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Liquidity planning should be in place now for $3m super tax: adviser
SMSFs should have money allocated to either a cash or fixed interest account to ensure they can pay any liabilities that may arise, says a leading adviser.
Liam Shorte, director and SMSF specialist adviser for SONAS Wealth, told SMSF Adviser that having a “buffer” in the SMSF is essential, especially with the proposed $3 million super tax proposal due to be legislated in the coming months.
Mr Shorte said creating a cash reserve within the SMSF to serve as a financial buffer can help trustees navigate unforeseen expenses without disrupting the overall investment strategy and add a layer of financial security and flexibility.
“I advise my clients that every SMSF should have some money allocated to cash and fixed interest deposits that range between six months and two years,” Mr Shorte said.
“Ideally they should have around three to five years worth of pension in these so in case of unforeseen circumstances they never have to worry about where their pension money will be coming from.”
Mr Shorte said diversification is important in an SMSF and as there is no capital gains tax when the fund is in the pension phase, it is best to ensure there is liquidity to cope with unexpected situations.
“Shares can be sold in three days, but unlisted funds can only be redeemed at certain times such as every quarter, and do have limits,” he said.
“Trustees should be aware of liquidity needs for up to two or three years and lump sum assets like property can pose problems if cash is needed in a short time frame.”
He said many SMSFs invest in property believing that nothing will go wrong, but things such as losing a tenant, fire or flood damage or loss, can impact the fund’s capability to meet its compliance obligations.
And with the proposed $3 million super tax likely to be in force by 2025, planning for cash flow needs is imperative.
“Trustees need to be planning well ahead to ensure they have liquidity needs ready,” he said.
“With the proposed Division 296 tax, I’m trying to make clients aware of the implications and to implement strategies to minimise or avoid unnecessary tax.”
One of those strategies is to try to ensure the total super balance remains below $3 million, he said, by moving assets into trusts, investment bonds or personal names.
“It’s time to look at the big picture and see where is the best place for those assets to be,” he said.
“In regard to commercial properties, it can take from 12-24 months to sell them and residential property at the moment may also be impacted by rate rises in regard to sales.”
He added that although the majority of people with balances above $3 million are generally well organised, some people will be caught off guard who do have large commercial or residential properties in their SMSF portfolio.
“Unfortunately with property you can’t sell off part of it and some people may have to look at moving it to another entity, the SMSF selling it or taking a lump sum asset out of the fund if they can do better than the proposed 30 per cent tax rate,” he said.
One strategy option for large assets like commercial property is a partial sale. You can then own the asset as tenants in common with a trust or personal. Only a partial CGT event as not all of the property is transferred if not 100% in pension phase, materially reduced stamp duty due to the regressive scales (in NSW at least not sure about other states) and customisable for targeting $3m or other threshold as you can determine the percentage transferred.
Obviously messy then with joint bank accounts for expenses/rent and unlikely to be possible if an LRBA exists.
Further, in case of NSW at least, you can do a series of "unrelated transfers" greater than 13 months apart and get stamp duty down even further using the lower tax thresholds and tax free amounts.
Not ideal but an option in the right client circumstances.1- Good to know - thank you.
Obviously, we now have to protect our assets within super as well now - these used to be protected. This tax is nothing short of confiscation. Our fund went up over 250% in 6 years, mostly unrealised capital gains. Taxable income went up not nearly so much, but above CPI due to a change in investment, with reutilisation of some cash in bank. It doesn't take much to see why the underlying assets are at significant risk under this tax regime. To leave the funds in SMSF is self-serving of the SMSF and is a disservice to members.
I am guessing that if properties are held in unit trusts, this makes your suggestion potentially easier.
Maybe this was the government's intention anyhow, to keep funds in super low? They have to know that there are better tax vehicles. I for one refuse to pay 10% more tax in super than I pay outside of super. What happened to my super concession I ask under this Bill?
My personal tax rate is 37%, my super tax bill for 2022 would have been almost 47% of taxable income due to the rapid growth in my fund. 2023 would have seen it as 39% of taxable income. I refuse to use the term "Tax on Earnings" which is disingenuous, hence the term "Taxable Income" that I use. Everyone understands this term. It is deliberate trickery by the government of the Australian people at large.1 - The Land valuation from the Valuer General on one property alone in my SMSF just went up 25% in only 2 years. Another one has gone up 21%! As you can imagine, the Land Tax went up accordingly. This Division 296 is a tax on a tax on a tax. How can I ever keep up with liquidity at this rate of property unrealised capital gains. Happy problem vs not so happy problem ....
My guess is the reason that tax credits will never be refunded is that Treasury understands explicitly the liquidity issues for the ATO in this as well, and does not want to create these issues for the ATO, when the increased tax revenue will already have been allocated allocated in the budget. This tax is just so unfair in so many different ways.
Treasury is acting like you would expect from a communist or socialist country, confiscating funds from wherever it can to its own ends.
And the Greens are squealing that renters can't keep up with rental increases.... Seriously?
No point asking for a break - we are just an "insignificant number of people" as Treasury refers to us.1
- The SMSF assets will be set at the market value as at 1 July 2025 - the start of Div 296. A view on likely asset growth from that point will be a key input in a cost benefit analysis of whether to move assets or stay invested in super. It is too simplistic to look at non super from a 30% perspective. Div 296 will not be 30% until the member balance is in the lofty heights (that were the broadcast levels the politicians used to "sell" this new tax).
A good way to understand the tax impost of Div 296 is simple calculation:
Most know how to work out the actual tax percentage at Fund level - total tax over taxable income. In most cases, less than 15%, unless the portfolio comprises only property and/or IEQ.
Div 296 is calculated on the percentage above $3m so once the "superannuation earnings" are calculated from the adjusted TSB movements, the 15% will be modified by the percentage over $3.
For example, a $10m balance is 70% over $3m. Therefore, the effective Div 296 tax is 10.5%.
The fund level tax percentage + the Div 296 effective tax rate can then be combined to come up with a comparative tax.
If fund level tax IS 15%, and in this example, Div 296 is 10.5%, the total tax is 25.5%. MTR can be lower than this but, as for companies, the lowest rate is 25% if not a base rate entity and not for investment bonds, for example.
Any capital movement from super is more likely to be motivated by the sheer unfairness of imposing tax, albeit a proportional approach, on unrealised gains. If this system of taxing was proposed for property investors, maybe there would be more push-back as more people would understand just how unfair the tax (calculation) is.2- Using 2022 for our 2 members in this household in the same fund its well over double the tax. In fact it is over a tripling of the total tax payable.
In 2022 our tax on "taxable income" was 15%, and using the Div 296 formula, it was more than a doubling of that 15% for the 2 members combined, making it almost 47% tax payable on "Taxable Income" for that year. 2023 was slightly less tax, but markedly over a doubling of tax again. That's how I like to refer to this tax. It is well above 30% total tax on "Taxable Earnings", for funds such as ours that have consistently high unrealised gains. Using the Treasury term "Earnings" is disingenuous and deliberately grossly misleading.
Speaking to the general public about this, they are always unaware of what it means and state unequivocally that a tax on paper profits is outrageous. None of them are in the category where they would currently be affected by this tax.
It is unAustralian and unfair. I say unAustralians as Australian are largely aspirational. They hope to see themselves one day being financially secure, even financially free.0- I would like to add to that, that we are still expected also to pay CGT when the asset is sold, so essentially, we are paying a form of Capital Gains Tax twice, once as it is accruing an unrealised gain (paper profit) and again once the capital gain is actually realised. The whole concept as portrayed to the general public is both disingenuous. It is also extremely egregious to a minority group of people who are being discriminated against. I say disingenuous as the Labor government and Treasury have deliberately dressed this as simply a doubling of the super tax to the broader community. It is very clearly not that, and in many cases significantly more than that, even more than a tripling of the Income Tax of the fund (as in our case), and the broader community does not seem to have grasped that this is an egregious tax on paper profits only. Given how the current government are very happy to steal our life's savings, they are likely to take this outside of superannuation as well or extend it within super at some point, as it is very easy money for them.
It is telling that with the short consultation process, and very insignificant changes overall, many more put forward by some very distinguished and well-respected organisations, that this government is very determined and they simply do not care, they just want their insatiable greed quenched.-1
- Thank you for your article, Keelie.
I have a couple of questions though.
Correct me if I am wrong, but CGT will apply on everything outside of the pension account (the remaining net funds must remain in accumulation phase) and as a maximum limit on a pension account (read TBC) is currently well below the $3m cap if this new tax comes in, there are CGT implications for moving excess assets out of super, simplified to 10% of the capital gain?
And that this amount also depends on the proportion of the year that you are retired in that year of transfer or sale?
And that you are retired (once meeting a condition of release for retirement) as long as you work less than 10 hours each week (not averaged), which means that it is not classified as earning meaningful income (that is, not classified as either Full-Time or Part-time work)?
And in the case of a transfer to another entity (such as a trust), there is likely stamp duty as per the relevant state legislation of the where the asset is located?
I would truly appreciate a reply to these questions. Thank you.0
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