The options for managing proposed tax changes to higher superannuation balances

The Division 296 changes affecting higher superannuation balances have stirred a lot of noise, but equally, it may be triggering action for investors too. For a refresher on the basics of Division 296 – the additional tax on superannuation balances above $3 million, you can read more here.

Some investors may be reconsidering how they use or balance superannuation accounts, while others may even be considering moving assets outside of superannuation. One reader commented on Livewire that, despite being nowhere near the cap, he had decided to sell his real estate investments held in super.

Just a quick search on google will show you that financial advisory businesses are having plenty of discussions in the form of webinars and papers (let alone phone calls) on the options with their clients – and to be clear, there are options - but whether or not they are right for you is an entirely different matter.

In a recent interview with Paul Aliprandi of Wilsons Advisory on end-of-financial-year tips, he shared his thoughts on what investors could do to manage the proposed changes. The good news is that you have up to 30 June of the year the legislation commences to make any changes you might choose. Bear in mind Division 296 still hasn't gone through Senate.

But, before going through some of the options Aliprandi discussed with me, it’s helpful to take a broad look at some of the anticipated implications of the tax. Here are some of the scenarios that might affect those of us with lower balances, as they have an economic impact. To that end, I headed to the discussion paper from Wilson Asset Management.

Economic implications and money leaving superannuation

Wilson Asset Management’s research, detailed in its discussion paper, projects the following:

• Most money will divert into residential property, where capital gains tax exemptions remain in place. Given the challenging property and rental environment in Australia, this is not a desirable outcome for younger Australians struggling to access the market and is likely to push up prices. It’s also worth noting the implications of higher property prices in terms of Australia’s inflation rate.
• Some Australians may choose to move money offshore, outside of superannuation.
• New business investment may be lower as self-managed superannuation funds will be less inclined to invest in start-ups, given the risk of unrealised capital gains as these businesses grow in value.

The paper also considered a range of global case studies.

For example, the Norwegian tax on unrealised capital gains resulted in over 100 of Norway’s top 400 taxpayers leaving the country to protect their businesses and resulted in a fall in gross domestic product and venture capital investment. The Spanish national wealth tax made non-residency more attractive than residency from a wealth perspective, and the Swedish wealth tax resulted in asset sales to meet tax liabilities, creating a liquidity crisis and contributing to capital flight.

Wilson Asset Management noted that these case studies, while not a direct replication of what is happening here, showed that there can be unforeseen secondary impacts and broader economic disruption.

The options investors are considering in light of proposed Division 296 changes

Aliprandi explains that the changes don’t necessarily mean immediately drawing down super. There are simpler measures to start with, such as equalising balances of a couple, looking at contribution splits.

“You want to avoid one member having a large balance in excess of $3 million, and the other member having a much lower balance below $3 million. To the extent you can, you want to start to bring those balances together,” Aliprandi says.

To do so, Aliprandi shares, one member needs to over age 60 and able to withdraw non-preserved benefits that can be contributed to the lower balance member.

Or for those still in active phase, investors might use a contribution split instead. For example, in a $30,000 deductible contribution, the member could elect for 85% of that contribution to be transferred to their spouse. This would slow the growth of the higher balance member, while growing the lower balance at a more rapid rate.

Retired members with no other income and balances over $3 million, may choose to simply withdraw the balance over $3 million to avoid the cap and use that as part of their pension.

Some members are also looking at moving assets, like a property, out of superannuation too, with some using discretionary trusts as an alternative vehicle.

“If a member is under 60, it can be transferred out as a sale. If the member is over age 60, they may choose to transfer it out as a benefit payment where they’ve met the appropriate condition of release and can access their benefits. Either way, you will need to think about indirect taxes, stamp duty, legal costs, etc,” Aliprandi says.

Discretionary trusts have increased in appeal with clients because they can be used to allocate income strategically, and there is no tax on unrealised capital gains.

“The reason clients may have a trust is that it allows them to send capital gains to individual beneficiaries to enjoy the CGT discount. The balance of the income could go to a corporate beneficiary capped at 30%,” he says.

When it comes to family self-managed superannuation funds, he adds, “for a large family group with significant assets, there may be no merit in pulling it out but for the fact they’ll be paying tax on those unrealised capital gains. If they were particularly unhappy with that, they could theoretically convert the portfolio into an income style portfolio where earnings will be interest only, as you would only pay tax on that.”

He cautions the situation for farmers and others with illiquid property investments in superannuation may be more precarious than the options above and may need individualised expert assistance.

The next generation

Aliprandi also highlights an unexpected option available to those with higher superannuation balances – helping the next generation.

He explains clients might offer funds as a loan to support their children, and that allows them to also draw down their super balance.

“If you’ve got a child with a mortgage, the funds may be better sitting in their mortgage offset account than sitting in your superannuation fund with the risk of the tax on unrealised capital gains,” Aliprandi says.

Final thoughts on superannuation

Aliprandi remains a strong proponent of the Australian superannuation system, though he cautions that those at the top of the cap may need to rethink their approach.

“When you look at the super structure versus a trust with the corporate beneficiary for the wealthier clients we have, it’s still a highly tax effective environment to hold your retirement capital,” he says.

He reminds investors they don’t need to make snap decisions about Division 296, after all, it hasn’t been enacted yet, and even then, you will have until 30 June of the year from which the legislation commences to take action (potentially 30 June 2026).

Are you considering making changes to your superannuation (or your clients) in light of Division 296? Let us know your thoughts in the comments.