A modelling tool to help SMSF members calculate their Division 296 tax and examine whether they should withdraw funds and reinvest in other structures has found doing so may have greater costs than first expected.
SMSF Alliance principal David Busoli made the claim as part of the launch of the tool, which he recently announced was in development, stating it determines whether a withdrawal is a valid option.
“You set the parameters – member balance, age, portfolio profile, source-fund type, personal tax rate, time horizon and all the usual Division 296 inputs, and it works out the optimal withdrawal amount and the vehicle, or combination of vehicles, that maximises the member’s net wealth over the period,” Busoli said.
“It runs a multi-stage search: first the best single-vehicle strategy across individual, company and insurance bonds, then a mix sweep with a materiality threshold, which checks whether splitting the withdrawal across two or three vehicles produces a meaningfully better outcome than the best single vehicle alone.
“If nothing materially beats leaving the money in super, it tells you that too.”
He noted the model showed making a withdrawal could have a larger impact than most people anticipate and undermine any shift made to reduce the impact of the Division 296 impost.
“To fund a withdrawal, the fund must generate cash, so unless cash is already sitting idle in the portfolio, assets have to be sold down. That triggers capital gains tax (CGT) on the pro-rata realised gains before the money even leaves super,” he stated.
“The optimiser models this honestly: the starting position of the alternative vehicle is reduced by the CGT drag on realisation and that drag then compounds over the modelling period.
“For portfolios with meaningful embedded gains, the first-year hit can materially change, and in some cases entirely undo, the case for withdrawal.
“This is not an impediment for large Australian Prudential Regulation Authority (APRA)-regulated fund members.
“APRA funds operate on a pooled unit-price basis with members continually moving in and out, so they always have cash on hand to meet a withdrawal request.
“No member-specific realisation event is triggered – the withdrawal is simply funded from the existing cash flow of the fund. That removes the year-one CGT drag entirely and meaningfully improves the optimiser’s output for APRA-source members relative to SMSF-source members holding the same portfolio.”
He pointed out the tool, which is accessible on his firm’s website, still indicates that where a fund member has a total super balance between $3 million and $10 million that superannuation still remains the most tax-effective vehicle, but for those above $10 million, insurance bonds may be more beneficial in some circumstances.
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason