Death, taxes and superannuation changes

The super wars are causing many Australians to draw a line in the sand and there is a lot of heated debate going on in the community right now.

It’s hard to defend individuals with balances in excess of $3 million on equity grounds and those people probably aren’t going to get much sympathy from everyone standing on the other side of the proverbial line.

playbook, which states: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

The proposed methodology behind the tax calculation goes against some established principles.

TONY GRECO

is technical policy general manager at the Institute of Public Accountants.

However, we should also remember it is not easy to accumulate balances that large under the current rules and the caps on concessional and nonconcessional super contributions they contain. As such, funds with more than $10 million appear to be the main legacy issue.

In any case, these individuals will die and the funds they’ve accumulated will exit the super concessionary tax environment. It would be nice if people could keep their money parked in tax purgatory forever, but just like people, super isn’t immortal.

To some extent, the advent of introducing a transfer balance cap limiting the total amount of super that can be transferred into tax-free retirement has reduced this benefit, but there is no limit on the amount of money that can be held in accumulation phase, which is subject to the concessional 15 per cent tax rate.

But are we also going to start targeting taxpayers who disproportionately claim other generous tax concessions? It would probably be more palatable for the select group that will be impacted if many other excesses of our tax system were addressed at the same time, but that is a matter for the government.

For those with short memories, it wasn’t that long ago we were encouraged to add to our superannuation balances. Back in 2007 the government of the day afforded individuals a onetime opportunity to pour $1 million into their super funds if they did so before 30 June, prior to limits being imposed. It means some people are now being haunted by the Ghost of Christmas Past.

Most of the high-balance member accounts are sourced from non-concessional contributions that have already borne tax, which is something a lot of people seem to forget. Superannuants with reasonable balances will never be a drain on society because they are essentially self-funding all their future needs. The government has gone for the highest return relative to the lowest number of people impacted, which is straight out of Louis XIV’s finance minister Jean-Baptiste Colbert’s infamous

First, the total super balance includes the tax-free transfer balance cap, the lifetime limit on the total amount of super that can be transferred into tax-free retirement, as it applies to funds in pension as well as accumulation phase.

Second, it treats income and unrealised capital gains equally. Taxing unrealised gains goes against well-established tax principles.

Third, it applies no capital gains tax (CGT) discount to unrealised capital gains. When capital gains are realised, the super fund can usually take advantage of CGT discounting rules, which limits tax to 10 per cent for realised gains.

Last, and this is the worst aspect, it appears there is no refund if unrealised gains reverse as the loss needs to be carried forward. It feels like a casino where the house never loses.

This may be a common scenario if asset values rise and never recover before the member dies. Therefore, you’re paying tax on the unrealised gain first, but then in future years if the asset value goes the other way, you don’t get to claw that back.

You need to wait for the investment value to recover before you get to see the benefit of that prepayment. While there is no detail yet on how the measure will work upon the death of a member, this could potentially mean if the member dies before the asset value recovers, the tax paid is essentially lost.

The younger generation will be watching and thinking about what the future government will do with their balance, which isn’t something that promotes certainty.

Tax incentives are important to encourage individuals to lock their money away for a long time, assist funding their retirement and to reduce the number of citizens requiring access to the age pension.

Further, let’s not forget the major political parties ruled out super changes as part of the lead-up to the last election.

Super is a honeypot and it’s irresistible for most governments because honey provides a delicious sugar rush. As such, it might be wishful thinking to expect nothing further will change in the future.

It would appear the only certainties in life are death, taxes and super changes.

Louise Biti

Director, Aged Care Steps

Aged Care Steps (AFSL 486723) specialises in the development of advice strategies to support financial planners, accountants and other service providers in relation to aged care and estate planning. For further information refer to www.agedcaresteps.com.au

Taxation of super balances over $3m

The government has indicated an intention to amend superannuation taxation laws to further limit the amount of money that is accumulated in the tax-effective super environment.

The argument is that balances in excess of what is needed to generate a reasonable retirement income should not be eligible for generous tax concessions.

This change is still only a proposal and legislation has not yet been introduced. But the concept proposes to tax the earnings on balances over $3 million at 30 per cent. The intention is to apply this change commencing in the 2026 financial year.

Paying super death benefits

www.ato.gov.au

at QC45254

Clarification has been provided by the ATO on situations where a lump sum payment that has been requested by a member has not been received before that member’s death.

The guidance states that if the trustee was aware the member was deceased at the time of payment, it should be treated as a death benefit. This should usually be the case for an SMSF.

This position aligns with standard industry practice, but may contravene previous SMSF private binding rulings.

Providing advice on SMSFs Information Sheet 274 (INFO 274)

ASIC has released an information sheet with tips to help Australian financial services licensees and authorised representatives to provide advice on SMSFs.

This covers issues around understanding obligations, assessing whether an SMSF is relevant for the client, determining the appropriate trustee structure and advice on the fund’s investment strategy.

Schemes involving an asset protection arrangement ATO warning

The ATO has issued a warning in relation to SMSF compliance risks for certain schemes involving asset protection strategies. These are schemes that have been used to provide protection from creditors.

These schemes use what is called a ‘vestey trust’ whereby SMSF assets are mortgaged to an asset protection trust.

The SMSF executes a promissory note and the trust lodges a caveat.

The ATO warns that these arrangements may breach superannuation laws and advises any trustees who have used such arrangements to selfdisclose.

Increases in penalty units

The value of penalty units increased to $275 on 1 January 2023, as announced in the October budget. The budget also indicated a further increase will occur on 1 July 2023.

NALE consultation paper Non-arm’s-length expenditure rules for superannuation funds consultation paper

The industry may be one step closer to resolving issues around non-arm’s-length income and nonarm’s-length expenditure, with the release of a consultation paper by the government.

This paper considered measures to limit the taxation penalties for breaches that relate to general expenses. It aims to address the potential for disproportionately severe outcomes under current rules.

The consultation period ended on 21 February.

Downsizer contribution age Treasury Laws Amendment (2022 Measures No 2) Bill 2022

Legislation has passed to reduce the eligible age for downsizer contributions to age 55.

Annual lodgements of TBAR

From 1 July, all SMSFs with members in retirement phase must report transfer balance account events quarterly through the lodgement of a transfer balance account report.

Indexation of thresholds

It is expected the general transfer balance cap will be indexed by $200,000 on 1 July 2023.

This increases the cap to $1.9 million. The indexation again will be applied on a proportionate basis.

However, the contribution cap limits will not increase for the 2024 financial year.