I know opinion is divided on the ALP’s intention to introduce a new tax on those with more than $3 million in super. In one corner, we have those who (rightly) point out that today, $3 million is quite a lot of money and super gets a lot of expensive tax concessions. In the opposite corner, we have those railing against the unfair calculation method – also rightly in my opinion.
While I have nothing new to add to this debate, I have been thinking about another aspect – the mechanics for those withdrawing money from their SMSF if they wish to avoid or at least reduce the tax.
On that front there are a few interesting issues to think about.
Meeting the legal requirements
First, and this is perhaps an obvious point, anyone who wants to take money out of super can only do so if they’ve met a condition of release. Most people impacted by this tax are over 65 so it’s not a problem for them. Anyone between 60 and 65 would generally need to argue they’ve retired in a superannuation sense (and unfortunately those under 60 are pretty much stuck). It does beg the question – will we see a flurry of retirements? Perhaps not. A quirky aspect of super law is that ‘retirement’ doesn’t always mean giving up work forever.
Simply quitting a paid job after 60 is enough to give full access to whatever super has built up to that point. It’s a shame we don’t have a census or election coming up because those are excellent ways of taking on legitimate short-term employment that ends. But it can be achieved in other ways as well – any short-term job will do, as long as it’s a real one. Don’t expect to ‘retire’ by getting paid for looking after your grandchildren for a bit and then stopping. Even popping back in to work for the family business you handed over years ago would be problematic if it was a manufactured position. But doing a real job for real ‘gain and reward’ (ie, a salary with tax withheld and super etc) and then ending it (a proper termination with annual leave – if applicable – paid out) does the trick.
It's also worth noting that people over 60 who’ve had paid employment in the past that’s ended (even a casual job at Coles in their teens) can also retire simply by ‘winding back a lot’. Anyone in this position who is now working less than 10 hours per week and can honestly, hand on heart, say they never intend to do more than this in terms of paid work in the future can be considered retired. But again, it has to be true. Pretending your high flying, full time, highly paid job can now be done in a day and a half per week would be unwise.
Benefiting from the super tax rules
The next issue of course is to sell or transfer assets to get money out of super. For many people with large SMSFs, this is often a property asset that will be transferred to another family member or entity.
One of the happiest groups in this whole debacle will definitely be State Governments collecting an unexpected windfall in stamp duties as families move their assets around!
But when it comes to the super fund’s tax treatment, this is curiously one area where SMSFs have an unexpected advantage.
Inevitably, any large payments out of super in response to this tax will usually come from a member’s accumulation account rather than their pension.
In an SMSF, we’re fortunate in that pension funds pay capital gains tax on a ‘proportionate’ basis. In other words, even though we know the asset being sold or transferred is going to reduce the member’s accumulation account, the capital gain still gets taxed as if a proportion of it was coming from a pension account.
Consider this example: Lilly has $5 million in super – a $2 million pension and $3 million accumulation account in her SMSF. She’s the only member.
She intends to withdraw $2 million from her accumulation account to get her balance down to around $3 million. Even though she knows she doesn’t actually have to take any action until 30 June 2026 (the first date her balance will be checked against $3 million for this tax), she wants to do it as soon as possible.
To get the money out of super, she’ll sell some assets in her SMSF and realise a $300,000 capital gain. Her fund has a pension so each year it gets an actuarial certificate that provides an important percentage: this is the proportion of the investment income that is exempt from tax. Her actuarial certificate for 2024/25 says that the magic number is 40%. (While I would love to say we actuaries do very complex maths to work this out, in fact we don’t. It’s basically: what’s the average pension balance over the year vs the average balance of the fund as a whole? In Lilly’s case, if nothing much has changed this year, her pension of around $2 million represents around 40% of her $5 million fund).
The beauty of this calculation is that even though Lilly’s fund is selling assets to take money out of her accumulation account, the capital gain she realises in the process is still 40% exempt from tax. Only the remaining 60% ($180,000 being 60% of $300,000) is subject to tax. Super funds get to discount their gain by one third so the fund would only pay $18,000 tax on this sale.
That wouldn’t happen in a non SMSF – any capital gains realised on money taken from her accumulation account would all be taxed. The tax bill would be more like $30,000 (ie 15% tax on 2/3rds of the capital gain).
Of course, this ‘proportioning’ approach for funds like Lilly’s has downsides too. She can’t choose to specifically sell ‘pension’ assets and have those realised CGT free. But it does seem to be a quirky SMSF benefit in this particular scenario.
Watch the timing
I’ve written before about one extra consideration Lilly should keep in mind.
Her actuarial percentage for 2024/25 is likely to be around 40% even if she withdraws a lot of money out of her accumulation account ‘now’ (June 2025). That’s because something happening right at the end of the year doesn’t change the average over the whole year very much.
But think about her fund’s percentage in 2025/26. It will be closer to 66% (her $2 million pension will remain, but the total fund will now only be around $3 million). It would be much better for Lilly to have that higher percentage when her capital gains are being realised!
Believe it or not she could achieve this if she held off taking any action for a month or so. If she sells assets and transfers money out of super in July 2025 (rather than June 2025), the $300,000 capital gain will be taxed based on her actuarial percentage for 2025/26. This will be around 66% because for most of the year her fund will only have $3 million. In other words, only around $100,000 of the $300,000 capital gain would be taxed ($300,000 less 66%). This time, the tax bill would be around $10,000.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
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