20 May Budget 2016 Report | The good, the bad and the ugly..
Budget 2016 Review
Over the years there have been many, many changes to super, so much so that the overall understanding of encouraging people to be fund for their retirement thereby reducing the overall Social Security burden seems to have disappeared.
It seems like superannuation is the proverbial political football when it comes to finding money for the budget and around election time.
The Turnbull government, like many other governments before them, could not resist the temptation to once again create further complexity and reduce confidence in the system. Particularly with what in some instances will be retrospective legislation.
In saying that, on paper, the budget changes to superannuation appear to have a degree of fairness and reasonableness if you can manage your superannuation affairs effectively as you move towards retirement.
For those of you closer to retirement, i.e. 50 and above, the opportunities may be limited but there are still many open doors to explore to maximise your retirement opportunities.
Let’s look at the main changes and some of the good, the bad and the very ugly.
- The introduction of a cap of $1.6 million per individual that could be transferred into pension phase of superannuation including the reduction of existing balances to $1.6m and the placement of any excess back into taxable environment of 15%.
Rating: Both bad & ugly
If you are financially well off and lucky enough to be affected by this change and able to get $1.6m for you and $1.6m for your spouse/partner, you can have:
- $3.2m earning for you tax free
- Draw the minimum allowable of $128,000 and
- Spend any other tax ineffective money first to top up your retirement income.
The challenge is how you balance out your super between you and your spouse/partner. Some of the other changes announced in the Budget below assist you in this area. However here are some broad areas to consider.
- Super splitting or sharing your concessional contributions with your spouse.
- Making a non-concessional contribution of up to $500,000 into their account if available.
- If they are working, maximising their concessional contributions through salary sacrifice and keeping yours at the minimum Superannuation Guarantee contributions required.
Also it appears if you buy one of the new annuity style products; the amount you use to buy the proposed retirement income product is not counted inside your cap.
However this is retrospective legislation! An absolute “no no” in the Legislation Handbook. This government has just ripped up any suggestion that changes to superannuation are never retrospective. So this does put doubt in the system.
- Tax of 30% on concessional contributions if your combined income and superannuation is greater than $250,000 (reduced from $300,000)
Reducing the threshold by $50,000 is penny pinching and we think it is in there to grandstand and show a degree of being tough with the higher income earners to make the lower income earner feel better. At a current marginal tax rate of 50% for income over $180,000, some would argue they are paying their way. Not talking about the tax avoiders here. We are talking about people who do the right thing and pay appropriate taxation.
Strategies to consider here are:
- Maximising non reportable fringe benefits including utilising the otherwise deductible rule where possible.
By the way, 30% is still considerably lower than the top marginal rate and your contributions are invested with earnings tax only at 15% so it is still a better deal than outside super.
- Lowering of the concessional contributions i.e. tax-deductible contribution to $25,000 down from $30,000 (and $35,000 for those over age 50).
There are plenty of people who have not contributed sufficiently for the retirement in the early years so they need to maximise their contributions now. And this is not just the so called wealthy. Those of you who have worked hard to provide a good level of education to your children and sacrificed in doing so, have put off maximising your super until very late. Now they are penalising you for doing so.
The level of tax deductible contributions has been continually reducing. This further reduction hits those people over 50 who have planned on loading up their contributions in their last 10 to 15 years before retirement and now have had a 30% reduction in what they can contribute. The likely impact is more pensions to be paid by the government for their life. Go figure!
Strategies to consider:
- If you have a partner look to maximise both maximum levels through salary sacrificing.
- This starts on the 1st July 2017 so you need to maximise your tax deductible contributions for this year and next.
- The introduction of a $500,000 lifetime limit for non-concessional contributions to an individual.
Rating: Ugly (for small business in particular and the retrospectivity back to 1/07/07)
This is a significant reduction in the level of non-tax-deductible contributions you could make to your superannuation fund. Previously you can contribute up to $180,000 per year in contributions which were non-tax-deductible and there was a “bring forward” rule which allowed you to make three years contributions in one go. Those small business people who are looking to utilise both the opportunity to contribute from the sale of their business on retirement, it appears now that the lifetime limit will be $500,000 in total per individual backdated to the 1st July 2007. However if you have contributed greater sums before the budget announcement you won’t be asked to take the money back out.
Again, many small business owners have not maximised super and poured their profits back in the business to continually be able to employ people and generate a living for themselves.
Now they closed the door substantially on trying to make up ground. There was no discussion or mention about the Small business CGT retirement concession in the budget. We only hope the 500k doesn’t apply to both.
Strategy to consider:
- Utilising the changes in contribution ages and working requirements maximise two lots of $500,000 for you and your spouse.
So how do you find out how much you have contributed since 1 July 2007?
The easiest (and cheapest) way to get this information is to contact the accountant who looks after your INDIVIDUAL tax affairs not your SMSF accountant (if you have an SMSF).
Ask them to confirm with the ATO what contributions have been made for you since 1 July 2007. They should be able to do this over the phone with the ATO.
THE ACCOUNTANT SHOULD CONFIRM ALL CONTRIBUTIONS MADE!!!! e.g. Spouse, Personal, Employer, CGT Rollover etc. and provide this information to you. The completeness of this information is essential in determining what amount remains of one’s $500k cap.
- To improve the balances of low income spouses the current spouse tax offset super will see the income threshold increased from $10,800 to $37,000. A spouse contributing for an eligible spouse there will be a benefit of up to $540 for contributions made to the spouse’s account. A Low Income Superannuation Tax Offset (LISTO) will be introduced for those with a balance under $37,000.
This will allow a greater benefit for people to contribute on behalf of their spouse tax effectively with a substantial increase in the income threshold.
The LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions up to a cap of $500. The LISTO will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.
- From 1 July 2017, individuals under the age of 75 will be able to claim tax deductions for personal superannuation conditions. This is another major benefit to assist with equalisation of accounts as people not earning income or who in fact want to top up their super can get tax deduction up to a total on the new concessional contribution limit of $25000. It also removes the old 10% rule for substantially self-employed people where you had to prove you had less than 10% of your income from employment sources.
A further recognition of the extension of people’s working life and the need to have greater flexibility with contributions. A silly rule in the first place now being adjusted to better reflect reality of people working either part time or full time well after the expected retirement age to provide for some form of comfortable retirement.
Strategies to consider:
The ability to make tax deductible contribution personally will only have a benefit if:
- You can offset other taxable income in that year, or
- You have utilised your entire $500k of non-tax deductible limit, considered in 4 above.
- The introduction of catch up concessional contributions by people who do not use their concessional confusion caps to carry forward on a rolling basis for up to 5 years if your account balance is below $500,000. This will assist people who have had interrupted work patterns (e.g. women) and allow them to make those catch up contributions if one can afford it.
This will assist people with broken working life or patterns to catch up (if they can afford to do so).
Strategies to consider:
- Planning when you can maximise the tax deductibility to offset against other taxable income is paramount. Making sure you get the maximum tax benefit will supplement the benefit of contributing.
- Removal of age restrictions for your ability to contribute so that the same contribution rules apply for all individuals up to age 75 from the 1 July 2017.
Rating: Very good
Treating people equally is important and this also brings in the opportunity to equalise accounts between partners. A very good step.
This will provide for those over 65 who may not have contributed any non-tax deductible contributions since 2007 the ability to use the maximum $500k non tax deductible contributions in one lump sum.
- Own a product from 1 July 2017 which carries a tax exemption on earnings in the retirement phase for products such as deferred lifetime annuities and groups style annuity products.
These products will be exempted from the retirement phase earnings tax exemption limit of $1.6 million and as such will be a significant incentive for people to utilise this style of product if they have over $1.6m account balance.
- The budget advised that the government plans to change the tax treatment of Transition to Retirement Pension Strategies . The government plans to remove the tax exempt nature of transition to retirement pensions. The Government hasn’t provided information as to how they will do this at this stage but we would suggest that if you are supplementing your income in a transition to retirement strategy then there may need to be a review of the strategy.
Rating: Very Ugly
We are guessing here at the moment but all we can see is a significant reduction in the attractiveness of this popular strategy. Watch this space for more information.
Strategies to consider:
- You might utilise the ability to drawdown tax effective money and put back the excess back into your spouse’s account rather than yours. Let’s wait and see.
- The anti-detriment provision which is an outdated and interesting provision introduced at the time that Keating introduced tax on superannuation funds is to be removed
This provision provided for a refund of the insurance costs during the lifetime of the fund as when Keating introduced tax on superannuation funds in the May 1988 Economic Statement he wanted to show he was being fair and not retrospective. Some funds allow, some funds don’t.
It is a benefit being taken away which is why we rated it Bad, but reality is, very few people use it as you have to die and the super fund must allow it. Overall not a big loss.
The opportunities that these changes present for effective planning both inside and outside super are quite extensive. Yes there is a significant impact to high income earners but reality is with effective planning to switch superannuation accounts in pension phase totaling $3.2 million, it is likely to meet the majority of Australians needs in retirement.
Time for a discussion with your financial adviser and accountant. What, if anything, do you need to do before the 30th June 2016 and planning for 2017 and beyond? What are areas are you affected by?
- want to maximise your tax deductible contributions
- are contributing non tax deductible contributions and you may be close or over the $500k lifetime limit
- have over $1.6m in an individual’s account in pension phase
- are wanting to try and equalise the balances in your and your spouse super accounts
Please contact us.
This has been adapted from an article prepared by Grahame Evans, Managing Director GPS Wealth Ltd AFSL 254544
General Advice Warning
The information contained in this article has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned in this article, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.