Kim
G’day, I’m Kim Bigg, and welcome to our podcast tailored for small and medium business owners who want to understand more about accounting and tax in Australia.
Please note the insights and tips we share in this podcast are general in nature and are not designed to replace personalised advice. Your financial situation is unique. It’s essential to weigh the information we discuss against your specific goals, current financial status, and individual needs. Seeking professional advice is always your best bet for making informed decisions that align with your personal circumstances.
Hi, everyone. I’m Kim Bigg and welcome to episode two of our podcast Show Me The Perks, which is tailored for small and medium businesses and their owners who want to understand more about accounting and taxation in Australia.
I’m a business services director at Perks accountants and wealth advisors, and I specialize in accounting and taxation for small and medium businesses and their owners.
In today’s episode, we will be discussing the government’s proposed legislation around taxing individuals with more than three million dollars in super.
As a reference, this podcast is being recorded in October 2023. For this episode two, we have Simon Wotherspoon with us, Simon is head of Perks Private Wealth. And Simon, can you explain a little bit more about yourself, your background, and your role at Perks?
Simon
Thanks, Kim. Good to be here. Yeah. I’m one of the four directors in Perks Private Wealth, working with, as an investment adviser, to my own clients, as well as managing a team and sitting on the investment committee.
I began my working life in sales and marketing for Colgate-Palmolive, And I used to tell people that I was the guy that screwed the lids on the toothpaste, but the truth is my job was probably less important. And then a few years, Actually, a few years before the GFC, I decided I wanted to get into finance and studied applied finance and moved into financial planning.
And just as I was ready to become an adviser and start advising the GFC hit, so you could say I started with a bit of a bang.
Kim
So, you came across to Perks about three years ago now. Is that right? Yeah.
Simon
That’s right. In 2020, the peak of COVID. Yep. That’s where I make my big decisions in in the crisis moments.
Kim
Excellent. Okay. Let’s jump into it. So, today’s episode, as I mentioned, is around the three million dollars in super tax, which is what it was colloquially being referred to by everyone in the industry.
So, the government’s now come out and provided some draft legislation, which has given everyone a lot of food for thought, certainly accountants and financial planners.
So, it now has a name, which is it is referred to as the division 296 tax. Which is perhaps a better name than the three million super tax. So did you wanna give us a little bit of a rundown sort of additional information, if you like, that’s a bit of a starting point from mine. But if you can give us a bit of a feel for what is this three million in super tax all about?
Simon
Yeah. So, in real simple terms, the government’s proposed an additional tax on individual super balances over three million dollars.
The formula to calculate is a bit nuance, but essentially there’s an additional fifteen percent tax on the movement in fund balances from year to year, apportioned for the amount of super an individual has above three million dollars.
Kim
So, it’s not on the taxable income of the fund.
Simon
No. It’s on the change in value from one year to the next.
Kim
So, it’s actually got nothing to do with the taxable earnings of a superannuation account at all. It’s completely irrelevant how much what the tax position of a certain superannuation fund is. It’s all about how much does the member’s balance move between 1 July and 30th of June in any given year?
Simon
Yeah. That’s right.
Kim
Which is why some people are up in arms regarding the unrealized capital gains movement of this world. Is that right?
Simon
Yeah. Absolutely. This is an additional tax you know, in addition to what tax you might otherwise pay due to earnings and realised capital gains. This is purely on the moving imbalance from 1 July to 30 June.
Kim
So, the tax is levied at the individual’s level. Isn’t it? This is not a super fund tax.
Simon
Yeah. So if you think about self-funded super fund where you may have two members, This is all about each individual member’s balance and the change in balance from year to year.
Kim
And we’re talking about this today, and a lot of listeners may think three million dollars is quite a lot of money, and it maybe doesn’t apply to them because they have a little bit less than that. And maybe it’s, you know, not something that concerns them greatly. One of the things we’ve been considering here at Perks is that it may not capture them right now. However, the lack of indexation for the three million dollar amount together with the fact that usually people, you know, moms and dads, if you like, inherit their spouses super when the other spouse passes away, we’re sort of thinking this three million dollars is going to capture more people than the government’s original anticipated people. So, and bring it more into middle Australia. Do you have any comments on that? I mean, that’s sort of the take off in reading in the media Yeah.
Simon
You’re right. I mean, immediately, the numbers talked about in the press is that this tax may impact roughly eighty thousand Australians which in the grand scheme of things is not many initially, but, you know, in the information, they proposed that this is not indexed. And so, if you think about super balances generally growing over time with inflation, if not earnings, more and more super balances will get to this three million dollar threshold, which itself is proposed to be fixed.
Kim
If you had two and a half million in super now, is every chance that with a few basic assumptions by the time you get 30 June 26, you’re going to hit three mil. So, you know, isn’t really for the people with three mil. It’s probably with the people with two and a half mille in super right now.
Simon
Yeah. That’s right. Or even, you know, pairing that back a bit, it only takes something like twelve years to get to three million if you have sort of one and a half now over the course of twelve years.
Kim
If you’re a fifty-year-old and you’ve got one and a half million in Super. There’s every chance you’re going to well and truly catch up with three mil in the not-too-distant future.
Simon
That’s right.
Kim
Yeah.
Simon
And I think as you say, another reason that people might experience or reach this threshold is, you know, if one spouse passes away and the other inherits their super balance and a combination
Kim
on one and a half mil each is right here now. If the unfortunate happens, in the near future, someone’s going to end up with three mil pretty quick.
So indeed, well, that’s a good summary. We’ve got it as per usual. I like to have a sort of story line running through some questions that I’m going to pose to some and so that we can talk through these. Everything’s normally easier contemplate if you use a storytelling exercise. So as this week, I’m referring to the castle and the Kerrigan family.
So, I’m going to fire away to begin with. My first question is to Simon.
So, we’re imagining that Daryl Kerrigan who is the father in the Kerrigan family who lives next to the airport and didn’t want to sell due to the vibe, etcetera.
So, if Daryl has five million dollars in Super and he came to you and said, I want you to explain what these three million dollars in Super thing is, how would you explain it? To Daryl?
Simon
Yes.
Kim
I think as we said in in layman’s terms, Daryl needs.
Simon
Well, in simple terms, it’s an extra tax on an individual super balance above three million dollars.
Kim
So, what does that mean for Daryl in his everyday life? Let’s say it’s 30 June 2026 or let’s say a little bit after, you know, is he going to get a tax bill or is this going to transpire?
Simon
So, let’s say Daryl started the year with five million dollars in the fund and had a ripper every year and ended with six million dollars in the fund.Then his, tax, he’ll be taxed on the million dollar gain, effectively, the movement in the fund of a million dollars, proportion to the amount of super balance he has over three million dollars. So, it’s not fifteen percent on the million dollar move. It’s fifteen percent on the million multiplied by the proportion of his balance over two over five.
Kim
Two million divided by five million as in his two million divided by three, isn’t it?
Kim
it’s, yeah, so it’s not going to be all of the million dollars at percent, but it’s going to be a lot of it certainly getting close to half.
Simon
So that’s not particularly simple terms, but essentially it’s this sort of up to fifteen percent additional extra tax on movement.
Kim
So that could be tax bill pushing out towards Daryl of in the vicinity of sixty thousand dollars year one.
Simon
That’s right.
Kim
That’s right. And it’ll continue if his super fund continues to perform well, he’s going to continue to get a tax bill in his individual name each and every year. Is that right?
Simon
That’s right.
Kim
Yeah. And it’s going to be dependent on how much his super fund goes up in up or down in value, and it has no bearing on what is tax bill of the super fund itself actually is. It’s purely a case of what is your balance at the end of the financial year and how much higher is it than the previous year?
Simon
That’s right.
Kim
And if it’s lower?
Simon
If it’s lower, you can get a credit so as that can be absorbed in future years where there’s sort of an upward movement begin. So, all is not lost if there’s sort of a reduction from one year and then an increase in the following year. So long as you can take advantage of that increase in following years.
Kim
Because you don’t get a refund.
Simon
You don’t get a refund.
Kim
You know, there is no refund, which is not good.
Let’s which also presents other issues if later on these said unrealised gains don’t materialise if the property ends up selling, you’ve essentially paid tax on those unrealised gains without actually may not turn into that in the end either.
My second question is, let’s imagine Daryl’s wife Sal has one point five million in super. How would you explain to Daryl in terms of how sales impact is as she approaches 30 June 2026 when this comes along.
Simon
Well, clearly, Sal one and a half million dollars in super is not immediately impacted.
So, it’s more about the longer-term implications for Sal, at least on her own member balance. And so, you know, like we said before, if her member balance grows over time and that three-million-dollar threshold is fixed, she’s likely to edge closer and closer to that threshold over time. You know, another way might be poor old Daryl dies and Sal inherits his super pension as a death benefit pension, she might be able to retain her balance in super whilst also taking on his pension, which might push her combined super and pension balance above three million dollars.
Kim
She may not be there now, but she’s going to get there eventually one suspects.
Simon
Well, I reckon Daryl’s one bad rissole away from this all happening.
Kim
Indeed. Indeed. Well, Sal probably made it.So, Sal will be in the gun there, I imagine. She may be incentivised perhaps.
Let’s imagine Daryl and Sal still live in their Coolaroo home in Melbourne live a very modest lifestyle, and their marginal tax rate is zero percent. He’s probably still racing Coco somewhere. And let’s say they’re living off their super pension only. So, let’s say they got a self-managed super fund and, you know, Daryl’s got five million Sal has one and a half. So, they got six and a half million in super. They’re just drawing their pension out. And they don’t really have a lot of other taxable income in their personal name. How would you review this, you know, as we approach 30th of June 2025 & 2026 with regards to structuring their affairs is things would you contemplate?
Simon
I think on the face of it, you know, obvious thing would be to consider taking some money out of Darryl’s super account and investing that perhaps in their joint names outside of super. So, we consider doing that. I mean, you can earn up to roughly twenty thousand dollars each, if not a bit more, without paying any tax. So that might equate to a sort of joint investment portfolio of somewhere around a million dollars if it was a sort of earning four percent income. Depending on Sal’s ability to make contributions, we might also consider redrawing some money from Daryl’s account and contributing for Sal. She’s got a bit of room before she gets to three million dollars. So subject to how she might get the money in.That’d be worth contemplating.
So that I mean, they’re the immediate things. I think that has to be managed against the longer-term implications because you know, certainly once you’re retired, it’s easy to get money out of super. It’s much harder to get it back in. So we’d want to have a look at the long term implications of, you know, for example, if they did take out a million dollars and invest personally, how that might grow over time and what tax implications I might have for them assuming that balance builds and builds, you know, if it got to the point of two million dollars, well, they might find they were better to have left it in super, be paying less tax or be it with additional tax than the tax they would otherwise pay on the portfolio outside of super. So, it’s going to be horses for courses, I think, and, but it’s got to be balanced with the immediate sort of tax against the longer-term implications given super is not an easy thing to add to, particularly once retired.
Kim
Yeah. Absolutely. And they’re all pretty valid sort of suggestions of things that you can do. Is there a timing on when you would, you know, if clearly there’s some things people can do, and Daryl and Sal, you know, have some things that they can do to try to sort of either mitigate the tax or, you know, make the best of the situation should this tax come through.
What timing would you suggest they come to see? You know, this thing comes into 30th of June 2025, but it’s actually So based on the 30th June 2026 yearend balance, you know, if they were your clients, you’d tell them to come in sort of 2025?
Simon
Yeah. Well, I mean, I think, again, with reference to super and there’s limits on what can be contributed, etcetera advanced planning makes sense. So having a game plan and a bit of an idea about what you might do, noting that nothing necessarily needs to happen, least as far as withdrawing balances until that 2025, 2026 financial year, but certainly getting a bit of vision and planning early would be sensible you make a good point that the tax calculation would really matter or sort of come in as at 30 June 2026 so what matters is your balance then.
Kim
But certainly, there’s no reason to go out in a mad hurry and start selling everything out of super not to mention the fact that the legislation’s draft only, so it’s not actually in law at the moment. Plus, there’s an election between now and 30th June 2025 mandated that it has to happen before then, which means in theory, the Liberals could get in or the Labor could get in. Labors said they want to keep it one hundred percent. Liberal at this stage is saying they don’t want it. So, there is still a little bit of water to go under the bridge. So, I think most people would be saying, by all means, start thinking about planning but don’t take any great actions straight away without seeking advice.
Simon
Yeah. That’s that’s good advice.
Kim
I’ve got another couple of questions for you. So, we’re imagining that the Kerrigans, Daryl, and Sal, that is eventually sold their castle, which is next to Melbourne airport for, let’s say, it’s a hundred million.
It seems like an absurd amount, but let’s imagine it is. And let’s imagine in their personal world, their tax rate is comfortably into the highest marginal tax rate, 47%. So, contrasting 0% with 47%, how would this change your advice when contemplating their affairs in that bleed up phase?
Simon
Well, a hundred million dollars they sell their home for. I mean, is this the point in the podcast when I reel out that famous line? Tell them their dreaming.
Kim
Tell them their dreaming. Well, it was a very well situated house as he quite rightly said and with the passing of time, I would imagine it probably is worth a hundred mil next to the Melbourne airport at the moment. So maybe it’s not a hundred mil, but let’s go with that. Let’s say it’s worth a lot and Daryl and Sal eventually couldn’t be bothered with the vibe anymore, and the money spoke, and they decided to sell. So, let’s imagine they’re on the highest marginal tax rate.
Simon
So, if it’s comparing against the highest marginal tax rate, then super is likely to be the most tax effective vehicle. We might talk about other implications later, but from a tax point of view, at most, there’s the 15% tax on accumulation balances that is the amount not held in pension phase and up to 15% additional tax in movement of balance. So, it would never be 30% in total, but theoretically up to thirty percent additional versus 47%.
So even, you know, when compared against investing the company at the company tax rate of 30%, super is still likely to be the most tax effective vehicle, because the additional 15% as we said before is just levied on the proportion of the balance above three million dollars. So, it’s never going to be full 15%, It’s likely to be some margin under.
Kim
So, providing a contrast there, If you got 0% marginal tax rate on the outside of super, there’s probably some restructuring that can be done to make your affairs better. But if your marginal tax rate on the outside is 47%, you know, you’re still going to be better off having your all of your money in superannuation because you’re going to get a better tax rate inside the super fund compared to what you’re going to achieve on the outside.
Simon
Yeah. I mean, I think
Kim
obviously contrasting the various different circumstances of each individual, I mean, different assets that they may have. But on balance, super’s still going to win out tax wise over.
Simon
Yeah.
Kim
And really, the government knows that they have to make super compelling place to save. Otherwise, people won’t necessarily save for their own retirement. So, yeah, theoretically, it needs to be a tax effective vehicle albeit as it’s now proposed on a scaling measure.
Very good. So, another question I’ve got is, I’m sort of adding lib a little bit to the Castle story, but let’s imagine that Darryl and Sal purchased the property next door from. Is it next door or across the road? But let’s imagine Farouk died, Daryl and Sal bought place next door clearly, Farouk house was a pretty modest house, so you’re not going to get a lot of rental ongoing rental income for that. But as I mentioned before, the house prices in that Melbourne airport region have skyrocketed.
So imagine if they had that inside this SMSF, in the contrast I’m really looking for here is an SMSF with an asset that is appreciating quickly in capital value, but not necessarily generating a lot of sort of revenue along the way. So low yield, high capital growth. How do you look at that affecting Daryl and Sal with regards to their SMSF.
Simon
Yeah.
So I think, you know, where an SMSF has a large property investment and not much other liquidity, you know, the funds being set up to buy a property and not much else. And it’s anticipated it might grow in value without much income. Well, then liquidity comes to mind because the tax will be levied regardless of realized gains or income, actual income being paid. So know, theoretically, they as you said before, they might be up for sixty thousand dollars worth of tax, but not have the means to pay so liquidity comes to mind there. I guess the other thing is in their situation, if they are retired or do have the means to take money out of super, they might want to contemplate holding the asset elsewhere if it hasn’t already been purchased starting, you know, by buying part of it, if not all, outside of super and managing tax in another way.
Kim
Yeah. So clearly, we’re using the assumption that Daryl and Sal are old enough that they are above sixty five so it can access their super. So, you know, if they were holding on to an asset, which they expected to have low yield high capital growth they might consider taking it out of the SMSF, self managed super fund.
And putting it in personal names.
Simon
Yeah. It’s for liquidity. It was a challenge. Yeah. Yeah.
Kim
To prevent this ongoing tax invoice that’s going to roll up tax assessment, I should say, that’s going to roll up from the ATO each year on the increment of the unrealized gain on Farouk’s house.
Last question before we move on to some summary points, Con and Sophie, so remembering Con is the accountant brother-in-law, not brother-in-law, son-in-law of Daryl and Sal with Sophie. So, I’m I’m referencing that these guys are under the age of sixty may well have a very high balance. Just referencing back to that liquidity item. Just reference. So, it’s all well and good for Daryl and sale. They can essentially adjust their affairs by taking money out of super to manipulate their super balance to be either under three mil or be better people who are under sixty don’t have the same flexibility. So how does division 296 affect those if people are approached three mil.
Simon
Yeah. I mean, this may well be a problem because if you have a lumpy asset without much liquidity that grows in value, be it a property or a farm or whatever it might be, And you don’t have the ability to take it out of super. In other words, you’ll pay this tax on the increase in value and not necessarily have the means to pay that can’t that may cause problems for people. So, I’m not sure there’s necessarily answers except that good planning will be required.
In the case of Con and Sophie, it may be that they need to hock a few personal items through the trading post so as to raise the money for the tax.
Kim
Yeah. Well, I think that’s where the other bloke, what’s his name? Wayne, I think Wayne comes in and helps out on that section. He’s pretty good at spotting a bargain. He’d have that in super, I’d expect. Okay.
So, onto the key takeouts.
So I’ve got a few summary points here. Sort of hoping you might be able to add to these as well.
Couple of points, there’s no indexation. So it is three mil at the moment, and there is sort of no indication from the labor government who’s putting this legislation forward that they’re going to index it.
Simon
At this stage. That’s right.
Kim
So that gives me the impression that over time, it may well be a tax on the wealthy in the right here and now perhaps, but it’s going to capture more of middle Australia over time, you would assume. The point I’ve had is it very closely targets if you like SME business owners and farmers in particular because of the strong sense of unrealised capital growth. They probably have with things like farmland, you know, commercial property. It’s fair to say that it impacts those operators more than the average, you know, worker with money and Rest Super or Host Plus.
Simon
Yeah. I think those particular issues certainly are likely to impact small business owners or business owners and farmers as they might tend to have particularly business owners with property in super, which may be the core asset. So, this is likely to sort of impact people beyond those that the government’s already anticipated.
Kim
We’ve got another point here relating to valuations. I think there’s a strong sense that getting good and high valuations, if you like, or, I shouldn’t say high. Just correct valuations up to 30th of June 2025 are imperative try to minimize the, you know, the potential future rise in people’s superannuation balances. Did you want to talk about that?
Simon
Yeah.
That’s a good point. I mean, this tax is going to measure in the first year that the move in super balance from July 2025 to June 2026. So, it would be sensible to get an up to date valuation on any know, significant assets, property, farms, etcetera, in super at the beginning of that period.
As in the 30th of June 2025, not 30th of June 2026. It’s not a case of trying to sneak under the three mil at 30th of June 2025. If you’re going to go and smash through it the following year, you’re actually losing on that count.
Simon
That’s right. Yeah.
Kim
Yeah. So strong point to go and get valuations around about 30th of June 2025. Good time to be a valuer.
Consider that based on yeah. So I’ve I’ve made a note here saying that on scenario analysis, it would appear that If you’re on the highest marginal tax rate in your personal name, there’s no burning platform here to move your money outside of super because super still is tax wise, at least, yeah, the best place to hold passive investment with it.
Simon
Yeah. That’s right.
I think from a tax point of view, I mean, as I say, horses for courses, but it’s likely to be on a tax basis, super’s still the most effective place to hold wealth.
Kim
Yeah. I mean, obviously, holding wealth on the outside of super gives about some more flexibility as far as leveraging and debt and things like that, which superannuation doesn’t have. So, I suppose the gap closes, if you like, between the pros and cons inside, super and outside, but from a tax perspective, super still wins, I suspect.
That’s all we have time for today. That’s a good summary of all the items relating to the three mil in super. I should add that you know, the items discussed today based on either our own views or a fictional character of the Castle, listeners should consider their own personal circumstances before taking any action or advice in relation to their own personal affairs. As I mentioned previously, on the last episode, we would normally have a question from the audience, but we do not have a question as yet.
So we’re going to park that until next episode, and I’ll be bringing a couple of questions next time. So, I’d like to thank Simon Wotherspoon, Head of Perks Private Wealth for coming along today and helping me with my second episode or Perks second episode of Show Me The Perks And until next time, we will continue to think of what he’s going to be episode number three. So, thanks everyone. Thank you.
