SMSFs' risk appetite to change under Division 296: Wilson

The controversial superannuation tax will likely see an exodus of SMSF capital from emerging companies as they look to avoid growth companies, a discussion paper says.

Following its initial discussion paper and petition on Division 296, Wilson Asset Management (WAM) has released a second discussion paper, highlighting some of the potential implications from the tax.

The core issue for SMSFs is the taxing of unrealised gains, creating an "enforced shift" in risk appetite, as liquidity becomes a "paramount concern" due to the illiquid nature of small and venture capital investments.

This creates a hurdle for SMSFs holding onto these assets to pay the unrealised gains tax, forcing them to sell other liquid assets, or worse - "attempt a premature and discounted sale of the illiquid holding" just to meet tax obligations.

"This tax introduces what can be described as a perverse 'success penalty'," the paper said.

"The better a small company or start-up investment performs, the larger the unrealised gains, and consequently the greater the tax liability and liquidity pressure for the SMSF holder.

"This would lead to reallocating away from typically volatile small growth companies, where gains are typically unrealised for longer time horizons, and towards more stable, income-generating assets."

SMSFs account for high ownership percentages of start-ups and unlisted companies and this behavioural shift may see the reduction of the $1.1 trillion pool of capital held in SMSFs.

"The potential pool of companies to be impacted requiring external financing (e.g. SMSF) is more realistically 25%," WAM explained.

"Therefore, of the 2,447,295 companies with turnover less than $2.0 million there are approximately 611,823 small companies (2,447,295 * 25%) that would require SMSF funding or personal contributions.

"As personal contributions come from the individual where they would be liable for taxation costs on unrealised gains it is prudent as a cross check to have them captured, as a trade-off decision for a small business owner to invest in superannuation with extra contributions or keep the business afloat."