SUPERANNUATION MONEY MAKING STRATEGIES & NEW DEVELOPMENTS. Trusted tax information you can count on ACN

Transcription

1 MONEY MAKING STRATEGIES & NEW DEVELOPMENTS Trusted tax information you can count on ACN

2 2 3 TOPICS 1 July 2017 Changes During the year the Government passed into law a package of significant superannuation changes with a start date of 1 July Who is impacted, and what strategies can you adopt in this new landscape? The Attraction of Superannuation Despite some recent unfavorable changes, regardless of your level of income, superannuation remains an attractive taxation environment in which to invest. This section details the reasons why. Contributing to Superannuation Contributions to superannuation remain at record high levels. With new contribution caps in place, this section details the new caps, and some contribution strategies. Pensions One of the most common ways to withdraw your superannuation is via a pension. We detail some taxeffective pension strategies, particularly in light of new rules that now apply. SMSFs and Property Holding property within SMSFs is becoming increasingly popular. What are the rules? And what strategies can be employed in this area? Super Strategies & Advice In this section we offer some advice and strategies relating to: Superannuation splitting Tax and welfare-friendly annuities Employers, and more 1 JULY 2017 CHANGES The Fair and Sustainable Superannuation Bill was passed into law on 23 November The legislation contains the most far-reaching package of superannuation reforms in the past decade. Following is a simplified snapshot of the changes many of which are expanded upon later in this publication. Contribution Changes page NON-CONCESSIONAL CONTRIBUTIONS 1. Reduced non-concessional cap of $100, 000 per year or $300, 000 over three years. 2. Transitional arrangements apply where you have triggered the 3-year bring-forward rule between 2015/2016 and 2016/ Ban on making non-concessional contributions where your account balance exceeds $1.6 million, and limited 3-year bring-forward contribution restrictions where your total superannuation is less than this but more than $1.4 million. CONCESSIONAL CONTRIBUTIONS 1. Concessional contributions cap reduced to $25, 000 per year for all taxpayers regardless of age. 2. Where concessional contributions made from 2018/2019 are less than the $25, 000 cap, the unused amount can be carried forward for up to 5 years. 3. Contributions and amounts in respect constitutionally protected funds and defined benefit schemes count towards your concessional contributions cap. 4. Employees are able to claim a deduction for after-tax superannuation contributions from 1 July If the sum of your income for surcharge purposes and your concessional contributions exceeds $250, 000 (down from $300, 000) your contributions are taxed at 30%. Pension Changes ACCOUNT-BASED PENSIONS You are only permitted to have $1.6 million in your pension account. TRANSITION TO RETIREMENT PENSIONS Income derived from assets supporting this type of pension will be taxed at 15% inside your super fund rather than taxfree MINIMUM PENSION DRAWDOWNS Where you commence an Account-Based Pension or Transition to Retirement Pension, partial commutations will no longer count towards the minimum annual payment requirements Other Changes SPOUSE CONTRIBUTIONS The spouse contributions tax offset will be made more widely available. LOW INCOME TAX OFFSET Much like the Low Income Superannuation Contribution it replaces, this maximum $500 payment will be made to your super fund where more than 10% of your income is from employment, and you have adjusted taxable income of less than $ ANTI-DETRIMENT Where a super fund, Australian Defence Force or life insurer pays an increased lump sum on death to a member s deceased estate or their spouse, former spouse or child it can no longer claim a tax deduction for the increased amount where the member dies from 1 July 2017 onwards. DEFERRED ANNUITIES Where you purchase one of these, it will qualify for the pension earnings tax exemption if you meet any of the following conditions of release: Turning 65 Permanent incapacity Retirement Terminal medical condition. PROPORTIONING RULE Where you purchase an income stream that will start at some set time in the future (a deferred product) earnings will be tax-exempt if the above conditions of release are met (see previous paragraph). PENSION PAYMENTS NO LONGER TREATED AS LUMP SUMS Where you are in receipt of a superannuation pension, you can no longer elect prior to the payment being made, for the payment to be treated as a lump sum. THE ATTRACTION OF SUPERANNNUATION Contributing to superannuation is still as popular as ever. Personal (voluntary) contributions in the December quarter 2016 (the latest available statistics) were $4,616 billion, up from $4,437 billion in the same quarter a year earlier. Superannuation assets in aggregate were $2,199 billion at the end of the December 2016 quarter, up from the previous quarter which was $2,145 billion, and are now at an all-time historical record level. Over the 12 months to December 2016, there was a 7.4% increase in total superannuation assets. This section details why, even in spite of recent unfavorable changes, contributing to superannuation is still so popular. Tax Concessions Superannuation is a concessionally taxed environment. This was highlighted in early 2017, when the Government released its Tax Expenditures Statement which stated that in total superannuation tax concessions cost the Government $38.85 billion in revenue in the previous financial year. These tax concessions which make superannuation so attractive as an investment include: CONCESSIONAL TAXATION OF EARNINGS Superannuation earnings (such as interest, dividends, rent etc.) are taxed at 15% when your account is in accumulation mode (i.e. not in pension mode). These earnings are tax-free when your account is in pension mode. This concessional taxation cost the Government $16.85 billion in foregone revenue in 2015/2016. By contrast, investment earnings on assets (such as shares, property, term deposits etc.) held outside of superannuation are taxed at your marginal tax rate as follows: Taxable Income $ 2017/2018 Tax Rate (not including Medicare Levy) Nil cents cents (plus $3 572) cents (plus $19 822) cents (plus $54 232) Note that your tax liability outside of superannuation may be further reduced by tax offsets such as those for low-income earners and pensioners. CONCESSIONAL TAXATION OF CAPITAL GAINS Capital gains made by superannuation funds are likewise taxed at 15% when your account is in accumulation mode. Where a CGT asset supports a pension, any capital gain made when those assets are sold is tax-free. On the other hand, if the same CGT asset was held by one of the following entities it would be taxed as follows: Individual marginal tax rate (see earlier) Company 30% (or 27.5% for a Small Business Entity) Trust marginal tax rate of individual. The tax on a capital gain made by your superannuation fund is reduced to 10% (a 33% discount) where that asset has been held for 12 months or more. Although this is a lesser discount than the 50% discount available to trusts and individuals, this is negated by the base CGT superannuation taxation rate being so low at 15%. The following example illustrates the benefits of both the concessional income tax and CGT taxation treatment inside superannuation. Adam is 42 years of age and earns $85, 000 in 2017/2018 from his job as a teacher. He also owns a large parcel of shares from which he was paid unfranked dividends of $7, 000. Late in that financial year he sells his shares (which have been owned for 2 years) and makes a capital gain of $12, 000. OUTSIDE If Adam held his shares outside of superannuation, his 2017/2018 tax liability (not including Medicare levy) would be $23, 892. INSIDE On the other hand, if the shares were owned by Adam s superannuation fund, the total tax liability would be $21, 422 ($19, 172 on his salary + $1, 050 on the dividend + $1, 200 on the discount capital gain). This represents a tax saving of $2, 470. Cut Your Income Tax TAX DEDUCTION FOR CONCESSIONAL CONTRIBUTIONS Subject to age limits, from 1 July 2017 almost all individuals can now claim a tax deduction for their personal concessional (after-tax) contributions that they make to superannuation. Before this date, most employees were unable to do this. See Page 8 for more details. OFFSET YOUR TAX PAYABLE By making a superannuation contribution to your nonworking or low-income earning spouse, you can offset your personal tax payable. From 1 July 2017, this offset has been made more widely available. See Page 7. REDUCE YOUR TAXABLE INCOME By salary sacrificing to superannuation, you can reduce your taxable income, and therefore your overall tax liability. Example Salary Sacrifice by the Average Wage Earner Cameron is an employee who has a 2017/2018 gross income of $82, 000 and $100 in deductions. He wishes to salary sacrifice $10, 000 into superannuation in order to provide for his pending retirement. Tax Position No Contribution $ Gross salary 82, 000 Salary sacrifice amount 0 Deductions 100 Annual taxable income 81, 900 Tax payable 18, 164 Medicare levy (2%) 1, 638

3 4 5 Gross disposable annual income 62, 097 Salary sacrificed superannuation 0 Total after-tax package 62, 097 Tax Position Salary Sacrifice Contribution $ Gross salary 82, 000 Salary sacrifice amount 10, 000 Deductions 100 Annual taxable income 71, 900 Tax payable 14, 914 Medicare levy (2%) 1, 438 Gross disposable annual income 55, 548 Sacrificed Superannuation 15% Contributions Tax 8, 500 Total after-tax package 64, 048 Therefore, despite sacrificing $10, 000, Cameron s disposable income is only reduced by $6, 549. This is because his income tax liability is reduced by $3, 450 (or $1, 950 after taking into account the 15% superannuation contributions tax). Furthermore, Cameron has provided for his retirement by contributing money into the concessionally taxed superannuation environment. S Those who salary sacrifice superannuation should be mindful of the following: Employers are not compelled to offer salary sacrifice A signed, written agreement should be in place outlining the name of each party, the date that the agreement commenced, the amount being sacrificed each pay period Employees should clarify whether the employer is still paying Superannuation Guarantee on the gross salary (before salary sacrifice) or the post-sacrifice salary. This can significantly impact the attractiveness of the overall package. By law, employers are only required to pay Superannuation Guarantee on the smaller, postsacrifice amount. Despite this, a number of employers agree to pay Superannuation Guarantee on the gross amount (before sacrifice). Less Generous? There has been much publicity surrounding the 1 July 2017 superannuation changes (outlined earlier) and how they have made superannuation less generous. However, in terms of increases to taxation, the changes are very much at the margins as follows: The extra 15% tax on concessional contributions is restricted to taxpayers whose income for surcharge purposes plus concessional contributions is more than $ (down from $ ). Given the high income threshold, this will only impact approximately 3.5% of superannuation account holders. The law change to cap the amount of savings that you can have in a pension account to $1.6 million may force individuals to park their excess savings in an accumulation account (where the earnings are taxed at 15% rather than tax-free in a pension account). However, less than 1% of account holders will be affected. Even for those who are impacted, the 15% tax rate will likely be lower than their marginal tax rate outside of superannuation. The law has been changed so that all recipients of Transition to Retirement Income Streams (TRIS) will have the earnings on the assets that support the TRIS taxed at 15% (rather than tax-free as was the case before 1 July 2017). Again, the 15% tax rate will in many cases be more generous than that outside superannuation. Also note that the tax treatment in the hands of the individual will not change (they are still entitled to a 15% tax offset for pension payments they receive see page 10). All told, while there have been some unfavourable tax changes stemming from the 1 July reforms, they have limited real impact. Downsides? While for the reasons outlined above, superannuation is considered by most experts to be a sound investment, there are arguably some downsides that should be considered: LOCKED BOX Superannuation is a locked box. Once your money is inside superannuation you cannot access it until you meet a Condition of Release. By far the most common Conditions of Release are the age-based conditions the earliest of which is reaching your Preservation Age which has now increased to 56 (and will increase to 60 for those born after 30 June 1964) and retiring or drawing a Transition to Retirement Pension. Therefore, absent an extraordinary event such as terminal illness or incapacity, your superannuation money is locked away until at least 56 years of age. Therefore, those who experience occasional cash-flow problems should think carefully before making personal contributions to superannuation, especially large sums. Having made a contribution you cannot subsequently change your mind. Returning to the earlier example, while Cameron may benefit from lower taxation by contributing to superannuation, the entire $ principal as well as the earnings on that principal are locked away until he meets a Condition of Release. Rule Changes As per any legislative regime, the superannuation laws are subject to change as evidenced by the sweeping 1 July 2017 changes. By investing into superannuation, you are leaving your money at the mercy of the legislators (i.e. the Government of the day). While any future law changes may of course be positive and benefit those with money already in superannuation, some changes may impact negatively. Risk Although people do not think of it as such, superannuation is an investment which, like direct investments in property and shares for example, is subject to risk. Once inside superannuation your funds are invested in various products and assets (such as shares, term deposits, property etc.). Returns on these investments can fluctuate. It is therefore important to ensure you understand how your superannuation is invested and seek advice when needed. MANAGING RISK For those who have their superannuation invested in a commercial fund (either industry or retail funds) although unlike SMSFs you don t manage your investments directly, you can nonetheless control your exposure to risk. That is, you can advise your fund whether you wish to have your investment option as low-risk (e.g. term deposits), balanced or high-risk. A younger person for instance may be more inclined towards a growth or high growth investment setting given that they have many years until retirement. CONTRIBUTIONS This section details the new superannuation contribution rules that apply, and some accompanying strategies in light of this new landscape. Concessional Contributions These are contributions made into your superannuation fund that are included in its assessable income. Concessional contributions are taxed in your fund at the concessional rate of 15% in the year that contribution is made (often referred to as contributions tax). The contributor is allowed a tax deduction. Concessional contributions include: Employer contributions (including the compulsory 9.5% Superannuation Guarantee (SG) and salary sacrifice) Personal contributions claimed as a tax deduction (see page 8), and Certain amounts transferred from a foreign superannuation fund to an Australian superannuation fund (this won t affect most taxpayers). CAP From 1 July 2017, the concessional contributions cap has been reduced to $25, 000 for all taxpayers. The cap is per taxpayer (not per superannuation or per contributor), per year. The new $25, 000 cap will be indexed in line with Average Weekly Ordinary Time Earnings in increments of $2, 500. Before this date, the amount of the cap depended on a taxpayer s age as follows: Income Year 2014/ / years and over on 30 June of the previous year General Cap for all other younger taxpayers $35, 000 $30, /2018 $25, 000 Where your cap is exceeded, the excess concessional contribution is included in your assessable income for the corresponding income year and taxed at your marginal tax rates (with a 15% tax offset to reflect the tax already paid by your superannuation fund). To pay this, you can apply to your fund to have up to 85% of the excess concessional contribution released. The inclusion of the excess contribution in your assessable income may have detrimental flow-on effects for other benefits or entitlements that are pegged to taxable income such as Family Assistance payments or Child Support. With the reduced caps now in operation, employees may need to review any pre-existing salary sacrifice arrangements to ensure that the amount sacrificed when the 2016/2017 concessional cap applied, does not result in the new, reduced 2017/2018 cap being exceeded. CARRY-FORWARD Where concessional contributions made in 2018/2019 and future years are less than the $25, 000 cap, the unused cap amount can be carried forward for up to five years. This may particularly benefit those who have had time out of the workforce (such as new parents) and those whose income fluctuates such as contractors or sole traders. Practically speaking, the first year that you can take advantage of this reform is 2019/2020 (for any unused 2018/2019 cap). Sammy is a train driver whose assessable income is $90, 000. With his wife recently having given birth, Sammy takes unpaid leave from January to July As a result of his leave, Sammy only uses $4 275 of his 2018/2019 cap (being the Superannuation Guarantee amount contributed by his employer). In 2019/2020 Sammy s effective concessional contributions cap is $ (the $ standard annual cap + $ of the unused 2018/2019 cap). This may come in handy if Sammy has disposable income at this time (or at any time across the next five income years being the period which this unused amount can be carried forward to). Not only can Sammy channel additional money into the concessionally taxed superannuation environment, but he can also claim a large deduction under the personal contribution rules that now apply (see page 8). Be mindful that this carry-forward law change can benefit not only those who have a change in their earning or working arrangements but also continuing employees many of whom do not earn enough from employment to use their entire $25, 000 cap. If you at any point over the following five years have a windfall gain (perhaps an inheritance, or you sell a high value asset) you can use the carry-forward cap and provide for your retirement as well as reducing your income tax by claiming a deduction. Non-Concessional Contributions These are contributions where the contributor is not entitled to a tax concession for making the contribution. Nonconcessional contributions are not subject to contributions tax. These contributions, also known as after-tax contributions, include: The amount of any excess concessional contribution for that income year that has not been released from a superannuation fund (see earlier in respect of releasing the excess) Additional amounts allocated to a person by the superannuation fund that are not assessable income of the fund Spouse contributions (unless the spouse is your employer) Contributions made for a person less than the age of 18 that are not made by their employer Contributions in excess of a person s lifetime CGT cap amount (see page 6) Amounts transferred from foreign superannuation funds excluding amounts included in the fund s assessable income Contributions included in the contribution s segment of the member s super interest in the constitutionally protected fund (CPF)

4 6 7 Contributions made or after 10 May 2016 to a fund while it was non-complying but is now complying. CAP From 1 July 2017, the non-concessional cap has been reduced to $100, 000 per year, or $300, 000 under the 3-year bringforward rule (i.e. the contributions can exceed $ in one year provided the total contributions in that year and the next two financial years do not exceed $300, 000). As the following table illustrates, this is a significant reduction from previous years: Type of Cap Standard Non-Concessional Contribution 3 Year Bring- Forward Non- Concessional Contributions for Those Aged under 65 From 1 July 2017, these caps may be further restricted if your total superannuation balance at the end of the prior financial year is above the following amounts: Total Superannuation Balance Cap for 2014/2015 to 2016/2017 Cap for 2017/2018 $ $ $ over three financial years $ over three financial years Cap $1.6 million or more No contributions allowed $1.5 million to $1.6 million $1.4 million to $1.5 million Less than $1.4 million Total superannuation balance is broadly the sum of an individual s accumulation interests, plus pension interests, plus any in transit rolled over superannuation benefits. There are also transitional arrangements/caps for the bringforward rule as follows: Bring-Forward Rule Triggered in: 2014/2015 $ (therefore no bring-forward) $ (therefore limited bring-forward) $ (therefore unlimited bring-forward) Cap Old rules apply. You can contribute $540, 000 over 2014/2015 to 2016/2017. Bring-Forward Rule Triggered in: 2015/ /2017 Cap -you can contribute $540, 000 during 2015/2016 and 2016/2017 -if you contributed at least $460, 000 over 2015/2016 and 2016/2017 you cannot make a contribution in 2017/2018 -if you contributed less than $460, 000 over 2015/2016 and 2016/2017, you can contribute in 2017/2018 provided from 2015/2016 to 2017/2018 you do not exceed $460, 000 -you can contribute $540, 000 in 2016/2017 -if you contributed at least $380, 000 in 2016/2017, you cannot make a contribution in 2017/2018 or 2018/2019 -if you contributed less than $380, 000 in 2016/2017, you can contribute in 2017/2018 and 2018/2019 provided from 2016/2017 to 2018/2019 you do not exceed $380, 000 If you triggered your bring-forward cap in 2014/2015, the transitional rules do not apply. Therefore, provided you are under 65 years of age, you are permitted to trigger and indeed exhaust your $300, 000 bring-forward cap in 2017/2018. The benefit of the bring-forward cap is that it allows you to contribute large amounts into superannuation as soon as possible and therefore enjoy the concessional superannuation tax treatment on the earnings on those amounts as early as possible. The cap can be beneficial where taxpayers receive a windfall cash amount for example a compensation payment, a pay-out from work, an inheritance, or the proceeds from the sale of a high-value asset (such as property). CGT Cap Amount While the concessional and non-concessional contributions caps have been significantly reduced (by approximately 16% and 45% respectively) there has been no reduction or change to the CGT Lifetime Cap Amount. This is good news for business owners. By way of background, in addition to the standard Concessional and Non-Concessional caps, there is an additional Lifetime CGT Cap Amount. Because of the generous concessional tax rates that apply inside superannuation, many exiting business owners are keen to invest the capital proceeds from selling their business into superannuation. However, the non-concessional contribution cap (particularly after the 1 July 2017 reduction) severely restricts the amount that can be contributed to your superannuation fund. Even where you elect to use the 3-year bring forward cap, $300, 000 can for many business owners fall short of the proceeds they receive from a business sale. To assist in this regard, business owners may wish to consider utilising the Lifetime CGT Cap. This cap allows non-concessional contributions to be made in excess of the standard non-concessional limit. The Lifetime Cap is $1.415 million in 2016/2017, increasing as a result of indexation to $1.445 million in 2017/2018. The cap is only available for Small Business Entities (SBEs) when the amounts contributed to superannuation are: Capital proceeds from the sale of an asset that qualifies for the 15-Year Exemption, or Capital gains from the sale of an asset that qualifies for the $500, 000 Retirement Exemption. Under the 15-year exemption, the entire capital proceeds, (not only the gains) can be contributed to superannuation under the Lifetime CGT Cap. Where the 15-Year Exemption does not apply, only that amount attributable to the Retirement Exemption (lifetime limit of $500, 000) can be contributed. Also note that a contribution to superannuation under the CGT Retirement Exemption limit can be met by an in-specie contribution of property. Brock is a 57-year old sole trader whose business commenced in The business has a turnover of just under $2 million, and therefore can access the CGT Small Business Concessions. In January 2018 he sells his business to Cameron for $1, The sale qualifies for the 15-Year Exemption and therefore any capital gain is totally exempt from tax. Keen to provide for his impending retirement, Brock wonders how he can contribute the proceeds into the concessionally taxed superannuation environment as soon as possible. ANSWER Through a combination of the standard non-concessional contribution cap and the CGT Lifetime Cap, Brock can immediately contribute the entire proceeds of the business sale into superannuation. CGT Lifetime Cap Because the sale of the business qualifies for the 15-Year Exemption, Brock can utilise the CGT Lifetime Cap. Provided he makes the contribution before 1 July 2018, he can contribute $1.445 million to superannuation and it will not count towards his standard non-concessional cap. Standard Non-Concessional Cap As he is under 65 years of age, Brock can utilise the 3-year bring forward non-concessional cap. By doing so he can contribute the remainder of the capital proceeds of $255, 000. In doing so, this will prevent him from making any further non-concessional contributions in 2017/2018 and also severely limit his ability to make non-concessional contributions in the following two financial years (only $45, 000 over these two years). Note also that the $1.6 million total superannuation balance cap restriction on making non-concessional contributions does not apply to contributions made under the CGT Lifetime Cap. The take-home message is that the CGT Lifetime Cap provides small business owners with extra capacity to make contributions, and is now more valuable than ever given the reductions to the non-concessional cap. Assess the nature of your capital gain where it qualifies for the 15-Year Exemption or the Retirement Exemption, the Lifetime CGT Limit can be utilised. This can allow you to more quickly get the proceeds of your sale into the concesssionally taxed superannuation environment than you would otherwise be permitted. In pursuing this strategy be aware that if you are between years of age, you must satisfy a work test in order to contribute to superannuation. If you are 75 or over, you cannot make personal contributions to superannuation. Spouse Contributions The spouse contributions tax offset has been made more generous. More taxpayers can now reduce their own personal tax liability while helping to provide for the retirement of their spouse. From 1 July 2017, where you make a superannuation contribution for your spouse you can claim a tax offset equal to 18% of your contributions, subject to the following rules: The maximum offset is $540. This means that the offset can be claimed for a maximum of $3, 000 contributions (18% of $3, 000). If the sum of your spouse s total income (consisting of assessable income, plus reportable fringe benefits total, plus reportable employer superannuation contributions) is greater than $37, 000 (up from $10, 800), the maximum contributions eligible for the tax offset ($3, 000) is reduced by the excess. Consequently, no tax offset can be claimed where the spouse s total income is greater than $40, 000 (up from $13, 800). Therefore, from 1 July 2017 there are three scenarios at play. If the receiving spouse s total income is: Less than $ the tax offset will be 18% of the lesser of the contribution and $3 000 Between $ and $ the tax offset will be 18% of the lesser of the contribution and $3 000, less the amount by which the spouse s total income exceeds $ More than $ the tax offset is zero. You can contribute more than $3, 000, however this will not increase the offset that you receive. Also note that no tax offset can be claimed if either: The receiving spouse s non-concessional contributions for the year exceed their non-concessional contributions cap, or At the end of the prior financial year, the spouse has total superannuation interests that exceed the general transfer balance cap (which is $1.6 million from 1 July 2017). Samantha is a dietician with taxable income of $95, 000. Her spouse Tim is a stay-at-home parent who works from home part-time and has total income of $15, 000. In 2017/2018, Samantha makes a $3, 000 contribution to Tim s superannuation fund. Samantha will receive a tax offset of $540 (being 18% of $3, 000). This will reduce her tax liability from $24, 682 to $24, 142). If Samantha had made that contribution before 1 July 2017 (under the old, less generous rules) she would have been ineligible for any offset as Tim s total income exceeded $13, 800.

5 8 9 To qualify, the receiving spouse must be under 65 years of age or alternatively aged between 65 and 69 and have met the superannuation work test (i.e. worked for at least 40 hours during no more than 30 consecutive days in the relevant financial year). Spouse contributions count towards the recipient s nonconcessional contributions cap. With the non-concessional cap being wound back from 1 July 2017 to $100, 000 per year or $ over 3 years, spouse contributions are an alternative way that you can inject money into the concessionally taxed superannuation environment. You can get up to an extra $100, 000 per year into the concessionally taxed superannuation environment and therefore provide for the retirement of you and your spouse. Personal Contributions Deductions for All! From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions. Before this date, you could only claim a deduction for your personal contributions where less than 10% of your assessable income, your reportable fringe benefits and your reportable employer superannuation contributions (e.g. salary sacrifice contributions) for the year were from being an employee this was known as the 10% Rule. This rule prevented most employees from claiming a tax deduction for this type of contribution. For the first nine months of the financial year, Zoe operated a florist business as a sole trader and earned $72, 000. Nearing retirement, she contributed $20, 000 to superannuation from her after-tax income in that same financial year. Zoe later sold her business, and for the last two months of the financial year was an employee at a local nursery where she earned $12, 000 from her employment. Zoe now wonders whether she will be able to claim a $20, 000 deduction for her personal superannuation contribution. OLD RULES If the contribution was received by the superannuation fund under the old rules that operated before 1 July 2017, then Zoe could not claim a deduction as more than 10% of her assessable income, reportable fringe benefits and reportable employer superannuation contributions came from being an employee ($12, 000 from being an employee is more than 14% of her total assessable income of $84, 000). NEW RULES If the contribution was made on or after 1 July 2017, then Zoe would be able to claim a deduction for the entire amount of her contribution ($20, 000). The 10% Rule no longer applies. Therefore, the composition of her income is irrelevant. Claiming a $20, 000 tax deduction would save Zoe $6, 900 in tax (2017/2018 tax rates including Medicare Levy). To claim a deduction, the standard requirements that existed under the old rules must also be satisfied as follows: Age All individuals under the age of 65 are eligible. Those aged 65 to 74 must meet the superannuation work test (work for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which you make the contribution). For those aged 75, the contribution must be made no later than 28 days after the end of the month in which you turn 75. Older taxpayers are ineligible. Minors If the individual is under 18 at the end of the income year in which the contribution is made, they must derive income in that year from being an employee or carrying on a business. Complying Fund The contribution must be made to a complying superannuation fund. Notice Requirements To claim the deduction you must provide your superannuation fund with a Notice of intention to claim a deduction form before you lodge your tax return in respect of that financial year. For employees who do not have access to salary sacrifice, the abolition of the 10% Rule from 1 July 2017 is a significant benefit which allows you to simultaneously provide for your retirement and improve your overall tax position. WARNING When you make excess concessional contributions, you can still claim the full amount of the contribution as a tax deduction. However, this is negated because as noted earlier when you make excess concessional contributions the excess is included in your assessable income for that year. STRATEGY Where you have an unused carry-forward concessional contribution cap (under the new law from 1 July 2018 see earlier), you claim an even larger deduction for your concessional contributions. For example, if you had an unused concessional carry-forward cap of $20, 000 in 2018/2019, and you had spare cash on hand, you could claim a deduction of up to $45, 000 for a concessional contribution in 2019/2020 (the 2018/2019 unused cap amount plus the 2019/2020 $ cap). This would significantly reduce your tax liability for that year. SALARY SACRIFICE? The opening up of personal deductions is great news for employees whose employers do not offer salary sacrifice. By claiming a deduction for your personal contributions, this puts you in the same tax position as those who salary sacrifice superannuation. Turning back to the earlier salary sacrifice example on Page 3, Cameron would be in exactly the same tax position had he not salary sacrificed superannuation but rather just made an after-tax contribution to superannuation and claimed a deduction. The only benefit of sacrificing would be a cashflow benefit you would enjoy lower tax each pay period rather than having to wait until year-end to claim a deduction. If your employer only paid Superannuation Guarantee on the post-sacrifice salary (see page 4) it would be more financially beneficial to not sacrifice and just make aftertax superannuation contributions and claim a deduction at year-end. Re-Contributions The decreased non-concessional contribution caps have curtailed but not erased the benefits of the withdrawal and recontributions strategy. By employing this strategy, you can alter the composition of your superannuation entitlements and, in doing so, maximise any payout to your non-dependent adult beneficiaries (e.g. adult children) upon your death. For most taxpayers, their superannuation account will consist of two components: Taxable component consisting of employer contributions (Superannuation Guarantee and salary sacrifice) as well as contributions you claimed as a tax deduction under the 10% rule (see earlier). For most taxpayers, this component forms the vast bulk of their superannuation balance. Upon your death, the taxable component is tax-free only if paid to a financial dependent or your spouse. If paid to a non-dependent (e.g. your adult children) the taxable component will be taxed at 15% plus Medicare levy. Tax-free component consisting of the personal contributions you have made from after-tax money (under the non-concessional cap). These amounts are tax-free in the event of death regardless of who they are paid to. For those who have met a condition of release (such as turning 56 and retiring), by withdrawing your superannuation (which is tax-free for over 60s) and then re-contributing it to your fund, you can increase your tax-free component and therefore maximise the payout your non-dependent beneficiaries (e.g. adult children) will receive upon your death. Note that if you are 65 and over you can only contribute to superannuation if you pass the work test (which broadly requires you to have worked for at least 40 hours in a period of not more than 30 consecutive days in the financial year that you make the contribution). Also be aware that any re-contribution will count towards your non-concessional cap. Susan is a retired 62 year-old. She has $700, 000 of superannuation savings; made up of $ taxable component and $100, 000 tax-free component. Her nominated beneficiary is her financially independent adult son Darcy. Before 1 July 2017 Keen to maximise Darcy s future inheritance, Susan withdraws $540, 000 of her superannuation (the maximum amount she can re-contribute). Because under the proportioning rule, withdrawals must be in proportion to your taxable and tax-free components, this means $77, 143 of the withdrawal will consist of the tax-free component, while $462, 857 will consist of the taxable component. As Susan is 60 years or older, her withdrawal is tax-free. She then re-contributes the entire $540, 000 (the maximum nonconcessional contribution allowed under the 3-year bringforward rule) back into superannuation, and commences a pension using the $540, 000 contribution. This pension consists of a 100% tax-free component as it is funded by the recent non-concessional contribution. All earnings on assets supporting this pension will also form part of the tax-free component. Thus, Susan has converted an accumulation interest 100% comprised of a taxable component, into a pension comprised of a 100% tax-free component. Susan tragically dies soon after, and the pension is paid out to Darcy as a lump sum. By implementing the withdrawal and re-contribution strategy, a tax saving of $ can be enjoyed, and therefore a greater inheritance bequeathed to Darcy as follows: *17% tax (including Medicare levy) payable on the remaining taxable component of $137, 143 Lump Sum Death Benefit Re-contribution Strategy No Strategy $700, 000 $700, 000 Tax Payable $23, 314* $102, 000** Net Death Benefit **17% tax payable on the taxable component of $600, 000. From 1 July 2017 Assume that the same strategy is utilised under the new contribution rules, and Susan withdraws $300, 000 (the maximum amount that can be re-contributed). Under the proportioning rule, $42, 857 of the withdrawal will consist of the tax-free component, while $257, 143 will consist of a taxable component. She then re-contributes the maximum non-concessional contribution of $300, 000. When the amount is paid out to Darcy following Susan s death, a tax saving of $43, 715 (and therefore a larger inheritance) is achieved as follows: Lump Sum Death Benefit $676, 686 $598, 000 Re-contribution Strategy No Strategy $700, 000 $700, 000 Tax Payable $58, 285* $102, 000** Net Death Benefit $641, 715 $598, 000 *17% tax (including Medicare levy) payable on the remaining taxable component of $342, 857 **17% tax payable on the taxable component of $600, 000. All told, the tax saving achieved under the withdrawal and re-contribution strategy is $34, 971 less than under the old rules ($ versus $43, 715). However, the saving still remains substantial ($43, 715) and thus the re-contribution strategy remains valuable. Before undertaking this strategy, you should consider the impact of triggering the bringforward cap it may prevent you from making any additional non-concessional contributions for up to two years following the year in which the contribution is made. You should also consider your age. If you have met a condition of release but are under 60 years of age, you will be taxed on the withdrawn taxable component amount that exceeds the low-rate cap ($200, 000 for 2017/2018) at 15%. (plus Medicare levy). PENSIONS The end-game of superannuation is to withdraw your savings to support you once you have retired or are nearing retirement. One of the most common ways to do this is via a pension. This section examines all things pension-related including some important new law changes. Transition to Retirement The transition to retirement (TTR) pension strategy has recently been made less generous.

6 10 11 Under this strategy, once you ve reached preservation age (currently 56) you can commence drawing a pension from your superannuation fund which can then be used to supplement your employment income. The rules are as follows: You must have reached your preservation age (currently 56) You can only take an income stream from your superannuation account generally by way of a TTR. These pensions require a minimum percentage amount be paid to you each year No lump sum withdrawals are allowable until retirement There is no work test to be met There is a cap on the amount of benefits that can be withdrawn. That is, no more than 10% of the account balance at the start of the financial year may be paid each year The taxable part of your income stream will be taxed at your marginal tax rate, but if your pension is paid from a taxed source, you will receive a tax offset equal to 15% of the taxable part of the income stream. Once you reach 60 years of age, the income stream is tax-free, and Your pension can be rolled back into accumulation mode at any time. ADVANTAGES Supplement - You can supplement your workforce income by accessing your super benefits early Taxation - Less tax is paid on the pension income, as compared to your employment income Lifestyle - You can reduce your working hours without sacrificing your way of life Flexibility The pension can be rolled back into accumulation mode at any time. This provides flexibility for those who wish to return to full-time work and therefore no longer have the need for their pension income. DISADVANTAGE On the downside, by drawing on your superannuation earlier than normal, you are depleting your retirement savings which can be detrimental long-term. CHANGE 1 TAXING INCOME From 1 July 2017, the Government has removed the taxexempt status from earnings on assets supporting this type of pension. Before this date, earnings on these assets (such as interest and dividends) were tax-free. From 1 July, they will be taxed inside the superannuation fund at 15% (the same as if the account was in accumulation mode and no pension was being drawn). This change applies to all TTR pensions even where they commenced prior to 1 July Despite this change, the tax treatment of TTR pensions in the hands of individuals will remain the same. That is, the pension amounts will be tax-free for those aged 60 and over, or taxed at your individual marginal tax rate less a 15% tax offset if you are younger than this. Sebastian is 57 years old and has reduced his working hours as he nears retirement. As a result, his earnings fall from $80, 000 to $60, 000. Sebastian commences a TTR pension that pays him $20, 000 per year. Under both the new and the old rules, Sebastian pays tax on his income ($60, $20, 000 pension) at his marginal tax rate with a 15% tax offset on the $ pension income. There is therefore no change to the personal taxation treatment. The only change is that from 1 July 2017, Sebastian s superannuation fund will pay tax at 15% on the earnings on assets supporting his TTR pension. The important take-away point is that the Government s changes although unfavorable have not altered the personal tax treatment of TTR pensions in that you still receive a 15% tax offset on the pension income. Therefore, they still offer exactly the same advantages outlined in the earlier table. It s just that your superannuation fund will continue to pay tax on earnings supporting the pension as it would if your account was not in pension mode. CHANGE 2 ESTATE PLANNING It is stated in the Explanatory Memorandum to the 1 July legislation that the Government intends to pass amendments so that a TTR can no longer be transferred to a reversionary beneficiary on the death of a person; only other pensions such as Account-Based Pensions can continue to be paid to a reversionary beneficiary. Individuals with a TTR pension that have planned to revert their pension on their death to their surviving beneficiary will therefore need to revise their SMSF estate planning. One alternative strategy on the death of a person who is only in receipt of a TTR pension, is that they would have met a full condition of release and thus a new Account- Based Pension can be commenced as a death benefit for the deceased member s dependant/s. New Transfer Balance Cap One of the most publicised 1 July 2017 changes to superannuation is the introduction of a $1.6 million transfer balance cap. From this date, there will be a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the tax free retirement phase. Therefore, if you are commencing an Account-Based Pension after this date, there is a $1.6 million limit on the amount of superannuation you can transfer into the pension phase. Likewise, if you commenced a pension before 1 July 2017, you must have shed any excess above $1.6 million by this date. However, if the excess does not exceed $ at this date, then you have 6 months to remove it (until 31 December 2017). Sheading any excess means rolling that money back into an accumulation account or withdrawing it from superannuation altogether (if you meet a condition of release). Where you elect to withdraw the excess from superannuation altogether, earnings made on the excess once it is outside superannuation will be taxed at your marginal tax rate. Often this will be more than the 15% superannuation tax rate, however tax offsets available to pensioners and low-income earners can make their effective tax rate lower than their marginal tax rate. Another point to consider before withdrawing the excess from superannuation altogether is that with the decreased contribution caps which apply from 1 July 2017 (including the prohibition on non-concessional contributions where you have more than $1.6 million in superannuation) there may be a resricted ability to contribute the money back inside your superannuation fund in the future. The reality is that less than 1% of Australian account holders will be affected by the Transfer Balance Cap as their superannuation savings are not in excess of $1.6 million. If you are affected, it s important to note that once a retirement phase income stream has commenced, any increase in the value of the pension account due to investment returns will not be treated as a credit to your transfer balance account. Therefore, you may wish to consider commencing a retirement phase income stream as soon as possible where you will be impacted by the transfer balance cap, as any growth that occurs after that time will not result in you exceeding your transfer balance cap. Account-Based Pensions Account-Based Pensions (also referred to as Allocated Pensions) is the most common type of superannuation pension. It is drawn from money you have accumulated in superannuation and is available once you have reached Preservation Age as follows: Date of Birth PRESERVATION AGE Preservation Age (Years) Before 1 July July June July June July June July June After 30 June To commence this type of pension you basically transfer money from your accumulation account to an Account- Based Pension account (a maximum of $1.6 million see earlier). The main advantage of an Account-Based Pension is that, once the pension commences, you do not pay tax on any investment earnings. Any income generated (such as interest or dividends) by the amount in your account (still inside superannuation) is tax-free. This will generally give you a better taxation result than withdrawing the entire amount as a lump sum and having earnings taxed at your marginal tax rates. Other advantages of an Account-Based Pension include: Pension payments received are tax-free once you reach 60 years of age If you are aged between Preservation Age and 59 the taxable portion of your pension is taxed at your marginal tax rate less a 15% tax offset Unlike TTR pensions, there is no cap on the amount you can withdraw you can access a large lump sum at any time Periodic payments can be varied There may be money left over for your Estate You can nominate a reversionary beneficiary (a person you want to get the benefit of your superannuation when you die e.g. spouse). As a reversionary beneficiary they will continue to receive the pension payments in exactly the same way you did when you were alive (including the earnings inside superannuation being tax-free). If there is a downside with Account-Based Pensions, it is the minimum drawdown requirement. This can deplete the amount of your savings. Even though you may not need to draw down any amount to live on during the year (for example, you may have earned money elsewhere) you are still forced to draw down the minimum amount. This may in some cases also result in you needing to dispose of superannuation assets to meet the minimum amount. Despite there being no maximum limit on the amount you can draw down, there is a minimum amount that must be drawn down each year depending on your age as follows: Age Minimum Annual Payment as a Percentage of Account Balance (2016/2017 and 2017/2018) % % % % % % % Failing to pay the minimum amount is quite a common error made by SMSFs. If the minimum amount is not paid, this may result in the income earned from pension assets not being tax exempt, so it s important to understand how this requirement works. The percentage of account balance is calculated at the start of each financial year on 1 July. Your age is also measured at the same time or, on the commencement day of your pension, if you commenced a pension during the financial year. John commenced an Account-Based Pension two years ago. On 1 July 2017 he is 71 years old, and has $700, 000 in his account on this date. Through investment earnings, this amount increases to $740, 000 by 30 June John s 2017/2018 minimum payment amount is $35, 000 (5% of $700, 000). Payments may be made at any interval e.g. monthly, weekly, fortnightly etc. If John commenced his pension part way through the year, the minimum payment amount would be pro-rated. For example, if he commenced his pension on 1 August 2017, the minimum payment amount would be $32, 030 ($35, 000 x 334/365). If the pension commences between 1 June to 30 June, there is no minimum payment requirement. Also note that from 1 July 2017, where you commence an Account-Based Pension or TTR Pension, partial commutations will no longer count towards the minimum annual payment requirements.

7 12 13 ACTION POINTS 4 If in pension mode, be aware of your account balance on 1 July each year speak with your advisor if you are uncertain. 4 Ensure the minimum amount is paid by 30 June. SMSFS AND PROPERTY Recent estimates indicate that SMSFs currently hold property worth almost $10 billion under Limited Recourse Borrowing Arrangements. This section looks at the many issues involved in holding property within your SMSF. Transferring Business Real Property into an SMSF Business Real Property is one of two assets (the other being listed shares/units/bonds) that can be transferred by a related party (i.e. SMSF member or relative) into your SMSF. Business Real Property is defined as land or buildings used exclusively in a business. There are three ways the transfer can be effected: DIRECT SALE This is perhaps the easiest way to make a transfer the SMSF buying the asset for market value. Where an SMSF does not have sufficient cash on hand to effect the purchase, it may enter into a Limited Recourse Borrowing Arrangement (LRBA) see later. Where the transfer is effected in this way, the transfer is not regarded as a contribution and therefore the SMSF member s contribution caps are not impacted. This is quite important in light of the reduced contribution caps that apply post-1 July IN-SPECIE CONTRIBUTION An in-specie contribution is a non-cash contribution by a member to their SMSF; for example, transferring the title of an office into the name of the SMSF s trustees or transferring ownership of shares. In this case, the market value of the property will generally be counted towards your non-concessional contribution cap. That is, the percentage of the property you own will be counted towards your cap. For example, if you have a $150, 000 property in the name of you and your spouse, $75, 000 will be counted towards each of your non-concessional caps. The limited contribution caps which apply from 1 July 2017 no doubt make it more difficult for business owners to make an in-specie contribution of business real property into their SMSFs without exceeding those caps. The $100, 000 per year cap in many cases may not accommodate the market value of your share of a property. Even the new $300, year bring-forward cap may be insufficient. The good news is that there is a strategy around this as follows: COMBINATION OF BOTH The third way the transfer can be effected is a combination of the above two methods. The amount of the contribution is the market value of the property less any amount paid by the SMSF. Therefore, using a combination of a direct sale and an in-specie contribution (or even just a direct sale), you can circumvent the caps and get the property into your SMSF. Brad and Emma jointly own a commercial office building out of which they operate their accounting practice. The market value of the building in September 2017 is $650, 000. Keen to capitalise on the tax benefits of owning the property inside their SMSF, they wish for the SMSF to take ownership. With the limited caps that now apply, this could not be achieved via a 100% in-specie contribution because with each ownership interest counting as a contribution ($ each) both Brad and Emma would exceed their nonconcessional contributions cap. To get around this, the SMSF pays or borrows under a Limited Recourse Borrowing Arrangement $ and pays this to Brad and Emma in a part-sale. This amount then gets deducted from the contribution and therefore the value of the contribution is reduced to $ (or $ each). Therefore, Brad and Emma are no longer in breach of their 3-year bring-forward cap, however they are unable to make any further non-concessional superannuation contributions in 2017/2018 and the following two financial years. WARNING In making an in-specie contribution, be mindful that there may be tax consequences: CGT the transfer of property will trigger a CGT liability. This may however be reduced by the 50% discount if the property was held for 12 months or more. Also, if the property was used as an active asset in a small business, it may also qualify for the CGT Small Business Concessions. GST if the transferor is registered for GST, a GST liability may arise. However, the SMSF will be able to claim this back if GST-registered. Stamp Duty The transfer may attract Stamp Duty. As this is a State-based tax with different exemptions in each jurisdiction, you should seek the advice of your Accountant. Acquiring Residential Premises from a Related Party Broadly speaking, an SMSF cannot acquire assets from a related party unless that asset is (a) either shares, units or bonds listed on an approved stock exchange or (b) Business Real Property. Because of the definition of Business Real Property (see earlier), an SMSF generally cannot acquire residential property from a related party. This is because such a property is likely being used for residential purposes (i.e. private accommodation) rather than exclusively in a business. However, as outlined in SMSF Ruling 2009/1, there are limited circumstances where this is not the case and that residential property does constitute business real property such as: A house used exclusively by a doctor in his medical practice (or any other business where this is the exclusive use) A primary production business with a residence on it Motel with manager s residence Bed and breakfast (in certain circumstances). Unless one of these rare exceptions applies, most SMSFs wishing to aquire residential property will need to do so from an unrelated party. LIMITED RECOURSE BORROWING ARRANGEMENTS Unless the SMSF has the cash on hand, it will need to borrow to acquire the property. SMSFs can only borrow via a Limited Recourse Borrowing Arrangement (LRBA). Under an LRBA, the SMSF trustees take out a loan from a thirdparty lender (e.g. bank) and then uses those borrowed funds to purchase a single asset (or a collection of identical assets that have the same market value) to be held in a separate holding Trust (bare Trust). Any investment returns such as rent go to the SMSF. If the loan defaults, the lender s rights are limited to the asset held in that Trust. When the loan is paid out, the property is transferred to the SMSF. There is a common misconception that LRBAs are restricted to commercial property such as Business Real Property. This is not the case. They can also be used to acquire residential property. We caution that LRBAs are complex and should only be entered into under the guidance of your Accountant. Taxation From a taxation standpoint, there are both advantages and disadvantages in having property inside an SMSF: ADVANTAGES As outlined earlier, superannuation funds enjoy concessional tax treatment. As such, any rent derived from the property is taxed at 15%, and is tax-free if your account is in pension mode. Capital gains are also taxed in the same way. Where the property has been held for 12 months or more any taxable capital gain is reduced by 33% down to a 10% tax rate. The CGT concession is important, considering the rate at which property can increase in value particularly where it is held long-term. It is that growth in the property from when your SMSF acquired it to when it is disposed of which is subject to concessional CGT treatment. DISADVANTAGES One of the main attractions of an SMSF is the low tax rate on earnings of 15% (or 0% if your account is in pension mode). However, if a property is negatively geared this tax rate works against you; effectively giving you tax deductions of just 15% as compared to your marginal tax rate of either 0%, 19%, 32.5%, 37% or 45% (not including Medicare Levy). Thus, in the context of SMSFs, because of their 15% tax rate only 15% of the loss on a geared property is used, and these losses on the negatively geared property are trapped within the SMSF and thus cannot be used to reduce your own taxable income (a key motivation in negative gearing). From a CGT perspective, any losses on the disposal of the property will always be dealt with on the capital account (not the income account). Therefore, these losses cannot reduce any income of the fund they can only reduce any current year or future year capital gains. Furthermore, if the gain is not exempt, the CGT Small Business Concessions are generally not available unless in the unlikely event that the SMSF is carrying on a business of property development. Use A property can only be leased to a related party of the SMSF if it constitutes Business Real Property (see earlier definition). Therefore, most residential premises cannot be leased to related parties, irrespective of whether marketvalue rent is being paid or not. As many SMSF investment restrictions focus on whether a related party is involved, it s important to have an understanding of who is included in this term. The following all constitute related parties: Members and relatives Standard employer sponsors of the SMSF (if any) Trusts you control Companies that you can sufficiently influence or in which you hold a majority voting interest Partnerships in which you are a partner. STRATEGIES / TOOLS / TIPS In this section we offer some advice and strategies relating to: Superannuation splitting Tax and Centrelink-friendly annuities Employers, and more! Low Income Earners The superannuation system provides a range of concessions for low income earners as follows: NEW LAW LOW INCOME EARNER TAX OFFSET From 1 July 2017, the Low Income Superannuation Tax Offset (LISTO) applies. Under LISTO the Government will pay to the superannuation account of low-income earners an amount equal to the tax paid by the fund on an individual s concessional contributions (e.g. Superannuation Guarantee contributions by their employer). To be eligible for the LISTO, an individual must: Have Adjusted Taxable Income of less than $ Have more than 10% of your income for the year from employment. The LISTO avoids the situation where low income earners pay more tax on contributions to superannuation than on their take-home pay. The amount of the LISTO that an individual is eligible for will be paid to their superannuation account directly. The LISTO is almost identical to the Low Income Superannuation Contribution (LISC) which it replaced. It is estimated that approximately 3.1 million Australians will benefit from the LISTO, including 1.9 million women. To be clear, unlike the Government Co-Contribution (see below) you do not need to make any personal contributions to superannuation to be eligible for the LISTO. GOVERNMENT CO-CONTRIBUTION The Co-Contributions scheme allows low income earners to receive free Government contributions to their superannuation account, with the Government matching your personal, after-tax contributions by 50% up to certain limits. You will be eligible for Co-Contributions scheme if: You make a personal after-tax superannuation contribution into a complying superannuation fund or Retirement Savings Account (RSA). This differs from the LISTO, in that you are actually required to

8 14 15 make a personal contribution to be eligible for the Co- Contribution scheme. Your total income* is less than $ (2017/2018) 10% or more of your total income is from eligible employment, running a business or a combination of both You are less than 71 years old at the end of the year of income You do not hold an eligible temporary resident visa at any time during the year and You lodge your income tax return. Additional eligibility requirements were added from 1 July 2017 including: Having a Total Superannuation Balance of less than $1.6 million on 30 June of the year before the contributions are being made Having not exceeded your non-concessional contributions cap in the relevant financial year. *Total income is the sum of your assessable income for the financial year, your reportable fringe benefits, your total reportable employer superannuation contributions (RESC), less your allowable business deductions. The inclusion of RESC means that you cannot salary sacrifice income in order to meet the total income threshold and qualify for the co-contribution scheme. The subtraction of business deductions to determine total income opens up the co-contribution scheme to those who are carrying on high turnover businesses but have large deductions. While it may be the case that many low income earners may not have the spare cash to contribute to superannuation, the exclusion of spouse income from the eligibility requirements means that many secondary low income earners in a family (even from wealthy households) may be able to benefit from the scheme as they may have the spare cash on hand. SUPER DEDUCTIONS...WITH A CATCH! As outlined earlier, from 1 July 2017 virtually all taxpayers including employees can now claim a deduction for their personal, after-tax superannuation contributions. However, low income earners may not receive any benefit from this new measure. If you earn below $20, 542 the effect of the taxfree threshold and the Low Income Tax Offset mean that you do not pay any net tax anyway. Therefore, any deductions that you claim (which of course lower your taxable income) are redundant as you are paying no net tax in any case. Thus, if part of your reason for making after-tax superannuation contributions is to claim a deduction, then this may give you pause for thought. Of course there are other benefits in making a contribution to superannuation such as providing for your retirement, and the concessional tax treatment afforded to investment earnings within your fund (see earlier). Employer Checklist Employers may find the following checklist useful when discharging their superannuation obligations: 4 COMMENCING EMPLOYEES Upon commencement of employment provide employees with a Superannuation Choice form. Also use this form if an employee wishes to change their nominated fund. 4 ATO TOOLS AND CALCULATORS Simplify superannuation compliance by using the electronic tools on the ATO website to: Determine whether a worker is eligible for super Determine how much super to pay an employee (which payments attract superannuation?) Calculate the Superannuation Guarantee Charge which you will be required to pay if you have made employee contributions after the due date Calculate the amount of the annual tax exclusion associated with the payment of a pension or annuity. 4 LATE If you pay an employee s Superannuation Guarantee (SG)late (including making up for inadvertent underpayments) simply paying the outstanding SG amounts as a late contribution straight to the employee s superannuation fund after the quarterly cut-off dates and not lodging an SG Charge Statement in the hope that this does not get detected, is not a legal solution. It s not up to the ATO to detect employers who have not met their superannuation obligations. Under the SG Charge self-assessment model, an employer must raise an assessment themselves by lodging an SG Charge Statement if there is any amount of SG Shortfall by the quarterly cut-off dates. If you have paid late, you should use the ATO s Superannuation Guarantee Charge tool to meet your obligations. Where you have made a late payment you can treat this amount as an offset to reduce the late payment, or a prepayment towards your SG liability in the following quarter. 4 STREAMLINE YOUR OBLIGATIONS If your business has a turnover of less than $2 million or has less than 20 employees, streamline your Superannuation Guarantee payment obligations by making all your payments to the ATO s Superannuation Clearing House. The Clearing House will then forward these amounts onto each employee s individual superannuation fund. Where your employees have a range of different funds, the savings in administration time can be significant. The ATO s Clearing House is also SuperStream compliant. Sign up to the Clearing House on the ATO website 4 TAX PLANNING A common tax strategy of employers is to pay their April- June Superannuation Guarantee contributions before 1 July. By doing so employers can bring forward an income tax deduction to the current financial year. This reduces their tax and results in a cash-flow benefit for the business (the bringing forward of the tax deduction by 12 months). Contribution Splitting The 1 July 2017 superannuation changes make the strategy of contribution splitting more readily available. Contributions splitting allows you to split your concessional superannuation contributions to your spouse s superannuation account. (Members of public sector superannuation schemes can also split untaxed employer contributions). This strategy is particularly beneficial where one spouse is significantly older than the other and is therefore closer to Preservation Age and consequently is able to access their superannuation earlier than the younger spouse. After the age of 60 (and having met a condition of release) they will have access to tax-free income payments or lump sum withdrawals earlier than if the contributions were to remain in the account of the younger spouse. Additionally, contribution splitting is also a useful strategy where one spouse is a low-income earner or is not working as it can help equalise your account balances. One of the advantages of this is that if you or your spouse opts to take a lump sum payment between Preservation Age and 60, you can both more fully utilise the $200, 000 tax-free threshold (2017/2018 rates) and consequently withdraw up to $400, 000 from your superannuation accounts tax-free before the age of 60 (assuming a condition of release has been met). The Rules You are only able to split superannuation contributions to your spouse, including same-sex couples and de facto couples. Furthermore, the spouse must be either under Preservation Age that applies to them (see earlier) or between their Preservation Age and 65 and not retired. The maximum amount you can split for any financial year is the lesser of 85% of your concessional contributions for that financial year or the concessional contribution cap for that financial year ($25, 000 from 1 July 2017). You can generally only split contributions made in the previous financial year. However, you can split contributions made in the current financial year if your entire benefit is being withdrawn before the end of that year as a rollover, transfer, lump sum benefit or a combination. Because from 1 July 2017, virtually all employees are able to claim a deduction for their personal after-tax contributions, this will mean that in many cases there will be a larger pool of splittable contributions for you to split given that these contributions are regarded as concessional contributions. Tim (52) and Dorris (34) have lived together as partners for five years but are not yet married. While Tim is a nonworking housekeeper who has no superannuation, Dorris is a Government employee whose employer contributed $8 000 to her account in Superannuation Guarantee for the 2017/2018 financial year. Dorris also made an after-tax $15, 000 contribution into her superannuation account for which she claimed a deduction. At the conclusion of the financial year, Dorris elects to split her eligible contributions with Tim, and therefore she completes the Superannuation Contributions Splitting Application form and lodges it with her fund during the following financial year as required. Before 1 July 2017, under the rules, the only contributions eligible to split were the $8 000 in Superannuation Guarantee. After this date, the $ of personal contributions made by Doris is also eligible. Dorris fund splits the maximum $19, 550 (85% of $23, 000) to Tim s fund following the end of the financial year. Dorris intends to continue with this strategy in the coming financial years. With Tim being significantly older than Dorris, the couple will have access to tax-free income payments and tax-free lump sum withdrawals earlier than if the contributions were to remain in the account of the Dorris (he too can utilise the $ tax-free threshold for lump sum payments rather than Dorris being the only member of the couple able to access this threshold, assuming he meets a condition of release). Loans from Related Parties Unless your SMSF has cash on hand, then in order to acquire big-ticket assets such as shares and property, it may need to borrow. The main advantages of acquiring such assets is that it allows you to build up your retirement savings more rapidly than just by making contributions. The capital growth on these assets is concessionally taxed (see earlier), as are the earnings such as interest and dividends (see earlier). The borrowing must take the form of a Limited Recourse Borrowing Arrangement (LRBA see earlier). Under these arrangements, the SMSF takes out a loan from a lender (which can be a related party but is usually a bank) for funds which are used to purchase an asset to be held in a separate holding trust. The returns from the asset (e.g. rent) then go to the SMSF. If the loan defaults, the lender s rights are limited to the asset held in the separate trust. The SMSF has the right to acquire the legal ownership of the asset by making one or more payments. For those of you with an SMSF and who are looking to borrow under an LRBA, have you considered borrowing from a related party? The advantages of doing so are as follows: You can inject money into the concessionally taxed superannuation environment without worrying about the now reduced contribution caps It may be cheaper than entering into an LRBA with a 3rd-party financier (e.g. bank). Note that the loan must still be on a commercial basis. Unlike a contribution, the lender s funds are not locked up inside superannuation and can be drawn on as a loan repayment at any time. You need not meet a condition of release to access the funds. Recently the ATO released Practical Compliance Guideline 2016/5 to assist SMSF members in structuring LRBAs, where the borrowing is from a related party. The guideline sets out the minimum interest rate, maximum loan term, the loanto-value ratio, repayment frequency and more that the ATO requires. You may enter into an LRBA that is inconsistent with the guidelines, but you must be able to demonstrate that the arrangement was entered into and maintained on terms consistent with an arm s length dealing. This may be where you replicate the terms of a commercial loan that is available in the same circumstances. Taxation of Annuities and the Centrelink Benefit Earlier we considered the tax treatment of Account-Based Pensions. An increasingly popular alternative is an annuity. Annuities, which can be either for a life term or a fixed number of years, are becoming an increasingly popular alternative to Account-Based Pensions as people seek out secure, guaranteed incomes. Annuities are purchased from a life insurance company using superannuation or savings outside of superannuation. They provide a guaranteed series of payments regardless of the performance of the market. Payments can be indexed to inflation or have preset increases. The first step is to work out what your income requirements are. From a tax perspective, payments received from an annuity purchased from superannuation savings when you reach 60 are tax-free. At the end of the term, all of your capital is

9 16 returned, and you then have the option of taking back your lump sum and dealing with it as you please, or reinvesting it in another annuity. Annuities differ from Account-Based Pensions in that with pensions you must draw on the capital as well as the income each year. By contrast, with annuities you are not required to touch the capital at all. From 1 January 2015, incomes drawn from an Account- Based Pension no longer contains a free element from an Age Pension assessment point of view. Consequently, superannuation accounts will be deemed to be earning a set income, which will be counted towards the Income Test for Age Pension purposes. The higher your assessable income, the lower your Age Pension entitlement. On the other hand, certain income streams such as some long-term Annuities are not deemed and may provide a favourable outcome under the Age Pension Income Test. This may help you receive a higher level of the Age Pension and thus make for a more comfortable retirement. In weighing up an Account-Based Pension versus an Annuity, there are many factors besides the Age Pension to consider. We recommend speaking with your financial advisor before making a decision. Splitting Super on Divorce Even where you meet the conditions for CGT rollover relief on divorce, when you eventually dispose of the asset CGT consequences can often arise such as where: Your spouse did not use a dwelling which was in their name or partly their name as their main residence during their period of ownership before separation (e.g. it was a holiday house), or After ownership of a dwelling was transferred to you, you did not use it as your main residence. A more tax-effective outcome to compensate a receiving spouse when splitting assets on divorce can be achieved through the transfer or splitting of superannuation benefits. Where a new interest is created in a fund for a non-member recipient spouse or the recipient s entitlement is rolled over to another fund, there are no immediate tax consequences. Upon transfer, a new superannuation benefit is created which will then be subject to the normal tax regime that applies to superannuation (see earlier) irrespective of how the transferring member would have been taxed had the benefit been paid to them instead of their spouse. This gives rise to tax planning opportunities where: The recipient spouse has reached age 60, met a condition of release and can take the amount tax-free as either a lump sum or pension The recipient spouse is aged between their Preservation Age and 60 but has not yet used their low rate cap ($ for 2017/2018). Campbell (54) is an SMSF member who is going through a divorce with his wife Denise (62). As part of the settlement, a Binding Financial Agreement is drawn up rolling-over $ of superannuation to Denise s fund. There are no tax consequences from the rollover itself. Denise has retired and therefore met a condition of release. She decides to withdraw a $ lump sum. Although this is above the low rate threshold, the amount will be taxfree as Denise has reached age 60. That Campbell would have been taxed on the amount if he had withdrawn it is irrelevant. Want More? For more superannuation strategies, see last year s edition of this publication which you can download from our website Published by My Tax Savers, P.O. Box 1177 Southport BC QLD info@mytaxsavers.com.au Phone: 1800 SAVETAX Web:. My Tax Savers is a trading name of My Tax Savers Pty Ltd ABN IMPORTANT DISCLAIMER This publication is in accordance with the legislation as tax rates and thresholds stand at May Tax legislation is complex and subject to constant change. Subscribers or readers of this publication should not act on the basis of information contained herein without seeking their own professional advice as to applicability in their own circumstances. Unless stated otherwise, the examples, case studies, calculations and other rate sensitive material appearing in this publication use income tax rates, schedules and thresholds applicable to the 2016/2017 financial year. Current rates, schedules and thresholds can be found in our special edition Tax Rates, Thresholds & Other Tax Essentials. This publication is issued on the understanding that the Authors and Publishers are not responsible for the results of any actions taken on the basis of information in this publication, or for any error in or omission from this publication. My Tax Savers Pty Ltd is not engaged in rendering legal, accounting or other professional advice. COPYRIGHT This publication has been written and designed for My Tax Savers Pty Ltd. No part of this publication that is covered by copyright may be reproduced without the express permission of My Tax Savers Pty Ltd. GENERAL ADVICE WARNING The information contained in this publication is general information only. Any advice, if any, is general advice only. Your objectives, financial situation or needs have not been taken into consideration. You should consider if this information is suitable for your needs and seek the advice of relevant taxation, superannuation and/or other relevant advisers before any financial product information is acted on.