Commutation decisions spur industry disagreement
While decisions around whether clients should transfer excess amounts above $1.6 million into accumulation or remove this money from super may seem straightforward, it’s a broader issue than many practitioners realise, says a technical expert.
Miller Super Solutions founder Tim Miller says while most SMSF practitioners and trustees dealing with excess amounts above the $1.6 million would have decided straightaway that rolling it back into accumulation was the best option, the issue is far more complex.
“It might have additional estate planning ramifications and even taxation ramifications,” Mr Miller said.
“[However], it’s also one of those areas where no one can predict the future, so when you do the risk assessment you’ve got to consider the fact that if you remove the money from super it could be problematic if for whatever reason the law changes and you can’t put it back in.”
One of the other points raised around taking the money out of the super environment, he said, is that that the taxing point for the income on assets outside super is quite high, and the individual would need to generate a fairly significant return.
“That’s all well and good in a low investment market from an income point of view, but if you start to contemplate the future things like deferred tax liabilities or capital gains, then that tax liability may start to build up on the outside, so the super environment of 10 or 15 per cent is still fairly attractive,” Mr Miller said.
Given some of the commentary from ASIC on best interest cases recently, getting these types of strategic decisions right for the client is critical.
“If someone advises someone to take their money out now, and their investment returns start to spike and all of sudden they’re paying marginal tax far earlier than they thought, then they’re going to come back and question whether that move was in their best interest,” Mr Miller warned.
He said the whole concept of whether the excess is removed from super as a lump sum or transferred to accumulation is, therefore, a difficult area to advise on.
“It certainly generates conversation and if there’s a room of however many people – whilst it wouldn’t necessarily be a 50-50 split – you’re going to get a division of who thinks it’s better to take it out and start planning via the use of other vehicles rather than just super, and who thinks it’s better to keep it in accumulation.
“So it’s certainly going to result in some sort of creative strategies, I suspect.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.