Is there still room in your SMSF for your medical practices?

If the Federal Government’s proposed tax on “excess member balances” comes into force on July 1, 2025, those with larger superannuation balances may need to rethink setting up their medical practices within their SMSF.

In the first part of this series, I made the case for transferring ownership of your medical rooms to your SMSF. Many healthcare professionals have already taken advantage of the generous tax breaks, cash flow management and flexibility in structuring their business.

This strategy works, until the government says otherwise. And this turning point is now for all SMSF investors.

Part two of this series examines the impact of the so-called proposed $3 million retirement tax.

Another pension tax is upon us

If the federal government’s proposed tax on “excess member balances” takes effect on July 1, 2025, those with larger retirement balances may need to rethink getting their room (or any property, and even less other growth assets) in their SMSF.

This problem could be compounded by the Victorian Government’s new annual tax on commercial and industrial property.

The delays involved in direct SMSF property transactions may require you to start considering your options now. Time is running out, as at the time of writing, the bill is currently going through Parliament and only a handful of senators have the power to make significant changes to the government’s plans.

Superannuation changes: understanding the potential new tax

The proposed tax works like:

1. an increase of 15%;
2. on the share of “gains”;
3. which concerns the proportion of the balance of your member account;
4. this represents more than 3 million dollars.

Supplement can either be paid personally or released from the fund via an apparent paperwork scramble with the ATO.

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

Critical points:

• Unrealized capital gains (i.e. paper profits) are included in “profits”;
• No capital gains tax (CGT) relief is available for assets held for more than 12 months;

(Skip to How serious will the changes be? section: if you do not want to read technical elements on this point.)

This is clearly at odds with the traditional treatment of capital gains in Australia. There are two features:

• CGT is event driven, meaning only when you sell an asset or there is a change of ownership or beneficial interest. It was not evaluated annually on the evolution of the value of the property;
• The CGT also encouraged long-term asset holding by granting discounts, depending on asset ownership, on the sale of an asset held for more than 12 months.

Critical point:

The taxation of unrealized capital gains in fact advances a CGT event which could will occur many years in the future.

The $3 million threshold it is not proposed to be indexed. The obvious problem here is that the threshold will not keep pace with inflation, meaning that over time more people will be affected. In other words, the real value of $2 million today will be $3 million in a few years.

How serious will the changes be?

Bad. Our recent analysis of the new tax leads us to conclude that the new law will disproportionately and negatively affect growth assets (e.g. real estate such as medical practices and stocks). The result is that superannuation becomes the highest taxed entity in which to house growth assets, to the extent that a member’s balance exceeds $3 million.

By comparing the CGT rate applied to an asset sale when the asset has been held for more than 12 months for different investment vehicles (see graph), it is clear that the pension is the least attractive investment vehicle.

Other considerations

The decision to hold high-growth assets should not be based solely on the tax implications of capital growth. Several other factors must be taken into account:

• The amount of income generated by the asset;
• Potential stamp duty on any transfer of assets;
• Estate planning intentions: Consider a possible death benefit tax of an additional 15%;
• Intended use over the life of the asset – for example to finance future capital works;
• Possibilities of asset depreciation.

Conclusion

If you have more than $2 million in your SMSF account (remember this will soon be the new $3 million) 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 these assets personally, or through other tax structures such as trusts, may provide greater opportunities for long-term tax optimization. As establishing such structures and implementing transfer strategies that need to be tailored to your individual situation can take some time, it is prudent to actively review your affairs today.

The new pension tax landscape is complex. First Samuel has been providing wealth management to healthcare professionals for over 25 years. We will consider wealth opportunities related to your unique situation by putting you at the center of everything we do.

Allow one of First Samuel’s private client advisors to discuss the best way to restructure your investments. Book your free consultation today. For more information, click here.