‘The new black’ of 30% forcing people to think outside the investment square

Vincent Stranges, head of product and projects at Generation Life, said SMSF advisers are seeing a wave of early year strategy reviews as trustees nearing the $3 million Division 296 threshold reassess whether super remains the best home for new capital.

“The new financial year is probably a time when those who are close to or approaching the $3 million threshold for Div 296 might start to consider their contribution strategies into the fund,” Stranges said.

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“They realise there’ll be a tipping point at some point and they need to start considering alternative strategies for excess funds. But it’s also a time for people who want to plan what to do with their wealth later on in life, because interestingly the Div 296 tax has opened up the discussion around death taxes.”

Stranges said people have started to understand that Div 296 means that they not only need to plan for the next financial year but for many years beyond.

“The complication with Div 296 tax is the way it’s all going to be dealt with on death,” he said.

“There is now additional work and complexity for trustees and people are trying to find alternative structures. We’ve now come to a position where 30 per cent is the new black in terms of taxation and people are trying to find ways to keep that to 30 per cent. In trusts, they will pay a minimum 30 per cent, and the same in a company structure.

“Company structures are notorious for being able to put money in, but hard to get money out without tax consequences, so you’ve really got to be really mindful of that and do your homework. And, of course, there’s the investment bond structure, where the maximum you’ll actually pay is 30 per cent and we are now seeing a lot of  interest and an uptick in investment bonds.”

Stranges continued that people who do have larger superannuation balances are looking for alternative structures, but the traditional strategies such as bucket companies can now mean they could be paying up to 60 per cent tax.

“Now they’re saying, ‘Well, what’s my next best alternative?’ Or, ‘What’s another alternative?’ And they’re looking at investment bonds which solves the tax problem, the immediate 30 per cent tax on earnings, but also helps solve the death benefit tax problem that will come down the track at some stage,” he said.

“Investment bonds have evolved significantly over the last 20-30 years, so now there’s investment choice available and there’s product providers which really focus on the after-tax return outcomes. You still have the flexibility from an asset allocation perspective through to a highly tax-efficient structure.”

Stranges said the benefit of investment bonds is that once they have been held for 10 years the maximum tax rate is 30 per cent, which is “enshrined” in legislation.

“It’s always hard when legislation changes, but the reality is that sometimes it provides the opportunities to make things better,” he said.

“People have just kept putting their money into their superannuation fund because that’s what they have done for the last 30 years. But things have changed, and all of a sudden they’ve had to look elsewhere to see what other opportunities are out there.”