If you have a Total Super Balance (TSB) of $3M or more, there’s every chance the 15% flat tax rate you’ve been enjoying on your superannuation earnings will end on 1 July 2025.
As we wait for the government to provide more information about its proposed 30% superannuation tax, which includes an extra 15% tax on superannuation earnings, a strategy commonly used in the 1960’s pre-super era, could provide an alternative for managing super funds that exceed $3M.
As announced by the Treasurer, Dr Jim Chalmers in February 2023, the Federal Government is proposing to raise the tax rate to 30% for earnings in superannuation funds, specifically for earnings generated in connection with members that have Total Super Balances (TSB) over $3M.
It is important to note, the new rules apply per person, not per fund, and to earnings to the extent that balances that exceed $3M, not the entirety.
We understand that earnings generated in connection with the first $3m will continue to attract the concessional 15% rate under existing rules.
Worryingly, the current proposal indicates that where a member’s TSB exceeds the $3M cap, the additional tax will apply to both realised and unrealised gains connected with the excess. This approach is drastically different to most other circumstances where gains on investments are subject to tax at the time of disposal.
The current proposal does not indicate that the $3M cap would be indexed to inflation.
This would mean that in a few short years, a much larger portion of the population (not just high net wealth individuals) may surpass the $3M cap and be subjected to the extra 15% tax on their retirement savings.
An obvious method which would allow members to mitigate the extra 15% tax is to simply withdraw the excess amount from their fund (to the extent that members satisfy a condition of release and are able to access their superannuation savings). There would also be more of an onus on couples to seek to equalise account balances in order to maximise the $3M cap.
Given the proposed new combined 30% tax rate is the same as standard company tax, it may be time to return to 1960’s thinking when, in the absence of superannuation funds, business owners, high earners or high net wealth individuals placed surplus cash and retirement savings in an investment company.
Among other things, this approach reduced their higher personal income tax rate to the lower company tax rate while providing other tax efficiencies not generally available to individuals. Nowadays, these tax efficiencies include:
- For starters, an investment company structure is likely to be simpler. Many of the strict compliance rules and regulations specific to superannuation will not apply.
- The proposed tax on unrealised gains should also not apply in a company setting.
- The ability to reinvest profits within a company is relatively simple compared to other structure types.
- Generally Division 7A will not apply where profits are directly reinvested within the company (which differs, for example, to investment trusts with a corporate beneficiary, where profits are often “loaned back” by the company to the trust, creating complex tax issues).
- Where earnings are primarily from fully franked dividends, the imputation credits attaching will generally clear most, if not all, of the investment company’s income tax liability.
- Companies have perpetual existence, which make them ideal for long term (and possibly multi-generational) wealth accumulation.
Today these types of companies are typically owned by a discretionary trust to provide flexibility in distributing profits to family members, however multiple share classes may also provide similar flexibility.
It goes without saying, any financial and tax management approach needs to be well considered in context of individual circumstances. For example, an obvious disadvantage of investing through a company is that a company cannot access the 50% CGT discount. Issues such as these would need to be considered when deciding whether to implement an investment company strategy.
As you’ve read here, there is a lot to consider and a number of interacting financial planning, wealth management and tax issues that need to be considered when determining the overall solution that’s right for you.
To learn more about the $3M TSB cap and how the extra 15% tax might affect your retirement savings and for options that could help you to manage your tax exposure, please contact Craig Barry, Resources Unearthed on +61 (0) 7 3007 2000 or email firstname.lastname@example.org.
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Resources Unearthed is a solutions hub that provides integrated financial, legal, property and accounting and business advisory services for executives, professionals and business owners in the mining and resources sectors.