Aaron Dunn, CEO of Smarter SMSF, said last week in the Senate estimates there had been discussion over the potential of people keeping assets in the super environment to avoid the impost of capital gains tax.
Greens’ senator Nick McKim told the committee last Wednesday (3 December) that the changes to the legislation were making superannuation a place to build wealth and had become an estate planning tool rather than a vehicle to ensure a dignified retirement.
Shadow finance minister James Paterson also stated that the new draft legislation will allow people to legally hold on to assets like property without having to sell them and realise the gains.
On the latest episode of the SMSF Adviser podcast, Dunn said it is an interesting strategy as it “somewhat goes against the grain of using money for retirement in the first instance”.
“The first point is a lot of these clients are going to have a component of that superannuation in retirement phase, so there is going to be a mandated obligation to take out a minimum pension each and every year,” Dunn said.
“At some stage this is going to impact on the assets of the fund, and we’re probably talking about property here. There will be a point in time where you cannot sell a brick, you’re going to actually have to make a decision that could equally be around the fact that the money gets rolled back to accumulation phase, and there’s no obligation to actually have to draw down.”
However, he said, there is a tax consequence in doing that, because then the member’s interest that was supporting that pension goes from an exempt environment back to a 15 per cent tax regime.
“Whether people want to do this sit-and-hold strategy, there will be pros and cons of actually doing that,” he said.
“Property is probably the most common theme with this one, but these are some of the challenges that people will need to think about in doing something like this.”
Dunn continued that presently there are no full details about how the legislation will look as the new version has yet to be released.
“In version one of these rules, in the year of death there was no Div 296 tax, but we knew once it carried over to a tax dependent, once it got past that first year, then there was going to be an inclusion of that balance onto that surviving individual,” he said.
“We don’t know any of that stuff yet, whether they decide to inflict Div 296 tax in that year of death, because there is a view that potentially people might sit and hold, and therefore you’ll capture that in that final year.
“These are the details that we’re still lacking and the more you go back and look at the fact sheet, there are things in there that are very loosely worded, that create more questions than they do answers at this point in time.”
Furthermore, Dunn said when the method of collecting tax changes, the rules around the year of death would also change.
“To focus purely on income and growth return in that calculation, we are still going to have to make some adjustments for things like contributions and pensions, and we don’t know how that formula will, in essence, work,” he said.
“In version one, there was a whole range of debits and credits that needed to be given consideration. We’re not expecting something that looks like that, but we will need to understand some of that detail before we simply apply a model where we just don’t sell anything until you’re dead.”
