The combination of the Government’s $3 million superannuation tax cap and its proposed increase in the sophisticated investor threshold is placing at risk investment in the Australian start-up and innovation sector, according to PrimaryMarkets.

PrimaryMarkets executive chair, Jamie Green said the two Government policies carried with them unintended consequences.

“Under the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 people with superannuation balances above $3 million will have an additional 15% tax applied to the earnings on the amount over $3 million,” Green said.

He pointed out that, under the Bill, the meaning of earnings includes any rise in the value of a superannuation fund that is not attributed to contributions, and the changes have the effect of taxing unrealised capital gains.

“For example, if you buy shares in BHP at $10 and at the relevant date, they’re $20 but you haven’t sold them, the plan is to tax that $10 gain even though you haven’t received it.” Green said. “That has potentially catastrophic consequences, some of which will be unforeseeable but many  of which should be readily foreseeable.”

He then cited the example of a self-managed super fund (SMSF) which has invested half its balance in blue chip listed securities and the other half in unlisted shares in more speculative start-ups.

“Let’s assume that on paper, the start-ups have gone very well and have tripled in value. You now get taxed on that increase in value in the start-ups. But how do you pay that tax? You must liquidate assets in the super fund but the only assets that you can liquidate in the super fund quickly are the listed shares,” he says. Further, if in the subsequent year the start-up goes bust then you will have virtually nothing left in your super fund as you will have had to sell the listed securities to pay the tax.

“Under these changes SMSFs may no longer be prepared to invest in illiquid assets such as start-ups because they do so at the peril of their liquid assets like shares,” Green said.

Secondly, the flagged increase in the assets needed to qualify someone as a sophisticated investor – from $2.5 million t0 $4.5 million- will also adversely impact the Australian innovation sector.

“By raising the bar on the value of the assets and income needed to be treated as a sophisticated investor you also narrow the available pool of capital that can go into investments that are only open to sophisticated investors, which is basically the whole start-up economy,” Green said.

“This combination of what appear, on the surface, to be two completely unrelated pieces of reform, have the potential to affect a pincer movement on the investment community and the capital markets, impacting the future of innovation in our start up sector,” says Green.

Financial Newswire – April 2024