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Pollies just can’t keep their hands off super

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By Paul Rickard

Despite calls for a bit of stability with the super system, the pollies just can’t keep their hands off it. Tuesday night’s budget brought another four changes. While two well telegraphed are, in the main, positive initiatives, it shows that super remains a moving feast.

Here is a rundown of the changes, plus, with just 50 sleeps until 30 June, the actions you should consider taking before the system fundamentally changes. And if you put a substantial sum into super, you don’t have to invest it now into the share or property markets. If you are concerned about the markets, SMSF members could invest it in cash or a term deposit, while members of an industry or retail super fund could select a lower risk investment option.

1. Downsizing 

Persons aged 65 or over who downsize by selling the family home will be able to make a non-concessional contribution of up to $300,000 from the proceeds. These contributions won’t be subject to meeting any work test, will be in addition to the current cap and won’t be subject to the $1.6m balance test for making non-concessional contributions. If a couple, then potentially $600,000 could be contributed.

The only qualification is that it must be the sale of your principle residence owned for the past 10 or more years.

While the measure doesn’t address issues with the pensioner assets test, transaction costs, and perhaps more importantly, the availability of suitable properties, it should prove popular with self-funded retirees who can then invest their savings in a 0% or worst case 15% taxing environment.

2. First home super saver scheme

At the other end of the housing market, first home buyers will be able to make voluntary salary sacrifice contributions into super, and withdraw these together with associated earnings for a first home deposit.

Up to $15,000 per year and $30,000 in total can be contributed. While it will count within the concessional cap of $25,000 per annum, both members of a couple can take advantage of the measure.

Normal taxing arrangements will apply to these contributions. Like other salary sacrifice contributions, from a person’s pre-tax income, and then taxed at 15% when it hits the super fund. Inside the fund, earnings will be taxed at 15% pa.  On withdrawal, taxed at marginal tax rates, less a 30% tax offset. This means that the maximum tax rate will be 17% - most will pay just 9%.

From a member’s point of view, this will be really easy to implement. No new account required, just instruct your employer to salary sacrifice and pay to your super fund. On the other hand, super funds won’t like it one bit because there will be extra administration required to keep account balances separate and apportion earnings.

Despite comments that “$30,000 doesn’t really give you much of a deposit for the Sydney or Melbourne markets”, this measure will prove to be popular when first home-owners realise that it is a “no-brainer”.

3. Discouraging SMSFs from borrowing

While the Government hasn’t gone as far as some have argued and stopped SMSFs from borrowing, it is introducing measures that will make it less attractive.

From 1 July, the outstanding loan balance on a limited recourse borrowing arrangement (LBRA) will be included in a member’s total superannuation balance. For example, if a single member SMSF owns a property worth $2m which is supported by a loan of $1m, only the net assets of $1m is currently counted in a members total superannuation balance. From 1 July, the loan will be included, meaning that the total super balance would be $2m. Once your balance exceeds $1.6m, you can’t make any additional non-concessional contributions.

Further, the repayment of principle and interest on the loan from a member’s accumulation account will count against the transfer balance cap of how much can be transferred into the pension phase.

There will also be changes to the rules around non-arm’s length transactions between related parties to make sure that they are done on a commercial basis.  

4. Only 50 sleeps to go!

Here is a quick re-cap on the super actions to take between now and 30 June, when the biggest change to super in nearly a decade takes effect.

Bring forward salary sacrifice arrangements

The concessional contributions cap will be reduced from $30,000 to $25,000, or for those who were 49 or older on 1 July 2016, from $35,000 to $25,000. Concessional contributions includes your employer’s contribution (the compulsory 9.5%), plus any amount you salary sacrifice, or if self-employed, any amount you claim a tax deduction for.

If you are making salary sacrifice contributions, you will need to review these from 1 July to make sure that you are under the new cap. Also, as this is the last year of the higher cap, the obvious strategy is to see whether you can utilise the full cap in 2016/17. If cash flow permits, accelerate salary sacrifice amounts this year, or if self-employed, make the full contribution prior to 30 June.

Make non-concessional contributions

The non-concessional cap reduces from $180,000 to $100,000. Non-concessional contributions are your own personal contributions which you aren’t able to claim a tax deduction for. 

The other change is that if your total superannuation balance is over $1,600,000, you won’t be able to make any contribution at all. This is a new constraint to apply from 1 July 2017. Super balances will be measured each June 30 (i.e. your balance at 30 June 17 will determine whether you can make a non-concessional contribution in 2017/18). 

Of course, to make a non-concessional contribution, you need to have the cash on hand. SMSF members can also consider in specie transfers, which must be done at market value and can’t include certain assets such as a residential investment property (it can include shares, managed funds and business real property). 

If you are selling assets to generate cash, or transferring in specie, these will count as disposals for capital gains tax purposes. You may also have to pay stamp duty, for example, on business real property. 

Access the bring-forward rule

With the change in the non-concessional cap to $100,000, the limit under the "bring forward" rule, which allows people who are under 65 to make up to three years of non-concessional contributions in one year, will fall from $540,000 to $300,000. So, if you want to get a large amount into super, do it before 30 June. And as the limit applies per person, if you have a partner, then you can effectively get up to $1,080,000 in super. From 1 July, this will only be $600,000.

If your total super balance is between $1.5m and $1.6m, your limit (under the bring forward rule) will still only be $100,000, and if your total super balance is between $1.4m and $1.5m, your limit will be $200,000. 

Remove any excess pension balances

The law relating to the transfer balance cap of $1.6m requires anyone who has more than $1.6m in the retirement phase of super (that is, in assets supporting the payment of the pension) to remove the excess, either by a lump sum withdrawal, or by rolling it back into the accumulation phase of super. The measurement date is 30 June 17.

Transitional relief is available if your balance is between $1.6m and $1.7m - you will have until 31 December 2017 to comply. If you have more than $1.7m, you are required to comply by 1 July.

From a tax point view, it will usually make sense to roll the money back into the accumulation phase as the 15% tax rate is still concessional. However, if you are not utilising your personal tax free threshold of $18,200, then from a tax point of view, withdrawing some or all of the excess as a lump sum and investing it in your own name will deliver a better outcome.

Capital gains tax relief is available if you are required to comply with the new transfer balance cap. This won’t be needed if you are making a lump sum withdrawal (as the asset would still be in the 0% pension state when sold), but may be required if the funds are being rolled back into the accumulation phase

Check whether you want to keep your TRIS

The investment earnings of assets supporting transition to retirement income streams or pensions (TRIS) will be taxed at 15% from 1 July, rather than the current 0%. As this removes the key financial incentive to have a TRIS, you will need to consider one of three choices:

  • keep the TRIS, in which case, continue to make minimum withdrawals of between 4% and 10% of the account balance each year;
  • roll the TRIS back into the accumulation phase; or
  • If circumstances allow, consider permanently retiring.

ImportantThis content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Published: Thursday, May 11, 2017


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