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An example when it’s not
The preamble to the US Declaration of Independence stated that “all men are created equal.” However, not all superannuation investments are equal. Especially when it comes to taxation.
The proposed new superannuation legislation that places an additional tax on superannuation earnings on balances above $3m creates an environment in which investments are unequally treated.
Investors who do not understand the nuances may end up paying more tax than they would otherwise pay.
‘Growth’ investments can be affected unequally.
A simplistic analysis would likely conclude that as the additional tax is applied at a flat rate of 15%, all investments are equally affected.
Such an analysis does not consider the tax outcomes of alternative investment structures, e.g. the differences in the treatment of capital gains.
Earnings of a capital nature are taxed differently to earnings of an income nature. Discounts of up to 50% can be applied to net capital gains on the sale of an investment held for 12 months or more, depending on the owner of the asset. In superannuation, that discount is 33.33%.
The proposed additional tax of 15% on superannuation disproportionately affects growth assets compared to income assets. This is in two main ways, irrespective of whether the asset is later realised for a gain or a loss:
- The new tax is levied each year when there is an increase in the net value of a member’s balance, including on unrealised capital gains.
- The usual 33.33% capital gains tax discount is not provided for assets that have been sold, even if held for longer than 12 months.
These two factors potentially shift the scales for members with balances above $3m who hold high growth assets, such as some types of direct property and equities.
Case study: Geoff’s superannuation and the potential tax burden
Geoff, 60, is a retired surgeon with a member balance greater than $3m in his Self-Managed Superannuation Fund (SMSF).
If Geoff’s net balance grows in a given year, his additional tax liability will be 15% of the appreciation of the proportion of the portfolio that is greater than $3m. This regardless of whether any assets are sold (i.e. there is tax on unrealised gains), regardless of any carry-forward capital losses and the tax cannot be reduced by deductions, offsets or losses.
If Geoff sells an investment held for more than 12 months, he will still face capital gains tax of 10% (i.e. 15% less a 33.33% discount).
Potential solutions: exploring alternative asset holding structure
Each dollar of growth investments that pushes Geoff over $3m in his member balance will face 15% tax on its annual capital appreciation and an additional 10% in capital gains tax once sold (where held for at least 12 months), i.e. a total of 25%.
Contrast this with Geoff holding the growth investment personally; when held for more than 12 months, it qualifies for a 50% discount. As Geoff is retired, it is likely that his personal marginal tax rate will be less than 47%. Hence future appreciation of the investment will not only qualify for the 50% CGT discount, but also spread the taxable gains over the various personal income tax tiers. Furthermore, the tax will remain only payable on the sale of the investment.
Whilst not all investments are high growth, holding those that are, to the extent that the member’s balance exceeds $3m, now faces potentially significant tax outcomes once the new laws pass. This, we believe, is only a matter of time.
Exploring alternative holding structures may offer better long-term tax advantages. With the potential implementation date approaching on July 1, 2025, a simple question arises. Is there merit in either:
- selling high growth assets; or
- transferring high growth investments from your SMSF
… before that date?
This is a matter that must not be left until June 2025 to address. Talk to your Private Client Advisor, or get in touch with First Samuel today.
No tax back if ‘earnings’ fall
If ‘earnings’ fall in a year, the individual does not get a tax refund. But instead can carry-forward the loss. The problem is if ‘earnings’ do not rise enough to recoup tax paid. This is more likely to be of concern once in the drawn down phase, particularly for individuals with higher minimum pension drawing requirements.
Beyond taxes: additional considerations for asset allocation
The decision on which vehicle to hold high-growth assets should not be solely based on the immediate tax implications of capital growth. Several other factors need to be considered:
- Asset income: the ongoing income generated by the asset
- Stamp duty (for real property): Potential stamp duty on asset transfers between superannuation and alternative structures
- Estate planning: there will be a further tax applied to your residual superannuation balance, eventually being paid to a non-dependent beneficiary (an extra 15%, plus Medicare levy unless distributed via your estate)
- Asset usage: the intended use during the asset’s life—future capital works and how they could potentially be undertaken and funded
- Depreciation opportunities: availability of depreciation benefits for specific assets
Take action: transform your financial future
Contact us today to discuss how the proposed new superannuation tax affects your wealth creation strategy and explore personalised solutions to optimise your financial future.
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The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation, or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.