Musings on the $3m cap consultation paper
The consultation paper has just been released on the Labor government’s proposed changes to the tax concessional treatment of superannuation. These proposed changes have caused much consternation amongst those involved in the SMSF sector. Reading articles, comment sections and direct discussions with trustees and intermediaries, one gets the feeling the proposals have confused people greatly.
I’ve even read an article where divorce is recommended to even up member accounts prior to 1 July 2026!
There are several things that need to be mentioned regarding Labor’s announcements.
The changes are just proposed
The first issue to point out is these are incomplete proposals. The consultation paper makes this abundantly clear. For example, determining the value of a member’s defined benefit interest for total super balance (TSB) purposes, earnings on defined benefit interests and how to tax defined benefits in excess of the $3 million cap are all in their infancy.
There is a lot that needs fleshing out to make these proposals even remotely workable.
Governments often cast the policy net out as far as they can, knowing they will have to drag it in eventually, either a lot or a little. There have been many issues raised with the proposals, so the government consultation period will be a rich source of food for thought our policymakers can nourish themselves on. What is the final legislative piece may well differ markedly to what is on the table currently.
The start date is a few years away
Whatever the proposal ends up being, it won’t be until the 2026/27 financial year that the tax penalty will be determined. Even then, it won’t be paid by super funds until sometime in the 2027/28 financial year.
There is also a federal election some time in the 2024/25 financial year, so if the changes are not what the electorate desires, people are free to vote against them. One might remember Labor’s changes to franking credit policy prior to the 2018 federal election that never saw the light of day due them never forming government.
There are strategies to reduce the impact of the tax
Even if the proposals pass into legislation unfettered, there are multiple strategies to reduce the impact of the extra tax.
Firstly, equalisation of member accounts will become an essential part of super planning. If one member has, say, $4 million and their spouse $1 million, the option should be to even up their accounts as best as possible using a recontribution strategy. Now that the work test has been abolished, members can make non-concessional contributions up to age 75, including making use of the bring-forward provisions (subject to the TSB and contribution caps).
Secondly, there are other structures that can assist those who will be impacted by the extra tax. Family trusts allow income to be streamed to a multitude of beneficiaries on lower marginal rates of tax (including corporate beneficiaries). Yes, this means withdrawing funds from super and creating a new tax structure – but given the higher rates of tax in the super environment, it might be time to look at this option.
Also, monies can be withdrawn from a member account and then recontributed back to super for other family members (subject to the member’s TSB and contribution cap limits). This can be done to build super for the next generation (a form of pre-death estate planning if you like). Whilst their account balances may be preserved for some time, this is one way to avoid the 15 per cent extra tax on earnings and any lump sum death benefits tax on the taxable component.
Finally, given people were encouraged to save for their retirement through super, many do not utilise the generous tax-free thresholds afforded to individual taxpayers. Investing in personal names could be a sound strategy, as it also avoids lump sum death benefits tax.
One of the complaints from government has been super is being used too much as a wealth transfer vehicle, rather than a retirement income stream vehicle. What is proposed could well have the opposite effect – people will plan the transfer of wealth from one generation to the next far more judiciously than ever before. And they will make sure they pay as little tax as possible along the way.
Superannuation will still be the best
An article in The Australian Financial Review (dated Wednesday, 29th of March) includes BDO analysis showing that even with the proposed changes, superannuation will still be the best retirement vehicle we have.
Whist not as attractive as before, super will still form the backbone of retirement savings for most Australians. They will just have to weigh up whether it will be the only retirement vehicle for consideration, or as part of a suite of invest options and vehicles.
The changes proposed by the Labor government have the potential to use policy settings that have long-term retirement savings consequences for all future Australians to target a small group of wealthy boomers in the short term.
And the changes will be wonderful for the accounting, legal and financial planning industries. Strategic advice will become more important than ever before.