Estate Planning, Superannuation

Super use in tax estate planning overstated

superannuation tax estate planning

Government claims superannuation is being used for tax-based estate planning are incorrect and reflect a misunderstanding of the super tax system.

Superannuation is not a good vehicle for tax-based estate planning in many cases, according to an SMSF legal expert who has rejected comments by a federal government minister that this is the case.

DBA Lawyers special counsel Bryce Figot said a statement from Financial Services Minister Stephen Jones in November last year raised questions about the government’s understanding of superannuation.

“Stephen Jones late last year said: ‘If the objective of super is to provide a tax‐preferred means for estate planning, you could say it is doing its job,’” Figot said during a DBA online briefing late last week.

“Basically he said rich people are using superannuation for tax-effective estate planning to pass assets on to the next generation and pay little tax on that. Is that actually true and does that reflect a true understanding of super?”

He provided an example of tax paid on death by a hypothetical person, John, who has $100 million worth of real estate carrying a large unrealised capital gain, noting the tax paid outside super is minimal compared to that inside superannuation, specifically within an SMSF, which is one-third of the total value of the asset.

Outside of super, the real estate could be held personally, in a family discretionary trust or corporate beneficiary and John’s children could inherit it personally or it may pass into a trust structure.

“How much is the tax liability? From an estate planning point of view, even with the unrealised capital gain valuable asset, when it comes to passing that on to the next generation, the liability is probably zero,” Figot said.

“There are capital gains tax (CGT) exemptions and there are no income tax or goods and service tax implications and probably a stamp duty exemption depending on where the real estate is located.

“Now let’s consider it inside super because that’s a very different kettle of fish.

“Potentially there’s a $10 million CGT-related income tax liability for the SMSF because transferring the asset out of the fund is its own CGT event.

“There is also a potential $17 million tax, including Medicare levy, when it goes to the kids and stamp duty of 5.5 per cent depending on the jurisdiction.

“If you add that up that’s almost a 33 per cent death tax. How can that possibly be said to be tax preferred?”

He acknowledged the hypothetical case was “ramped up” but done so to highlight the tax levels applied in superannuation on death, and did not include the potential for pay-as-you-go withholding tax if the asset was 100 per cent taxable and transferred in-specie to John’s children.

“The government has been saying super is really good for rich people and avoiding tax on death. I disagree. This example shows that super is very good during people’s life for tax effectiveness, but it’s terrible upon death,” he said.

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