Accountants urged ‘not to jump the gun’ on $3m threshold

While the $3 million threshold tax for high balance funds is causing considerable worry for high balance clients, Heffron managing director Meg Heffron has advised accountants against rushing out and telling clients to pull money out of super.

“I’d be nervous about doing that for a number of reasons. Firstly it’s just a proposal for now even if the government is very determined to [pass this measure],” Ms Heffron said speaking in a recent webinar.

“I think the government will remain firm on this measure but politics is a funny game who knows if it will fall over at the final hurdle. So don’t take your money out yet.”

It’s also important that accountants and their clients keep in mind that it’s only a tax on incremental gains.

“It’s just a tax on incremental gains, the bits of growth your clients are getting each year and it’s not touching gains they’d built up before 2025,” she said in a recent SMSF Hero webcast.

“If you’ve got a client with a very large gain built up before 2025, they won’t feel this tax much because the tax only touches the incremental gain. In contrast, if they’ve got a very large capital gain sitting there and they realise that gain too early before they’ve got as much as possible into pension phase, then they’ll pay more tax than they would have if they’d just waited a bit longer.

“So I don’t think the answer is to sell up, take everything out of super, even if it does come in exactly as announced. I also don’t think the answer will be to take everything over $3 million out of super.”

The main group of clients who might be thinking of taking money out of super will be those who’ve just sold an asset, according to Ms Heffron.

“The super fund has sold an asset and realised the capital gain on that asset and they might be thinking ‘okay, I’ve got $4 million in cash in my $7 million fund. Do I take it out and make my next investment in a family trust instead?” she said.

“Let’s say I do some smart tax planning and I make sure that the income on that investment is never taxed more than 30 per cent. Perhaps I’ve got a corporate beneficiary of that family trust or maybe with the stage three tax cuts they can receive it themselves at a maximum rate of 30 per cent.”

This would mean the client avoids pay any tax on the incremental gain as that asset goes up in value, she said.

“They’ll pay some tax up to 30 per cent on the earnings, but only on earnings, not unrealised capital gains. So it might look attractive to have it outside super during that phase when it’s growing but you haven’t sold it yet,” said Ms Heffron.

However, Ms Heffron warned that in some of the modelling she’s done on the measure, once the asset has been sold the equation then flips.

“You’d much rather realise the gain in super than realise it in a trust structure, unless you can get your tax rate down below 30 per cent,” she stated.

“What that means is that it looks good while the asset is growing but bad when you sell the asset.”

This means that the length of time the asset is held becomes important.

“I’ve looked at periods of five, six or even seven years and it was still better to have it super. You have to accept the fact that you’re paying more tax on the way up but you then pay a lot less tax when you actually sell the asset,” she said.

“It’s interesting that even with some fairly basic modelling, it still looked fairly good leaving it in super.”

Ms Heffron said clients shouldn’t necessarily stop making contributions either.

“These guys are not making non-concessional contributions, they’ve got too much in super already. They’re making one of the other types of contribution I’ve listed such as concessional or they’ve sold a small business or they’re making a downsizer or any one of those contributions,” she said.

“If you think about it, that has some other benefit. People make those contributions for different reasons. I’d still make them and then bank on the fact that you’ve got plenty of time before this measure comes in, you only need to take the money out before 30 June 2026, we’ve got quite a bit of time here.”

For younger clients it’s a different situation, however.

“For your 45 year old client, they’ve got possibly 20 years before they can do much about this. It doesn’t look like they’ll be able to choose to take the money out,” she said.

The importance of equalising balances

For wealthier clients, it will become even more important to ensure their balances are as close to each other as possible, said Ms Heffron.

“There’s always been good reasons to do this. It’s useful for transfer balance purposes and for when you inherit from a spouse,” she said.

“Unfortunately, it’s tricky to even up people’s balances. We can do contribution splitting and re-contributions to the lower balance spouse but they take time and there’s only a limited degree to which you can do that. If the lower balance spouse already has more than their transfer balance cap in super, they won’t be able to make non-concessional contributions.”

Ms Heffron said some clients might look to apply different investment approaches to different members.

“We might see what I’ve describe as member investment choice where the lower balance member is invested in the more volatile assets that have higher growth potential, and the higher balance member is in less volatile lower growth potential assets,” she said.

“I’m not talking about segregating for tax purposes, because higher balance clients with pensions generally can’t do that but they can attribute different assets to different accounts purely for the purposes of allocating investment earnings.

You might have exactly the same overall investment strategy for the fund, but simply have it split up differently between different people.

“One of things people are worried about is that if they’ve got highly volatile assets and they’re total super balance is jumping all of the place then their tax bill could jump up enormously,” she said.

“They might prefer to have those more volatile assets in the lower balance spouse’s account.”