It’s been nicely quiet out there in DIY super regulation land. Occasional jawboning, the odd threat, but little to no action.
The lack of big changes in recent years has been welcome, given the turmoil of the period between 2006-07 and about 2011-12.
But it’s not time to relax. This calendar year, 2016, holds plenty of risks for self-managed superannuation fund trustees. While things might have been “better” in the past, the future could certainly be worse.
Many of the threats are out of your control. (That is, apart enlisting to a “SMSF grey army” and them becoming a militant mass, exerting power before, or at, the voting booth.)
But we do know what the rules are now. And, given what’s potentially down the pipeline, some might wish to act under known rules, rather than risk having to take action under uncertain future legislation.
So, what are the big risks facing SMSF trustees and members in 2016?
- Election scenario 1: Coalition Victory
The Coalition Government is still acting under former Prime Minister Tony Abbott’s promise of “no unexpected negative changes to super” for its first term in government.
But that first term is likely to end some time this year. Treasury is looking for ways to raise tax. There’s a growing acceptance – I’m not saying it’s a majority – that higher-income earners are too heavily advantaged by the current super tax arrangements.
Unless we hear something soon, specifically stating that super/pensions are sacrosanct in the next term of a Coalition Government, I’d be putting money on some change to taxation arrangements for either pension funds, or income paid from pension funds, by a Coalition Government.
If so, would existing arrangements for pensions in place at the time be grandfathered?
2. Election scenario 2: Labor victory
It was the previous Rudd Labor Government’s policy to tax pension funds once they earned $100,000 a year. It was a thought bubble on which a lot of time was subsequently spent, but that could not be rationally implemented.
Labor’s current policy is to tax income drawn from pension funds above $75,000 a year. This policy would, from the reaction, be easier to implement.
How would it be taxed?
The advantage of this, over the Rudd Government proposal, is that pension funds would continue to be untaxed. But pension funds must pay pensions (taxing individuals with multiple pension funds was the downfall of the Rudd Government plan). And if a super fund was worth $1,875,000, it would have to pay a minimum pension of 4%, or $75,000 (for those aged under 65).
However, drawing from pension funds would wind up being taxed on smaller and smaller balances as people age (see below table).
Table 1: Minimum pension fund sizes before $75,000 drawdown income is taxed
|Age||Min pension %||Pension fund size before being taxed|
3. Attack on non-concessional contributions (NCCs)
Under current rules, members can put in $180,000 of after-tax (non-concessional) money into super. If you have enough, you can put in up to $540,000 using the three-year pull-forward rule.
It’s a fact that wealthier Australians are most able to take advantage of this opportunity. The horrendously inaccurate pre-Christmas attack by Industry Super Australia on SMSFs (see this column, 16/12/15) and NCCs does, however, raise the point that wealthier Australians can get very large sums of money into super, if they start putting in $180,000 a year via NCCs early enough in their working lives.
Don’t be surprised if, at some stage, the ability to make NCCs of this size is somewhat diminished. When NCCs were conceived, they were three times the concessional contribution limit. They are now six times that limit.
And not many people have enough wherewithal to make that quantum of contributions. If an attack is going to be launched on the ability of the wealthy to get money into super, this is an obvious place to attack.
Action: If you are thinking of getting large dollops of NCCs into super, I’m not sure I’d be waiting to see the colour of the government after the next election.
4. Closing Transition To Retirement (TTR)
When originally conceived by the Howard Government, the TTR rules were, literally, designed to allow those nearing retirement to cut back from five days to four or three, and make up the paycut difference with a pension from their super fund.
But it’s not how people are using it. It is now, largely, used to allow people to maximise contributions and reduce tax, while still working full-time (or whatever they were working previously) in the run-up to retirement. Is it a tax dodge? Well, no, it’s simply become another legitimate tax reduction strategy. The Tax Office knows all about it and understands that the law is being followed.
It would be a “mean” government who closed this opportunity. Individually, it might add tens of thousands of dollars to an individual’s retirement, if maximised.
It’s legal now. And, in many cases, you’re being a fool if you’re not using these rules. But it’s an opportunity on which the door could be shut, without notice.
5. Tax White Paper
Major threat? Minor? It’s still too early in the process, but this could be the launch-pad for, well, almost anything.
David Murray’s Financial Systems Inquiry was accepted almost in full – with a thankful exception of a ban on limited recourse borrowing arrangements (LRBAs). But any tax paper is likely to have some spears aimed at superannuation taxation.
6. Deadline for related-party LRBAs
If you have an existing made a related party loan to your super fund, then you need to be aware of a very important deadline – 30 June 2016.
By that date, you need to make sure that the loan itself is likely to be considered to by the ATO to be on, effectively, “commercial terms”. See this column of 4/11/15.
Related party loans are loans from you, or related entities, to your SMSF. For many years, it was considered okay – the ATO had given it tacit approval – for those loans to be non-commercial. That is, potentially with a 0% interest rate, or a higher-than-normal interest rate, or with repayment terms that were outside standard, or a multitude of other terms that could be considered non-commercial.
However, in October last year, the ATO issued an ultimatum: “SMSFs have until mid 2016 to get these loans on commercial terms”.
If you have a related party loan to you super fund, check in with your accountant and/or financial adviser immediately. It could take some time to make the changes. And there will be some pain for some … that perhaps might require asset sales, if funds can’t be raised, or loans addressed, to get them where the ATO wants them.
- Banning of LRBAs
It would be unlikely. The former Abbott Government ruled it out after a specific recommendation from Murray’s FSI. But a ban is still possible.
8. Further interest rate hikes for LRBA investors
The Australian Prudential Regulation Authority has wreaked havoc in the investment property sector this year.
Pressure applied by APRA saw interest rates charged by lenders rise across the board, even more so for investors than home buyers.
But while there seems to have been some softening of growth in asset prices in the property space – as was partly APRA’s intention – via three jabs at banks, there’s nothing to say that there might not be further APRA commandments that could lead to further interest rate rises from the banks.
And that’s to say nothing of the Reserve Bank of Australia potentially raising interest rates from their historic lows also.
9. Crackdowns on property developers
Expect, or rather hope, for further action from all sorts of authorities in regards to retarding the ability of property developers to offload dud properties.
ASIC is cracking down (see column on 2/12/15) and APRA’s intervention in the lending space is having an impact. Congratulations must go out to AMP Bank. In December, as they returned to the LRBA space, they said they would not accept loans for development property.
Property investment via developers, with LRBAs, in this space is the single biggest risk to SMSF trustees.
With any luck, this year will be another boring year for superannuation.
But the realities of pressure being placed on the Federal Budget – particularly for who wins the next election – mean that we’ll need to keep an eye on what’s being promised and when, in the coming months.
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.