The proposed changes in Labor’s plans to tax earnings on superannuation balances above $3 million are causing concern among wealthy investors, prompting a reevaluation of investment strategies. According to analysis conducted for AFR Weekend, individuals with a $1 million investment property in their superannuation could face a significant tax burden over the next decade. For instance, those with properties yielding high capital growth but low rental income could see tax liabilities as high as $778,760 over 10 years.
These potential tax implications are prompting wealthy super savers to reassess their investment approaches. Some are contemplating shifting towards alternative investment structures such as discretionary trusts and companies, despite the new rules not taking effect until July 1, 2025.
The complexity of determining the most tax-efficient investment platform is challenging advisers and investors alike. Variables such as asset type, growth rate, and tax implications make it difficult to pinpoint the optimal strategy. Moreover, the removal of stage three tax cuts for certain income brackets adds further complexity to the decision-making process.
To prepare for the changes, various strategies are suggested. Creating a cash or fixed-interest buffers to cover increased tax liabilities, preventing the need for a rushed sale of assets. This also highlights the importance of asset valuation, as it directly influences tax liabilities.
Investors are exploring alternatives such as trusts and companies for their investment needs. Discretionary trusts offer flexibility and potential tax advantages, especially for high-net-worth individuals with little taxable income. Companies provide asset protection, flexibility in income distribution, and estate planning advantages.
Investment bonds are gaining traction, offering tax advantages for investors not needing immediate access to capital. Effective tax rates on investment bonds can be lower than other structures, making them attractive for certain investors.
Couples are exploring strategies like asset splitting to mitigate tax impacts. By transferring assets between partners, they can manage their combined super balances more effectively.
Additionally, the changes present opportunities for estate planning. Intergenerational wealth transfers and the use of testamentary trusts are being considered to optimize tax outcomes and ensure smooth wealth transition.
Overall, the impending tax changes are prompting investors to rethink their superannuation and investment strategies, seeking the most tax-efficient options available.
