Fears for farmers, small businesses as $3m super attack’s fine print reveals tax on unrealised capital gains

The small end of town could be the biggest victims of the Federal Government’s attack on $3 million-plus superannuation balances amid warnings it’s a new capital gains tax. With tens of thousands of farmers and other business operators holding working properties in self-managed super funds, tax specialists fear legitimate leasing arrangements will be hurt by the planned 30 per cent slug on big super’s earnings. The fine print of the Federal Government’s new tax proposal reveals a broader reach for the extra 15 per cent tax on the calculated earnings when a person’s total superannuation balance exceeds $3m. The peak group for self-managed superannuation fund advisers, the SMSF Association, has warned the new rules will undermine the longstanding principal that capital gains are not taxed until the asset is sold. Accountants at RSM warn the measure could have a particularly hard impact on asset-rich, cash-poor businesses such as farms and small to medium enterprises in suburbs and towns. Unlike the existing tax on fund earnings, RSM super specialist Katie Timms said the proposed extra 15 per cent tax on $3m-plus balances would include unrealised gains in the value of the member’s assets. Ms Timms said she had spoken on Thursday to a farmer in the Esperance district worried about having to pay tax on surges in the net value of land held in his SMSF. “This is not only realised income but movements in market value,” Ms Timms said. “We’re taxing people on income that has not been earned yet.” Earnings for calculating the 15 per cent tax will be based on the growth in the members total superannuation balance in the tax year. The members’ withdrawals during the year are then added and net contributions are subtracted. “The calculation of earnings includes all notional (unrealised) gains and losses,” the explanatory note says. The Federal Government’s draft rules say losses will be able to be carried forward and offset against future tax liabilities, but the fine print of the offset promise is not yet known.. SMSFs are a popular place for doctors, dentists, lawyers, retailers and manufacturers to hold their commercial premises. SMSF Association policy head Tracey Scotchbrook said this was a strategy commonly used by farmers and tradies, such as plumbers and carpenters. “Many small business owners across business sectors have chosen to own their business premises in their SMSF,” she said. “What is proposed would operate fundamentally differently to how capital gains are currently taxed.” RSM pointed to a farming client whose property had increased in value to $6m from around $1m when purchased by his SMSF in 2006. Under the new two-tiered tax proposal, the SMSF’s tax bill on its $300,000 rental income would rise $45,000 to $67,000 even before the fund’s unrealised capital gains were considered. Its agribusiness chief Ross Paterson said the changes would have “a significant impact on fairly modest farmers who are far from being the big end of town”. “The agri sector is likely to be hit harder than any other sector,” he said. “More full and frank consultation with trustees, regulators and the public is needed to ensure farmers and other small business operators are not casualties of this policy change.”