“Contrariwise," continued Tweedledee, "if it was so, it might be; and if it were so, it would be; but as it isn't, it ain't. That's logic."
Treasurer Scott Morrison has delivered the Christmas present to the financial planning industry that it had glimpsed six months ago but was too excited to actually believe – massive new complexity to the superannuation system. The body of Simpler Super has been incinerated, buried and interred. RIP Simple Super. In its place is a labyrinth of new rules that would make Alice wish she had never gone down the rabbit hole. Long live complexity, bureaucracy and tinkering governments.
Quite what we have done to deserve this exhilarating Christmas present is a mystery, but we’ll take it. The need for superannuation and wealth planning advice just became essential. Whatever next? Taxpayer subsidised advice (as the system is now utterly incomprehensible to all)? We are now prepared, like the White Queen, to believe six impossible things before breakfast.
The lucky folk who have had their superannuation retirement savings subject to hot debate recently have some big decisions to make over the next six months. We highlight five questions of critical importance.
1. Pension, accumulation or outside super due to the Transfer Balance Cap?
The recent passing of the legislation represents the biggest change to our superannuation system in a decade, with a limit imposed on how much you can save in superannuation and how much you place into a tax-free pension. At least you aren’t hit with massive taxes if you withdraw the amount above the Transfer Balance Cap from super.
From 1 July 2017, if you have less than $1.6 million then you will still be able to save for your retirement and make additional personal after-tax contributions much like the current system. However, once you reach the $1.6 million balance (per member), whether it be from capital growth or additional contributions, you will no longer be able to make your non-concessional contributions from after-tax monies.
There are no grandfathering arrangements for those who already have more than $1.6 million in super. If you are a pension member, then the most you can have in the tax-exempt pension environment is $1.6 million. If your pension balance exceeds the Transfer Balance Cap, you will need to transfer the excess back into an accumulation account or remove it from the superannuation environment (for example, if your personal marginal tax rate is zero versus 15% in the super accumulation phase).
The alternative method applies a proportioning approach where the tax-exempt percentage of the fund is determined by an actuary based on the balance of pension interests to accumulation interests. If you have substantial income-generating assets outside of super, then it may be worth keeping your surplus super assets in the accumulation phase. This is your first major decision.
2. Can I still make a large contribution into super?
This depends on when you plan to contribute and how much you already have in super. The non-concessional limits are set to reduce from $180,000 a year to $100,000 a year from 1 July 2017, which means the three year bring-forward cap will be limited to $300,000. To add to the confusion, transitional bring-forward caps will apply if you have already triggered the bring-forward caps in the last two financial years but have yet to utilise the entire cap. Got that?
If you have the capital to consider a large non-concessional contribution, you may wish to act before the end of this 2016/2017 financial year, irrespective of your total superannuation balance. With the upcoming Transfer Balance Cap, individuals under 65 still have the capability to make a non-concessional contribution up to $540,000 within the next seven months (provided you haven’t already triggered your bring-forward arrangements). Even if it pushes your balance over $1.6 million, lock it into super now and deal with the pension transfer issue later. This will be one of the most significant decisions for higher net worth individuals to make over the next six months. You may even decide to borrow the funds to make one last significant contribution to super. Don’t ask us for a unique answer, as it depends on your circumstances and, frankly, like the Mad Hatter, ‘we haven’t the slightest idea’.
3. Is segregation of assets still possible?
Yes and no. Curiouser and curiouser! Today, most SMSFs operate under a segregated approach where members could cherry-pick the assets used to support their pension account. This is a useful tax-planning tool where the pension assets have a tax-exempt status and therefore do not pay tax on the investment earnings or realised capital gains. The alternative method applies a proportioning approach taking into consideration the percentage of the fund that is tax-exempt based on the balance of pension interests to accumulation interests.
From 1 July 2017, SMSFs will no longer be able to use the segregation approach for tax planning purposes if a member’s balance exceeds $1.6 million in the sum of any superannuation structure, be it the SMSF, retail or industry funds. This essentially prevents SMSF members cycling assets between accumulation and pension phase in order to maximise tax concessions available when a Capital Gains Tax (CGT) event arises.
On that note, there is the need for careful planning when transferring the excess amount from pension to accumulation before the end of the financial year as CGT relief may be available.
For the impacted members who have assets supporting pensions before 9 November 2016, you may wish to review the underlying assets and ‘reset’ the CGT cost base before 30 June 2017 to receive tax concessions on the capital gains that would otherwise apply if you had sold the pension asset. You don’t have to sell the asset to reset the cost base and apply the CGT relief.
The CGT relief should not be applied to all assets as those currently on unrealised capital losses may be better off to continue carrying the original cost base whilst the assets on large gains, (particularly bulk assets such as property) may benefit from revaluing the cost base before 30 June 2017. If you have an asset sitting on a large gain, it may be worth considering the CGT relief but it is an irrevocable election which means there may be some tax liability when you sell the asset in the future.
4. What happened to Transitioning to Retirement (TTR)?
Remember the days where you could access your super at 55 (or older), continue to work, pay less taxes but keep the same cashflow? Well, the government has caught up to all the smart people employing the TTR and salary sacrifice strategy, meaning there is no longer any tax arbitrage from transferring your super balance to a TTR pension as opposed to retaining the funds in accumulation phase. This is because the 15% tax on investment earnings will continue to apply up until the age of 65 (the magic age where everything becomes unrestricted). If you have a TTR pension, you will need to decide whether to roll into an account-based pension or to roll back into an accumulation account. You’ll also need to determine whether you have met the SIS definition of ‘retired’ (it’s not a definition you might expect).
5. Is it time to switch to an OPP?
If you don’t currently have a financial planner and you are in the group of the so-called ‘1% of impacted pension members’ (we believe Mr. Turnbull would refer to this as a ‘post-truth’), then it may be time remove yourself from the DIY nature of managing your SMSF and switch to an OPP (Other People's Problem).
An OPP is a complex structure that involves the stimulatory process of removing and spending all your excess super balance to take you just above the new age pension assets test threshold of $250,000 and so entitle yourself to the maximum age pension (this strategy sometimes goes by the less familiar term of PQE - the People’s Quantitative Easing). This kills two regulatory birds with one stone, as the assets test taper rate will double on 1 January 2017 to $3 per fortnight per $1,000 of assets (that is, if you exceed the threshold by $100,000, your pension drops by $300 a fortnight or $7,800 a year). Unless you can find a risk-free way to beat a return of 7.8%, an OPP is worth considering.
Merry Christmas, Mr Morrison
Whilst it’s fair to say that Scott Morrison has cut short the Christmas holidays for financial advisers and accountants, his poster hangs on all our bedroom walls.
It may be worth pointing out that the childcare industry is a warning not an instruction manual. If you make a service so expensive and complex by regulating it to within an inch of its life, and you then have to offer taxpayer subsidies just so that these same taxpayers can afford to use it, you are officially on the road to hell. Or, as Alice remarked, “if you drink much from a bottle marked 'poison' it is certain to disagree with you sooner or later.”
“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?”
We do, Alice. It would be so nice if something made sense for a change.
Diana Chan is Head of Compliance and Jonathan Hoyle is Chief Executive Officer at Stanford Brown. This article is general information and does not consider the specific circumstances of any individual, and is based on a current understanding of the legislation.