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.