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SUMMARY: The Budget super changes are far from law. But, clearly, couples must work more closely as a super team from this instant on.
If the Turnbull Government’s super changes are enacted, stand by for a flood of new super strategies. Of Biblical proportions.
I’m stacking them up, ready to deliver in this forum. Strategies about turning on or rolling back pensions (regarding the $1.6m limit), about geared property, about maximising contributions, about insurance in super.
The problem, at the moment, is dealing with them in order of importance, or likelihood of occurring.
Will the Turnbull Government’s Budget night changes get up? If Labor wins on July 2, will they get their proposals through? Or could we still be dealing with the current, more generous rules, in 6-12 months?
And what do we do in the meantime?
At the moment, we need to assume the worst and plan accordingly.
And the worst, for those interested in maximising super benefits with minimal tax, is definitely the Coalition’s proposals. See my column from two weeks ago (4/5/16) for the big picture overview from the Federal Budget.
Above all else – and irrespective of who wins on July 2 – there is one odds-on certainty.
Super pensions are going to be taxed, either directly or indirectly, in the not too distant future. Either via the $1.6 million limit (Coalition), or by income drawn (Labor) from pensions, or some other method.
I will not be waiting any longer, and will be becoming more forceful, with clients on issues regarding the equalisation of super between couples.
There will be absolutely no point having one member of a couple with $2.5m in super, if their partner has $300,000 in their account.
Here are a bunch of strategies that, likely irrespective of who is in government after July 2, you need to lift up the order of importance immediately.
Spouse super splitting
Under the current rules, a spouse can move their concessional contributions from one spouse to another. That is, 85% of what was contributed, up to the concessional contribution limits can be passed to your spouse’s super account.
If your spouse has a considerably lower balance than you, and you have contributed up to the limit of $35,000 (for the over-50s) or $30,000 for the under-50s, consider doing this, quickly, for FY15 (as in, the year that finished nearly 11 months ago) and also for the current financial year, FY16, though you will need to wait until after the end of the financial year to do that.
If couples have to do this year after year, the paperwork will be worthwhile. Some will query what happens if a couple were to subsequently split up. But, as a broad rule, super is a divisible asset nowadays in separations, so even if one has a larger balance at the time of separation, it will be largely be split as just another asset during a separation anyway.
Combining salary sacrifice strategies
Where one member of a couple is older than the other, be aware of strategies to turn on tax-free super pensions for older members.
If they’re over 60 and are able to get a tax-free super pension, then it might be worth turning on. Combine this with strategies such as spouse splitting (either to the older or the younger member) could make this quite powerful and will become one of the strategies of the future, if the Coalition’s plans get through.
For example, a 62yo drawing a tax-free pension from a large account may wish to draw a small pension, and split any contributions back to the spouse. Or, if the younger spouse earns a higher income (and therefore gets a higher tax break on the 15% contributions tax), splitting the other direction might even make sense. (I’ll have more strategies around these in the coming months.)
Making non-concessional contributions
Currently, the worst on the table is that non-concessional contributions will be limited to $500k per person. If you have the choice, in your household, and you’re wanting to make NCCs, then you can currently take into account that per-person limit.
If one of you has contributed more than $500k since July 2007, but the other one hasn’t, then you have that opportunity to put in up to $500k for the other. The problem here is knowing what both members of the couple have contributed. We’re now told that the Australian Tax Office has reliable figures for post-2007, but you will need to get those figures from the ATO. In writing.
This is one of those limits that was introduced as at 7.30pm on Budget night. Whether or not it gets through parliament is another matter.
But if you have spare cash (from, say, the sale of an investment property) that you were willing to put in to super, and wish to do so before 30 June, then using the $500k limit each for you and your partner might be the best way of getting that money into super. You may still have to be wary of the $1.6m limit for pension transfers. But it’s less likely to be a problem for a member who has not used their $500k limit.
Spouse contribution rebate
This strategy will be considerably enhanced under the Coalition. So, while it’s no certainty of getting up, and would likely be a year away in any case, it’s a good idea to start giving it some consideration now.
The current rule is that a spouse earning less than $10,800 can receive a contribution from a spouse of up to $3000. The contributing spouse receives a tax rebate of 18% (or up to $540) for the contribution.
Under the Coalition’s changes, the $10,800 threshold will be lifted to $37,000. This is a change that takes this contribution from an almost negligible, fringe, strategy, to one that will be useful for a significant number of couples.
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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.