The Government's plan to increase the concessional contributions tax to 30 per cent for workers earning over $300,000 will create an administrative nightmare for superannuation funds attempting to work out how much tax to deduct from each individual member, according to Minter Ellison partner Maged Girgis .
The increased tax will affect around 128,000 people or 1.2 per cent of total people making contributions, according to Girgis. Because it's a singular cut-off rather than a scaled tax, someone making $299,000 would be far better off than someone making $301,000, he said.
He compared the tax increase to the superannuation surcharge introduced on super by the Liberal party in 1997 that was eventually abandoned because the administrative costs outweighed the benefits.
Super funds are essentially taxed on their overall income (including investment returns and contributions) minus deductions such as insurance premiums and legal fees.
The remaining taxable income is taxed at 15 per cent, and funds can deduct a flat 15 per cent from their entire member base.
But he said under the proposed changes funds will need to pay 30 per cent tax on contributions for a portion of their member base – requiring funds to "unscramble the egg" to work out how much each member is earning.
This would require a lot of legwork and a lot of communication between each fund and the Australian Taxation Office, Girgis said.
The other option would be for the Government to implement it as a new tax, similar to the 1997 surcharge.
This method would mean the liability of the new tax sits with the individual rather than the fund, but is payable by the fund while that money sits with the fund.
But if the member moves to a new fund, so does the liability, and if the money is paid out the liability moves to the individual, Girgis said.
With the time delay between contributions payments and tax returns, this could create a time lag of up to two years for self-employed people – in which time the member could move funds, retire or pass away, he said.
There are additional complications, he said.
"What if it's a defined benefit fund? What if it's an underfunded defined benefit fund? What if it's a Commonwealth scheme where no contributions are ever made? What if it's a parliamentary scheme or a state scheme that's not subject to tax?" he asked.
