How to avoid family wealth being lost to new super tax

Investors worried that superannuation changes targeting balances over $3 million will

affect the transfer of wealth to their children and grandchildren are turning to alternative

assets and strategies that offer comparable tax breaks and greater flexibility.

Their plans range from tax-efficient investment bonds through to discretionary and

testamentary trusts that can provide family savings structures with enhanced asset

protection, say financial advisers.

Anna Hacker, client director of Pitcher Partners Advisory, says: “There are many overlooked

options to super that can create and protect significant investment wealth exceeding super

caps. They have always been there, but they are more attractive now. Investors might need to

be a bit more creative.”

Greg Bird, Australian Unity’s head of strategy and distribution for life and super, adds: “This

is going to affect a wider group of people than just those with $3 million in their super.”

Bird, who manages more than $2 billion worth of investment bonds, also says:

“Psychologically, it will filter down to younger super savers worried about what else will be

changed over coming years.

“Those in their 40s now are likely to find that the rules and regulation around

superannuation savings are very different when they reach their preservation age and

eventual retirement.”

He says investors are already asking about different strategies to lower the regulatory or

legislative risk of more changes.

Anne-Marie Tassoni, a partner of private wealth at Cameron Harrison, adds: “The most

affected members will simply restructure their affairs and invest the excess above $3 million

in other tax structures. They can also be a bit more strategic about what types of assets they

invest in which entities.”

The retirement rethink follows the federal government’s decision to place a $3 million cap

on individual member balances. For balances over that amount, earnings will be taxed at 30

per cent, which is double the current rate of 15 per cent for those in accumulation phase.

While the super changes still have to be finalised, advisers, tax experts and fund managers

suggest the following options to pass on family wealth outside super:

Children’s super

Tassoni says: “Investors that have accumulated more than they need to support their

lifetimes might consider drawing down on their superannuation above $3 million and

contribute to the superannuation accounts of their children.”

She says the inheritance advice will prevent “frivolous consumption” by the children, who

may be many years away from accessing superannuation, while adding to their future nest

egg.

“There are risks,” she adds. “It presents a potential asset protection issue if an adult child’s

relationship breaks down and there is a marital property settlement.”

Investment bonds

Grant Hackett, chief executive of Generation Life, says the proposed super changes are

already sparking new interest among investors looking for investments that will complement

super.

Unlike super, investment bond funds are not locked until preservation age or retirement,

which means funds can be withdrawn at any time. They are popular with high-income

earners seeking to maximise tax, protect assets and wanting more certainty in estate

planning.

Tax is not paid on any income distributed by the bonds. Investment earnings are taxed at 30

per cent, but the rate can be lower depending on the level of imputation tax credits generated

from the underlying Australian shares. Hackett says taxation on its bonds is typically

between 12 per cent and 17 per cent.

Hackett says that savers are concerned about the possibility of additional changes. “There’s

distrust growing among investors.”

Tassoni adds: “Investors can use a so-called umbrella strategy where they invest alongside

their super in franked dividend-paying assets where the franking credit can be used to offset

personal marginal tax.”

The bonds can be redeemed tax-free after 10 years. In addition, each year up to 125 per cent

of the previous year’s contributions can be made without resetting the 10-year term.

Investment options range from property and shares through to fixed interest and cash.

Investors can usually switch between investment options without triggering capital gains.

Bird adds: “The added benefit is that upon death, the proceeds from an investment bond are

paid tax-free to the beneficiaries without the need for probate, irrespective of how long the

investment has been held.”

Trusts

Trusts provide options for asset protection and lowering tax payable on distributions, such as

directing income to beneficiaries who earn little or no income, says Pitcher Partners’ Hacker.

Discretionary trusts can allow distribution to a wide range of beneficiaries in a tax-effective

way.

“It is a bit more complicated than super but can distribute to a wider range of beneficiaries,”

she says.

Alternatively, testamentary trusts, which are used in wills, can distribute income to spouses

and children who earn no other income rather than an adult on a high marginal tax rate.

For example, they can distribute income to children under 18 at ordinary adult marginal

rates (including the $18,200 tax-free threshold, rebates and offsets), which means the total

amount that can be earned by a beneficiary before tax is around $25,000.

Alternatively, a company can be set up to manage trusts and, depending on its structure,

provide arms length administration, says Hacker.

Anyone considering a trust structure needs expert legal and financial advice.

Spouse super

Equalising balances between domestic partners is not a new strategy but will become even

more effective under the new changes.

Couples (including spouses and others living in long-term relationships) can sidestep the

super cap by transferring assets.

For example, if one partner has a $3.5 million balance and the other $1 million, the member

with the higher balance could withdraw $500,000 and contribute it to the account with the

lower balance. This assumes they are over 65 or have met other conditions of release, such as

retiring from full-time employment.

It means the couple’s combined super balance of $4,5 million has not changed and that

$500,000 avoids the extra 15 per cent tax.

Stick with super

Chris Balalovski, partner with consultant BDO Australia, says: “There is no cap on the

amount that can be accumulated within super. That means there are significant

opportunities for generating wealth that can be handed on to future generations and provide

for them”.

He says super remains one of the most concessionally taxed investments.