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SUMMARY: Don’t risk being caught short on a transition to retirement strategy ahead of Budget 2016.
Rarely has so much mud slinging on superannuation tax change occurred as it has this year. But, thankfully to date, so little that appears to have stuck.
We’ve had talk of reduced contributions limits, lowering of income thresholds for penalty tax rates and reductions to capital gains discounts.
It’s also been mooted that the murder of transition to retirement (TTR) could be unveiled on Budget night. (Clue: by the Treasurer, in the Lower House, with a razor blade.)
But we’ve got a Budget coming up. It’s been brought forward to May 3. So, what are the threats?
And is there anything that super fund members should act on?
In a word, yes.
Superannuation is in the gun sight. And wealthier Australians are living in fairy land if they don’t believe their superannuation could be a target.
During the traditional pre-Budget kite-flying season of February and March, many super suggestions were flown, but most of them seem to have largely been shot down. But risks still exist. And if there was something that you could have done about it, but didn’t, then you’ll be kicking yourself.
Transition To Retirement (TTR)
TTR was started in the Howard Government’s final years. The idea was to allow older Australians to be able to reduce their working days from, say, five to four or three and top up that lost income with a super pension.
Nice idea. But it’s not how it has been used. It has been almost solely used as a way of reducing tax – salary sacrificing up to the maximum allowable income at a tax rate of 15%, while drawing down on a tax-free income stream, for those over 60.
Arguably, for most people aged over 60, they are literally throwing away money if they are not using a TTR strategy.
It has been around for only a little more than a decade. It would be relatively easy, legally, to dismantle it, going forward.
The fact that it would be reasonably easy to undo is the reason why those who aren’t currently using a TTR strategy should urgently consider getting one in place.
Most legislation is not made retrospective. And it’s reasonably rare that some warning of these sorts of changes isn’t given. But it is one of those laws that could potentially change at 7.30pm on Budget night.
I wouldn’t say the risks are huge. But it is certainly possible. It is probably more likely that the Government would announce an end-date of 1 July or 1 January, 2017.
But if you’re over 60 and still working and know that you would benefit from a TTR strategy, why take the risk? If you start one, they can be stopped easily. But if you haven’t started one and they change the rules, you will have potentially locked yourself out of this tax strategy for good.
Contribution limits reductions
There has been talk of reducing the concessional contributions (CCs) limits further. They are currently $30,000 for the under-50s and $35,000 for the over-50s. A few years ago, they were $25,000 and $50,000. And before that they were $50,000 and $100,000.
One kite that was flown suggested the government was considering reducing these to $20,000. This would significantly hurt higher-income earning Australians.
A salary earner on, say, $100,000 a year would receive $9500 a year in Superannuation Guarantee super contributions. If they had a limit of $30,000, they could top up, via salary sacrifice, $20,500. If they were restricted to $20,000, then they could only add an extra $9500 into super.
The extra $10,000 would be taxed at a marginal tax rate of 39%, rather than 15% in super. That’s an extra, immediate, $2400 in revenue to the government.
Given the nature of CCs generally being made over the course of a 12-month period and some planning being required, it would be considered highly unlikely that this would be a change that was announced with an implementation date of Budget night.
But some industry experts believe it’s possible. And if you have the ability to top up your CCs to your age-based limit beforehand, then you should consider doing so.
A bigger risk, I feel, is to non-concessional contributions (NCCs). I think there is a far bigger chance they will be cut dramatically, if not in this budget, then in a budgetary reality not too far away. It is through NCCs that truly large super funds are developed and where the wealthy can significantly reduce the overall tax burden of family wealth.
Higher contributions taxes
Very separate from CC and NCC limits are higher contribution taxes.
The previous government introduced a 30% super tax for those earning over $300,000 a year. There were no tears shed. And likely, no votes lost.
Labor’s tabled plan is to reduce that threshold to $250,000. But the Turnbull Government leaked that it was considering cutting the threshold to $180,000. So, when the top marginal tax rate of, effectively, 49% kicked in, you would also see your super contributions tax double from 15% to 30%.
Again, this is not something that is likely to be an urgent Budget night implementation. If announced, this would almost certainly be a 1 July introduction. And possibly not even 2016, but 2017 or later.
Raising capital gains tax
Currently, super funds get a one-third reduction of a capital gain before the 15% tax rate is applied. This essentially leads to what is referred to as a 10% CGT rate for super funds.
Consideration was certainly given to reducing the one-third deduction to a one-sixth reduction when it was floated in February. This would convert to an effective CGT rate of 12.5% for super fund gains – gains made on the sale of an asset held for longer than one year.
Would you sell an investment in super to save 2.5% in tax? Perhaps, and it would probably depend considerably on the size of the investment.
And could this be a Budget night implementation? The Howard Government famously updated the CGT rules as at 11.45am on 21 September 1999, the moment the press conference to announce it started in Canberra. Assets purchased after that specific time had to pay tax according to the new rules, while those purchased before had a choice between the former indexation method and the new 50% CGT reduction method.
On the positive side …
We can only hope that, at some stage, a lifetime super limit is introduced. And it has been talked about in recent months.
That is, if you don’t use all of your CC limit in one year, you can bring that forward to use the following year. If you only use $15,000 of your $30,000 CC limit in, say, FY2016, then you could potentially pump $45,000 into super in FY17.
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The strategy with the least potential downside and the most potential upside is for those who could start a TTR strategy.
If you’re 60, it’s most likely that you should be doing it anyway for the thousands of dollars a year that you could save. If you could, but you hadn’t, and they shut it down on Budget night, it will rightly be something that you’ll be kicking yourself about for, literally, years to come.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.