Liz Westover, partner and national SMSF leader at Deloitte, says this is especially critical when dealing with older clients who may have “lumpy assets” inside their fund.
“We don’t have a crystal ball about when people are going to die but we know super is a highly concessionally taxed environment, so somehow we have to find the right balance between holding assets in super and knowing when to actually withdraw them, because we know we’ve got a death tax in super,” Westover said at the SMSF Adviser Technical Strategy Day in Sydney.
“And again, a lot of clients do not know there is a death tax in super, so if you think those assets are going to end up with adult children or non-tax dependents, they’re going to pay up to 17 per cent tax on the taxable component.”
Part of estate planning to weigh up the balance of concessions in super and possible death tax, and calculate the best time to get some assets out of the superannuation environment.
“It’s not going to be the same answer for every client. You have to understand what they want, and how much risk they’re willing to take,” Westover said.
“Some people are averse to having to pay death tax, and others don’t care. That’s why there’s no right or wrong answer and you’ve just got to be able to zero in on the right time to do it.”
She added that in some cases, assets can be transferred as in-specie payments but for other clients, they may not actually want to hold the asset personally outside of super and prefer to set up a trust, and then think about whether the fund can sell the asset(s) to that entity.
“[For property] that may have some stamp duty implications, but at least it gets that asset into the vehicle that you want it to be.”
“If it’s a benefit payment, it has to go to that individual, but there are options around getting assets out of the fund, which you cash up and then pay out the benefit to that person.”
She added that this was more relevant for clients who are crystallising assets for the purpose of withdrawing monies, and the timing of the sale would be critical to achieve the best tax outcomes.
Westover gave an example of a $ 4 million fund with $2 million in pension phase and $2 million in accumulation. It sells an asset worth $2 million and takes it out of super at the beginning of the year, which would mean the actuarial percentage would be very high.
“If you do this at the beginning of the year, for most of the year your actuarial percentage is going to be in the 90s and you get to apply that against the capital gain that you actually made on the property.”
“If you do it late in the year, your actuarial percentage is going to be much closer to 50 per cent, so timing of these assets, and particularly if you have related parties, you possibly have a little bit more flexibility around the timing of it.”
She said even if someone is dealing with unrelated parties, and the purchaser is happy to wait for settlement until the exchange of contracts or until after the end of the financial year, the timing can work in their favour to reduce the tax liability.
