When Scott Morrison handed down his first budget last year, few advisers expected the foreshadowed changes would be weighted so heavily on superannuation, much less in a year when millions of pre-retirees and retirees would be going to the polls.
Many of the changes gave advisers just a little over 18 months to revisit and shift strategies, especially for
the soon-to-retire, the already-retired, the high earner and the low-earning spouse. Unsurprisingly, questions about super would become among the most asked of the year, as clients strategically and emotionally prepared
to pivot their retirement plans.
Fast forward a year and time has almost expired to prepare clients for the new rules. While clients would have ideally had their new plan in place last year, advisers know clients tend to wait until the egg timer sounds before proposing changes to their current plan. Some advisers, meanwhile, haven’t had time to review every one of their clients’ strategies for the new regime.
Fortunately, there is still time to review the new landscape and make appropriate changes to reduce the chance of a tax surprise, says Tim Howard, advice technical consultant for BT Financial Group.
New contribution caps
Lowered contribution caps will affect clients across the age and wealth spectrum, so preparing for the change will be high on the action list for many advisers, Howard says.
“Next year, you’ve got a couple of interacting changes,” he says. “Advisers are in pole position to help their clients make the most of this year’s caps and then plan next year. [To start with], target your wealth-accumulation clients to dial up their contributions, should they be eligible and able to afford it.”
While there is an opportunity to maximise concessional contributions before the new cap of $25,000 kicks in, Howard also proposes taking advantage of the transitional bring forward rule period for non-concessional contributions.
While the after-tax yearly contribution cap will be lowered from $180,000 to $100,000 – and in bring forward terms $540,000 to $300,000 – the transitional rule allows clients under 65 who have made their first contribution in either the 2015-16 or 2016-17 financial year but haven’t hit their $540,000 limit a slightly higher transitional non-concessional cap for the 2017-18 and 2018-19 financial years.
For example, Howard says if a client under the age of 65 were to contribute $200,000 this year, they could then contribute up to $180,000 over the following two years, to a total of $380,000 over three years. Without triggering the rule, their contributions over three years would be capped at $300,000. (See this chart for an example.)
“Those who have greater than $1.6 million in super won’t be able to make non-concessional contributions from next year,” he notes. “In addition, individuals with balances close to $1.6 million will be able to bring forward only the annual non-concessional cap amount for the number of years that would take their balance
to $1.6 million.”
Craig Day, executive manager at Colonial First State, says clients who have already triggered the bring forward rule would ideally hit the full $540,000 before July 1, but even if they have less, the transitional arrangements are worth making the most of. Another strategy worth considering for clients with higher super balances could be withdrawing the unrestricted component of their balance to maximise non-concessional contributions, Day says.
Prior to last year’s budget, Morrison famously labelled transition-to-retirement pensions a “loophole” in the retirement income system and hinted the arrangements were towards the top of his hit list. Indeed, from July 1, earnings on assets supporting TTR pensions will be taxed at 15 per cent, which may make setting one up prohibitive, especially for clients in their mid-to-late 50s, Howard says.
“For those aged between 55 and 59, if they are primarily relying on the tax-free aspect, the benefit will be quite small,” he says. “They may want to reconsider starting one because of the cost to set it up.”
Day agrees clients in their mid-50s could be worse off under the strategy due to the changes, especially combined with the reduced Division 293 tax threshold and concessional contribution caps. However, he says supplementing a TTR with salary sacrifice or deductible super contributions could still make sense for some clients in the age bracket.
For clients over age 60, income from TTR pension-paying assets will similarly be taxable, but because pension payments continue to be tax free, the arrangements may prove more worthwhile, Howard says. Again, advisers will have to crunch the numbers to make sure it makes sense.
Transfer balance cap
The $1.6 million pension transfer balance cap was introduced to restrict Australians from holding millions of dollars in the tax-free pension phase.
In his budget speech, Morrison said the cap, like the non-concessional contributions and Div 293 tax, would affect less than 1 per cent of super fund members. However, anecdotal insights from advisers suggest it has been among the more concerning of the changes for clients, even if they do not come close to the balance.
For clients who suspect they may trigger the cap, there is an urgency to move any excess above $1.6 million out of pension to avoid a tax penalty, Howard says. But even for clients who don’t have an excess, reassurance may be needed if they are wondering how to make sure they fall within the new rules, he adds.
SMSF clients who do trigger the transfer balance cap or have established TTR pensions may be eligible for capital gains tax relief for disposed of assets that would have previously been exempt from income tax under the old regime. The one-off concession recognises the tax trustees may trigger in shifting some assets from pension to accumulation to comply with the new rules and, as such, may allow trustees to reset the cost base of some of their assets, Howard says.
But the application – and appropriateness – of claiming the relief has been an area of confusion. To begin with, some clients may assume the relief is automatically applied – which it is not – or that it applies to all assets – which it doesn’t, Howard adds. He says advisers will have to clarify the asset-by-asset nature of the CGT relief and that an application will be required. They will also have to work closely with accountants on the administration of relief. Given the looming deadline, preparations should be started shortly.