By John Kehoe and James Hall
Wealthy retirees have begun selling assets and restructuring their investment portfolios to avoid Labor’s planned extra tax on superannuation savings worth more than $3 million, financial advisers say.
Some high-income earners aged in their 40s have also stopped putting additional money into self-managed superannuation funds because of the uncertainty caused by the Albanese government’s proposed tax on unrealised gains, advisers said.
Treasurer Jim Chalmers in 2023 announced a surprise doubling of the existing 15 per cent tax on the annual returns from superannuation savings above $3 million, including unrealised gains on assets held inside super funds such as shares and property, even if they had not been sold.
The controversial super tax is Labor’s major revenue-raising initiative for its second term of government and is forecast to rake in $2.3 billion a year initially. It will raise billions more over time as inflation pushes hundreds of thousands more people above the $3 million threshold, which Chalmers has refused to index.
Labor will be able to legislate the new tax, scheduled to start on July 1, with the Senate support of the Greens, who have indicated they will not block the tax and will give ground on their request for the threshold to be lowered to $2 million.
‘Significant amount of panic’
Melbourne-based tax adviser Noel Beharis told The Australian Financial Review there was a “significant amount of panic” among SMSF members.
“For members of retirement age who can cash out their superannuation benefits, they have started the process of selling down assets and transferring the assets out of the fund to vehicles that will hold that wealth going forward.
“They are using the proposed changes as an opportunity to review their succession plans and setting up the appropriate structures to carry those plans out.”
Investment companies and family trusts are two alternative investment vehicles that people with high superannuation balances are considering.
Liberal Tim Wilson, whose lead in the Melbourne bayside seat of Goldstein had narrowed to 401 votes on Wednesday night, writing in the Financial Review said he would set up a campaign fund to which concerned members of the community could contribute to help defeat Labor’s super tax.
“A campaign will focus on ensuring the Labor MPs understand that voting for this tax means seppuku for their political careers,” Wilson said.
Liberal senator Jane Hume called on Labor’s new assistant ministers, economists Daniel Mulino and Andrew Charlton, to talk sense into Chalmers to drop the “retirement tax”.
“These guys might be able to help Jim Chalmers see the light on this,” Hume said on Sky News. “It’s a terrible policy.”
Teal independent Allegra Spender, who represents the Sydney eastern suburbs electorate of Wentworth, has implored the treasurer to rethink the tax.
Some Labor MPs have said it was the one negative issue raised with them at polling booths during the election campaign.
Chalmers on Wednesday rejected suggestions there had been widespread criticism of the super tax changes applying to unrealised gains.
“I’m not generally or genuinely stopped in the street about these changes,” Chalmers said from his working-class home suburb of Logan in outer Brisbane.
“I think most people recognise that these are modest changes [that] affect a tiny, tiny sliver of people with superannuation – still concessional tax treatment just slightly less concessional for people with very large superannuation balances.”
If the value of assets inside a super fund fell after an unrealised gain tax was paid, Chalmers said people would be able to carry forward losses to offset against any future gains if asset prices inside the fund recovered above the previous peak.
More people impacted
Chalmers argued this week that only about 80,000 people, or 0.5 per cent of the population, would pay the new tax.
Treasury estimates the top 10 per cent of taxpayers would be impacted in 30 years if the $3 million threshold is not indexed. The Financial Services Council projects more than 500,000 people who are working today will be caught by the tax over their lifetime.
Jonathan Philpot, wealth management partner at accounting firm HLB Mann Judd in Sydney, said wealthy clients with more than $5 million in SMSFs were looking to shift money into investment companies, which are taxed at a maximum rate of 30 per cent but do not pay tax on unrealised gains.
Others with multiple family members would consider using a family trust to stream income to take advantage of lower personal marginal income tax rates, he said.
“A fairly large portion of the people with more than $3 million in super can start to look at withdrawing the excess amount out of super and look at structuring their affairs.”
Although the new regime is proposed to start on July 1 this year, Philpot said people have until the end of the financial year on June 30, 2026, to restructure their affairs when the total superannuation balance will first be measured.
But superannuation was still a very tax-effective investment for people with up to $2 million to $3 million in retirement savings, he said.
Beharis said some SMSFs had significant unrealised gains in them, but selling was not always the best strategy. It would depend on the asset mix inside the fund, how long they had been held and the existing capital gain.
“Although the 15 per cent tax is painful, the cost of winding up the fund is also painful.”
Threat for Gen Z
Assets sold out of the fund before the new tax takes effect will be subject to the existing 10 per cent capital gains tax on super assets.
“They may be able to do better economically in the fund in spite of the [proposed super] tax than what they could economically achieve outside the fund,” Beharis said.
If it is introduced as announced from July 1, the so-called Division 296 tax of 15 per cent will be imposed on the growth in the superannuation balance (less contributions) each year, in addition to the existing 15 per cent tax on super earnings.
For assets outside the fund, income is expected to be taxed on average at the corporate rate of up to 30 per cent and discounted capital gains tax rate of 23.5 per cent.
Research by AMP deputy chief economist Diana Mousina shows at least half of Gen Z will hit the $3 million mark by the time they near retirement in about 40 years. This is due to wage inflation and the power of compound interest.
Beharis said many wealthy people aged around 40 who had little wealth in superannuation did not want to hear any advice on why superannuation is a good idea.
“They believe that by the time they retire, they will not be able to access their superannuation or that their superannuation will be taxed to such an extent that they will not be able to live off it.
“The belief is that they made superannuation too good for the Baby Boomers and forgot everyone else.
Chalmers has defended not indexing the $3 million threshold, arguing that other taxes such as income tax were not automatically indexed and governments in the future could lift the $3 million threshold.
The Coalition claimed during the election campaign that because the $3 million threshold is not indexed to increases in inflation, in 40 years the tax could collect $58 billion annually.
In Victoria, the sale of property held inside SMSFs had been exacerbated by the state Labor government’s additional taxes on residential and commercial investment properties, vacant land and Airbnb places, Beharis said.
“The Division 296 tax couldn’t come at a worse time for SMSFs that hold real property in Victoria,” Beharis said.
“The anger of many is that the Division 296 is forcing them to move significant real property assets outside superannuation because they cannot afford the tax.”
