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How will SMSF trustees handle the new super tax proposal?

The Federal Government is seeking to increase the tax on super balances over $3 million. Here are some of the possible issues with the super tax, as well some observations based on client discussions with SMSF trustees.

Brief recap of the proposal

  • If passed, the changes will apply for the 2026 financial year, commencing 1 July 2025. The details still need to be developed and legislation drafted.
  • The changes will apply to individuals (not superannuation funds) with a Total Super Balance (from all their super funds) in excess of $3 million on 30 June 2026.
  • A new tax of 15% will be levied on the 'earnings' derived from their TSB above $3 million. This will be in addition to current superannuation income tax rate of 15%, applying to the whole of fund earnings.
  • Unrealised capital gains ('earnings') will be taxed in a radical change in a tax system that currently only applies tax on income received and realised gains from the sale of asset.
  • Unrealised losses can be carried forward, but will not result in a tax refund.
  • The individual can elect for their superannuation fund pay the tax. The tax collection mechanism will be similar to the collection of Division 293 tax on concessional superannuation contributions for high income earners.

Possible issues and ramifications of the new tax

Anyone impacted by the changes will need to assess the benefit of holding more than $3 million in superannuation and whether it would be more tax effective to invest the excess in other tax entities, especially other vehicles that don’t tax earnings on an accruals basis.

There remains a question, however, whether members who are not yet retired, or who have not met a condition of release to access their superannuation benefits, will be able to move their excess balance out of super.

The $3 million threshold and tax applicable is tested only at year end which may be unfair when fund asset values fluctuate throughout the year.

The new tax is levied on individual superannuation balances and not couples or families. A couple can avoid the tax if the total of their combined TSB is under $6 million and neither of them individually exceeds $3 million. Whereas where one partner has say $5 million in super and their partner has zero superannuation, then the new tax would apply.

It will encourage family tax planning strategies by building up the superannuation balance of family members who are below the $3 million threshold and reducing balances of family members above the $3 million threshold, perhaps via recontribution strategies or contribution splitting.

Asset allocation in superannuation funds may also be affected. It may discourage investment in high growth (but low or no income yielding) investments and illiquid assets such as real property.. Some members may not hold enough cash to the pay the tax, which means the tax may be paid by the member personally.

Elderly people may consider taking out all their superannuation above $3 million to avoid the extra tax, as well as addressing the possibility of the superannuation death benefits tax of up to 17% earlier than otherwise.

Observations from SMSF clients

Clients are generally accepting of tax reform on superannuation provided it is fair and not retrospective and they are not forced to take out superannuation that is already in the system. The proposed changes seem to achieve that.

However many clients have complained about the way the new tax is calculated, in particular basing the tax on a $3 million cap at year end and the calculation of taxable income based on unrealised earnings.

We are already seeing clients reconsider whether to hold illiquid assets, such as property, in their SMSF, especially where the investment would rely heavily on capital gains rather than income for its returns.

Many clients opt for an SMSF to invest in unlisted, private or closely-held investments such as private equity or business real property. They usually cannot invest their superannuation in these type of assets through other superannuation vehicles such as public funds.

These SMSF clients are thinking these assets may be better sitting in another type of entity. Property and private equity may be removed from super where there are no liquidity events.

Overall, clients are talking about a re-allocation of capital to more income-producing, or high-yielding and possibly higher risk assets in superannuation in order to have the liquidity to pay the new tax.

Where to from here?

The client process on the proposed new tax has to date focused on education as opposed to immediate responsive action.

We are telling clients not to panic because we have not seen the full details yet. There may be changes after the consultation process. Clients may commence minor planning but we’re telling them not to over plan as commencement is two years from now.

But it is clear that the new tax will encourage those with more than $3 million in superannuation to look at ways to reduce their superannuation benefits. It will also discourage those with less than $3 million to grow their superannuation balance to more than the new tax threshold.

 

Andrew Yee is Director of Wealth Management at HLB Mann Judd, Sydney. This article is general information and does not consider the circumstances of any individual.

 

13 Comments
Leonie
April 10, 2023

Given the ALP is determined to complicate things my question/suggestion is.....

Has Grattan or anyone else modelled:
- increasing of the minimum withdrawal on allocated pensions over $1M, (we are currently at 50% of the minimum)
- Once someone chooses to commence their pension and get the tax benefits then having a withdrawal requirement on the accumulation balance and
- leave UNREALISED capital gains alone.

This will get far more money out into the day to day economy with no incomprehensibly unfair taxing of unrealised gains and reduce the balances quicker than current rules.

Computers will work out the calculation mess that we end up with either way??????

James
April 12, 2023

Here's Grattan's wish list, from todays AFR (was tabulated with suggested timeframes and estimates of savings but unable to transpose format here)

Ways to reduce the budget deficit
OPTIONS TO REDUCE SPENDING
Improve infrastructure and defence procurement
Undo the WA GST deal
Include more of the family home in the age pension asset test
• All equity over $750,000
Cut costs in hospitals, pathology, & pharmaceuticals
Clean up grants and advertising
Abolish Family Tax Benefit part B for couples
• Keep the payment for single parents
Abolish the Business Innovation and Investment Program visa
Other options
• Mitigate aged care cost growth
• Mitigate NDIS cost growth
• Evaluator-General to identify and reduce ineffective spending

OPTIONS TO INCREASE REVENUE
Redesign the Stage 3 tax cuts
• Retain the 37% tax bracket
Reduce income tax breaks
• Super tax concessions
• Capital Gains Tax & negative gearing
• Trusts
Raise the super preservation age
• Graduallv raise from 60 to 65
Plus freeze Super Guarantee rate
Raise the GST
• 15% GST + low-income compensation
• Cwth keeps half the extra revenue
Wind back fuel tax credits
• Count the cost of roads and pollution
Redesign the Petroleum Resource Rent Tax
• Change method for pricing gas; and/or
• Introduce a 10% Commonwealth royalty on offshore gas
Bolder options
• Realign company tax rates at 30%
• Carbon tax
• Inheritance tax

SOURCE: GRATTAN INSTITUTE

Mark
April 13, 2023

In time some of these will come about. Governments are always looking for ways to increase revenue.

Martin
April 09, 2023

I am also concerned that too few look at the long term effect on the young.
My daughter aged 30 with three young children scrimped last year to put additional funds into her (industry) super fund. “The benefits of long term compounding Dad!” she proudly said.
Now, she is looking at the ravages of long term inflation which mean a $3 million cap will be the equivalent of under $1 million in todays money by the time she retires.
She now realises that one can never trust a government not to grab what is yours in the name of a “progressive” tax. Her future investments from saving will be in eliminating her mortgage and then outside superannuation.
I am in the fortunate position of being able to withdraw funds at will from my superannuation. So I will reduce my 15% taxed accumulation portion to well below the gap between my pension balance and $3million. We have all seen the incredibly large gains a portfolio of shares can have in a year (my SMS fund was over 50% in the post Covid year) and the idea of paying taxes on what was a retracement of the massive losses of the prior year is not one which can stand any moral examination.
Given my investments are mostly in companies paying fully franked dividends, having them in a trust which is not taxed on an arbitrary gain point is clearly a superior financial outcome for me and avoids the death bed scramble to avoid the inheritance tax in super.
It also has the collateral benefit that my wife (and then my beneficiaries) need not await the outcome of the administration of my estate before receiving the income from the trust investments.

Ian
April 13, 2023

sounds like you are all over it, Martin. as will many others.

Mark
April 13, 2023

Trust's unfortunately are in the firing line as well.

AMAC
April 07, 2023

I know this comment doesn't directly relate to the info in the article, but what really grinds me is people saying that Super is being used as an inheritance fund. This is absolute rubbish!

When people pass away, they are generally holding most of their remaining wealth in super as it makes the most financial sense as it is (generally) tax free. The government are PROMOTING the use of super for goodness sake. It does NOT mean that people are simply putting it into super for an inheritance! If those people who died had bought an expensive PPOR instead - would people then say "Oh look! People are just using property as an inheitance vehicle" No, they wouldn't, as it doesn't make sense.

I think there are numerous studies that indicate that most people die having not drawn their super down to zero - as those people a) don't know when they're going to die and b) are spending cautiously as they have no other income at that stage of life and therefore an inheritance is normally from within a super fund!

Yes, that grinds my gears, but don't get me started on the absoulte absurdity of taxing non-realised gains! Surely this won't make it into law or God help us all!!

Dave Wellington
April 07, 2023

This is hitting the nail on the head! Just seems that the media are missing so much! Why isn't this being reported better?

Lyn
April 12, 2023

AMAC, inheritance fund bit does grind. Savers always leave something. Fail to understand why muck with thing that encouraged more savers since 1992, at time think near bottom of league for savings and industry grown around it in 30 odd yrs & jobs it supports. Next it'll be a redundancy field. Time close when best for the expensive home, keep only a mortgage at the bank and savngs under the bed. Doubt ATO like that as obvious will follow.Who ever thinks up all this complicated stuff in Canberra??

BuffetFan
April 07, 2023

And just how will a SMSF member value their illiquid assets at the end of each financial year? Will the member have to pay for a professional valuation of a farm or real estate investment? As for industry and retail funds playing games with their illiquid holdings....

June
April 07, 2023

Macca and Rob both make very valid points. We have not ever been sorry that we started our own SMSF, as we got sick of the Industry Fund that my husband was in losing money, and charging him for the privilege of doing so! However, the constant tinkering and changes are what have made self-funded retirement somewhat stressful. We don't know if we will be impacted by the proposed cap as we are heavily invested in the stock market for income and that can fluctuate wildly, as we all know. I also feel concerned for people invested in property in their Super Fund, especially those running a business, or with a family business being run, from the property. This may be a minefield for cash flow where these "unrealised gains" are going to be taxed. This proposal seem to also involve "double taxation", where a member pays the tax on unrealised gains during the life of the property/share/item, and then pays CGT again when the asset is actually sold. Surely this is amoral? Is not this very principle what led to the establishment of Franking Credits to avoid double taxation?

Macca
April 06, 2023

We have been retired for 10 years having purchased a standalone house in a retirement village.
We understand what a favorable situation this is. We worked & saved to achieve it.
Suggestions about, no indexation & taxing unrealized gains make no sense. We could claim a historic world first, of being able to tax unrealized gains. Claiming to be the first country to do so.
Let's ignore politics for the moment. Before the last federal election one party suggested we should allow some money to be withdrawn from a superfund to place a deposit on a house. This received strong opposition from industry super funds.
The main reason seemed to be that total balances would fall. Some unions receive payments from the public funds. Owning your home before retirement is just as important as your superfund balance.

Rob
April 06, 2023

What it does for those impacted and in retirement, is to bring forward some planning: - If your health is not great do you simply cut and run to avoid the 17% Death Tax? - Should you rebalance in favour of the Family home? [Just what the country needs is a high end property boom!] - Should you pull funds now to help kids balance their future retirement accounts or upgrade their primary residences? An early inheritance? - Should you make a contribution to grandkids Super to get them started? - Is it time to have other investment vehicles such as Trusts running alongside Super? If you are working and still in Accumulation phase, you now have many reasons to distrust the long term bargain of compulsory retirement savings via Super, as you have little certainty as to what the rules may be when you get there. Seems to me in that environment, the Family home and paying off the Mortgage make more sense than additional contributions. Those contributions that do go in, should where possible, be directed into "equalizing" super balances within the family unit. I hear the advice to wait for the legislation and the consultation process, but that involves a level of Trust in the very people who have just broken an election promise. Why would I do that? I reckon you assume it will be introduced "as proposed" and model the impact on you personally. Take the emotion out of it, have real numbers to work with, even back test against prior years and then decide.

 

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