The Future of Superannuation. May 2015

Transcription

1 The Future of Superannuation May 2015

2 Agenda What has changed in the 2015 Federal Budget? What changes are the major political parties planning to make to superannuation and retirement planning? How will these changes affect your superannuation savings or pension? What strategies should be considered now to minimise the potential impact or maximise the benefit of future regulatory changes? How can we help?

3 2015 Federal Budget Some minor announcements assets test, defined benefit income, terminal illness and penalty units No new taxes on superannuation under this Government No adverse changes to super at all What is an adverse change? Will it ignore its own Taxation White Paper? There were some announcements that relate to superannuation and retirement incomes in the Budget.

4 2015 Federal Budget Budget Announcements Age Pension Assets Test changes reduced asset threshold. Defined Benefit Income Testing amount excluded capped at 10%. Terminal Medical Condition of Release life expectancy now 24 months. Penalty unit value will increase from $170 to $180 applies to SMSF Trustees that breach the super rules. But what s still to come?

5 Liberal party policy Financial Systems Inquiry Retain tax-free super for 60 and over Delay Superannuation Guarantee increase for 2 years Reverse Low Income Super Contribution (LISC) Cancellation of proposed tax on pension earnings over $100,000 Major review of excess contribution penalties Increase caps when Budget permits

6 Liberal party policy Retain tax-free super for 60 and over Coalition have said: We will ensure that no more negative unexpected changes occur to the superannuation system so that those planning for their retirement can face the future with a high degree of predictability. Have stated they will make no changes to the tax treatment of super beyond the next election. No changes will be made irrespective of recommendations in the upcoming Taxation White Paper.

7 Liberal party policy Delay Superannuation Guarantee increase for 2 years From 1 July 2014, SG rate increased to 9.5%. The SG rate will remain at 9.5% for 7 years. It will increase to 10% from July It will eventually increase to 12% from July years slower than originally proposed under the previous Labor Government. SG payments continue for those over 70.

8 Liberal party policy Abolition of the Low Income Super Contribution (LISC) For people who earn less than $37,000 a year. Concessional contributions to super receive a refund of the 15% contributions tax. Paid by the Government. Maximum amount of refund is $500. Will apply until financial year. Was to be funded from the Mineral Resource Rent Tax (MRRT).

9 Liberal party policy Abolition of the tax on pension earnings Labor policy prior to the 2013 Federal Election. The proposed tax was supposed to apply when pension earnings exceeded $100,000. The proposed tax rate was 15%. Would have applied on an individual basis. Unrealised capital gains partially grandfathered. Supposed to only affect 16,000 Australians with a super balance of over $2 million.

10 Liberal party policy Refund of excess non-concessional contributions Excess non-concessional contributions can now be refunded to the contributor. An assumed rate of return is determined on the excess non-concessional contribution. This amount is taxed at the contributor s marginal tax rate. Stops inadvertant breaches of the non-concessional contributions cap being taxed at 45%.

11 Liberal party policy Increase in concessional contribution caps Indexed concessional caps from $25,000 to $30,000. Have stated they will increase concessional caps once the Budget is in a strong enough position. Favour a voluntary approach to contributions through higher caps than a mandatory approach through higher Superannuation Guarantee. Concessional caps reduced from $100,000 and $50,000 to $25,000 under the Labor Government.

12 Liberal party policy Increase contributions tax for high income earners An announcement of the previous Labor Government. Became legislation under the Coalition Government. Imposes extra tax on individuals earning more than $300,000. Contributions tax effectively 30% not 15%.

13 Liberal party policy Conduct a Financial Systems Inquiry The Murray Report (Financial Systems Inquiry or FSI Report). 44 recommendations made with 9 relating to superannuation. Government sought industry and public feedback (date for submissions was 31 March 2015). Therefore too late to make the Budget So no new changes in the Budget, but what about after the Budget? Could there be changes proposed and taken to the next election?

14 Liberal party policy The Financial Systems Inquiry (FSI) Report No barriers to entry were recommended. Importantly two of the key recommendations were: The abolition of direct borrowings by superannuation funds. The reassessment of the concessional tax treatment of superannuation.

15 Liberal party policy The abolition of direct borrowings by superannuation funds SMSFs have been able to borrow since The law was first introduced as Instalment Warrants. Changed to Limited Recourse Borrowing Arrangements in The report stated SMSF borrowing has the potential to lead to greater risks in the case of another global financial crisis. SMSF leverage to purchase assets could result in forced sales in a declining market which could jeopardise retirement savings. The report s other argument is that superannuation should be a savings vehicle and not a wealth management tool.

16 Liberal party policy The abolition of direct borrowings by superannuation funds It appears concern about direct leverage has been fuelled by industry and retail funds worried about the growth in SMSFs. There has also been some alarmist commentary in the financial media about the impact on LRBAs on property prices. Also suggestions SMSFs borrowing to invest in property has squeezed first home buyers from the market. The perceptions of risk have not been helped by property spruikers in an unregulated market and poor lending practices.

17 Liberal party policy The Facts In a $1.35 trillion home finance market, borrowings by SMSFs amounted to approximately $10 billion less than 1%. SMSF borrowings are less than 2% of all SMSF assets. Whilst LRBAs are growing, they are not growing at an alarming rate. This is not material enough to suggest SMSF borrowings are driving first home buyers out of the market. More broadly SMSF property investments are not causing a market bubble.

18 Liberal party policy The Facts According to the latest ATO figures, SMSFs own $21 billion in residential property and $70 billion in non-residential property. Out of a total asset base of $554 billion, that s 3.8% and 12.6% respectively. Whilst their may be risk of some SMSFs losing some of their retirement savings, there really is not a strong argument to ban SMSF borrowing. Most Banks also have very tight lending criteria with prudent Loan to Valuation ratios. Also have strict guidelines on what property assets can be purchased (for example many will not lend for vacant land or apartments).

19 Liberal party policy The concessional treatment of superannuation The report recommends concessional contributions to super be taxed at the member s marginal tax rate rather than 15%. Also recommends removing the tax-free status of pension income and implementing a tax on member earnings. The other recommendation is to reduce the non-concessional contributions cap or remove the bring-forward rule. The two year bring-forward rule allows members under the age of 65 to contribute $540,000 in a three-year period. States that superannuation should not be a wealth accumulation vehicle for the rich.

20 Liberal party policy Tax Discussion White Paper Looks at a number of potential taxation changes, including superannuation. As with the FSI, states super tax concessions distort savings choices. Agenda items include: No tax concessions on compulsory contributions. Higher contributions tax for higher income earners. Tax on pension earnings. Cap on super account balances. Removal of Small Business CGT concessions.

21 Liberal party policy Tax Discussion White Paper Super concessions are supposed to distort savings choices. Money is locked away for years there must be a tax incentive to do this. The rationale for super has always been saving for one s retirement so there is less reliance on the social welfare system. The trade-off is you get tax concessions on your retirement savings. If there were no tax concessions for making voluntary superannuation contributions fewer people would do it.

22 Liberal party policy Post Budget Announcement by Coalition Prime Minister Tony Abbott: There will be no changes to super, no adverse changes to super in this term of Parliament and we have no plans to make adverse changes to super in the future. Will the Coalition not propose changes to the taxation of super at the next election? Regardless of the recommendations from its recently commissioned Taxation White Paper?

23 Labor party policy Announced in April 2015 to redress the fact super benefits the rich These tax concessions benefit high income earners and over time will place an increasing burden on the Budget High income earners.receive a disproportionately large amount of the superannuation concessions Reduce tax free concession for people with fund earnings of more than $75,000 Reduce threshold for Higher Income Superannuation Charge from $300,000 to $250,000

24 Labor party policy Labor s Plan Reduce the tax-free concession for people with annual superannuation incomes from fund earnings of more than $75,000. From 1 July 2017, earnings above $75,000 will attract the same rate of tax the applies to earnings in the accumulation phase. Therefore earnings above $75,000 for a fund member will be taxed at 15%. This measure will affect approximately 60,000 superannuation account holders with balances in excess of $1.5 million. $1.5 million x assumed 5% return = $75,000.

25 Labor party policy Labor s Plan What constitutes earnings? Realised capital gains Dividends Distributions Rent Interest income

26 Labor party policy Example Tim, 67, has $500,000 in his SMSF. He is the sole member of the fund. He decides to retire and goes into pension mode. The fund realises $100,000 in capital gains. Therefore the fund has earned more than $75,000. $25,000 earnings will be subject to tax.

27 Labor party policy Labor s Plan Whilst capital gains will be granfathered, funds with relatively small balances may be impacted. The average balanced fund earned 13% in 2013/14. This means a fund member with a balance of just $580,000 could be hit by Labor s tax on the rich. The previous year (2012/13) the average balanced fund earned 16%. A fund member balance of just $470,000 could be impacted by the policy announcement.

28 Labor party policy Labor s Plan Reduce Higher Income Superannuation Charge (HISC) threshold. Currently $300,000 proposal will reduce this to $250,000. Taxes concessional contributions at 30% - not 15%. To better align superannuation concessions with those on low and middle incomes. But the top 20% of earners already pay 63% of all income taxes. What about indexation? Will it eventually be expanded to all taxpayers on the top marginal tax rate?

29 Labor party policy Balance of Power Parties Why are these important? Some negotiation with minor parties may be required to get legislation through a hostile Upper House. The Government may need to adopt some policy measures to get more important legislation through the Senate. Therefore the superannuation policies of minor parties particularly The Greens becomes an important consideration.

30 The Greens policy Progressively increase concessional contributions tax rate. The 30% contributions rate comes into effect at $150,000. Modelling suggests this will benefit very low income earners. Will be detrimental to everyone else. Also plan to abolish Transition to Retirement pension strategies. Their views on the Taxation White Paper is unknown, other than they see superannuation as a tax haven for the super rich.

31 The Greens policy

32 Political party proposed changes What changes will become law? If Labor wins the next election they have clearly stated their intentions for superannuation changes. The Coalition have stated they will not make any changes to superannuation but many say the superannuation concessions are unsustainable. This view will not go away. The Simpler Super changes are seen as too generous. The populist view is superannuation is used by rich people to preserve their wealth.

33 Mitigate Legislative Risk What strategies can we implement to minimise legislative risk? In the main, any legislative change is usually grandfathered. That is, those who undertook strategies in good faith, based on policy at the time, should not be punished by a change in policy. However, the policy of taxing pension earnings is retrospective. This creates uncertainty and legislative risk. So as a matter of course, all SMSF members should look at increasing the tax-free proportion of pension income.

34 Mitigate Legislative Risk What strategies can we implement to minimise legislative risk? Recontribution strategies Spouse Contribution. Contribution splitting. Keep separate pension accounts. Start a pension.

35 Mitigate Legislative Risk Re-contribution strategy This strategy converts the taxable portion of superannuation benefits into tax-free components. Reduces the potential for tax payable when super is passed to beneficiaries post death. Also has the potential to reduce any tax payable on pension income for pension recipients less than 60 years of age. Increases the tax free portion of pension income if pensions become taxable again due to legislative change. Spouse Re-contribution strategy can reduce the tax payable on pension earnings above $75,000.

36 Mitigate Legislative Risk Example Spouse Re-contribution strategy Peter, 63, and retired, has $1,500,000 in his SMSF. He is married to Angelique, who has $300,000 in the fund. Both are in pension mode. $1,000,000 of Peter s benefit is a taxable component. Angelique s benefit is all taxable. The fund earns 10% for the year.

37 Mitigate Legislative Risk Example Spouse Re-contribution strategy Therefore Peter s pension account earns $1,500,000 x 10% = $150,000. His account will therefore be subject to the following tax: $150,000 - $75,000 = $75,000 x 15% = $11,250. Angelique s account will earn $300,000 x 10% = $30,000. As this is under the $75,000 threshold she will not be subject to tax.

38 Mitigate Legislative Risk Example Spouse Re-contribution strategy As Peter is over 60 and retired, he can access his superannuation benefit as he has no cashing restrictions. He could withdraw $450,000 from his member benefit in the form of a tax free pension. He could then make a Spouse Contribution for Angelique of $450,000 using the bring-forward provisions. The aim here is to even up their super balances. Need to consider any realised capital gains in undertaking the strategy, as this will add to pension earnings for the year.

39 Mitigate Legislative Risk Example Spouse Re-contribution strategy After the withdrawal and re-contribution, Peter and Angelique will have the following account balances: Peter $1,050,000 ($1,500,000 - $450,000) Angelique $750,000 ($300,000 + $450,000) If the fund earns 10% Peter s pension account now earns the following: $1,050,000 x 10% = $105,000. His account will therefore be subject to the following tax: $105,000 - $75,000 = $30,000 x 15% = $4,500.

40 Mitigate Legislative Risk Example Spouse Re-contribution strategy Angelique s account will earn $750,000 x 10% = $75,000. As this is within the $75,000 threshold she will not be subject to tax. The re-contribution strategy reduces the tax payable from $11,250 to $4,500. This is a savings of $6,750 in year one. This could save significant tax over time. Also $300,000 of Peter s taxable component is now a tax free component for Angelique.

41 Mitigate Legislative Risk Example Spouse Re-contribution strategy Peter withdrew $450,000. His benefit in the fund is 67% taxable and 33% tax free. Therefore 67% x $450,000 = $300,000 taxable component withdrawn from his account. When the $450,000 is re-contributed as a Spouse Contribution for Angelique, $450,000 is a non-concessional contribution. Non-concessional contributions are a tax free component. Therefore $300,000 taxable component for Peter is turned into a $300,000 tax free component for Angelique.

42 Mitigate Legislative Risk Contribution Splitting Can split up to 85% of the concessional contributions received in a financial year with a spouse. The split is permitted in the year after the contribution is received by the fund. Can be split up to age 65 if the spouse has not satisfied the retirement condition of release. If implemented over time, for younger members this has the ability to even up member accounts and mitigate against tax on future pension earnings. The aim is to keep both accounts below the relevant threshold ($75,000).

43 Mitigate Legislative Risk Example - Contribution Splitting Richard, aged 50, is looking to increase his contributions to super via salary sacrifice. His intentions are to make concessional contributions each year up to the cap of $35,000. He contributes $35,000 concessional contribution in the 2014/15 financial year. The maximum amount that Richard may split with his spouse Sandy is 85% of his concessional contributions. The remaining 15% is the contributions tax withheld by the fund.

44 Mitigate Legislative Risk Example - Contribution Splitting So long as Sandy does not satisfy a retirement condition of release, Richard can split concessional contributions to Sandy up to the age of 65. This could be a significant amount that is transferred to Sandy s account over time. Ignoring indexation of the concessional cap, the amount split could be as follows (assuming the strategy continues for 15 years): $35,000 x 85% x 15 years = $446,250. Sandy could then satisfy a condition of release at age 65 and withdraw the whole amount tax free and re-contribute as a non-concessional contribution.

45 Mitigate Legislative Risk Keep separate pension accounts If undertaking a re-contribution strategy, keep this tax free account separate from other member accounts to target specific components in the SMSF. Once again, the aim should always be to increase the tax free proportion of a member benefit. By starting a pension with a non-concessional contribution, it is considered a separate superannuation interest. This isolates the tax free status of the non-concessional contribution and provides strategic planning opportunities.

46 Mitigate Legislative Risk Example - Keep separate pension accounts Emma, 61, has $1,000,000 in her SMSF. It is all a taxable component. Emma has permanently retired from the work force. Emma has not used the bring-forward provisions. Emma could withdraw $540,000 from her member account tax free in 2014/15. The remainder in the fund - $460,000 could be used to commence a 100% taxable pension.

47 Mitigate Legislative Risk Example - Keep separate pension accounts The $540,000 withdrawn could then be re-contributed to the SMSF as a non-concessional contribution. As soon as the $540,000 non-concessional contribution is received by the SMSF, Emma could start a second Account Based Pension. The $540,000 Account Based Pension would be 100% tax free. In 2017/18, when Emma is 64, she could again withdraw money from her SMSF. She could withdraw money from the taxable Account Based Pension (let s assume it has grown to $500,000).

48 Mitigate Legislative Risk Example - Keep separate pension accounts As Emma is over 60, she can withdraw the $500,000 taxable component pension from superannuation tax free. The tax free Account Based Pension is a separate superannuation interest. It can be left as is in the SMSF. The amount withdrawn can then be contributed back to the SMSF as a nonconcessional contribution. As Emma is less than 65 she can use the bring-forward provisions. It is now a tax free component and can be used to commence a second 100% tax free Account Based Pension.

49 Mitigate Legislative Risk Example - Keep separate pension accounts Emma now has two 100% tax free pensions. If Emma had not commenced a pension with the remaining taxable component in the fund ($460,000), after withdrawing the $540,000, she would have mixed the components. Therefore if she made a non-concessional contribution of $540,000 and started a pension, it would be a mixture of both tax free and taxable components: $540,000/$1,000,000 = 54% tax free $460,000/$1,000,000 = 46% taxable Therefore the $540,000 pension would consist of only 54% tax free.

50 Mitigate Legislative Risk Example - Keep separate pension accounts $291,600 is tax free and $248,400 is taxable. The amount in accumulation - $460,000 = is also 54% tax free. If this is then used to commence a pension it will be part tax free/part taxable. In 2017/18, when Emma is 64, she could again withdraw money from her SMSF. She could withdraw money from this Account Based Pension (let s assume it has grown to $500,000).

51 Mitigate Legislative Risk Example - Keep separate pension accounts Again, as Emma is over 60, she can withdraw the $500,000 taxable component pension from superannuation tax free. The existing Account Based Pension is a separate superannuation interest. It can be left as is in the SMSF. But it is only partly tax free. The amount re-contributed ($500,000) could be a non-concessional contribution and could be used to start a second pension (100% tax free). But Emma would end up with a 54% tax free pension and a 100% tax free pension.

52 Mitigate Legislative Risk Example - Keep separate pension accounts In the first scenario Emma commenced a pension with the taxable component in the fund. This made it a separate superannuation interest. This meant the non-concessional contribution could be used to commence a 100% tax free pension. The 100% taxable pension could then later be withdrawn and re-contributed as a non-concessional contribution. This would then be another superannuation interest. This strategy leads to two 100% tax free pensions.

53 Mitigate Legislative Risk Example - Keep separate pension accounts This has benefits from an estate planning perspective as well as creating a tax free member account. If pension income is made taxable in the future, this strategy will mean the income is still received tax free. By not commencing a pension with the taxable accumulation account in the second scenario, the amount re-contributed is mixed with the taxable component. The accumulation account is a mix of components one cannot separate the tax free from the taxable. But it does not help if the earnings are taxed!

54 Mitigate Legislative Risk Commence Pensions Commencing a pension crystallises the tax free and taxable components. This has the benefit of locking in the tax free percentage for the life of the pension. Any growth in a pension account will be in the ratio of tax free to taxable. Any growth in an accumulation account is a taxable component even if the accumulation account consists of a tax free component. Commencing a pension also has other benefits transition to retirement, tax free income that can be contributed as a non-concessional contribution, etc.

55 Mitigate Legislative Risk Example - Commence Pensions Stuart, 62, makes a non-concessional contribution to super of $500,000. He leaves the money in accumulation for three years. At the age of 65 he commences a pension. The accumulation account has grown to $600,000. The components are as follows: Tax free $500,000 (83%) Taxable $100,000 (17%) The accumulation account will also be subject to tax on earnings.

56 Mitigate Legislative Risk Example - Commence Pensions Stuart, 62, makes a non-concessional contribution to super of $500,000. He commences a pension with this benefit. The pension account grows to $600,000. The components are as follows: Tax free $600,000 (100%) All growth will be a tax free component as commencing a pension crystallises the benefit.

57 Mitigate Legislative Risk Conclusion Maximise tax free components within superannuation. Withdrawal and re-contribution strategies. Spouse contributions to equalise member accounts. Look at strategies to maintain separate superannuation interests. Commence a pension Transition to Retirement, Account Based Pension, etc.

58 Services to support SMSF Trustees How can we help? Contact your Fund Accountant or Client Service Representative for Contribution rules re-contributions Commencing a pension Use your Dashboard functionality to ensure you do not breach the caps and satisfy the pension payment standards Speak with our Technical Team if you want to explore superannuation strategies

59 Disclaimer This presentation was prepared by SuperIQ Pty Ltd (ABN ) ( SIQ ). Material contained in this presentation is a summary only and is based on information believed to be reliable and received from sources within the market. The information is believed to be accurate at the time of compilation and is provided by SIQ in good faith. However, the statements including assumptions and conclusions are not intended to be a comprehensive statement of relevant practice or law that isoften complex and can change. It is not the intention of SIQ that this presentation be used as the primary source of readers information but as an adjunct to their own resources and training. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. SuperIQ does not guarantee the performance of any fund or the return of an investor's capital. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and SIQ will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded). Individual circumstances, in particular relating to self managed superannuation funds, may vary greatly. This presentation has been prepared for general information purposes only and not having regard to any particular person s investment objectives, financial situation or needs. Accordingly, no recommendation (express or implied) or other information should be acted upon without obtaining specific advice from an authorised representative.

60 See your future clearly superiq.com.au superconcepts.com.au