The federal government’s recently released draft legislation doubling the concessional tax rate for super balances exceeding $3 million – set to take effect in July 2025 – throws up some estate planning complexities that create potential opportunities for advice, according to three industry professionals.
Finextra Wealth financial adviser Heath Hebenton says people often view superannuation as part of their estate planning because of the built-in succession planning within the system and the substantial wealth they have in their funds.
“They think they’re being clever by using super as an estate planning vehicle,” he tells Professional Planner.
He adds that advice will play a crucial role both before and after the legislation comes into force.
“[People are] going to have the rest of this financial year plus the following financial year to get their ducks lined up in a row,” he says.
A recent Generation Life research paper found that while over 80 per cent of high-net-worth Australians aim to leave a legacy, only one in five has a concrete plan to for how to do that.
The GenLife study also revealed that many rely on wills and superannuation for legacy planning, despite gaps in their knowledge and preparedness.
“The ATO website states and I quote: ‘Super is money put aside by your employer over your working life for you to live on when you retire from work.’ That’s a bit misleading, because it doesn’t allow for personal contributions, and it talks about [the contributions of] your employer. But it states [super is] there for you to live on when you retire from work. So, super was never intended by design to be a wealth transfer tool.”
While some succession planning is inherent in the superannuation system, Elston head of strategy advice Darren Withers says superannuation serving as a vehicle for accumulating extreme wealth for future generations is “probably not” its purpose, noting that the federal government has already addressed the issue of extremely large balances through various regulations and caps.
He adds that the government explaining superannuation is not for estate planning purposes is not necessarily going to stop people from using it for that.
Smarter SMSF technical and education manager Tim Miller says there is “nothing to suggest that super shouldn’t form part of [a] sensible estate planning process”.
“Where we tend to lose a little bit of focus is that previously – and when I say previously, I’m talking about 20 years ago – it was mandated that when you hit 65 and you weren’t working, you had to start taking your superannuation proceeds out,” he says.
“So, the government have in effect created a rod for their own back by removing the compulsory cashing requirements when you retired, therefore giving you the capacity to continue to build wealth inside the concessionary tax super environment.”
The tax change will only affect around 80,000 Australians initially, according to Hebenton.
“The $3 million threshold will not be automatically indexed, therefore this will affect a lot more people in the future,” he says.
“[But] I would encourage people to cool their jets until things are locked down.”
Withers claims the government’s description of the 2025 super tax increase is somewhat misleading.
“They describe it as an additional 15 per cent to bring the tax rate up to 30 per cent on balances above three million [dollars], but if you can look at it in a practical sense, it’s not how the tax [will work],” he explains.
Withers notes that the new tax is distinct from the existing tax on superannuation earnings and should be viewed as “an additional or a second tax on top of the existing tax that obviously applies to some people.”
He adds that tax preparation for individuals with superannuation balances exceeding $3 million is complex.
“It’s a difficult one because I think the solution for a lot of people will depend on their broad circumstances,” he says.
He explains that the optimal strategy will depend on factors such as an individual’s taxable income outside the superannuation system and the composition of assets within the fund.
“It’s not something you can generalise, because all those individual factors will weigh-in to the best way for people to approach it in their own circumstances,” he says.
Smarter SMSF’s Miller says self-managed funds will “probably” be the sector of the superannuation industry impacted the most by the doubling of the concessional tax rate.
“Recent research undertaken by the University of Adelaide indicated that at least 50,000 SMSF members would be affected, so based on membership sample, it means more SMSF members will be impacted than other funds,” Miller says.
“[Additionally], the current method for calculating earnings factors in unrealised capital gains. This is likely to impact SMSFs more than other sectors as trustees will likely need to liquidate assets that have otherwise formed part of their formulated investment strategy to pay the liability, and this can become a recurring problem.
“It’s then made worse if the fund assets rise year on year creating an annual liability but then there is a market correction that does create a potential loss to carry forward but has no recourse for prior liabilities even though they were based on paper valuations.”
This could be a good place to incorporate the bit from down below that I suggested be brought up higher.