Westcourt

10 Tax Tips about the New $3m Super Tax

Super tax

The government’s proposal to tax SMSF’s and super fund trustees with a new 30% tax has a range of confusion and angst by many Perth tax accountants and their clients.

Here are 10 tax tips about the new 30% SMSF tax that families in business should consider.

The new tax is 15% not 30%

Contrary to the widespread misconception among Perth SMSF accountants labelled as a 30% tax increase, the recent tax change is not doubling the tax but rather a new 15% tax addition.  

Just as a 45% personal tax rate combined with a 10% GST doesn’t equate to a total tax rate of 55%, these distinct taxes cannot be summed up.  The new super tax, yet to be formally named, follows a similar principle.

The announcement made by Jim Chalmers and Treasury on February 28, 2023, regarding the imposition of a 30% tax rate on balances exceeding $3 million is incorrect.  There are two separate 15% taxes at play.

The 15% tax isn’t directly levied on ‘Earnings,’ including unrealised capital gains, within accumulation funds below the $3 million threshold.  Instead, it applies to taxable (assessable) income.  This tax stands independent of personal income tax or the current superannuation fund tax, targeting the individual rather than the fund itself despite being based on Total Superannuation Balances (TSBs).

The mislabelling of this tax as 30% stems from its addition atop the existing 15% tax on accumulation funds.  For a member holding $3 million in a pension account, the cumulative tax amounts to 15%, with the initial $3 million being untaxed.

Payment can be delayed to 2028

There’s a silver lining in this scenario.  Considering the commencement on July 1, 2025, and the initial financial year’s closure on June 30, 2026, SMSF trustees will have until May 15, 2027, to submit their annual reports.  Subsequently, once the ATO receives this data, it must issue an assessment along with payment timelines.  With the newfound incentive for numerous SMSFs to delay reporting, the likelihood of payment being due before June 30, 2027, seems slim.  The payment might extend well into the FY28 period, allowing ample time for potential changes.

This delay isn’t solely about managing tax flow or present value; it significantly impacts the calculation process.  It’s crucial to recall that the determination of tax liability hinges on the definition of ‘Earnings’:

Earnings = TSB (end of FY) – TSB (start of FY) + Withdrawals – Contributions

A tax payment is considered a withdrawal.  In the initial assessment for FY26, there won’t be any withdrawals attributable to this new tax.  Further delays might mean no payment during FY27 either.  Thus, the initial addition to the ‘Withdrawal’ definition won’t occur until FY28, consequently affecting the defined ‘Earnings.’

Valuations will become critical

An SMSF boasts a diverse portfolio encompassing a wide array of investments, each with varying valuations, often subject to interpretation even among experts.  While valuations currently serve purposes like determining Total Superannuation Balances (TSB) to regulate non-concessional contributions— restricted for balances over $1.9 million—their significance elevates when they directly influence member tax liabilities.

In the future, clashes between trustees and valuers are inevitable due to the taxation of unrealised gains.  Trustees are likely to explore multiple valuers with the support of their Perth business accountant to secure the most advantageous figures.  They aim to have a higher value on July 1, 2025, and a lower one on June 30, 2026.  Consider these scenarios:

  1. A farm experiencing fluctuating fortunes over a decade due to cycles of droughts and floods, yielding varied harvests from record highs to lows.
  2. A factory built four decades ago; the land’s value as a vacant block is now more than the land and building combined.
  3. A doctor’s practice in a rural area struggling to attract practitioners.
  4. A restaurant grappling with the challenges of the pandemic, navigating closures, staffing issues, inflation, migration impacts, and recession threats.

Assets inside an SMSF, like 50:50 unit trusts, art collections, vintage cars, wines, and NFTs, among others, present additional valuation complexities.  If the Treasury aims to impose taxes based on accurate, independent asset values across the board, it’s likely to create an administrative labyrinth.

The CGT Discount in super funds will not apply

Assets held in superannuation and sold receive discounted capital gains tax if held for longer than 12 months at two-thirds of 15%, or 10%.  And as Perth SMSF accountants tracking and understanding the CGT discount for SMSF’s is a key strategy.  However not only will unrealised capital gains be taxed at 15%, but so will realised gains, which will increase the TSB at the end of the financial year.

In addition, if Earnings, as defined, show a loss, such as due to super balances falling over the financial year, there will be no tax refund.

You can’t reduce the balance without a condition of release

The new 15% tax on Earnings and the existing 15% tax on taxable income (purposely avoiding labelling it as 30%) might prompt individuals to reconsider maintaining substantial superannuation balances.  

With the help of their Perth tax accountant, many members will likely transfer funds from super once they’ve met a ‘Condition of Release’ required when a member wants to access their super.  The Government might not oppose this shift and could even welcome it, given the Treasury’s perspective that anyone holding over $3 million in super possesses ample resources to fulfil the ‘Objective of Super’—providing retirement income.  While diverting assets from tax-advantaged structures may align with Treasurer Jim Chalmers’ objectives, funnelling more funds into pricey family homes might not contribute significantly to national development.

A classical time when a SMSF looks to satisfy a condition of release from a high value fund is when they want to help their kids buy a home.

However, this option isn’t feasible for individuals with substantial balances who haven’t met a ‘Condition of Release.’

The definition of earnings are unclear

The current definition of a person’s total superannuation balance (TSB) is the difference between the closing and opening balance adjusted for contributions and withdrawals.  However, the adjustments must be extended to include additional items like divorce splits, personal injury payments, reversionary pensions, Div 293 release assessments and foreign fund rollovers.

As Perth SMSF accountants giving advice we need to understand the exact definition of earnings so our clients can embark on SMSF tax strategies.

The $3m must be indexed at some time

In a future scenario, the $3 million threshold is expected to be adjusted upwards to prevent encompassing too many individuals and disincentivising savings within superannuation.  The potential imposition of taxes on super that surpass specific personal marginal tax rates is a concern acknowledged by Jim Chalmers:

“Our proposal is to retain the $3 million limit to enhance the system’s sustainability over time.  However, any government, regardless of political affiliation, retains the flexibility to modify that threshold in the short or long term.”

Under various assumptions, the value of $3 million diminishes significantly in future terms.  Finance Minister Katy Gallagher acknowledged in Parliament:

“Treasury projects that in 30 years, only approximately the top 10% will retire with superannuation balances near $3 million.”

The Financial Services Council (FSC), representing major superannuation funds, highlights the repercussions if the proposed $3 million superannuation balance cap isn’t indexed:

“Without indexing this cap, around 500,000 Australian taxpayers are estimated to exceed it during their lifetime, subjecting them to a 30% earnings tax, including 204,000 Australians below the age of 30 …  Leaving the cap static at $3 million would equate to roughly a $1 million cap in today’s value for a 30-year-old, raising concerns about the fairness across generations with an unindexed cap.”

The FSC illustrates the case of a 25-year-old professional earning $100,000, projecting that with a current superannuation balance of $35,000, they would breach the $3 million threshold by age 65.  Additionally, the FSC provides a table demonstrating the real value of $3 million considering various inflation rates.

For those who have attained a ‘Condition of Release’ and anticipate a substantial tax liability, withdrawing funds from their super in June to avoid breaching the $3 million limit might become a strategic consideration, especially if they’re only slightly above this threshold.

Given that super funds have a hidden death tax impact within them many funds will consider reducing their balances if the $3m threshold is not indexed.

The limit is worth around $2.5m now

It’s prudent to refrain from referencing the limit as $3 million since that denotes a future value set today, significantly ahead of its implementation.  It will never hold the same worth as $3 million in today’s monetary value.  Considering the earliest assessment date for the new tax set at June 30, 2026—more than three years away—assuming a 6% inflation rate, the projected future value of $3 million equates to around $2.5 million in current terms.  Hence, anyone assessing the likely impact should consider its value as of June 30, 2026, which approximately translates to $2.5 million in today’s value.

The new tax applies solely to individuals whose superannuation exceeds $3 million by the end, not the beginning, of a financial year.

Divorce can be a time to avoid the $3m tax

It is fair to say that getting divorced is a difficult time and the tax implications of divorce are wide and varied.

The Total Superannuation Balance (TSB) is assessed by Perth SMSF accountants individually rather than collectively for an entire Self-Managed Superannuation Fund (SMSF).  In cases where one partner in a couple possesses $5.8 million in super while the other has none, the tax implications differ significantly compared to a scenario where two individuals each have $2.9 million.

Yet, transferring a substantial amount of super to a spouse isn’t feasible except in small portions.  For instance, up to 85% of concessional contributions can be split with a spouse within a fiscal year, with a cap of $27,500 on these contributions.  Additionally, if someone earns less than $37,000 annually, their spouse can contribute up to $3,000 yearly and receive a $540 tax rebate.

Strategies might emerge aiming to swiftly transfer substantial sums by leveraging these limits.  This could involve contemplating divorce to allocate half of the super as part of the settlement, adhering to any mandatory separation requirements, and then remarrying with the super split.  Such unconventional strategies may be just one example of the ingenuity inspired by the new tax rules.

On the topic of couples, when one partner passes away, leaving their super to their spouse as a pension, the surviving partner’s TSB will include the transferred balance and could potentially trigger the new tax if the TSB reaches a considerable threshold.

If your super falls below $3m you won’t get a refund

A ‘loss’ in the new ‘Earnings’ calculation can be carried forward into subsequent years to reduce a future year’s Earnings.  However, if the TSB is lower at the end of a following financial year than at the beginning, and there are no contributions or withdrawals, there will be no refund for tax paid in the prior year.  

If money is removed from super and the TSB falls below $3 million permanently, or the individual dies, there may never be an opportunity to use the carry-forward loss.

There are many examples where an asset placed into an SMSF rises quickly over a financial year, and the member will be presented with a large tax bill.  The asset may then fall in value and never recover.  Imagine if this new tax operated during the mining boom and busts, which many Perth SMSF trustees invest in.

What is certain is that superannuation remains one of the most tax effective wealth creation and succession vehicles available for Perth tax accountants to use.  At Westcourt we have one purpose – to help families in business become great.  Given our independent approach of giving tax advice only (removing it from investment choice advisory), deep knowledge of ultra-high value funds, proven technical excellence and international tax reach we are well placed to support families in business with their SMSF.  So if you need advice about creating, managing growing and closing your SMSF – why not give us a call?

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