The Australian Government’s plan to overhaul superannuation is causing widespread concern to many in the business community. Tax specialist Murray Howlett highlights how the proposed changes will effectively kill superannuation as an investment tool for high net worth individuals and entrepreneurs to build wealth.
In its original form, superannuation provided a safe place to grow a nest egg for retirement. Even so, entrepreneurs have long-struggled to invest in superannuation due to the restrictions on investments inherent in existing laws.
Limitations for entrepreneurs considering superannuation included the inability to borrow funds (subject to limited exceptions) or assets be used as surety for borrowings.
Most importantly of all though, monies invested within Australia’s superannuation regime are compulsorily trapped within the system until attaining the prescribed retirement age (somewhere between age 55 and 65 depending upon your date of birth and employment situation). This last restriction is a significant concern to entrepreneurs who are already unhappy with the restrictions placed on superannuation investments, particularly given both major parties’ track record of changing rules once monies are committed to the system.
The trade-off was attractive low income tax rates and strong asset protection benefits.
Lack of trust
The latest round of super changes has upset the balance, particularly given both major parties’ track record of changing rules once monies are committed to the system. There now appears to be a political position that a certain level of super is sufficient and any amount above that is just ‘rorting the system’.
With the Government continuing to tinker away with superannuation many entrepreneurs no longer trust the system. They are fearful that they won’t be able to access their money how and when they want it.
The changes ahead
In the 2016-17 Budget, the Government announced a superannuation reform package and redefined the objectives for Australia’s superannuation scheme which is to “provide income in retirement to substitute or supplement the age pension.”
Within the context of this new definition, the proposed changes include higher taxes on super contributions for high-income earners, changes to super contribution caps as well as restrictions to Transition to Retirement pensions (TTR). They also seek to impose a per person balance of $1.6 million before existing, long-standing, tax concessions disappear.
Further, the government has now proposed supplementary objectives for superannuation being:
1. facilitate consumption smoothing over the course of an individual’s life;
2. manage risks in retirement;
3. be invested in the best interests of superannuation fund members;
4. alleviate fiscal pressures on Government from the retirement income system; and
5. be simple, efficient and provide safeguards.
Points one and two raise the question whether the Government will place further restrictions on lump sum withdrawals. In other words, superannuation is not intended to be an estate planning or wealth creation tool but purely a mechanism to allow members to accumulate enough savings to fund a pension up to the age pension equivalent.
What are the alternatives?
Entrepreneurs are no longer willing to back superannuation and are seeking alternate wealth management and creation structures that do not require their monies to be locked away for many years or to be subject to the political whims of the current ruling party.
With superannuation out of the mix, entrepreneurs are seeking alternative structures.
Currently Australian’s have a choice of four structures, or combinations thereof, for their various business and investment operations. These being:
1. Your own name;
2. A company;
3. A trust; or
4. A superannuation fund.
The right structure for any particular circumstance will always depend upon the peculiar facts of the situation.
Well drafted discretionary trusts have proven to provide strong asset protection given no-one is considered to own the assets in such a trust. Discretionary trusts also provide flexibility of ownership and are adaptable to the changing circumstances not only of our political parties, but also of the trust’s controlling family.
One thing trusts do not offer is a low income tax rate. Indeed, if trusts do not distribute their income to other taxpayers in each year, tax will be paid at the highest possible personal tax rate of 49%. As company’s offer access to a 30% tax rate on investment income, they will also often play a role in a superannuation alternative structure.
The right structure for any individual’s circumstance will depend upon their particular needs.
Some examples may be as follows:
1. A discretionary trust owning 100% of the shares in an investment company;
2. A discretionary trust holding investments but distributing income to a company as beneficiary;
3. A combination of 1 and 2 whereby capital growth assets are held by a discretionary trust, but income bearing investments are held by the company; and/or
4. A number of trusts designed to achieve the above benefits but to enable smoother transfers of wealth across generations.
Superannuation as an investment and wealth creation tool is dead. Now is the time to look for alternative options. An experienced tax and business advisor is the best person to speak to in order to plan for the future. BFM
DISCLAIMER: This article contains general information only and is not intended to constitute financial advice. Any information provided or conclusions made, whether expressed or implied, do not take into account individual circumstances. It should not be relied upon as a substitute for professional advice.
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