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The industry is already changing as new superannuation tax rules loom, says KeyInvest CEO Craig Brooke. (Source: Youtube\/The Inside Adviser\/Getty) <\/p>\n The industry is already changing as new superannuation tax rules loom, says KeyInvest CEO Craig Brooke. (Source: Youtube\/The Inside Adviser\/Getty) <\/p>\n
Wealthy retirees<\/a> and high income earners<\/a> are already changing their behaviour as new changes to superannuation tax rules come into effect in months<\/a>. The looming reforms will reshape popular wealth strategies with industry insiders saying they mark “the end of unconstrained super”.<\/p>\n Advisors in the financial planning industry have been shifting from understanding the new policy to advising on subsequent strategies, says KeyInvest CEO Craig Brooke. Despite “pretty large” estimates from treasury about how much the new taxes will raise, advisors are proactively planning to help clients minimise how much they are impacted by the changes.<\/p>\n As a result, the country’s massive $4.5 trillion superannuation sector is “no longer the default destination for all long-term capital” of Aussie workers, he told Yahoo Finance.<\/p>\n RELATED<\/p>\n The changes, known as Division 296<\/a>, have been described as a “quasi wealth tax” and will introduce higher tax rates on the gains made by superannuation balances above $3 million and $10 million. It will double the tax rate<\/a> on the earnings of super accounts between $3 million and $10 million to 30 per cent. While the earnings on balances over $10 million will be taxed at 40 per cent.<\/p>\n As Australia’s wealth has boomed in recent years<\/a>, the sector has grown from its intended purpose of replacing the age pension to increasingly become a tax shelter for the wealthy. The new rules are about reducing the cost to the federal budget of tax concessions for the growing number of very large super balances.<\/p>\n “The question is, is superannuation still the best structure to save for my retirement? My answer is yes, it absolutely is,” Brooke said.<\/p>\n “But the next question simply becomes, if I’m going to pass those thresholds, can I afford to just be passive about my super? No way,” he added.<\/p>\n “How do I actively manage it? And what other [tax advantageous] structures are around?”<\/p>\n These are the questions that are now dominating the world of financial advice ahead of the new laws kicking in from July 1.<\/p>\n KeyInvest is an APRA regulated specialist financial services provider that doesn’t give individual advice but works with advisors in the industry.<\/p>\n Story continues <\/p>\n As expected, retirees in many cases are being advised to reduce their balance to a comfortable cushion below the $3 million threshold to mitigate against the new tax.<\/p>\n “The strategies we’re seeing in statements of advice at the moment … include pre-paying back down to anywhere from the $2.5 to $2.7 million range, assuming people are at preservation age,” Brooke said.<\/p>\n “That’s one cohort that’s already acting. They’re not waiting.”<\/p>\n The member-owned mutual society is estimating as much as $240 billion will rotate out of superannuation structures in anticipation.<\/p>\n But somewhat more surprisingly, after months of researching the impact of the new law, the group has heard from younger high income earners already changing their plans for future investment allocations.<\/p>\n “This is a cohort that we didn’t expect,” Brooke said.<\/p>\n While superannuation might still be the most attractive spot purely from a tax perspective, having to lock away the funds until at least the age of 60 might no longer be worth it, with workers now more inclined to prioritise the flexibility outside of super.<\/p>\n As one person told KeyInvest: “I can see I’m going to butt heads with these thresholds at a particular point in time. So therefore, I’m not having anyone \u2013 government, tax office or otherwise \u2013 tell me when I can retire. I need to build wealth in the most effective way I can outside of super.”<\/p>\n The $3 million and $10 million thresholds are indexed to inflation in increments of $150,000 and $500,000, respectively, but because the indexation is inflation-based, as opposed to asset-price-based, that increases the likelihood of threshold creep over time. Younger high income workers now \u2013 especially as mandatory contributions rise to 12 per cent<\/a> \u2013 will likely be captured by the new tax thresholds.<\/p>\n Modelling shows a $5 million super balance could generate more than $200,000 in additional tax over a decade under the new regime.<\/p>\n According to Brooke, three main alternative structures for wealthy workers have come into focus. They are trusts (which have been in the crosshairs of the ATO<\/a>), trading companies, and investment bonds which are popular for estate planning and wealth transfer strategies.<\/p>\n “People are getting these structures to simply work next to each other [in addition to super],” he said.<\/p>\n One of those wealth advisors currently helping clients best navigate the incoming Division 296 is Mark O’Flynn from firm Oxlade Financial.<\/p>\n “I’m in the middle of doing that right now,” he told Yahoo Finance on Wednesday.<\/p>\n “Even if people aren’t there yet [at the thresholds], maybe they will be in the future.”<\/p>\n However O’Flynn stressed that for most Aussies, superannuation will remain the best place to invest.<\/p>\n “I also think we probably need to be realistic. Superannuation is still a great deal. It’s a better deal than anything else and I’d like to remind my clients about that as well,” he said.<\/p>\n Treasury expects to raise about $2.3 billion from the Division 296 changes in the first full year and as much as $40 billion over the first decade.<\/p>\n Get the latest Yahoo Finance news – follow us on Facebook<\/a>, LinkedIn<\/a> and Instagram<\/a>.<\/p>\n For most, super will remain the best place to invest. But there’s now more to consider. (Source: Getty\/Yahoo Finance) <\/p>\n