Australian Financial Review
16 December 2016
Some experts predict that after the death of a partner who has more than $1.6 million in super, the surviving spouse might look to pump more money into property either for themselves or for their children in order to avoid paying extra tax.
Some experts predict that after the death of a partner who has more than $1.6 million in super, the surviving spouse might look to pump more money into property either for themselves or for their children in order to avoid paying.
This is because any amount in a partner’s super account in excess of $1.6 million must be taken out of the tax-friendly savings vehicle when they die.
“You will have to find something to put the money in,” said Suzanne Mackenzie, a principal at DMAW Lawyers. “One way of dealing with this is to buy a very expensive principle private place of residence. At least you’ll get a tax break,” Ms Mackenzie said.
The changes to the super inheritance rules, which are part of a super reform package designed to make the retirement savings system more sustainable and equitable, are due to come into force in July next year.
“I think it will definitely encourage people to buy more property. It will encourage people to buy big family homes. It is ridiculous from the point of view of housing availability,” said Bryce Doherty, chief executive of UBS Asset Management in Australia.
Graeme Colley, executive manager of SMSF technical and private wealth at SuperConcepts, said that while some people who have been widowed might upgrade their homes, others might buy a home for their children, or help them to pay off their mortgage. Other experts have pointed out that people who have carefully been planning their estates under the current rules will be forced to re-visit that advice, given the raft of changes to be introduced on July 1.
The full impact of the $1.6 million ceiling on super pension transfers is not well understood.
Under the current pension rules, when a person dies their pension must be cashed out, either as a pension or a lump sum outside outside the super system. When the $1.6 million pension transfer cap is introduced, if the deceased spouse has retirement savings both in a private pension account and an accumulation account, any money in the accumulation account will need to be removed from the super system altogether and managed separately. Earnings will be taxed at the marginal tax rate rather than at 15 per cent in an accumulation account or tax-free in a pension account.
However, Mark Draper, an adviser at GEM Financial Advice, said he doubted the pension changes would lead to a property buying spree.
“With the changes, all that happens is that people will pay a bit more tax. It is hardly the end of the world. Are you doing to arrange all your affairs to save a bit on tax? Probably not,” Mr Draper said.
The Adelaide-based adviser said that using the tax-free thresholds and franking credits could help to keep the amount of tax to minimal levels, even if the assets were held in the investor’s personal name.