For most Australians, the idea of an increase in tax aimed at the wealthiest 0.5 per cent of the population probably doesn’t sound that controversial.
But there’s an aspect of the proposed Div 296 tax that has both professionals and the public raising their eyebrows, and that’s primarily around the proposal to tax and unrealised capital gains.
To date in Australia, taxation has only ever been applied to realised gains.
Realised gains occur when an asset (like shares or property) is sold for a profit. (The gain is ‘realised’ when the owner converts the asset into cash or another form of value.)
Unrealised gains refer to the increase in value of an asset that hasn’t yet been sold. – That is, the owner hasn’t converted it into cash. The gain only exists on paper.
Sure, the Div 296 tax will only apply to those very wealthy 0.5 per cent of Australians with sizeable super balances over $3 million, and yes, it’s only applied to the earnings of those balances (not the total balance).
…But the proposed Division 296 tax has raised concerns that introducing a tax on a portion of unrealised gains on those earnings may set a precedent for future laws, potentially paving the way for governments to tax unrealised gains in other policy areas beyond superannuation.
It will also require the payment of tax when no cash proceeds have been received following the sale of an asset. This is a new concept in Australian tax law.
The proposed Div 296 tax also doesn’t take indexation into account. So those with super balances nearing the $3 million mark in the future may also need to revise their retirement strategy.
All-in-all, a policy to reduce the tax concessions in superannuation for those with relatively high account balances makes sense in theory, but despite its intentions, the proposed workings of the law are clunky at best.
For most Australians, the Div 296 measures won’t impact their retirement savings. But if you do have a super balance close to $3 million or above, it’s worth looking into how this might affect your future earnings.
For example, you may consider:
- Diversifying investments – exploring alternative investment structures like family trusts, investment companies that allow for flexible income distribution;
- Optimising asset allocation
- Reviewing your contribution strategy
- Strategically planning for any withdrawals
- Reviewing your investment mix
- and consulting with an adviser to help understand the impact of the tax on your situation.
Superannuation remains one of the most the most tax-effective strategies available, regardless of your balance.
Wherever you’re at with super, speaking with a trusted financial adviser can help you make informed and strategic decisions that are right for you.
Please call or email if you have any questions. (02) 9913 9995.
