SMSF members cautioned not to act propitiously re $3m cap

SMSF Association Media Release


Self-managed super funds (SMSFs) should avoid knee-jerk reactions to the Government’s proposed tax on earnings on super balances exceeding $3 million, Heffron Consulting Managing Director Meg Heffron told the 2024 SMSF Association National Conference in Brisbane today.

In her plenary address titled $3m super tax: Beyond the doom and gloom, Heffron said SMSF members should take a deep breath before taking any precipitous action if the proposed legislation becomes law.

“Although our impacted clients would prefer this new tax would disappear, it’s not a disaster and clients shouldn’t remove excess amounts from super without careful consideration.”

Heffron reminded her audience that getting to $3 million was much harder than it used to be. “Many clients will never get there and still see value in their SMSF, appreciating they are a genuine platform for their retirement savings strategy.

Looking at the Heffron client based, she noted that 43 per cent have less than $3 million and are over 65 – their peak savings years have passed.

“For those who opt to take their money out of superannuation, she cautioned that important issues to consider included the impact of large withdrawals on exempt current pension income (ECPI), not wasting losses and/or negative earnings, and any tax on death benefits.”

SMSF Association CEO Peter Burgess, in his plenary address titled Leading through change: SMSF legislative and technical update, told delegates that they could expect the $3 million cap to become law by 30 June this year.

“The only questions that remains is whether the Government’s proposal not to index the cap and to tax unrealised capital gains will survive the scrutiny of the Senate cross bench.

“Although there might not be sufficient cross bench support to block this Bill, we hope that they will support amendments which simplify and improve this tax.”

Burgess added indexation of the $3m cap could easily be added and the proposed calculation of earnings could be simplified, and the taxation of unrealised capital gains substantially removed, by replacing the proposed complex formula and system of carried forward negative earnings, with a rate which more closely resembles taxable earnings.

“Our modelling shows that if the 90-day bank bill rate was used to calculate earnings, over the medium to long term, not only would taxpayers pay substantially less tax, but their tax liability from one year to the next is much smoother and far less erratic than the Government’s proposed approach.

“Paying less tax was an outcome even if you choose a 15-year period over the past 30 years when there were successive years of negative returns – which under the Government’s proposed approach could be carried forward and used to offset the tax in a future year.”

“One of the biggest flaws with the Government’s proposed approach is the erratic and unpredictable nature of the tax – an outworking of the calculation which is linked to movements in investment markets.

“This unpredictability means members will need to maintain much higher cash balances from one year to the next – and ultimately this will have an adverse impact on their investment returns”.