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Fresh warning on reserving strategies amid $5 million cap discussion

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By Miranda Brownlee
15 November 2022 — 2 minute read

With Labor strongly considering a $5 million cap on super, SMSFs have been warned against the use of reserving strategies as a way to get around the proposed measure.

Earlier this month, Minister for Financial Services Stephen Jones stated that the government would be reviewing the taxation of super once an objective for super had been set, including the introduction of a cap on super balances.

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This follows lobby efforts from various groups within the superannuation industry including AIST and Mercer that have called on the government to introduce a $5 million cap on the amount an individual can hold within super.

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Speaking in a recent webinar, DBA Lawyers special counsel Bryce Figot said while there is nothing concrete yet in terms of this particular measure, it appears the government is committed to legislating an objective for super and reducing the tax concessions in super for the ultra-wealthy.

Mr Figot said the idea of implementing a $5 million limit on super is now more feasible than it was in previous years given that there are now market valuation laws in place and a mechanism to easily report and measure total super balances.

“This measure does seem like something the Australian Labor Party (ALP) are pretty committed to,” said he said.

This may prompt some SMSF professionals or their clients to consider implementing strategies to try and address this proposed cap, said Mr Figot.

He warned that certain voices in the SMSF sector over the years have suggested the use of reserves as a way of diminishing total super balances while keeping the money in a concessionally taxed environment.

“This would be inadvisable. Amongst other things, the SMSF Regulator’s Bulletin SMSFRB 2018/1 says the types of arrangements that the Commissioner will scrutinise carefully with a view to determining whether Part IVA of the ITAA 1936 applies include the intentional use of a reserve to reduce a member’s total superannuation balance,” cautioned Mr Figot.

“This is exactly what some people are proposing to deal with this situation. I don’t think anyone should be playing around with reserves. You should be trying to wear down reserves as much as possible.”

While the measure may not end up going ahead, Mr Figot said at this stage it’s probably best that clients are aware that it could happen.

Mr Figot also challenged a statement made by the Assistant Treasurer that superannuation had become a “tax preferred means for estate planning”.

While superannuation may offer some tax preferred outcomes during an individual’s lifetime, Mr Figot said super was a “difficult creature for estate planning”.

“If all you cared about was estate planning, I’m not sure you’d do it all through an SMSF, there [are] better vehicles out there. Effectively there is a death tax on super of anywhere up to one third once you factor in stamp duty, income tax on the recipient and CGT in the hands of the fund,” he stated.

 

 

Fresh warning on reserving strategies amid $5 million cap discussion
bryce figot new2 smsf
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