Stand by for a superannuation exodus as investors seek new tax breaks

Doubling tax on super amounts over $3m will push savings out of the system as investors seek new tax breaks | What are the options?

With house prices falling, the appeal of negative gearing and capital gains tax discounts will be subdued in the near term.

Goodbye to the golden age of super: billions of dollars will now be diverted from the super system after the government’s surprise move to double the tax on amounts above $3m.

Investors will immediately look towards the slim menu of tax breaks left open to everyday investors.

But with house prices falling, the appeal of negative gearing and capital gains tax discounts will be subdued in the near term.

In contrast, the appeal of franked dividends on blue chip shares will be boosted, while the sector set to boom will be investment bonds which offer long term tax protected investing outside super.

Under the new rules announced on Tuesday money in super will now be taxed in three bands: zero until the amount hits $1.7m, 15 per cent up to $3m and a new 30 per cent rate for all money over $3m.

While industry super funds “welcomed” the decision to lift super taxes — despite election promises not to do so — professionals in the sector were furious with the surprise announcement.

Tony Negline, of the Chartered Accountants Australian and New Zealand group, said “investing in super in this country is like trying to shoot a moving target”.

“How on earth can we expect Australians to invest in their super now when the rules keep changing – and who knows what the rules will be when they reach retirement age?”

Separately, Wealth Partnership chief executive Tony Rumble said “these changes will further increase the value of franked dividend income due to their ability to offset taxable income.”

Older Australians – especially retirees – depend on franked dividends, although this income stream is also under pressure with a plan to stop companies from paying fully franked dividends from the proceeds of a capital raising.

Meanwhile, Grant Hackett, CEO of the market’s biggest investment bond provider, Generation Life, said; “This new limit will send investors to seek alternatives. For many there is just too much instability in super rules, it no longer makes sense to base all your plans on a system that keeps changing.”

Grant Hackett, CEO of investment bond provider, Generation Life. Picture: Wayne Taylor

As Hackett – the former Olympic swimmer – suggests, investment bonds have had a stable tax protected environment for two decades, while super has been hit with dozens of changes in the last decade.

The tax on investment bonds is set at the corporate rate of 30 per cent, rather than personal rates which run up to 45 per cent, and investors can access the profits via “tax paid” at the end of a 10-year term.

Whether by accident or design it just so happens the latest super changes means that investment bonds and super – above $3m — will now be taxed at the same 30 per cent rate.

Australian Unity, Generation Life and Insignia are all active in the investment bond market which is worth around $14bn a year – a fraction of the amount in superannuation.

Hackett says he doesn’t know if the government will actually raise the estimated $2bn per annum from the new rules as forecast by Treasury, but he believes “people looking who are looking for tax protection on strong salaries will be asking, when does this stop?”

Investment bonds – which can be used for estate planning – operate under the credit legislation where their investors are protected from creditors in the event of financial hardship such as bankruptcy.

Many financial advisers began to examine investment bonds after the super rules were tightened sharply in 2016 with the closure of unlimited tax free super.

Still, not all financial advisers are fans of investment bonds. Adviser James Gerrard says: “there are limitations with investment bonds – especially if you take money out before the 10-year term expires. Investors should be very careful investing in anything on the basis of tax advantages.”

Originally published as Stand by for a superannuation exodus as investors seek new tax breaks