Whilst all the details of the Commonwealth Government’s proposed tax changes on superannuation funds with balances over $3m are yet to be fully finalised, the working plan is to double the tax rate to 30 per cent commencing 1 July 2025. This is likely to have significant implications for the way that effected super fund members will manage their financial affairs and we believe it is not too early to start looking at alternative options.
Personal circumstances will dictate whether members choose to retain funds in super and be subject to extra tax or consider withdrawing excess funds and investing outside of super. A key discussion point right now is shifting ‘growth’ assets outside of super to other structures such as Trusts or in Individuals names.
Trusts provide some level of asset protection, as well as the ability to split income amongst multiple beneficiaries, which can result in reducing the overall effective tax rate for earnings on those assets. The flexibility of trusts, combined with the benefit of a 50% discount on realised capital gains, means that trusts have the capacity to lower the effective tax rate below the proposed 30% tax on gains in super.
Where members choose to retain the excess in superannuation, members should carefully consider fund liquidity. The impact of holding illiquid assets given ‘notional’ earnings will be assessed for tax purposes could throw up some challenges. Members will be given the option to fund the extra tax liability from personal funds or within super under special rules.
What else should super members think about?
There are several other considerations when weighing up your options: -
- Ability to access superannuation as a member must ‘meet a condition of release’ in order to be able to withdraw funds from super.
- Assessing the costs of moving assets out of super such as capital gains tax or stamp duty. Selling down assets or transferring out assets in ‘accumulation’ phase before 1 July 2025, will incur a maximum 10% CGT (for assets are held for > 12 months). Managing potential capital gains liability over the 2 financial years leading up to 1 July 2025 could be considered.
- The ability to split super assets with spouses who have lower super balances. Whilst a worthwhile strategy to consider for some, it will subject to contribution limits (caps) and a members Total Super Balance cap, which will increase to $1.9m on 1 July 2023.
- Impact on an existing estate plan. Super is well protected against bankruptcy compared to other structures, particularly if assets are going to be held personally rather than in a trust structure. Advice on asset protection is pertinent.
- The changes will also impact current estate planning strategies around receiving super death benefits from a spouse. This may no longer be the best strategy for some going forward and should be reviewed.
Whilst still in draft mode, early planning and seeking specialist advice is important to ensure being well prepared ahead of the proposed changes.