Wealthy Australians outsmart Labor’s new $40bn super tax

Where there’s a will, there’s a way. These are the strategies wealthy Australians plan to use to skirt the proposed new tax.

Wealthy Australians have found a way around being hit by the new super tax.

While the federal government hopes to add $2.3bn per year to its coffers from the incoming super tax, savvy Australians are preparing to implement strategies via self managed super funds (SMSFs) to circumvent its impact. It may leave the government well short of its $40bn collection target over the next decade.

When federal parliament resumes later this month Labor will welcome three extra senators, boosting their numbers to 29. And with 10 green senators and a further 10 crossbenchers, the government will have multiple pathways to get the required 39 votes needed to pass the contentious Div 296 superannuation tax on super balances above $3m.

With the commencement of this new tax on unrealised gains looking more like a case of ‘when’ rather than ‘if’, Sydney-based accountant Timothy Ricardo from Accounting Advisor Group says that the key to overcoming Div 296 tax is to bring forward family succession planning arrangements.

“Rather than wait until death to transfer wealth to the next generation, a retiree with over $3m in a self managed super fund might consider adding their children to the fund and start to build their member balance now,” Ricardo says.

The way this would work is that the retiree would withdraw a tax-free lump sum from their account-based pension and gift it to the child. The child would then contribute the amount back to the SMSF as a non-concessional contribution. By utilising bring forward rules, the maximum a child could contribute to super is $360,000 in one financial year.

“For someone with $3.5m in super and two children, withdrawing two lots of $360,000 and having the children contribute it back to the SMSF, this would reduce the member balance out of the danger zone of Div 296 to $2.78m while the overall fund balance would remain at $3.5m” Ricardo says.

Although the children would be in the accumulation phase and their member balance taxed at up to 15 per cent on income and gains, it sidesteps the annual taxing of unrealised capital gains under Div 296 tax. It was only in 2021 that the Morrison government increased the maximum number of SMSF members from 4 to 6, which conveniently allows more children and family members to participate in this strategy.

What you need to know to beat Div 296

The first is that you must have reached a condition of release to be able to withdraw lump sum amounts from super. This usually means reaching age 60 and having retired. For people aged between 60 to 64 who are still working, a transition to retirement pension can be established and up to 10 per cent of the balance withdrawn each financial year as a pension payment.

You also need to have a high level of trust that your child or family member will contribute the funds you gift them back to the SMSF rather than take the money and run. And to state the obvious, even when contributed back to the SMSF by the child, it forms part of their members balance, which may be inaccessible for decades if the child is aged in their 30’s or 40’s.

Administratively, as each member of a SMSF must also be a trustee, the operation of the fund becomes more complex. All trustees will be required to sign off on documents such as the investment strategy review, minutes, resolutions, financial statements and tax return.

The final challenge is having sufficient liquidity within the super fund to make withdrawals to give to your children. Although this may seem like a deal breaker for those with lumpy assets in the SMSF such as the 17,000 farmers with primary production land inside of SMSF, a recycling strategy can be executed which achieves the goal of transitioning super out of the higher balance parent’s name into the lower balance child’s name.

Ricardo explains the circular nature of the strategy: “Say a 65 year old retired farmer with a $4m farm in their SMSF only has $100,000 in the fund bank account. To build the member balance of the children, the farmer can withdraw the $100,000 cash from the fund, give it to the child who then contributes it back in the fund, replenishing the $100,000 SMSF bank account balance. This process can then be repeated over and over again until either contribution caps are reached for the child or the desired level of dilution of the parents member balance has been achieved.”

It is important to remember that although much has been spoken about the new super tax and its adverse consequences for people with more than $3m in super, its wording has yet to be finalised. Labor does not have a majority in the senate and they may need to compromise with the Greens or crossbenchers, which could see amendments to the final bill. As such, the advice coming from tax, legal and financial advisors is to prepare strategies to mitigate the Div 296 tax, however keep them on ice until the final legislation is passed and comes into effect.

James Gerrard is principal and director of financial planning firm www.financialadvisor.com.au