Superannuation reforms — the aftermath – SMSF Feature Part 2

The Federal Government's super reforms, which targeted the wealthy, will impact many SMSF clients. Here lies an opportunity for advisers to walk clients through the changes, writes Malavika Santhebennur.

With ATO figures indicating average assets of SMSFs had hit $1.1 million, the Federal Government's superannuation reforms, which cracked down on the tax benefits afforded to the wealthy in super, would pinch the pockets of SMSF clients similar to other super members with high balances.

One of the reforms included introducing a $1.6 million super transfer balance cap for the retirement phase, with members expected to transfer the excess amount into the accumulation phase to avoid paying a 15 per cent tax.

HLB Mann Judd wealth management partner, Michael Hutton, said this aspect did not receive much airplay.

"Because people with $1.6 million, you know, who cares, they can look after themselves. It's a lot of money. I don't think the Government's crying crocodile tears for them," he said.

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However, he said advisers had an opportunity to advise these high net worth clients who had exceeded the cap and had to transfer the difference to the accumulation phase and pay a 15 per cent tax.

"I reckon to a T every client I've explained that to have thought that's okay. People aren't too deterred about that actually speaking," Hutton said.

However, Hutton warned advisers that large super balances would become problematic if spouses passed away after 1 July this year.

If a spouse had $3 million and passed away, the surviving spouse could inherit $1.6 million in the pension phase provided they did not exceed the cap, but would have to inherit the remaining amount as a lump sum.

"You can't bequeath your superannuation money and stay in super unless it's paid out as a pension. I just think it's going to become quite problematic. You're going to have 80-year-old grieving widows or widowers suddenly having a big chunk of money coming into their bank account that they're going to have to work out how to invest it and distribute it," Hutton said.

This could increase the threat of elderly financial abuse from not only relatives and children, but also property spruikers.

"Again the government is not feeling too sorry for them because they've still got $1.6 million in super and that's still got a lot of money floating around. Why put that imposition on people? Why force that money out of the superannuation system? That is where elderly people are going to need advice," Hutton said.

Investing outside super

With the super changes having created uncertainty for members, William Buck's wealth advisory director, Adrian Frinsdorf warned of promoters endorsing life insurance bonds and investment bonds, where the tax rate was 30 per cent.

"Now, the investment management in those has always been pretty ordinary and the tax rate... there's various rebates and the like and it comes out tax-free, it's still 30 per cent of the same time," Frinsdorf said.

Wealthier clients might choose to invest in their company structures where they paid 30 per cent tax until they distributed that money to the directors.

"Holding investment money in company structures might become more palatable for those that don't need to draw money out because they're only paying 30 per cent tax," he said.

"When they want to get that money out they get franked dividends paid but they might be able to delay that until times where their tax rate's less than 30 per cent and therefore they claim some of that tax back."

Dixon Advisory managing director, financial advisory, Nerida Cole, said SMSFs, along with retail and industry super funds offered competitive investment options, features and fees as there was a lot of pressure on funds and governments to lower fees.

"But if you go and try and invest in your personal name or in one of these other types of tax structures there hasn't been up until today as much competition. The fees tend to be a bit higher, and I guess the sorts of features and things that you can get, there might not be as much competition across the sector in the non-super sector," she said.

Click here to read part one of this feature: SMSF advisers – A convergence?
Click here to read part three of this feature: All eggs in one basket