Australian superannuation changes: Farmers, small business face huge tax bills from Govt’s controversial move

Thousands of small business owners and farming families could soon face tax bills on unrealised gains, profits they have not received and cannot use, as the Albanese Government pushes ahead with controversial changes to superannuation.

Industry groups say the move risks forcing asset-rich, cash-poor Australians to sell property or businesses just to cover the tax.

On Tuesday, Treasurer Jim Chalmers confirmed Labor was committed to pushing its controversial Division 296 policy through Parliament. The policy would tax unrealised gains on asset appreciation and impose an additional 15 per cent tax on earnings from the portion of an individual’s superannuation balance that exceeds $3 million.

But Labor is increasingly facing resistance to the policy, with Teal independents continuing to express opposition.

Independent MP for Warringah Zali Steggall described the policy as “ill conceived” and questioned assertions by the Government that just a small fraction of superannuation balances would be affected.

“Those changes will first impact a lot more people than what the government is saying, because they’re not indexed, and so that will catch a lot of people,” Ms Steggall said on radio.

However, with an increased mandate, the legislation, which has been before Parliament since 30 November 2023, will only require Senate support from the Greens to pass, a likely outcome given they have already expressed support for the policy.

The expected incoming member for Goldstein, Liberal MP Tim Wilson, told The Nightly last week that he would fight the policy “straight away”, but there is little the party can do in terms of resistance.

However the policy may not have received full-throated support inside Labor, with leaked audio revealing Deakin Labor candidate Matt Gregg telling prospective voters it was “not Labor policy”.

Under the expectation the legislation could be in force from July 1, financial advisers are fielding frantic calls from clients about how to cope with the changes.

David Dahm, a financial adviser who specialises in health professionals such as GPs, said the “horrendous” policy would hit many practitioners who often bought their medical clinics using self-managed super funds as a retirement strategy.

He said it would unfairly affect property owners who likely made their financial plans years ago under the assumption the tax rules wouldn’t change.

“This would be coming as a real shock to them. The real shock is the cash flow impact, suddenly realising that you’re going to be paying money on something that you can’t offset until the day you sell the asset.

“I mean, it’s crazy. It really is crazy,” Mr Dahm said.

Charging tax for unrealised gains was a “fundamental breach of Australian tax principles”, according to Richard Webb, superannuation lead at CPA Australia. He called on the Government to rethink the policy and described it as inconsistent with the legislated objective of superannuation. He said it would result in increasingly burdensome administration, compliance, and regulatory issues.

Mr Webb said the policy “appears to be driven primarily by budget repair, rather than a comprehensive approach to retirement savings policy” and that it set a dangerous precedent.

“If this precedent is set, where are the limits? Opening this Pandora’s box could ultimately lead to the imposition of capital gains tax on other assets and investments, even if today’s policymakers insist otherwise. It is not fair, and not healthy for the economy, if individuals are pushed into selling their investments to avoid paying tax on a hypothetical profit,” he said.

The Government has budgeted $2.3 billion of additional revenue from the bill, which also includes an increase in tax rates from 15 per cent to 30 per cent on earnings from balances over $3m in its first full year of operation. Revenue is forecast to hit $40b over a decade.

Given the cap is not indexed, those affected will increasingly fall into that tax category in the coming years, with AMP deputy economist Diana Mousina calculating that a 22-year-old on average full-time wages, experiencing typical wage growth and investment returns, would likely breach the cap before they hit retirement.

“Bracket creep is already having a silent eroding effect on personal finances. Allowing this further erosion of superannuation savings is contrary to the fundamental principles of our tax system,” Mr Webb said.

“To portray this issue as older Australians protecting their wealth is simply not accurate. Three million dollars will not represent anywhere near the spending power it has today. As awareness of this issue grows, there is a growing realisation that this will not be a fair system for future generations.”

Business groups have been consistently lobbying the Government to drop the unrealised gains component of the policy, with Council of Small Business Associations chief executive Luke Achterstraat saying that despite raising concerns for two years, they had not seen “any consideration to change the tax”.

“I think we need to keep the foot on the gas here, and make sure they’re aware of the damage this is going to do to a lot of enterprises, and by that I mean enterprises outside of Martin Place.

“We’re not necessarily talking about high net worth individuals here. We’re talking about a lot of small family and farming communities,” Mr Achterstraat said.

National Farmers’ Federation president David Jochinke said 3500 farming families will be instantly hit under the new tax rules, with another 14,000 facing the same fate if property values grow above the threshold.

He said that it would particularly stress multi-generational farming families where older farmers hold their assets in an SMSF and lease the operations to their children, providing retirement income for them as well as an opportunity for the next generation to start farming.

“Like any property, farmland values can rise, but these paper gains don’t translate to real income. Rises in land values usually mean very little when farms are multi-generational with no intention of being sold,” Mr Jochinke said.

“This tax could force some farmers to sell up just to pay their tax bill.”

Mr Achterstraat said a similar situation faced many small and medium enterprises, who often used the SMSF ownership of a building and warehouse as a vehicle for retirement planning and a way to offset the risk of using the family home as collateral.

“The business owner is typically paying themselves last in terms of a regular income and has that asset in their self managed super fund for precisely that reason,” he said.

Mr Achterstraat said many firms would see a hit to cash flow under the changed rules, which would undermine future investment.

“The Treasurer is talking about this renewed push for productivity. Well this policy is a stinker for private investment and a stinker for aspiration,” he said.