Wealth firms are preparing richest Australians for pension tax fallout
Under legislation set to reach the Senate in the coming weeks, pension balances of A$3 million (S$2.5 million) and above would face an additional 15 per cent tax on top of the current 15 per cent rate. The proposal, set to affect about 80,000 people, has triggered a wave of interest from affluent savers looking to use trusts, insurance bonds and other strategies to shift funds.
'People are definitely spooked,' said Tim Cudlipp, a partner and investment advisor at Sydney-based Escala Partners, which serves high-net-worth and family office clients.
Some of the options Australians are considering include company structures that face corporate tax rates on earnings, instead of higher personal rates, and family trusts where levies are imposed on beneficiaries, not balances. 'People use a trust to distribute to their kids, for example, to reduce the income tax that they are paying,' Cudlipp said.
The anticipated change has also reignited the appeal of insurance bonds, which can offer preferential tax treatment after a long lock-up period. While those products have grown in popularity in the past couple of years, the new tax proposal 'has shifted more and more focus there,' said Singapore-based financial adviser Jarrad Brown, who works with Australian clients in the city-state.
Others are looking at moving retirement assets into low-risk fixed income investments to avoid short-term gains that would lead to a higher tax bill. 'That's definitely something that we are starting to discuss with clients,' Cudlipp said.
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Clients are mostly being advised to wait until there's clarity on the outcome of the legislation, while they explore the options available to them.
'We are not entirely sure of exactly where it's going to land,' Peter Nevill, a Sydney-based partner at Viola Wealth, said of the legislation. 'The treatment of unrealised capital gains is a big sticking point for a lot of people.'
Another point of contention is that the A$3 million threshold is not indexed, meaning its real value will erode over time as inflation rises. With Australia's pension system now more than three decades old, a growing number of workers are saving consistently throughout their entire careers. That increases the likelihood that more people will eventually be caught by the tax.
'Within 15 to 20 years, it will be pulling a decent chunk of Australians into it,' said Sarah Abood, chief executive officer of the Financial Advice Association Australia. She added that taxing unrealised capital gains could force some individuals to sell assets in order to meet tax liabilities.
Australia's A$4.1 trillion pension industry has become the envy of the world and grown into a global powerhouse. But critics argue its tax settings have rendered the system a high-wealth accumulation vehicle. Treasurer Jim Chalmers, who first unveiled the tax in 2023, said in June the measure would make the system more equitable and financially sustainable.
To pass the legislation, the government must secure support from Senate crossbenchers, creating a potential roadblock. Labour has accused the opposition Liberal-National coalition of refusing to negotiate, while the Greens say they are open to talks with the Treasurer.
Meanwhile, wealthy Australians are also considering accelerating intergenerational gifting to reduce balances, Nevill said.
'One of the easiest solutions is just pull it out and give it to the kids,' he said. BLOOMBERG
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