As soon as the government announced its thirty per cent tax on higher superannuation balances policy the task of working out its practical impacts began.

A major concern is the issue of taxing unrealised capital gains.  This comes about because of the proposed calculations used to determine how much tax is paid.  Two other problems starting to get coverage is the treatment of unrealised capital losses and how defined benefit pensions will be treated.

What is not so well known is the potential for pension payments and other withdrawals such as divorce settlements to also be subject to this new tax.  These represent big changes from tax policy settings in place since July 2007.

Before implementing any changes, super fund members will have to decide what adjustments they will make to where and why they hold their savings.  There are pros and cons with any investment choice and the various options will have to be considered.  For example, should I take money out of super and use it to upgrade to a better family home?  Or should I distribute some of my wealth early to my independent adult children?

Many of the current cohort of high balance super members have these choices because they are retired and can decide to remove money from the system.  When they die all their super monies will be paid out of the system.  There is a small cohort of super fund members under 65 who have large balances because they have been good investors.  The current policy will see these people having to pay this new tax until they retire.  Ideally they should be given a choice to withdraw their high balances out of the system.

An issue that will have to be considered is the increase in costs in administering high balance member accounts including higher IT system costs, changes to disclosure documents, increased member queries and so on.  Every super fund member will pay for these higher costs.

The overall task shouldn’t be under-estimated.  In rough terms about 30 per cent of total SMSF assets, or $250 billion, is held by SMSFs with more than $5 million in total assets.  It will be interesting to see what changes take place over time and how this impacts real estate and capital markets.

All super fund trustees that will look after investments for a member with more than $3 million in total super assets will need to make significant adjustments to how they operate their funds.

The first issue trustees and their tax advisers and accountants will need to consider is how they manage the payment of the new tax.

Our analysis shows that cash-flow management throughout the year becomes even more critical.

A long standing common strategy for funds paying pensions has been to ensure that the fund always has about two years of future pension payments in cash.  We believe this may no longer be adequate and an additional buffer may be needed in the future.  Up to three years pension payments may need to be held in cash especially if the pension account balance is more than $2 million.

Self-managed Super Funds trustees with large balance members that are not being used to pay a pension, and therefore subject to 15% income tax in the super fund, will need to decide if they should use tax effective accounting.  This type of accounting makes provision for likely tax impacts if an asset were to be sold.  This in turn reduces a member’s account balance at the end of a financial year which then reduces the amount of tax payable under this new policy.

For people in this bracket it can be difficult to predict when the tax is payable until very late in a financial year.

Who pays the new tax?  Under the proposed measure an individual taxpayer can either pay it personally or they can ask a fund to pay it for them.  The idea of withdrawing a tax-free lump sum from a super account and paying the tax personally won’t work as all withdrawals are subject to this new tax.

Another problem is the lack of indexation of the $3 million threshold.  In the forty years between 1982 and 2022, wages have increased 5.8 times, Sydney houses prices increased by 4.6 times and the Australian Stock Exchange by 13.9 times.  Clearly many young people with normal working years before retirement, higher than average salaries and super fund investment experience will be caught by this measure.

We think the days of treating the super system like a game of Jenga must stop.  The government should ask the Productivity Commission to review a range of superannuation policy settings because the system needs major reform.  For example, should those earning more than $250,000 salary per year be removed from the compulsory employer super system?

The complexity and controversy of this new tax shows that the superannuation system needs major reform.  It needs to be reviewed from sustainability, efficiency and equity perspectives while still encouraging long term savings.  A review needs to recommend how to make the system better and a pathway for how we might get there as soon as possible.