Take a close look at all the "mini measures" and how they would affect you. SHUTTERSTOCK
There was relief all round that there were no big changes to superannuation in the federal budget. But this doesn't mean you don't need to take a close look at all the "mini measures" and how they would affect you.
Some will bring good news all round – like the proposal for high earners to nominate just one employer for compulsory super so they don't breach the super contribution caps. But others – including the increased number of members in a self-managed super fund (SMSF) and closing inactive super funds – may bring mixed blessings.
Concessional super contributions less tax-effective
Personal income tax cuts were the centrepiece of the budget. The package begins with tax offsets for people on lower incomes before affording relief for those on higher incomes. By 2024-25, the second top tax bracket (set at 37¢ in the dollar) will be completely eliminated and the 32.5 rate will apply to incomes ranging from $40,001 all the way up to $200,000.
As a result, though, pre-tax contributions to super will be less tax effective for some.
For example, the value of the tax deduction for those earning between $120,000 and $200,000 will be 4.5 per cent less. On a maximum concessional contribution of $25,000, says RSM Australia business advisory services director Brad Eppingstall, that equals $1125 less.
"But from a taxation point of view it will still be beneficial to make concessional contributions," he adds. "A concessional contribution of $25,000 will still save $4875 of tax after accounting for the contributions tax in the superannuation fund."
Three-year audit cycle for some SMSFs
From July 1, 2019, the government will allow certain SMSFs to move from an annual audit cycle to a three-yearly cycle. This will be afforded to funds with a good history of compliance. It is proposed that this requirement will apply to SMSFs with a history of three consecutive years of unqualified audit reports and that have lodged the fund's annual returns in a timely manner. Reaction to the measure has been mixed. SMSF Association chief executive John Maroney says the measure will cut red tape and is a "fitting reward for trustees who strictly adhere to the regulatory regime". But Deakin University associate professor Adrian Raftery wonders whether it will be more hassle than it is worth. "Each year the SMSF will need to submit a tax return, which means the preparation of annual accounts anyway," he says. "Now when the auditor does the three-year sign off, they will need to review transactions across the three years. They will need to check the tax provision is correct, which means looking at all three years.
Will SMSF auditors handle the lumpiness of the extra workload every three years?" Colonial First State FirstTech executive manager Craig Day is also cautious. While the measure might make SMSFs cheaper to operate for some, it could also make any compliance breaches more serious, he says.
This is because it will be up to three years before a breach is detected, which could make the harm more difficult and costly to rectify.
BDO Australia has similar concerns. "While encouraging red tape reductions, BDO is concerned that reducing audit requirements form annually to every three years could result in an increase in inadvertent and unrecognised SMSF non-compliance."
SMSF member limit lifted to six
The budget confirmed an earlier announcement by Revenue and Financial Services Minister Kelly O'Dwyer that SMSFs will be allowed to have up to six members. This will be achieved by changing the definition of an SMSF in law. Small APRA-regulated funds will also be eligible for the measure, which is due to begin on July 1, 2019. Take up is expected to be fairly small but the SMSF Association has welcomed the flexibility the six-member limit will provide. "This will especially benefit family groups who want to include parents and their children, and potentially their children's spouses, in a single SMSF," says Maroney. "Currently family groups may need to have multiple SMSFs to accommodation more than four members, so this proposal will allow a single SMSF for the group, bringing the benefits of reduced costs and grater scale." Colonial First State FirstTech's Day says there could be some pitfalls. Trustees will need to be alert to the fact that different members require different investment strategies according to risk. "Larger SMSF membership may also result in increased risk of trustee dispute," he says. "Therefore members may need to carefully consider the fund's voting rules in the trust deed and confirm whether proportional voting rules should apply, and whether some important decisions (such as the payment of death benefits) require a unanimous decision."
Charis Liew, who heads the superannuation team at accounting firm William Buck in Sydney, raises a similar point. "Greater consideration will be necessary for any imbalance of control over the SMSF, particularly 'mum and dad' funds where children could outvote parents regarding trustee decisions or there are estate planning issues for blended families," she says.
High-income earners with multiple employers
A budget measure will make it easier for high-income earners with multiple employers to avoid charges for paying too much into superannuation. From July 1 of this year, people earning $263,157 a year from multiple sources will be able to nominate a single employer to pay the 9.5 per cent of salary that constitutes the super guarantee (SG). This will help them avoid breaches of the $25,000 pre-tax contributions cap. " Eligible employees will have greater flexibility and control regarding their concessional contributions and will be able to negotiate to receive any SG foregone as additional income," William Buck says in post-budget note to its clients. "This will reduce the likelihood of excess contributions tax and interest charge liabilities."
Life insurance trap
Super lawyers warn there could be an unintended trap for older savers in the budget move to transfer all inactive super accounts where the balance is below $6000 to the ATO. While the aim is to reunite these inactive superannuation accounts with the member's active account, there could be "drastic unintended consequences where a member has deliberately maintained a small super account that was established when they were with a former employer to retain a favourable life insurance policy", says Brian Hor, special counsel superannuation at Townsends Business & Corporate Lawyers.
In many cases even though the balance may be small and not added to, the life insurance policy is what's valuable – especially if it's an older policy offering cover for medical conditions a more recent super fund would not cover. "Depending on the size and nature of the insurance policy, a balance of up to $6,000 plus earnings might still be able to fund the insurance premiums for several years or more without the need for additional contributions to be made," says Hor.
But if this sort of fund was transferred, the policy would be lost. "This could devastate the member's estate plans, especially if that policy was "earmarked" for a particular beneficiary or for a particular purpose – for instance, to provide benefits for a current spouse and thereby free up the member's personal estate to benefit children of a previous relationship," adds Hor.
So what should you do if you're in this situation? Options include making a lump sum contribution to keep the balance over the $6000 threshold (but check it regularly) or making regular smaller contributions to keep it "active". In both cases, says Hor, make sure you don't breach the $25,000 annual concessional contribution cap or the $100,000 non-concessional cap.
Means-test changes to annuities for the age pension will make lifetime retirement income products more attractive. Under the budget proposal, says Mercer Super, from July 1, 2019, a fixed 60 per cent of all lifetime product payments will be assessed as income for age pension eligibility, and 60 per cent of the purchase price will be assessed as assets, reducing to 30 per cent from the later of age 84 or five years after purchase.
David Knox, a senior partner at Mercer, says products that provide longevity protection would be more attractive for retirees receiving a part age pension.
"There will be an immediate increase in the part pension when assets are used to purchase a qualifying product," Knox says. "If a 70-year-old pensioner with $400,000 in assets invested $100,000 in a longevity product, they would immediately increase their age pension payment by $120 a fortnight."
Let's look at the choices available to new retirees Bob and Wendy, both 66 with $700,000 in super. Financial modelling undertaken by Dixon Advisory's Nerida Cole is based on the couple wanting income of about $60,000 a year (close to the "comfortable" standard of living set out by the Association of Superannuation Funds of Australia).
Option 1: invest the $700,000 in an account-based pension and, after allowing for the $10,650 they will get in the age pension, they need to draw down another $50,000 a year. This will reduce their capital over the next 14-16 years and they are concerned their funds will run out.
Option 2: invest in the same account-based pension but reduce the drawdown to the minimum 5 per cent. While this will help their capital lasting between 18 and 23 years, says Cole, they will need to cut their annual expenditure by about $15,000.
Option 3: they can trade off having access to $300,000 of their capital and lock it into an annuity. This will only be assessed as $180,000 under the age pension asset test, says Cole, so they can almost double the amount of age pension they are eligible for – from $10,650 to $20,010. "When combined with the payment from the annuity, they can draw the minimum payment from the $400,000 held in the account-based pension, and meet their preferred standard of living and also help to stretch out how long the capital will last," Cole adds.
By Joanna Mather
11 May 2018
#ASIC #Advice #FinancialPlanning #FrankingCredits #specialist #will #enduringpowerofattorney #FederalBudget #smsf #law #estateplanning #Contribution #Retail #Fund #SMSF #Superannuation #Cap #Retiree #EPA #lawyer #Pension