Early modelling of superannuation withdrawals and reinvestment in other structures to avoid the new Division 296 tax has found super remains the most tax-effective vehicle for those with balances below $10 million.
The findings were made by SMSF Alliance principal David Busoli as part of development work on a tool to model outcomes comparing maintaining funds within superannuation and withdrawals reinvested in an individual’s name, a company structure or insurance bonds.
“Based on preliminary testing across portfolio types and balance levels, some patterns have emerged from the modelling,” Busoli said.
“As you would expect, the two Division 296 tiers [of $3 million and $10 million] produce quite different outcomes.
“The first tier and second tier need to be considered separately because the case for withdrawal depends almost entirely on which tier the member’s balance falls into.
“For members whose balance sits between $3 million and $10 million, super generally wins.
“The exception is if the portfolio mainly comprises cash, term deposits and fixed income, which is not what you would expect to find in a long-term investment portfolio. For such portfolios, the insurance bond has a narrow advantage due to its tax-free redemption after 10 years.
“For members with balances above $10 million, the picture changes.
“At this level, the insurance bond’s advantage is genuine across most portfolio types, though this advantage is tempered by the costs of restructuring and the inability of insurance bonds to invest in direct property, and narrows as investments favour growth-oriented portfolios.”
He noted a company vehicle almost never produced an optimal outcome at either tax threshold due to its tax position when finally cashing out any investment, and investing in an individual’s name may outperform super for balances over $10 million, but failed over the long term if they were taxed at the highest marginal rate.
“The key takeaway is that the withdrawal strategy is primarily a second-tier play,” he added.
“For members between $3 million and $10 million, super remains the most tax-efficient vehicle for most portfolio types and the case for withdrawal is narrow.
“Above $10 million, the additional 10 per cent Division 296 [tax] rate creates an incentive to move capital outside super, particularly into insurance bonds and particularly for income-oriented portfolios.”
He stated the tool, which was due to be released soon, would be publicly available on his firm’s website and model the effect of the new impost tax on a super fund member’s wealth over time based upon various considerations.
These would include a pension/accumulation split with minimum pension drawdown rates by age, a two-tier proportional calculation with CPI-indexed thresholds, cost-base tracking for capital gains, transaction costs and capital gains tax on initial rebalancing, and terminal value encashment calculations of investments in all structures.
