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In just over 12 months’ time, the new tax rules that apply to earnings on super balances above $3 million will commence. That may seem a long way away, but for those of you considering changes to your SMSF, that time frame could already be rather tight!
As you would expect, there has been a considerable amount of press coverage on this issue, but what seems to be lacking is attention to the key issues that SMSF trustees and members need to consider in the time leading up to these changes.
So, let’s look at some of these key issues now.
Do I withdraw part of my super balance and invest elsewhere?
First of all, you can only make a withdrawal from your super fund when you have met a condition of release that allows access, such as reaching age 65 or retiring after your preservation age. If you have not yet met a condition of release that allows access to your benefits, then this really is a moot point.
For those over preservation age, but not yet allowed full access to super benefits, you may need to commence a transition-to-retirement pension (TTR) instead. This would allow a maximum amount of 10% to be withdrawn from your TTR pension each year.
Due to the 10% limit, you may need to consider starting a TRIS this financial year so you can gain access to 10% of the pension balance in the current 2024 financial year. Then you can draw a further 10% in the 2025 financial year, before the changes commence.
Also, before you go ahead and withdraw super to invest elsewhere, you should first look at what you are trying to achieve.
Is this only to save tax? If so, keep in mind that the new tax applies only to super fund earnings on balances above $3 million. And the rate of tax is 15%. Will withdrawing and investing through other entities or in your own name result in a tax rate lower than 15%?
It would be prudent to carry out detailed financial modelling before you make any changes to your existing position to ensure you would be better off by investing elsewhere!
Do I keep existing fund assets?
Following on from the comments above, if you are looking to withdraw part of your super balance you need to consider if your super fund has the required liquidity available to allow the withdrawal to take place.
In most situations, super funds would need to sell assets to fund any large member benefit payment so you would need to consider the relevant transaction costs or tax that may become payable as a result of the asset sale.
You should also consider the time required to sell large fund assets. For instance, property assets take time to market, sell and then receive the sale proceeds. So, if this is a strategy you plan to use, think about when you need to start the sale process.
One aspect of the new laws that has caused the most concern is that it applies to unrealised capital gains as well as realised capital gains. This is something new to the Australian taxation system whereby tax can become payable BEFORE a transaction occurs to realise an asset.
Some SMSFs may already have in place plans that could significantly increase the value of a fund asset, for instance property improvements. If this is relevant to you or your SMSF, it may be worth seeking professional advice around the most appropriate course of action.
Member balance equalisation
In situations where there is a large discrepancy between spouse super balances, and where one spouse has a balance that is close to or already exceeds $3 million, you could consider implementing strategies to help equalise those member balances.
This can be achieved several ways:
- Contribution splitting: This allows you to split or ‘reallocate’ up to 85% of the concessional contributions that were made for you in the prior financial year into your spouse’s super account in the current financial year.
- Withdraw and recontribute to your spouse’s account: When you are allowed to access your super, you can withdraw an amount from your own super account and then recontribute these amounts back into your spouse’s account.
- Make non-concessional contributions for the lower balance spouse: When making any further non-concessional contributions, do so for the lower balance spouse.
Estate planning: Do changes need to be made around reversionary pensions?
If you have an existing pension that was established as a reversionary pension, you may want to consider how the new tax rules will play out on your death.
A reversionary pension will automatically pass to the nominated beneficiary on the death of the initial recipient. Where the new recipient already has a significant super balance of their own, then their combined balance could very easily exceed the $3 million threshold.
For some, being able to choose the most appropriate course of action at the time of death of their spouse may be more appropriate.
The bottom line
Super fund members holding large balances should already be thinking about how the 1 July 2025 changes will affect them and what plans they intend to implement, if any.
For some, making the required changes or implementing the appropriate strategies will take time.
It is also important to note that the rules as they exist today do not include any indexation to the $3 million threshold. So those with super balances close to or approaching the threshold should also consider whether the available strategies are appropriate.
You say:
“Is this only to save tax? If so, keep in mind that the new tax applies only to super fund earnings on balances above $3 million. And the rate of tax is 15%. Will withdrawing and investing through other entities or in your own name result in a tax rate lower than 15%?”
But it is not that simple – the new 15% tax includes unrealised capital gains whereas this would not apply to investments in your own name. Over 15 years the earning rate of my SMSF (which does include unrealised capital gains) has averaged around 8.4% but the annual return has ranged from -4.5% to over 30% (once!)
In a year where there is a large share portfolio value rise, the 15% tax on this could easily be much larger than even 45% tax on the ACTUAL taxable income (dividends and realised capital gains).
Although you can carry forward losses you CANNOT use a large capital loss to claim back tax already paid – so if FY25-26 is a really good year on the market you are immediately hit with a large tax bill – conversely if FY24-25 was the really good year, and there was a correction in FY25-26, then you start off the new system with a tax loss buffer.
Not a good scenario for sensible tax forecasting or sensible investing strategies when the actual tax involved can be so subject to the closing prices on each 30 June market close. But possibly a good scenario for market manipulation by the really big boys?!
Thank you for your comment.
Yes the tax does capture unrealised capital gains and this is a common criticism of how it will be implemented.
Keep in mind only the portion of gains attributed to a balance above $3 million attracts the additional tax.
For example, if the total balance was $3,100,000 at the end of the financial year, then approximately 3.2% of the balance is above $3 million. The tax will therefore apply to 3.2% of the calculated earnings for that financial year.
In years when the earnings calculated are negative (including because of capital losses), the loss can be carried forward to offset taxable earnings in future years. These transferable negative earnings will accumulate if an individual’s total superannuation balance was higher than $3 million either:
Implementation of this tax is certainly not perfect, however it has been designed this way so that the ATO can use existing reporting received from super funds about members’ total super balance to charge it. Other solutions would have required significant additional fund reporting at huge expense, which was not considered equitable or worthwhile when the new tax will affect such a small proportion of super fund members.