Issue 18 / 13 May 2024

If the federal government’s proposed tax on ‘excess member balances’ comes into effect from 1 July 2025, those with larger superannuation balances may need to rethink having their medical rooms in their SMSF.

In part 1 of this series, I made the case for consideration of transferring ownership of your medical rooms into your SMSF. Many medical professionals have already taken advantage of the generous tax concessions, cash-flow management, and business structuring flexibility available.

That strategy works, until the government says that it doesn’t. And that turning point is now upon all SMSF investors.

Part 2 of this series reviews the impact of what is being referred to as the proposed $3m superannuation tax.

Another superannuation impost is upon us

If the federal government’s proposed tax on ‘excess member balances’ comes into effect from 1 July 2025, those with larger superannuation balances may need to rethink having their rooms (or any property, much less other growth assets) in their SMSF.

This issue may be compounded by the Victorian state government’s upcoming new annual tax on commercial and industrial property.

The timeframes involved in SMSF direct property transactions may require you to begin considering your options now. Time is of the essence, as at the time of writing this article, the proposed legislation is making its way through parliament, and only a handful of senators have the power to make any meaningful change to the government’s plans.

Superannuation changes: understanding the potential new tax

The proposed tax operates as a:

  1. a surcharge of 15%;
  2. on the portion of ‘earnings’;
  3. that relates to the proportion of your member account balance;
  4. that is in excess of $3m.

The surcharge can either be paid personally or can be released from the fund via a seeming paper chase with the ATO.

Earnings are the increase in the value of your SMSF account balance in a fiscal year, ignoring contributions and withdrawals.

Critical points:

  • Unrealised capital gains (ie paper profits) are included in ‘earnings’;
  • No capital gains tax (CGT) discount is available for assets held for more than 12 months;

[Skip to the How Bad Will the Changes Be section: if you do not want to read some technical stuff on this point.]

This is significantly at odds with Australia’s traditional treatment of capital gains. There are two features:

  • CGT is event driven, ie only when you sell an asset or there is a change in ownership or beneficial interest. It has not been assessed annually on the change in the asset’s value;
  • CGT has also encouraged long-term holding of assets by providing discounts, depending on the ownership of the asset, on the sale of an asset held for greater than 12 months.

Critical point:

The taxation of unrealised capital gains effectively brings forward a CGT event that might happen many years in the future.

The $3m threshold is not proposed to be indexed. The obvious issue here is that the threshold will not keep pace with inflation, which over time means more people are affected. That is, the real value of $2m today will be $3m in a few years.

How bad will the changes be?

Bad. Our recent analysis of the new tax leads us to conclude that the new law will disproportionately and adversely affect growth assets (eg property, such as medical rooms, and shares). The result is that superannuation becomes the highest taxing entity in which to house growth assets, to the extent that a member’s balance exceeds $3m.

Comparing the CGT rate on an asset sale where the asset has been held for more than 12 months for different investment vehicles (see chart), it is clear that superannuation is the least attractive investment vehicle.

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Other considerations

The decision on where to hold high growth assets should not simply be based on the tax implications of capital growth alone. There are several other factors that need to be considered:

  • The amount of income that the asset produces;
  • Potential stamp duty on any asset transfer;
  • Estate planning intentions – consider the possible Death Benefits Tax of another 15%;
  • Intended use during the life of the asset – for example future capital works funding;
  • Asset depreciation opportunities.

Conclusion

If you have more than $2m in your SMSF account (remember that this will soon be the new $3m) you will be affected by the new tax.

If your SMSF holds your rooms, or other capital (i.e. growth) assets then you should consider taking advice now.

Holding such assets personally, or via other tax structures such as trusts, may provide better long-term tax optimisation opportunities. As it can take some time to establish such structures and give effect to transfer strategies that need to be tailored to your individual circumstance, it’s prudent to actively consider your affairs today.

The new superannuation tax landscape is complex. First Samuel has been providing wealth management to medical professionals for over 25 years. We will consider the wealth opportunity of your unique circumstances by placing you at the centre of everything we do.

Allow one of First Samuel’s Private Client Advisers to discuss how best to restructure your investments. Book your free consultation today. For more information, click here.

Medical rooms ownership: Opportunities and pitfalls - Featured Image

Braith Morrow is the Head of Advice at First Samuel. Braith has 20 years of experience in the financial services industry. He has extensive experience helping businesses understand their regulatory and legislative obligations across Australian and New Zealand financial services operations. Braith is passionate about working with stakeholders to deliver client-focused outcomes while meeting and exceeding regulatory standards.