Super changes will hit saving strategies

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Reporting on the $100K limit across multiple funds, pain and no gain for Industry Funds.

The Government proposal to tax superannuation pensions on income over $100,000 seems simple and not too complicated until you look in to it in more detail as the administrators are starting to do.

How will the government legislate so that the already very common strategy of splitting your superannuation over a number of different providers’ funds is not abused? Surely one can expect that the initial strategy before the legislation is finalised will be to place pension balances with each provider to conveniently earn just under $100,000 threshold in each one.

It may be simple for those with just one pension with one provider but if you have a Defined Benefit Pension or a Employer Scheme Pension as well as a retail, industry pension or SMSF pension as many do, then the administration could end up being very difficult for some. Especially frustrating for the Industry funds who will be required to report on member’s account earnings even though they have few pension members with balances that would have that earning capacity.

With many newer retail funds reporting to their members by late July but Industry and older retail funds dragging the chain and then SMSF not being required to report until 6-9 months later, this is a another reporting nightmare in the offing.

Which fund pays the tax on the excess, the first or last to report or do they give the member a choice? You can imagine the forms already!

Better increase the ATO’s budget to manage this scheme.

Super splitting now even more relevant

A tip for those with one main breadwinner in the family and looking to avoid the $100K earnings threshold is to make full use of the ability to Super Split from as young as possible. This is where you can transfer or technically “Split” up to 85% of your concessional contributions (after the government has taken its 15% contribution tax) to your spouse’s account and thereby reduce your balance and increase theirs.

We have been using this strategy for a number of years as it does not cost anything to implement and just one form is required. Why? Well we expected that at some stage future governments would change legislation to hurt those with high balances but to be honest we were thinking more of caps on Lump sum withdrawals and we wanted maximum flexibility for our clients. But it is equally relevant for the proposed scenario.

Re-contribution strategies at risk

Another strategy that has been set for those that are on Centrelink Pensions and looking to improve the taxable and tax free portions of their superannuation by engaging in the re-contribution strategies as part of their estate planning.  This strategy is often used to ensure that any balances left to a non-dependant were not subject to the 16.5% tax on death of the pension member.

The new proposal to deem all pension from 2015 the same as non-superannuation assets will mean people will have to think twice about drawing down lump sums to recontribute to new pensions after that date as they will lose the pretty generous treatment received by current pension under the existing rules which provide a deductible amount under the income test , often wiping out any reportable income.

My feeling is that we will see people quarantining pre-2015 pensions and locking in the concessions and then having separate pension, call them post 2015 pensions for any strategies used after that date.  Another set of dates we will have to remember.

Business Real Property may be better off outside of super

For those planning to hold a business premises through their super during their working life and possibly on in to retirement as a steady income source for their pensions, they may have to revisit the strategy. It may be more beneficial to keep the property outside of super, especially if it is expected to be worth less than $2m in the future.

Outside of super you could consider accessing the Small Business CGT concessions such as the exemption under the 15 year rule rather than placing it in a SMSF and possibly incurring CGT or tax on rental income later down the track. This is very much a case of you and your Accountant or SMSF Specialist Advisor sitting down and forecasting using some reasonable projections based on the alternative strategies.

Comments

  1. Diogenes the CynicMEMBER

    All valid points but you missed one obvious one and it is a biggie.

    The continual tinkering to Super means that legislative risk is now at the forefront of the punters’ minds. Anyone under 50 should not bother to put extra cash into Super and if you already had a decent chunk of super perhaps under 55. It is very likely that further changes will be made in the near future, diminishing this vehicle’s tax attractiveness once again. The honeypot is too tempting.

    Those under 50s looking for tax effective strategies must look elsewhere. Working in a low tax jurisdiction is the best avenue I can see.

    • thomickersMEMBER

      +1

      The 2 main tax minimization strategies are:

      -salary sacrificing into super (mainly diversified portfolios)
      -Gearing on property outside super.

      I think with this new legislation you will get a proportion of wealth accumulators switching strategies from salary sacrifice into negative gearing on property.

      • +1 super is just way too big a honey-pot for the politicians. There is no certainty on the rules for this money. Risks include not just increased taxes, but also changes in availability, risk of capital controls etc. There really is something very very spooky about having a government say when you can and can’t use your own money. (and i reiterate, for everyone other than public servants this is our own money – it gets taken out of our package – we earn less because of it!)

        This will push more to gear as a tax shelter (mainly through property), and paradoxically probably expose people to more risk through being in property than the government tinkering risk.

        I certainly have super off the table as a useful saving tool – just use it as the stuff that might still be there at the very end of days (80+) if i get there.

    • It would be unreasonable in my opinion to have a blanket view to ignore the tax effectiveness of Super at age 50+ when you are at or nearing your disposable earnings peak. The tax concessions both in terms of savings tax on your employment income and on the earnings within the fund are too high to ignore.

      When a person in the 38.5% tax bracket can save 22% simply by contributing to super and save 22% + some franking credit refunds on earnings, that is a lot of money to make up when considering the alternatives.

      • thomickersMEMBER

        you are correct. super is the most optimal way to accumulate wealth before retirement

        however a normal lay person will consider the political noise regarding super in determining their long term financial goals.

        from a macro perspective, we will have less “savers” as the crowd becomes less confident in the tax structure.

  2. At first glance Labor appear not to have worked through the mechanics, but then how did this work with the reasonable benefits limits in the past?

    Do they simply do it in the person’s tax return making it a question to disclose the increase in all super balances held during the year and then call for the tax from each fund in proportion to the overall increase, or some similar way of collecting from the funds.

    • Explorer, ask any accountant, financial planner or indeed tax office employee about the nightmare that was RBLs. The frustration and hours wasted trying to gather the right information and then calculate the right RBLs was a nightmare and the ATO employees bore the brunt of everyone’s frustration.

  3. Nice post – advisory firms will be lapping up the changes. Sometimes i wonder if these constant changes are not just part of the employment strategy of the government.

    I guess the 100K isn’t indexed either, so those of us with 20-30+ years to retirement can treat this as a standard tax (that will probably be increased over time) – can’t see 100K buying much in 30yrs time.

    • Hi aj.

      This proposed $100,000 threshold will be indexed annually with CPI and will increase in $10,000 increments.

      However we have seen them freeze the indexing of the Concessional cap so what is to stop them doing the same with this cap.

      Labels like Simple Super and Stronger Super are now laughable.

      • Tks S.C – well at least there is a cpi increase in principle. But the rules really are now so complex that it feels like the tax system in that it is far more preferential to very wealthy users than poor old PAYG.

    • thomickersMEMBER

      Financial advisors pretty much play chess against new government legislation.

      each legislative proposal is a like a chess move.

      what SMSF coach has posted are pretty much his chess moves in response to the changes.

      • thomickers

        That is the best explanation I have heard so far and all I would add is that hopefully people are not only reacting to government moves but being pro-active and building their defence in advance.

  4. The Householder

    Would linking account records via tax file numbers make it easier to identify who is making more than $100K in their super?

    • Hi The Householder, yes it should make it a bit easier but it will be a case of an unknown final income until the last of the accounts reports. So for example a Colonial First State account that provides a tax statement now by the end of July may have to wait until an Industry fund reports a few months later or a SMSF in the following May!. Imagine the confusion in trying to handle mid year rollovers, withdrawals etc if you cannot be sure of the tax payable on an account.

      I am sure they will come up with a solution but it will be a band aid approach as usual.

  5. Outside of super you could consider accessing the Small Business CGT concessions such as the exemption under the 15 year rule rather than placing it in a SMSF and possibly incurring CGT or tax on rental income later down the track. This is very much a case of you and your Accountant or SMSF Specialist Advisor sitting down and forecasting using some reasonable projections based on the alternative strategies.

    Already decided that the future sale (if any) of my small business will not go anywhere near the SMSF now. Little trust left. Fat mattress.

  6. I belive the government has said that this policy ‘will be taken to the election’. Also with just 5 sitting weeks before the election and with the budget/gonski/NDIS to be passed there is unlikely to be time to pass this as well.
    So probably all angst for people and Labor MPs for nothing.
    Also understand the DBS pensions of federal pollies/federal civil servants and federal judges will also be taxed but the plan is that they do not have to pay the tax until they go on retirement. If true another goodie for the pollies and one in the eye for the taxpayer.