SMSF members with high balances and in pension phase may find the best course of action in regards to the proposed Division 296 tax is to avoid any major restructuring as their fund will still be the most tax-effective savings vehicle for them, DBA Lawyers special counsel Bryce Figot has noted.
Figot said this would be the case even where a client may be on the highest marginal tax rate (MTR) of 47 per cent, but recognised that not taking any action seemed counterintuitive.
“You might think the 50 per cent personal capital gains tax (CGT) discount trumps the one-third superannuation discount,” he said in a recent online briefing.
“You might justify your view with the following back-of-the-envelope calculation of the 50 per cent discount timesed by the 47 per cent MTR equating to 23.5 per cent tax versus in the SMSF where it’s a two-third CGT discount times [the total of] 15 per cent plus an additional 15 per cent [from the Division 296 $3 million threshold] and a further 10 per cent [from the $10 million threshold] for a tax of 26.66 per cent.
“Given this, you might say for some clients it’s cheaper outside of super rather than inside and this is the reason that just comparing percentages I find very misleading because if you crunch the numbers you’ll see it doesn’t come out that way.”
Figot gave the example of Mitchell, aged 60, whose income is on the highest MTR, who is a sole member of an SMSF with a balance of $50 million and his superannuation benefits are all unrestricted and non-preserved, and who will purchase $50 million of shares on 1 July 2026 and dispose of them for $75 million on 30 June 2028.
He questioned whether Mitchell would be better off withdrawing money from the SMSF and buying the shares personally, via a company or conducting the transactions completely within his fund.
“On its face, one might think that restructuring is needed, however, remember if someone is old enough to withdraw from an SMSF, they’re probably old enough to also receive a pension, and the SMSF normal income tax will be far less because of the role of exempt current pension income,” he noted.
Using the first option, the tax payable would be $5.875 million ($25 million profit x the 50 per cent CGT deduction x 47 per cent MTR), while the second option would result in a tax of $7.5 million ($25 million profit x 30 per cent company tax), while within the SMSF the total tax would be $5.844 million due to 20 per cent of the fund being in retirement phase.
“The Division 296 tax [based on the calculations released by the government] is $3.8445 million and the regular income tax was $2 million because if 20 per cent of the fund is in the retirement phase, he got rid of 20 per cent of that tax,” Figot indicated.
“Once you factor in the role of the pension exemption, even with the most extreme examples, the SMSF is still the best game in town, but you need to sit down and do some dispassionate calculations.”
