“The biggest challenge that I see is the way that it’s calculated where it’s essentially a bullet number above last year or your prior year’s balances,” Mr McVeigh told SMSF Adviser.

“This means that you’re going to be paying tax on unrealised gains, which is pretty punitive compared to how the rest of the tax system works. If you’ve got unrealised gains in your personal capacity (such as investment properties), you don’t pay the tax until you sell and realise those gains.

“So, I think this could potentially have an impact of people not putting as much money into their super because it could be quite a punitive amount of tax that gets paid on the unrealised gains.”

These challenges require considerable forward planning and management by SMSF trustees, including identifying what their liabilities could be and ensuring that they’re in investments that produce cash flow and enable them to pay any additional taxes if required.

“In their forward planning, a trustee has to think about the fact that if they have a bunch of tax bills, they will be levied in their individual capacity. But you can take that money out of your super fund,” Mr McVeigh said.

“If you’ve got all of your investments in your super fund in liquids, or you’ve got it in a series of investments that you don’t want to realise, then you might not have the cash balances to pay that tax. Even if you withdraw the money from your super, you might not have the cash within your super to be able to pay that.”

SMSF advisers could consider alternative structures for clients with superannuation balances over $3 million in order to avoid being taxed until the gain is realised.

However, it would depend on a client’s personal circumstances, including their income and the composition of their investment portfolio and other assets already held in that portfolio, he underlined.

When asked if SMSF trustees should consider acting immediately or postpone it and see whether the proposal becomes legislation, Mr McVeigh said “it’s a delicate question”.

“I think it needs to be considered now because if real estate is illiquid, it could take some time for that asset to be realised,” he said.

Mr McVeigh added he expects there to be a series of potential sales that could occur before 2025 when the proposal comes into effect if legislated, with clients seeking to crystallise their gains before the additional tax is applied.

“Now, the challenge is going to be, once the money is in the super fund, how do you get it back out and invest in something else,” Mr McVeigh asked.

“If you have gains that you’ve realised in your SMSF before this tax comes in, how do you extract it out of your SMSF to be able to put it into an alternative structure where you’re not going to be subject to this punitive unrealised gain tax?”

Mr McVeigh’s comments came during the SMSF Adviser Technical Strategy Day 2023, which he said is an opportunity for gold partner Remara to educate SMSF advisers about how to provide investment advice on alternative offerings, including private credit.

Remara manages $700 million in funds across private credit, real estate, and tactical opportunities.

“Private credit is in its infancy in Australia and is a growing strategy about which trustees require education. It pays distribution on a monthly basis and offers quarterly liquidity. If trustees need to realise a portion of their investment to pay additional tax, that quarterly liquidity window allows them to realise a portion of their investment to pay tax,” Mr McVeigh said.

“While its offerings are wide-ranging, however, you need to be really careful with understanding the underlying credit instruments, the process that goes through the credit and asset selection, and how these funds operate.”

To receive the latest legislative and strategic updates in the SMSF landscape, come along to the SMSF Adviser Technical Strategy Day 2023.

It will be held on Thursday, 25 October at the Grand Hyatt Melbourne.

Click here to buy tickets and don’t miss out!

For more information, including agenda and speakers, click here.