Advisers weigh pros and cons of Div 296

While the industry is still waiting to see the full impact, the Div 296 tax changes have created an inflection point to have vital conversations with clients around retirement and estate planning.

Pitcher Partners client director Minny Talasch tells Professional Planner the change is “almost forcing” older clients to reconsider their estate plans.

“It is also having other discussions – for our younger clients, the ones that are nearing their preservation age, it’s having that conversation about when they can access their super and what does retirement mean? It’s allowing us to have a lot of different conversations, and sometimes these conversations only come up when there’s a major life event that occurs,” Talasch says.

“While there are some negatives to the tax, there are also some positives, because we can really start to plan – we can start to be introduced to the next generation of our clients, meeting their children and grandchildren and the like.”

On the flip side, Talasch says, there are clients that are tired of hearing about the tax and the news coverage surrounding it, and there was a “lot of scaremongering” happening towards the end of last financial year.

The Div 296 changes have yet to be passed, with Treasurer Jim Chalmers telling ABC’s Insiders program on Monday that he wasn’t in a rush to “reintroduce” them to Parliament, with the government’s priorities instead lying in cost-of-living measures.
Chalmers also said that the government is not currently contemplating further changes to the tax-free status of income in the retirement phase, despite it being raised at last week’s Economic Reform Roundtable.

For Jordan Kennedy, partner at Pitcher Partners, the noise that surrounds Div 296 has been the biggest issue from it. With it yet to be legislated – and question marks about whether it even will be, in its current form – there’s only so many outcomes that can be simulated, and people are “shooting in the dark”.

“Ultimately, we need the rubber to hit the road, but I think what’s being missed is the effect on the sector as a whole,” Kennedy says.

“I’ve had far more pushback leading into 30 June than I’ve ever had before because of distrust in the total system. I had to convince a client of mine to make a $360,000 non-concessional contribution and she said ‘They’re going to change it, I’m scared’. Regardless of the fact that it’s only supposed to effect 81,000 people, the broader population is hearing ‘change to super’ and instability for super.”

The only constant is change

If the government continues to meddle with a system that people prefer to think of as static and unchanging – and make their decisions about it as such – it will ultimately lead to more distrust in the system, and people failing to make to make contributions because they’re scared the system is unstable.

Most of the clients Kennedy is talking to have “come to terms with” the idea that things are going to change; they’ve got the wealth and accumulated resources to navigate that change.

“The people that are [affected by it] are the people that think they’re affected by it,”  Kennedy said.

“They’re not. They get scared, they sit on their hands, and then they’re not making the strategic moves that they should be making to ready themselves for retirement. I think that’s the issue that’s being overlooked; should we be tinkering?

“The noise needs to be shut down and we need to be focused on the fact that if we don’t get this right, people won’t support the system and government won’t have the resources to be able to support these people in retirement because they haven’t adequately provided for themselves – and the system becomes broken.”

Craig Emanuel, founding partner and managing director of Emanuel, Whybourne & Loehr, estimates that – with an average account size of just under $10 million per family, and about 40 per cent of that held in super – roughly a quarter of the firm’s client base would be impacted should Div 296 come into effect.

“I think it’s unfairly hitting multi-generational farming families and medicos and GPs,” Emanuel says.

“Typically, an SMSF is restricted in holding direct property other than what’s called business real property; guessing, I’d say more than half or two thirds of GPs probably own their business real property through their super fund, and they would’ve bought those assets in the ‘80s or ‘90s or even 15 years ago. Because of Covid-19 and the pandemic bounce and free money, they’re sitting on some pretty sizeable unrealised gains in their super fund.”

‘Wait and see’

But pre-30 June, EWL clients were still taking a “wait and see approach”, and while the firm did a lot of financial modelling it didn’t pull a single dollar out of any fund for any client.
There’s two potential solutions Emanuel is working on: withdrawing some large components of super and distributing the benefits to a family trust or corporate beneficiary, depending on circumstances; and “looking at asset allocation from a different perspective”.

“Given the proposed legislation will be taxing unrealised gains and reset first July every year, it’s better in that instance to have most income generating assets in super funds and everything else outside of super, because you know then with certainty what your tax bill will be,” Emanuel says.

“Bear in mind it’s not law yet. And Chalmers has kicked around that maybe it might not become law. There’s a possibility we’re working towards something that might not happen. We have a few clients that have decided to withdraw large components from their super, given their high net worth position.”

What’s been most frustrating for Emanuel is that there’s been little clarity around indexation or the funding of the tax debt.

“How does a super fund fund its debt if there’s no liquidity in the fund? You can’t carve an asset up – I think the tax office is looking at some kind of instalment plan to allow a super fund to pay its debt externally. It might work and it might not.”

And the fact that Div 296 might not even come to pass – or pass in its current form – is creating a fog around decision-making, while any changes made in response to it could also prove to be of short-lived necessity.

“I think the risk you run there is that we have a change of government [at some point] and this law is somehow changed – then you’ve got to go completely rewire and reallocate assets for that change,” he says.

“I know where [the government] is coming from, but there should be discussion of where else they can clip or tax other areas. Our state government is bankrupt, the federal government is bankrupt, as are most other countries in the developed world. In time, I think it’s a first step towards some kind of death or estate duties in Australia, because we’re the only developed country in the world that doesn’t have one.”