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.