Super tax proposal could open door to alternative management strategies
The $3 million super tax proposal could open the door to conversations with clients about how to manage the transfer of wealth to beneficiaries to avoid them being hit by big tax bills, says leading adviser Meg Heffron.
By letting accumulation accounts bloom, SMSFs are setting themselves for a much bigger tax problem, Ms Heffron said during her keynote address at last week’s SMSF Association Technical Summit.
Ms Heffron said the government is looking at ballooning SMSFs and wanting to ‘clamp down’ on them, not realising that many of the members in these funds are old and used superannuation as a wealth creation vehicle when there was no compulsory cashing.
“The cases we’re seeing now, most of the people are very elderly and are dying now,” she said.
“They’ve lived through an environment where most of the time there was compulsory cashing, or they were heavily incentivised to draw down on their super, and it’s only for the last six years, they haven’t.
“But in 10 years’ time, we’ll have people who have left their accumulation accounts there for years and have never drawn anything out, and the death tax problem is going to get bigger.”
Ms Heffron said the tax rate now is at a rate of only around 15 per cent for most people, but she also raised the question of what will happen to these funds with the $3 million super tax proposal and death benefit payments.
“It raises the question of what will happen when member and their partner dies, and the money goes to your state tax, because it’s ultimately going to your adult children, which will be left with a big tax bill at that point,” she said.
“I think the $3 million thing, by focusing our mind on getting money out of super, will actually push us to address the bigger issue, which is this one.
“Do we simply encourage our clients to turn their accumulation accounts into fake pensions, and start drawing them down at the same rate that they draw their pension out?
“Taking money out of super and putting it elsewhere may give the beneficiaries a much larger inheritance.”
“[You think about] how much wealthier would I be if I’d done this especially if the person dies at say 65, 66, or 67.
“You can see the longer it goes on, the more you’re taking out, but the more death tax we’re saving, and the more the children love us and want to become a client.
“I know people would love to say I’m going to wait until the day before someone dies and I’m going to completely liquidate their fund and take everything out and avoid the death tax.
“Fantastic. If we can do that, it’s brilliant. But I would challenge you to look at your client base and look at all the people who’ve died and I would love you to find the case where that was done perfectly.
“Remember our clients have access to really good advice, and they still can’t quite get there. It’s never as simple as you think to completely liquidate an SMSF.
“People don’t want to have this conversation about liquidating their SMSF when they’re nearing end of life, so I think this idea of a gradual withdrawal is actually something that appeals.
“This getting the money out progressively might well be the valuable conversation that comes out of the new tax.”
