A sizable chunk of tax-free SMSF assets now taxable due to super reforms.
The 2016 superannuation reforms have had a significant negative impact on SMSF pension assets and Labor’s proposal to reduce imputation credits for SMSFs would further punish self-funded retirees, according to Class.
The SMSF software provider revealed the introduction of the $1.6 million transfer balance cap and the change to the tax status of transition-to-retirement income stream accounts had resulted in almost 25 per cent of SMSF assets that were tax-free becoming taxable.
Its June 2018 SMSF Benchmark Report, “Super reform: the great pension squeeze”, revealed taxable SMSF assets in accumulation phase hit $422 billion in June, a 90 per cent increase from March 2017 when asset value in
accumulation was $222 billion.
“The 2016 super reform changes have now been largely completed. The net result is a tectonic shift in assets,” the report said.
“In March 2017, 31 per cent of assets were held in pension phase and 45 per cent were held in mixed phase. As at June 2018, only 14 per cent of assets remain in tax-free pension phase, while mixed phase has jumped to 57 per cent.”
It further said tax due on SMSF earnings had increased to $3.2 billion in the 2018 financial year – a $1.5 billion jump from 2016/17. This is even after assuming a modest return of 5 per cent on assets for the 2018 financial year, it noted.
“Our tax estimates are based on earnings only. The tax outcome of a fund also needs to take into account contribution tax, deductible expenses and rebates, including franking credits,” it said.
Class chief executive Kevin Bungard said: “Assuming a modest return on assets for the 2018 financial year, we estimate this shift will result in an increase in the gross tax due on SMSF earnings of nearly 90 per cent from 2017 – a massive impact.”
Based on these findings, Class made a case against Labor’s proposed policy to reduce imputation credits for SMSFs, arguing it is inappropriate to further increase the tax burden on self-funded retirees, particularly if it disproportionally affects SMSFs compared to Australian Prudential Regulation Authority-regulated funds.
On the other hand, the report noted new strategies that were implemented as a result of the 2016 super reforms are delivering unexpected benefits.
It said there has been an increase in contribution splitting and recontributions, resulting in the closing of the gender gap in SMSF assets and balances.
By Malavika Santhebennur
Self Managed Super
1 August 2018