The recent media landscape, including articles in the Australian Financial Review (AFR), has been buzzing with suggestions for significant tax reform. While these are currently just proposals and not yet law, they could have a profound impact on how you structure your wealth, particularly for those with trusts, investment properties, and significant superannuation balances. This article outlines the key suggestions and provides guidance on how to prepare.

The Push to Reshape Capital Gains and Trust Taxation

The conversation around trusts and capital gains is often centred on making the tax system more equitable and raising revenue for the government’s priorities, such as funding other tax cuts. Two primary areas are under scrutiny:

• Capital Gains Tax (CGT) Discount: Currently, individuals who hold an asset for more than 12 months are entitled to a 50% discount on any capital gain. Some proposals suggest reducing this discount, possibly to 25%, or even replacing it with a system that indexes the cost of the asset for inflation. This would significantly increase the tax payable on the sale of assets like investment properties and shares. For clients with significant unrealised capital gains, this could mean a much larger tax bill in the future. There is often a debate about grandfathering existing assets, meaning the new rules would only apply to assets acquired after a certain date. This is a critical point to watch for.
• Trusts and Income Splitting: Family trusts are a common tool for distributing income to beneficiaries in lower tax brackets. One suggestion to curb this is to apply a minimum tax rate (e.g., 25% or 30%) on trust distributions to adult beneficiaries who are not “actively participating” in the business. This would effectively limit the tax benefits of distributing income to low-income family members.

These proposals highlight a shift towards scrutinizing wealth accumulation structures. It’s a reminder that relying solely on existing tax concessions may become a risky long-term strategy.

The New Tax on Large Superannuation Balances (Division 296)

The most concrete proposal to date is the additional tax on superannuation balances over $3 million, often referred to as Division 296. This is a significant change that could reshape SMSF strategies.

• What it is: The government has proposed an additional 15% tax on earnings attributable to superannuation balances exceeding $3 million, starting from July 1, 2025. This takes the total tax rate on those earnings from 15% to 30%.
• The Crucial Calculation: The most controversial element is that the “earnings” are calculated on the movement in your total superannuation balance, which includes unrealised gains. This means you could be liable for tax on an asset’s increase in value, even if you haven’t sold it and don’t have the cash to pay the tax. This is particularly relevant for SMSFs holding illiquid assets, like direct property.
• A Personal Tax: This tax is assessed at the individual level, not the fund level, and you have the choice to pay it personally or have it released from your super fund.
• No Indexation: The $3 million threshold is not indexed for inflation, meaning that more and more people will be caught by this tax over time as their balances grow.

This new tax is likely to have a major impact on SMSFs, especially those with property-heavy portfolios. Further problems may arise if the fund holds business property such as warehouses, offices or farm assets which are tied to family businesses. It introduces new complexity and potential liquidity challenges that require careful planning.

Inheritance tax and Death Duties

Australia had death duties which were abolished in 1979.  Some of the largest OECD countries such as the United States, Japan, UK and Germany all currently have some form of death or estate taxes. There is a growing move by many countries to expand this tax base as traditional tax revenue sources diminish. Australia does have some forms of stealth inheritance taxes including:

• Capital Gains Tax (CGT): When a beneficiary sells an inherited asset (like an investment property or shares), they may be liable for CGT. The cost base for calculating the gain is generally the deceased’s original purchase price, not the market value at the time of death. However, there are exemptions, such as for the deceased’s main residence if sold within two years. An expansion of this base might see for example a flat rate of tax irrespective of the gain to align the treatment with other countries
• Superannuation Death Benefits Tax: This is a major area of tax on death. If a superannuation death benefit is paid to a non-tax dependent (e.g., an adult child who is not financially dependent on the deceased), the taxable component of the super benefit is taxed. The tax rate on this can be up to 17% (15% plus the Medicare levy). Careful planning before the time of death can help navigate this tax.

To preserve generational wealth the possibility of death and inheritances taxes must be front and centre of concern for high net worth and ultra-high net worth families, as overseas tax trends tend to filter down into Australia.  GST is a good example of this.

Our Recommendations and What You Should Do Now

While we await the final legislation on many of these proposals, a proactive approach is crucial. Here’s what you should consider doing:

1. Review Your Strategy: Don’t panic but do review your current financial and tax strategies. Consider how your trust, investment, and superannuation structures would fare under the proposed changes.
2. Assess Your SMSF Liquidity: If you have an SMSF with a balance over $3 million, you need to understand the potential impact of Division 296. This is especially important if you hold illiquid assets. You may need to stress-test your fund’s ability to meet potential tax liabilities without being forced to sell assets in unfavourable market conditions. If your SMSF does not have liquidity, do you personally have the capacity to meet the imposition of this proposed tax?
3. Review your Estate plan: Careful structuring of your family assets including superannuation and other investments can help avoid unwanted consequences. This may include the considered use of testamentary trusts. We can help you understand how your estate will be taxed and avoid a large portion being lost to taxes.
4. Talk to Us: The landscape is shifting. We are closely monitoring these developments and their potential impact. We encourage you to schedule a meeting to discuss your individual circumstances and the best way to navigate these proposed changes. We can help you model different scenarios and ensure your financial plan remains robust and tax-effective in the long run.

Did you find these insights valuable? Follow Stewart & Smith Advisory for more expert guidance on navigating the complexities of business finance and strategy.