Looking to the past for solutions to super tax threshold
The issues facing clients now with the newly announced $3 million threshold is not new and tried-and-true methods to help clients can be found by looking at the past, says a technical expert.
Speaking to SMSF Adviser, SuperConcepts SMSF technical and strategic solutions Philip La Greca explained in some respects this latest measure is fairly similar to what SMSF professionals did in 2017 when the government introduced a $1.6 million pension cap.
“But instead of 15 per cent tax we’re now talking about a notional 30 per cent tax rate, so it’s the same sort of dilemma but a little bit worse," said Mr La Greca.
“The alternative back then was ‘do I pay 15 per cent or take it out and see what the external tax rate would be, or leave it where it is?’”
Mr La Greca said one of the first things people should consider is – if pulling assets out – whether they will have enough liquidity left in their account as they would have to pay Capital Gains Tax on the withdrawal.
“In the end, it costs to withdraw assets in whatever vehicle you may be in,” he said.
“It’s important to remember, too, that the 30 per cent is not a real tax rate. In your superannuation account you don’t pay 15 per cent tax on the earnings in the account balance, you only pay 15 per cent on the taxable income that the super fund earns in any given year.
“For example, if I have $1,000 in shares at the beginning of year and my assets and funds’ value goes up so does my account balance. It could go from $1,000 to $1,500 but it has no taxable income. You don’t pay tax on the unrealised gain, you only pay CGT when you dispose of the asset.
“Now, if my $1,000 in shares went to $1,500 and I was paid $100 in a dividend fund my account has gone up to $1,600 but I would only pay 15 per cent tax on that dividend of $100 not the gross $600 movement in my account balance”.
Mr La Greca added that eventually every asset in a super fund has to be disposed of, whether it is actually sold or transferred ownership to another party, but tax is not paid on an unrealised gain.
“There is an upfront cost of getting money out of a super fund and you have to consider whether the tax rate is better outside of the fund or not. Most structures are not going to be better, and I think the rate of 30 per cent was deliberate by the government for that reason, because most people will not want to do a full withdrawal.
“What do I do with the money if I pull it out? That is the question, that is why I think 30 per cent has been deliberately picked so there is no advantage one way or another.”
He continued that if a superannuant was earning less than $18,000 a year, it could be worthwhile pulling some money out as any future earnings will be based on the marginal tax rate rather than 30 per cent.
“It’s a big analysis process and you have to weigh up the cost to get money out and then about the about differentials in what it will be invested in outside of super and the tax effectiveness outside compared to the super environment.”
Bill Parkes, director of Southern Cross Accounting Redlands, agrees.
“A person with $3 million in super will likely receive a tax benefit at 30 per cent still. However, serious thought could be given to leaving money in superannuation, where the tax rate is the same as putting it into a company,” he said.
Mr Parkes said some of the other considerations that may need to be thought through include:
- If you die and leave that super to non-death benefits dependent, they will pay 15% on the entire taxable component, leading to an effective tax rate of 45% on the earnings.
- Taking money out of the company will come with franking credits but may put you in a position of paying top-up tax. Conversely, leaving it in the company and leaving the shares to a testamentary trust may allow you to pay dividends without further tax.
- A company does not need to comply with any SIS rules so that you can have in-house assets, loans to members.
“As these changes to super balances of over $3 million will not take effect until after the next election, there is plenty of time to plan and model out the best path for your situation (if you are one of the few who this will affect),” he said.
“You will need an actuarial certificate to determine what percentage of the fund’s income will be taxed at 0%, 15% and 30%.
“While the average Australian super fund may be far below this threshold, that doesn’t mean a fund cannot be increased. Through voluntary contributions, including concessional and non-concessional contributions, you can help to boost your nest egg to a comfortable level.”