Liquidity planning should be in place now for $3m super tax: adviser
SMSFs should have money allocated to either a cash or fixed interest account to ensure they can pay any liabilities that may arise, says a leading adviser.
Liam Shorte, director and SMSF specialist adviser for SONAS Wealth, told SMSF Adviser that having a “buffer” in the SMSF is essential, especially with the proposed $3 million super tax proposal due to be legislated in the coming months.
Mr Shorte said creating a cash reserve within the SMSF to serve as a financial buffer can help trustees navigate unforeseen expenses without disrupting the overall investment strategy and add a layer of financial security and flexibility.
“I advise my clients that every SMSF should have some money allocated to cash and fixed interest deposits that range between six months and two years,” Mr Shorte said.
“Ideally they should have around three to five years worth of pension in these so in case of unforeseen circumstances they never have to worry about where their pension money will be coming from.”
Mr Shorte said diversification is important in an SMSF and as there is no capital gains tax when the fund is in the pension phase, it is best to ensure there is liquidity to cope with unexpected situations.
“Shares can be sold in three days, but unlisted funds can only be redeemed at certain times such as every quarter, and do have limits,” he said.
“Trustees should be aware of liquidity needs for up to two or three years and lump sum assets like property can pose problems if cash is needed in a short time frame.”
He said many SMSFs invest in property believing that nothing will go wrong, but things such as losing a tenant, fire or flood damage or loss, can impact the fund’s capability to meet its compliance obligations.
And with the proposed $3 million super tax likely to be in force by 2025, planning for cash flow needs is imperative.
“Trustees need to be planning well ahead to ensure they have liquidity needs ready,” he said.
“With the proposed Division 296 tax, I’m trying to make clients aware of the implications and to implement strategies to minimise or avoid unnecessary tax.”
One of those strategies is to try to ensure the total super balance remains below $3 million, he said, by moving assets into trusts, investment bonds or personal names.
“It’s time to look at the big picture and see where is the best place for those assets to be,” he said.
“In regard to commercial properties, it can take from 12-24 months to sell them and residential property at the moment may also be impacted by rate rises in regard to sales.”
He added that although the majority of people with balances above $3 million are generally well organised, some people will be caught off guard who do have large commercial or residential properties in their SMSF portfolio.
“Unfortunately with property you can’t sell off part of it and some people may have to look at moving it to another entity, the SMSF selling it or taking a lump sum asset out of the fund if they can do better than the proposed 30 per cent tax rate,” he said.
