THE BUDGET AND HOW IT IMPACTS ON SUPERANNUATION PLANNING |
The changes to superannuation will have significant impact for our clients and has generated by far the most client enquiries so we have decided to expand our budget commentary and look at the superannuation changes in more detail and strategies to be considered.
Lifetime Superannuation Pension Cap - $1.6 Applies From 1 July 2017
The impact of this is that you will be capped at converting $1.6m into pensions as a life time cap. Those with pensions exceeding $1.6m will need to roll back the excess into accumulation.
From a planning viewpoint asset management will be critical as any losses sustained can never be replaced but profits can be retained. Hence this could push us into the more complex structure of asset segregation where you nominate the $1.6m of pension assets and segregate them from accumulation by way of record keeping and most likely separate bank accounts for income flows and pension payments. While this adds to compliance costs it may help to preserve pension assets and maximize the tax free status.
Another issue is that if you have assets likely to yield a high return you may consider an early conversion to pension status so you can lock in the profits and push your balance beyond $1.6m. It may come at an income cost under new Transition to Retirement Income Streams (TRIS) rules but it may be worth triggering in the long run. This may be also be a strategy for a SMSF about to realize a large capital gain on a property or share portfolio in order to reduce tax.
The strategy of trying to keep balances between spouses even will be firmly back on the table so recycling and contribution splitting need to be considered.
It should be noted that balances in excess of $1.6m can be retained in accumulation phase. The impact will be that earnings will be taxed at 15% but funds withdrawn will still be tax free for those over 60. This is still a far more attractive proposition than personal tax rates.
Transition to Retirement Income Streams (TRIS)
The impact is conversion to a TRIS will no longer render the underlying pension balance tax free. There is no change to the tax on receipt of the pension where it is taxable with a 15% rebate for those under 60 and tax free for those over 60.
For those over 60 you need to be aware that you do not necessarily have to be retired to have your pension classified as a normal pension and not a TRIS. Resignation from a job or working less than 10 hours per week will trigger a release point and allow your underlying balance to be tax free.
There is still merit in TRIS conversions between now and 30 June 2017 particularly in view of the ATO’s recent stance on allowing lump sum draws to be treated as pension payments. We had recently flagged opportunities in this area but recommended it only be undertaken with a private ruling. It seems the ATO stance has softened on this and a private ruling may not be required. We therefore suggest strong consideration be given to TRIS conversions for anyone over 55 at 1/7/15. The strategy works on the basis you elect to take a lump sum draw which counts towards your pension so both the SMSF and the draw up to $195,000 are tax free. The strategy is only valid to 30/6/2017.
Unfortunately for some clients 30/6/17 will mark the end of the tax effectiveness of TRIS’s and you will need to look at rolling back into accumulation.
Lifetime Cap of $500,000 for Non Concessional Contributions
This cap is backdated to include any contributions after 1 July 2007 and will assess any contributions after 3 May 2016. The impact is many clients will have already exhausted their cap and will have to look to maximize concessional contributions to grow their superannuation balance.
Any retrospective legislation is particularly harsh and taxpayers who are between exchange and settlement on asset purchases could now be in a position where they have to breach this cap to complete a contract. I suspect this is the one change that will meet spirited industry opposition to have it amended prior to implementation so it will be something to monitor.
It will also place greater onus on clients and advisors to ensure contributions histories are accurately kept so it is probably a good idea to review your contributions caps now and certainly before further non concessional contributions are made.
Concessional Contributions Changes
The cap reduces to $25,000 from 1 July 2017. There is however a relaxation to catch up amounts contributed below the cap for up to 5 years for balances below $500,000. This could be useful for those with fluctuating incomes or perhaps large capital gains in a given year as you may get the opportunity to increase contributions above $25,000 to effect a lower tax rate.
There is also a relaxation in the rules on making contributions from 1 July 2017. Contributions can now be made up to age 75 whereas previously you needed to meet the work test after age 65 including spouse contributions. For some clients in this age this may present the opportunity to rebalance accounts between spouses to even up accounts especially where one member is over the $1.6m cap and the other is below and has cap space under the $500,000 lifetime limit.
The 10% rule has also been scrapped form 1 July 2017 so there is no longer a restriction an topping up personal deductible contributions where you salary is more than 10% of your taxable income. This will make it easier to maximize the use of concessional caps.
CGT Considerations
For those clients likely to be impacted by tax on balances over $1.6m or tax on balances under pinning TRIS’s serious consideration needs to be given to realizing any unrealized capital gains before 30/6/17 as this may be your last chance to have the gain treated tax free.
Small Business CGT Concessions
There are no changes so small business sales remain a viable strategy to flow funds into superannuation and reduce or eliminate CGT. This applies to both rolling over capital gains on sales and contribution of sales proceeds. These do not count towards the lifetime cap on non concessional contributions.
Disclaimer - The material contained in this newsletter does not constitute advice. DPL is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.
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