ATO targets unlisted SMSF assets

Close to 1.15 million Australians manage their own retirement savings through one of the nation’s 616,400 self-managed super funds (SMSFs) ^[1].

Not only are we seeing the highest number of SMSFs on record, the real eye catcher is that these funds have collectively notched up $896 billion in net assets^[2].

Not surprisingly, this sort of money has attracted the attention of the federal government, and doctors need to be prepared for upcoming changes to the way high-balance SMSFs are taxed.

Australians with over $3 million in super to face increased tax

By way of background, in February 2023 the Federal Government announced an uptick in the tax applicable to superannuation balances over $3 million^[3].

These are the so-called ‘Division 296’ tax changes, named after the section of tax legislation they relate to.

Put simply, from 1 July 2025 an additional 15% tax will apply to investment returns earned by super accounts with a balance greater than $3 million at the end of the financial year.

This represents an additional 15% tax on top of the 15% tax already in place, increasing the tax applicable to super returns to 30% though only on the balance that exceeds $3 million. Fund earnings relating to the balance up to $3 million in the accumulation phase will still be taxed at 15%.

How does this relate to SMSFs?

The Division 296 tax applies to all superannuation balances greater than $3 million, not just SMSFs. That said, it is especially relevant to SMSFs, which often hold unlisted assets such as interests in a private company, unlisted unit trust or commercial property.

Maree Macphail, a partner with ESV Business advice and accounting, says, “The Australian Taxation Office (ATO) has always looked at the unlisted investment held by SMSFs, but its focus is a lot sharper now because of the Division 296 tax changes.”

The ATO has these types of assets in its spotlight because a rise in the value of, say, a commercial property, could push the value of an SMSF’s overall investments beyond the $3 million benchmark, potentially rendering the fund liable to pay the additional Division 296 tax.

What this means for medical professionals

According to Macphail, doctors need to be mindful of three key issues in regard to commercial property assets:

1. Medical properties are hard to value

As Macphail explains, some unlisted assets are challenging to value. This can especially be the case with commercial property used by doctors.

“With investments such as listed shares, it is very easy to determine a market value at 30 June each year,” says Macphail. “But this is not usually the case with a commercial property, especially a building that has been configured and fitted out for specialist use such as a medical centre, dental practice or veterinary surgery.”

2. Professional valuations can be expensive

Auditors of SMSFs are required to sign off on the fund’s accounts each year. This demands clear documentation, and as Macphail notes, “It is critical for an SMSF with a commercial property asset to have the right property valuation from the commencement of the new rules, and for the property to be revalued every year.”

The catch, according to Macphail, is that having a medical property professionally valued can cost thousands of dollars.

“This can significantly raise the compliance burden for SMSFs,” Macphail says. “However, if an auditor qualifies their report because of an uncertain asset valuation, the fund can become the subject of unwanted ATO attention.”

3. Unrealised market movements may be taxed

As it stands, the additional 15% tax on super balances over $3 million is set to be based on the difference between a member’s opening and closing total balances for the year, after allowing for withdrawals, contributions and several other exclusions^[4].

This means the taxable difference is likely to reflect gains on the value of the underlying investments – gains that may not always be realised.

As Maree Macphail points out, this can present some challenges to medical professionals.

“The extra 15% tax can be levied to a fund member, or the fund can pay the tax on the member’s behalf,” says Macphail. “But if a SMSF is not adequately diversified, or if a large proportion of fund earnings (such as rent) is going towards servicing the property loan, there may not be much spare cash to meet the additional tax bill if the preference is for the fund to release funds to pay the tax. This can trigger a serious liquidity issue within the fund.” 

Alternatively, if a member pays the tax themselves, assuming they have the available funds to pay, this reduces their personal cashflow – money that could be used for other purposes, such as repaying non-deductible debt.

The key takeout: Start planning now

While Assistant Treasurer Stephen Jones, has commented that just 5% of Australians will be impacted by the new, higher super tax^[5], now is the time to prepare. Even if your SMSF is not affected on 1 July 2025 it could be impacted in subsequent years.

Macphail highlights the value of early action. “Check your SMSF investment strategy aligns with fund investments. Some doctors have very old SMSFs where the fund Deed may need to be updated. The ATO requires Deeds to be regularly reviewed and updated to reflect the current rules and legislation,” she notes.

“Review the fund’s cash position and plan ahead to know how you will deal with a higher tax impost. This is also an opportunity to revisit your overall SMSF investment strategy and seek professional advice,” says Macphail. Part of the review of your SMSF should involve speaking to an Avant finance specialist about your fund’s investment property loan(s). Refinancing to a lower rate can free up valuable cash, which can make a noteworthy difference to net returns and your SMSF’s cashflow.

For support identifying the funding best suited to your SMSF, call Avant on 1300 99 22 08, or request a free consultation with one of Avant’s medical finance specialists. If you have any questions for Maree Macphail or are seeking business advice and accounting, you can contact her and the ESV team here.