, but this is forcing us to be driven in superannuation strategy to a certain extent by tax. So a little bit of a change in advising. What would you tell anybody who thinks that they may be impacted? Where do they start to look at this and try and...

Katie Timms (27:46)

The first rule is don't panic and don't make any snap decisions or judgments. Second rule is you need to make sure that you talk to someone that can go through with you exactly how does this apply to you specifically because everyone's circumstances, as I say, everyone is different. Everyone has different assets. Everyone has different tax situations outside. Everyone has different family circumstances. So you need to make sure that you understand exactly how it applies to you.

I've had some clients where we've met with them and when they're horrified, it's scary, it's gonna be the worst. And then when you actually sit down with them and go through it, they say, actually, yeah, I'm happy to pay that amount of tax. If we model it out over what has happened over the last 10 years, yeah, I can pay that over the time because I'd rather the assets be in super, it makes more sense for whatever reason for them. So it's really about making sure that you understand how does it apply just to your circumstances first.

And make sure that any decisions you make are planned, not reactive. That's the most important thing I can tell people.

Andrew Sykes (28:46)

Yeah, and avoid that pub talk reaction. "I'm just taking my money out of super. It's all too hard now." And we can't get away from the fact that it's still a very advantageous environment. Taxed at 15% on income, 10% on capital gains. So it is still potentially really good. So talk to your adviser, make sure how the numbers actually work for you.

Katie Timms (28:57)

Yeah, absolutely. I really encourage people to make sure that they understand it for themselves. Bob at the bowling club is going to have a very different conversation, situation. And just because they've been told one thing by their adviser, it may not be the right thing for you. You know, taking assets out of super come with a lot of complication and cost and in some states, stamp duty.

Andrew Sykes (29:26)

Mm.

Katie Timms (29:28)

Plus capital gains tax on that. So there's a lot of factors that come into play for it. And sometimes it's worth taking that little bit more time and making sure that you know exactly what you're facing, rather than, as you say, reacting and panicking and that's it, take it out. My accountant said to take it out. No, no, no, let's wait. And at least let's wait until it's actually passed parliament. Because who knows when that's going to be at this point.

Alternatives to division 296 for taxing super

Andrew Sykes (29:53)

Yep. Now, so, Katie, given a bit of detail and some good outlines on the new Div 296 tax, there was a statement by Jim Chalmer saying that the unrealised capital gains calculation was recommended to us by Treasury. "We provided years of opportunity for people to suggest different ways to calculate that liability and nobody has been able to come up with one. And so that's an important bit of perspective." Now in response to Treasurer Chalmers' statement, do you think there's a better way that this could be handled or a better solution to this?

Katie Timms (30:20)

Thanks. Yeah, look, I can tell you that statement made a lot of people very, very angry. There were people that I know that were involved in that consultation. A lot of them were told, we're not here to question the calculation method. So they actually weren't inviting any other suggestions. But the reality is there's been alternative methods put forward. The SMSF Association has put forward alternate methodology which is based around deeming which I've also seen someone else come out with this week as well as to hey here is another method. Now look deeming is still a made-up number it's an average but it does sort of smooth out that risk of really big asset fluctuations. But, "Has anyone come up with one?" Yeah there's one right there. So basically

Andrew Sykes (31:16)

So what would deeming involve? Explain the difference.

Katie Timms (31:21)

Yeah, so look, instead of saying, this is your closing member balance minus your opening member balance, they would just say everyone is deemed to have had a return of 7%. And then that's what you pay the tax on, your $3 million and 7% apply the same proportion, and then pay the tax on that number. So it gets rid of this risk of really big asset jumps and asset drops. It smooths it out. Still look, it still comes with inherent problems, because there is that issue. With that, it's not real. You may not actually have that amount of money, but it does smooth it out. Correct. Yeah, correct. Look, I've also heard conversations around, look, SMS and SMSF, let's be clear, are disproportionately impacted by this tax, because we can actually say exactly, this is the income that this member account has earned. APRA funds don't have that ability.

Andrew Sykes (31:52)

There is an unrealised element there to it as well, isn't there?

Katie Timms (32:12)

I have seen suggestions say, then have two different methodologies. If you're able to determine exactly what the income, what your earnings is, according to the traditional definition, let us pay tax on that. And if you can't, then you have either the deeming or the new definition of earnings method. There are other alternatives that are out there. The complication as I, look, I made this comment earlier that was designed around simplicity over equity. So they've just said we need to make a system simple. We can't make all the APRA funds change how they calculate things and you know that cost would be prohibitive. So let's just make it simple for everyone and that's not ended up with an equitable response.

Andrew Sykes (32:51)

Yeah, well, deeming is a concept that we're already familiar with through age pensions, through any sort of Centrelink type asset-based or income-based tests. Do you know of any other jurisdictions around the world that do an unrealised capital gains tax like this?

Katie Timms (32:57)

Yeah! Look, I've tried to do a deep dive on this because I've had this question as well. I do know that there was a proposed wealth tax in America and obviously that has not gone anywhere. That has absolutely fallen off over there and I believe that there is one other jurisdiction that does have a tax that does look at this in a similar way but nothing like what we've got proposed here.

Potential for abuse in tax calculations

Andrew Sykes (33:33)

Yeah. So you mentioned then it is quite interesting the difference between the APRA funds and the self-managed super funds. What if my superannuation mix is say two million in my self-managed fund and two million in my APRA fund, who pays the tax? Or how is it? It's just calculated based on...

Katie Timms (33:38)

You do. Here and two million here and at the end of the year you've got 2.2 and 2.2 everything is just added together. If you then choose to have your superannuation pay for it you can choose which super fund you want to have that money come out of. So in that instance you know it may actually make it easier because there might be one that you know has the cash to pay for it.

Andrew Sykes (34:10)

Yeah, certainly sounds like a scheme too that's open to abuse and manipulation of asset values, doesn't it?

Katie Timms (34:16)

Absolutely and look I've already, I've had a lot of conversations with people around are the ATO going to be looking to apply integrity measures, you know, there's been commentary around, anti-avoidance and a lot of these things. Now, I mean, again, it is legislated already that you are required to have a proper valuation. I think just what it's going to do is make people have to pay more money for valuations that are going to stand up to the scrutiny should the ATO come looking if they think you're trying to avoid this tax.

Future considerations

Andrew Sykes (34:42)

I'm assuming we're to have something up on the RSM website. Do we have some guides or something we can refer people to?

Katie Timms (34:51)

We absolutely will have some more things up on the website. So we did produce I did do a webinar before I flew off to Africa. Encourage people to go and watch that—that is available on our website. I go through some specific examples there so you can see the mechanics of that. We're busy working on some more information to go up on the website. So hopefully we're going to have that up there and we will have our modeling available as well for our clients who want more assistance in this space as well. So stay tuned, we'll make sure that we have everything there for you.

Andrew Sykes (35:18)

Terrific. So anybody listening can go to rsm.com.au, locate your very good webinar there and also your contact details will be there. So if you have any questions, feel free to email Katie and the team.

Katie Timms (35:27)

Feel free, it's pretty much all we're talking about at the moment.

Andrew Sykes (35:35)

All right, well, Katie, thank you very much. Thank you for your time today. That's been really interesting. I've certainly increased my knowledge of what is going to be a very complex tax. I think we can leave everybody listening with a suggestion: get it checked out. Make sure, and look, don't be scared of it. It's just something we're gonna have to deal with. It's another tax, another thing that we need to balance when we're making our decisions.

Katie Timms (35:53)

Thank you.

Andrew Sykes (35:59)

Yeah, thank you for your time. Thank you all for listening to the RSM talkBIG podcast. If you head over to rsm.com.au, you'll find a bunch of information there you can download for free in relation to it. And any questions, feel free. Hate to see Katie's inbox flooded, any questions, you can email over to Katie and she can perhaps guide you or send you to someone who can help. Thank you for your time today.

Katie Timms (36:16)

You too.