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Super versus trusts: What is the best option with Div 296? Super used to be clearly the “best” option due to low tax rates but the increasing complexity of things like Division 296 tax, compliance risk, and death benefits tax is narrowing that advantage, a top specialist said.
. Katie Timms, partner with RSM, said the choice to use either a trust or an SMSF now is highly strategic and depends on wealth level, beneficiaries, and estate planning, and both have advantages and disadvantages. Timms said the proposed Div 296 tax is adding complexity to the estate planning process, creating another layer in strategic calculations around whether to retain wealth inside super or hold it in alternative structures like trusts or companies. She said for individuals running large pension balances or sophisticated super strategies, the actual impact may not always be as severe as initially feared, but it still requires careful modelling and ongoing monitoring. It also reduces the certainty that super was once known for in long-term tax planning. She continued that overall, Div 296 narrows the gap between superannuation and other wealth structures and while super can still be highly tax-effective, particularly below the $3 million and $10 million threshold, high-balance individuals now need to weigh the additional tax against other considerations such as estate planning, access to capital, and flexibility. “Traditionally speaking, for high-net-wealth individuals, these are people who are going to be impacted by Div 296,” she said. She said those clients now need to weigh up the tax advantages of a trust versus holding wealth within the super environment in an SMSF. The advantages of an SMSF in regard to tax include the fact that it is generally taxed at 15 per cent or zero in pension phase, they are often simpler, the member/director has some control over decisions and are traditionally attractive for high-net-worth individuals. However, Timms said, the SMSF structure does also come with challenges, particularly now with the introduction of the Div 296 tax including the risk of death benefits tax when super is paid to certain beneficiaries, and compliance risks such as non-arm’s length income. “For clients that are running pensions a lot of the time, their tax is nowhere near as bad as what we think it is going to be. But for a trust, what’s the big win? No death benefits tax,” Timms said. “We don’t have a looming tax that is sitting there waiting if we’ve left assets too long. Unfortunately, I do think I’m getting further away from being able to say super is the best because of all these complications with Div 296 tax for high balances.” Timms said the ability to just use children as tax beneficiaries via a trust has been diminished, especially with Division 7A tax, and clients now have to “juggle” making distributions via a trust structure. “What happens if we’ve got loans? It adds another layer of complexity to having these sorts of structures if we’re trying to get money out,” she said. “At the end of the day with an SMSF, if you’re the member, you are the director, you have some say in what is going on. You can’t ultimately control and rule as to what that person does with that money once it’s been gifted and with your trust, it’s absolutely vital to really manage your estate plan well, because if you’ve got things like unpaid present entitlements, or you’ve gifted money to the next generation, it’s gone into the trust as a gift and you’ve got to make sure that’s really protected from your estate planning.” However, she said there are upcoming challenges. “At the end of the day, your assets inside of super unless you’re doing something really wrong, 15 per cent or zero. On your trust side of things, you’ve got the flexibility to manage that if you’ve got the ability to distribute down to children, to non-working parents, or at the end of the day, a corporate beneficiary, you can make that decision as for the best tax outcome,” Timms said.
Keeli Cambourne |
