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Tread cautiously before making decisions about $3 million tax proposal, adviser warns
The proposed $3 million super tax is highlighting the problems that already existed in the SMSF industry and how it deals with illiquid and non-divisible assets, says a leading adviser.
Phil La Greca, executive manager, SMSF technical and strategic service for SuperConcepts said property held in an SMSF is a prime example of this and urges caution for those looking to offload these types of assets until the legislation and calculations are finalised.
“Property is not like shares that you can cash in,” he said.
“With shares you don’t need to sell the whole lot, but with a property you do. You can’t sell part of a property.
“The $3 million super tax proposal has just highlighted how people have treated property within an SMSF.”
Mr La Greca said the issue of holding property is less of a problem in the APRA fund space where there is more money coming in through contributions and a spread of people in different phases of their super journey.
“In the SMSF space, around 32 per cent of funds are in the pension phase and in the APRA space that is completely different because of the wider spread of demographics,” he said.
Mr La Greca said the concern over SMSFs having to rid themselves of property assets is a result of poor planning and the lack of recognition that the asset has to leave the fund at some point.
“All the $3 million super tax proposal is doing is putting into sharper focus the problem that was there anyway,” he claimed.
“In 2017, the government bought in the TBC at $1.6 million and if you had more than that in pension phase, you had to roll it back into accumulation phase. It is effectively the same decision being talked about now.”
He said he believes the government is not expecting to actually collect much from the proposal but is rather working towards getting surplus assets out of the system.
“It all really comes back to the objective of super,” he said.
“In 2002–03 the total tax expenditure costs of super was $11 billion, now it’s $50 billion so it is costing five times as much now.
“The government has to say ‘where is the bang for my buck’ and so is winding concessions back.
“The question is about whether super is purely about retirement. Is it about having as much superannuation as you like or is the government trying to put a minimum floor on it?
“All these things have to be thought about in context.”
He said rather than trying to determine if assets must be sold or liquidated people should take a more cautious approach.
“Tread cautiously before doing anything now. A lot of people who are looking at the effect of the $3 million super tax are not young and if they pull money out, the contribution rules say they can’t put it back,” he said.
“Be alert, not alarmed yet. Of course, the SMSF sector doesn’t like the fact the proposal is there, but I take the view that we can’t just look at this as the SMSF sector but as the super sector as a whole.”
Clearly as far as the government is concerned the "objective of super" is to steer money towards the big public offer retail funds where they can access funds for government purposes.0- It irks me to be told that having illiquid assets in super in a result of poor planning. I knew that at some point I would have to sell property, but until then, once in retirement, the retirement was funded by the income generated by that property, and some cash reserves, until such time as the assets needed to be sold. There should have been plenty of time to plan the sale (I am talking years, not months), to ensure that it was not rushed and at an inappropriate time in the economic cycle.
What this new tax is doing is bringing the sale dramatically forward, as in my case, the tax payable will be over 3 TIMES the current 15% tax on income, due to the change in the definition of income (based on the last 2 tax returns as an example). The income from the properties and the cash reserves in the fund will inevitably run out much sooner than surely anyone could have anticipated, bringing the inevitable sale date forward by many years.
For me, I have options open to me that are far more favourable than paying more than threefold or 300% more tax in dollar terms than we presently do in our fund. I keep hearing the famous words of Kerry Packer in my head - any wonder that sales will be brought forward ahead of this measure coming into effect! Who can afford for their dreams to be smashed like this?
Will we be rushed? Well, we are not getting timely details from Treasury or the government, so although it is prudent to wait (it may not come into effect), for something supposedly coming into effect from 1st July 2025, the government is not giving us enough time for a considered and strategic exit.
Pity those that are caught up in this and nowhere near retirement. If the government no longer wants people to have large savings in superannuation (after encouraging us to do so for years), they should give everyone an opportunity to withdraw the excess funds without excessive financial disadvantage in doing so, and allowing for an orderly withdrawal.
PS: The $3m threshold announced on 28th February 2023 will be worth nothing near $3m in real terms come 30th June 2026, when the $3m limit test comes into effect, as inflation at the moment is running rampant in Australia.1
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