The investment around this alternative asset has caught the attention of older investors as the ATO’s SMSF numbers attest, reassured by the entry into the market of established asset managers such as Blackrock and Fidelity.
With the aid of Google maps, driving around Italy seemed the obvious way to go – until numerous fines started landing on my Melbourne doorstep. My advice? Grit your teeth and pay.
Looming super tax change prompting high-net-worth rethink
Investment strategists are reviewing high-net-worth client portfolios and readying for major changes to the treatment of superannuation following the Albanese Government’s landslide election victory.
Strategies being considered for dealing with an expected increased tax on the earnings of superannuation accounts with more than $3 million range from asset splitting between spouses to increased use of discretionary trusts and investment companies.
Alex Jamieson, financial adviser for AJ Financial Planning, says: “We’ve pulled out a list of those with more than $3 million in their super and booked in a strategy meeting. There are some interesting ways to navigate around the changes.”
But key unanswered questions about the treatment of unrealised investment losses, standardising asset valuations and indexation are frustrating investors and their advisers.
Josh Chye, tax consulting partner at HLB Mann Judd, says: “This is creating additional uncertainty because this type of tax is unprecedented. The practicalities of dealing with the tax is stimulating new thinking about strategies.”
About 80,000 Australians are estimated to have superannuation balances of more than $3 million, or about 0.5 per cent of all superannuation account holders, according to the Association of Superannuation Funds of Australia.
The Financial Services Council estimates this number will grow to more than 500,000 over coming decades as savers now in their 20s and 30s retire at 65.
Super funds in the pension phase currently pay zero tax on earnings for balances below $1.9 million, and this is expected to continue under the new regime (although indexation is pushing this up to $2 million from July 1). Earnings on any excess amount in an accumulation account are taxed at 15 per cent.
Under the proposed changes, the earnings on a total super balance above $3 million will face an additional new headline tax rate of 15 per cent on top of the existing tax. This additional tax is to be known as Division 296.
Investors will need to decide whether to leave money in super and be taxed at an extra 15 per cent on earnings for amounts above $3 million or consider an alternative investment structure taxed at progressive marginal rates.
Tristan Bowman (pictured), partner at independent wealth manager Cameron Harrison, adds: “The decision will be specific to each investor as each vehicle has its own pros and cons.”
He says superannuants considering alternative investment structures, such as a trust or investment company, will typically have between $3 million and $8 million in their super. “Super high net worth individuals are limited in how they can minimise tax below the 30 per cent corporate tax rate,” Bowman says.
Aaron Minney, head of retirement income research at wealth manager Challenger, adds that superannuation remains the most effective shelter outside the family home.
He adds that there is no formal limit to the amount that can be accumulated in super and that it continues to provide important opportunities for generating wealth.
Guy Taylor, a partner of consultancy BDO, recommends not taking any action until the legislation is passed and the rules are in place. The Government’s initial deadline was July 1, 2025, but that timeline will have to be revised as the legislation will need to be reintroduced and passed in the new Parliament.
Strategies include:
- Selling illiquid assets in anticipation of withdrawing money from super to invest the funds in a different entity (such as a trust or investment company). Illiquid assets, such as investment properties, typically cannot be sold quickly often with a significant loss in value.
- Giving assets to the next generation while still alive. “Bequeathing with warm hands, rather than cold,” says BDO’s Taylor. Also using discretionary trusts to protect assets and choose how income and capital gains are distributed among beneficiaries.
- Investment companies for housing assets for distribution at a future time, such as retirement when tax rates are lower. There is a flat company tax rate of 30 per cent. Franking credits can offset some tax payable on dividends.
- Equalisation of super assets between spouses and long-term partners. This includes spouse contributions and super contribution splitting that avoids higher tax by moving amounts from higher balance spouse’s account and contributing it into the other’s spouse’s account, subject to the contribution caps.
- Switching into defensive assets, such as cash, rather than traditional growth assets, including equities and property.
- Considering alternative investment products such as annuities or bonds.
