Earlier this month, Minister for Financial Services Stephen Jones announced that the government would soon be releasing a consultation paper on the objective of super and that superannuation.
He also stated that superannuation tax concessions would be one of the areas he’d be looking at ahead of the federal budget in May.
Speaking in a recent episode of the SMSF Adviser Show, Smarter SMSF chief executive Aaron Dunn said it is now “almost guaranteed” there will be measures relating to superannuation tax concessions in the May budget.
“I’ve seen him talk on several occasions about the topic of the $5 million cap. Now, whether it’s a $5 million cap or something that uses that kind of mechanism we’ll have to wait and see,” said Mr Dunn.
“What he has made clear the whole time though, is that they want to bed down this objective of super and that that objective of super is ultimately going to say is that superannuation is not for estate planning purposes. That will enable them to [establish] this cap around balances within superannuation. So the reality is this is front and centre.”
Mr Dunn said that Labor is likely “testing the waters” with the $5 million balance cap by leaking it to the media.
“When you hear the narrative that’s being used, that it’s only going to impact 11,000 people in superannuation and the discussion about $100 million balances, the pub test here suggests that this is where it’s going to land,” he said.
The $5 million cap on superannuation balances has been pushed by a wide range of industry bodies and superannuation funds operating in the APRA-regulated space including AIST, ASFA and funds such as Hesta.
AIST has proposed that individuals with a total superannuation balance of more than $5 million across both accumulation and pension stages should be required to withdraw the excess amount by 1 July 2024.
Other groups have alternatively proposed that where an individual’s investment earnings exceed this cap, they should be taxed at the top personal income tax rate.
The SMSF Association has previously expressed concerns about the idea of a cap on superannuation balances, stating that large balances are a legacy issue following the introduction of the transfer balance cap which limits the amount that can be held in the tax-free retirement phase.
Mr Dunn agreed with the SMSF Association’s view that these problems will largely be resolved once the oldest generation has moved through the system.
“Once you get past the beneficiary being able to receive part of that money, these larger balances are all going to have to leave the superannuation system anyway,” he explained.
“There may be a group of boomers that benefit from it now, but by the time that money gets to me from my parents for example, that money is going to have to leave the system and the ability for me to get it back in is going to be subject to total super balance thresholds and like anyway. So we don’t want the government getting to trigger-happy. We want to see the [current] legislation take its course.”
So now we are expected to sell our factory as it can no longer be a part of a $5M member balance of our SMSF
Seems like a short term money grab, let the system do its job, it will eventually sort itself and those legacy funds with 10s of millions of dollars will not be a part of the problem anymore. Having said that I do see the narrative around ensuring the Superannuation benefits are for retirement. But its hard to tell people what to do with their money, there have been plenty of SMSF funds and members that would need to unwind any strategies they might have in place when in comes to estate planning.
Whilst it seems like a simple thing to cap super at (lets play along) $5m, how, in practice does that work?
Do we have to withdraw all but $5m from super by a designated date and incur the inevitable capital gains tax, not to mention somehow managing illiquid asset positions?
So we do as asked, but the markets run on, and by the next FY, we are over $5m again. Do we have to then chip more from super and so on?
The capping works by limiting what can be contributed and that was implemented in 2017.
Capital capping is just not feasible unless it comes with a requirement for asset allocation to be restricted to term deposits and cash.
Super isn’t an estate planning strategy for large account holders as they are forced to remove super from the accumulation phase on death.
If you go to the extreme end of this and take a $100m member balance (or is that actually the fund balance, lets not quibble). Member dies and around $1.6m can stay in super IF they have a spouse, otherwise, it all must be removed. Where there is a spouse, the remaining $98.4m is forced from the fund paying 10 – 15% on capital gains as well as up to 17% on the taxable component of the payout if paid to a non tax dependant such as an adult child. Where there is no spouse, all of the balance comes out on death.
Anyone receiving their parents super will see it reduced by the death benefits tax and capital gains tax. This has been a feature of the super system for a long time and, we know that with the large boomer generation aging, the likelihood of this tax showing up in “noticed” numbers is getting closer.
A minimum transition period of 10 years is required to effectively lower the balances held in super.
The only “fair” way to do this, given the inordinate disruption the significant structural changes in 2017 caused, and, are still working through the system, is to consider a stratified tax system. As superfunds have strong lobbying effect, it is unlikely that changes will be made to the flat tax incurred at fund level so will we will have a variation of the Div 293 regime whereby it comes out to the member’s personal tax return?
At the moment the constant conversation about super being capped is causing unnecessary alarm and more needs to be done to explain how in practice this could be implemented. The basic message is just being repeated without fundamental analysis or identification of the many “problem statements”.
Unfortunately, Kim, way too much logic and common sense in your post. Such qualities will never overcome the emotive and envious statements being made about those nasty, selfish, tax-evading people with $millions stashed away.
And, so, we will likely be lumbered with yet another shambolic, poorly-thought out and hopelessly implemented add-on regime because as always [i]”The basic message is just being repeated without fundamental analysis or identification of the many “problem statements”.”[/i]