Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Beware the Trojan horse: Unrealised capital gains tax risks gutting SMSFs
Many self-funded retirees will have their eyes glued to their TV sets on Saturday night, fearing the election outcome might see Labor needing the support of the Greens to retain the Treasury benches.
If that state of affairs comes to pass, Labor’s proposal to tax unrealised capital gains for superannuation balances exceeding $3 million – it currently affects about 80,000 SMSF members – could take a nasty turn with the Greens committed to lowering this threshold. [$2 million has been mooted.]
When added to Labor’s point-blank refusal not to entertain indexing this tax, it means this figure of 80,000 will grow exponentially.
While a case can be made for widening the tax net on equity grounds, what remains totally unacceptable is the fact this proposed legislation (Labor could not muster Senate crossbench support in the last Parliament to get the Bill passed) will tax unrealised earnings, a radical departure from current tax practice.
Jamie Green, executive chairman of PrimaryMarkets, sums it up succinctly: “Essentially, this is a tax on hypothetical profits. The investor has not received any cash benefit, and worse, the asset might later fall in value, leaving them taxed on gains that were never realised.”
Critics of this tax, which have come from the SMSF Association, SMEs, the farming community and the venture capital sector, argue this unprecedented move would set Australia apart globally, with no other major economy taxing unrealised gains in this fashion.
Green warns that this change could have dramatic consequences, not only by eroding personal wealth but also harming Australia’s attractiveness to foreign investors by introducing a new sovereign risk.
Describing the proposal as a “trojan horse” aimed at normalising the idea of taxing unrealised gains, he argues it will likely be expanded to cover all assets including shares, property and private investments, forcing Australians to pay annual taxes on asset values regardless of whether they ever sell or profit.
Compounding the problem, if asset values fall, taxpayers will not receive cash refunds for previously paid taxes; instead, they would carry forward losses, which may or may not be useful in the future.
An example provided by Green illustrates the practical difficulties. Consider an SMSF that invests $1,000 in blue-chip, ASX-listed shares, $500 in a speculative unlisted start-up and holds $500 in cash.
Suppose over a year, the listed shares rise 10 per cent to $1,100 and the start-up surges in value to $5,000. The SMSF would then show a theoretical unrealised gain of $4,600. With a 30 per cent marginal tax rate, the fund would face a $1,380 tax bill.
To pay it, the fund could be forced to sell all its listed shares and most of its cash holdings. If the start-up collapsed the following year, the fund could be left with almost nothing, but an unusable tax loss carry-forward.
Green says this illustrates the fundamental issue: under a regime that taxes unrealised gains, it will become too risky to hold illiquid or high-risk assets, not only in superannuation funds but potentially across all investment vehicles if the tax is extended.
Investors will be forced to focus on liquid, low-risk assets, dramatically altering investment behaviour and undermining long-term wealth creation.
Green also points out that the treatment of existing assets with significant unrealised gains remains unclear. For example, farmers often hold their farms in their SMSF as part of their retirement planning.
Under the proposed laws, if a farm’s value appreciates above the $3 million threshold, the owners could face tax bills on gains they have not realised potentially forcing them to sell their land to pay tax, with no compensation if values later fall.
A further concern is the risk of encouraging short-termism across Australian markets. Investors would be incentivised to sell assets every year to cover tax bills, resulting in a rolling 12-month investment cycle rather than building long-term portfolios.
This would hurt not only individuals but also start-ups and businesses that rely on patient capital to grow, particularly those offering illiquid or innovative investment opportunities. Even ordinarily liquid ASX-listed shares could become problematic under this system if, for example, investors are subject to escrow periods preventing immediate sale while still being taxed on paper gains.
