$3mil super cap threatens farms

Farmers will be significantly and disproportionately affected if the Division 296 passes in its proposed state, an expert wealth advisor has cautioned.

Ulton Wealth Management Partner Kylie Wright says that the Division 296 tax, informally known as the $3mil super cap, poses a real threat to our farms.

“In its proposed state, the tax will massively impact a lot of people. And for farmers who hold their property in a SMSF, the implications may be devastating,” said Ms Wright.

The Division 296 draft legislation was first introduced to parliament in February 2023, under the Better Targeted Superannuation Concessions Bill. The draft legislation proposes an additional 15% tax on earnings for super balances over $3million. In this instance, “earnings” includes the growth in value of assets that haven’t been sold, making the Division 296 proposal a tax on unrealised capital gains.

For the many farmers who are asset rich but income poor, the Division 296 draft threatens a situation where their tax bills outpace their income.

Ms Wright, who has been a trusted advisor to many multi-generational farming families over the years, says that the broad-strokes approach of the Division 296 draft fails to recognise the difference between farming property and other types of assets.

“The point is that to the vast majority of farmers, the farm is not an asset they plan to cash in down the track for a capital gain. Almost always, they want to pass it on to the next generation,” she said.

The potential impacts of the Division 296 tax aren’t exclusive to farmers holding property in their SMSFs. More than 1 in 5 SMSFs hold some form of real property. If it passes in its current form, anyone with a super balance above $3 million will be hit with the additional 15% tax on the proportion of earnings over $3 million—a move which Ms Wright says will destabilise the role of superannuation.

“The issue is that this bill punishes people for their sacrifice. These are people who have foregone lifestyle to put money into super, because governments have touted super as a stable option,” said Ms Wright.

“Every government we’ve had since 1992 when super became mandatory has said they want certainty and stability around super, but what’s being proposed now is in direct conflict with that. Naturally, this has caused a whole lot of confusion around retirement.”

Ms Wright adds that the longer the proposed Division 296 remains without verdict, the more anxiety and confusion it creates.

At the time it was first introduced to parliament in 2023, the proposed legislation was referred to a senate committee for review. In May of this year, that committee reported back with a majority recommendation to pass the bill unaltered. However, many Independents now perceive the inherent issues with the bill and the final months of 2024 are looming closer without conformation that the bill will become legislation. This is particularly alarming considering that if the Division 296 is legislated, the changes will come in from 01 July 2025. This gives people very little time to prepare, especially those who have illiquid property assets and are therefore restricted by how nimbly they can react.

“What we really need are answers on what is going to happen, and we need these answers as soon as possible,” said Ms Wright.

While Ms Wright adds her voice to the financial profession’s calls for answers, she also cautions her clients against making any premature financial changes.

“No one should be making major decisions until there is legislation. Yes—keep up to date with the latest developments, but you should not be making any changes until we have confirmation of what is going ahead,” she said.

Though she vehemently warns against taking action before having all the information, ms Wright does encourage intelligent preparation. Ever since the first whispers of the proposed Division 296 tax, Ms Wright and her Ulton Wealth team have been helping their clients understand the possible personal implications of this tax and prepare accordingly.

For Ms Wright and her team, this has meant making sure their clients are fully informed with every new development and deep diving into the specific impacts this tax would have if it’s passed in its current state.

“Along with investigating the interaction between the proposed tax and estate tax, we’ve been using analysis of clients’ current situations to create personalised and realistic projections of how things may look if the tax passes as-is. This means that if a time comes when we have to move quickly, we can,” said Ms Wright,

Ulton Wealth specialise in comprehensive advice, an area of expertise Ms Wright recognises as especially important when considering how to approach the Division 296 tax.

“The $3million super tax isn’t something we’re talking about with our clients in isolation. This is part of a bigger conversation we’re having with our clients around retirement and estate planning,” she said.

“For truly effective wealth management, all of these things need to be considered together because your financial decisions in one area will usually have an effect that ripples across other areas too. And that is why comprehensive advice is so important.”

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