Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 185

Five questions after Super Scott’s Santa surprise

Contrariwise," continued Tweedledee, "if it was so, it might be; and if it were so, it would be; but as it isn't, it ain't. That's logic."

 

Treasurer Scott Morrison has delivered the Christmas present to the financial planning industry that it had glimpsed six months ago but was too excited to actually believe – massive new complexity to the superannuation system. The body of Simpler Super has been incinerated, buried and interred. RIP Simple Super. In its place is a labyrinth of new rules that would make Alice wish she had never gone down the rabbit hole. Long live complexity, bureaucracy and tinkering governments.

Quite what we have done to deserve this exhilarating Christmas present is a mystery, but we’ll take it. The need for superannuation and wealth planning advice just became essential. Whatever next? Taxpayer subsidised advice (as the system is now utterly incomprehensible to all)? We are now prepared, like the White Queen, to believe six impossible things before breakfast.

The lucky folk who have had their superannuation retirement savings subject to hot debate recently have some big decisions to make over the next six months. We highlight five questions of critical importance.

1. Pension, accumulation or outside super due to the Transfer Balance Cap?

The recent passing of the legislation represents the biggest change to our superannuation system in a decade, with a limit imposed on how much you can save in superannuation and how much you place into a tax-free pension. At least you aren’t hit with massive taxes if you withdraw the amount above the Transfer Balance Cap from super.

From 1 July 2017, if you have less than $1.6 million then you will still be able to save for your retirement and make additional personal after-tax contributions much like the current system. However, once you reach the $1.6 million balance (per member), whether it be from capital growth or additional contributions, you will no longer be able to make your non-concessional contributions from after-tax monies.

There are no grandfathering arrangements for those who already have more than $1.6 million in super. If you are a pension member, then the most you can have in the tax-exempt pension environment is $1.6 million. If your pension balance exceeds the Transfer Balance Cap, you will need to transfer the excess back into an accumulation account or remove it from the superannuation environment (for example, if your personal marginal tax rate is zero versus 15% in the super accumulation phase).

The alternative method applies a proportioning approach where the tax-exempt percentage of the fund is determined by an actuary based on the balance of pension interests to accumulation interests. If you have substantial income-generating assets outside of super, then it may be worth keeping your surplus super assets in the accumulation phase. This is your first major decision.

2. Can I still make a large contribution into super?

This depends on when you plan to contribute and how much you already have in super. The non-concessional limits are set to reduce from $180,000 a year to $100,000 a year from 1 July 2017, which means the three year bring-forward cap will be limited to $300,000. To add to the confusion, transitional bring-forward caps will apply if you have already triggered the bring-forward caps in the last two financial years but have yet to utilise the entire cap. Got that?

If you have the capital to consider a large non-concessional contribution, you may wish to act before the end of this 2016/2017 financial year, irrespective of your total superannuation balance. With the upcoming Transfer Balance Cap, individuals under 65 still have the capability to make a non-concessional contribution up to $540,000 within the next seven months (provided you haven’t already triggered your bring-forward arrangements). Even if it pushes your balance over $1.6 million, lock it into super now and deal with the pension transfer issue later. This will be one of the most significant decisions for higher net worth individuals to make over the next six months. You may even decide to borrow the funds to make one last significant contribution to super. Don’t ask us for a unique answer, as it depends on your circumstances and, frankly, like the Mad Hatter, ‘we haven’t the slightest idea’.

3. Is segregation of assets still possible?

Yes and no. Curiouser and curiouser! Today, most SMSFs operate under a segregated approach where members could cherry-pick the assets used to support their pension account. This is a useful tax-planning tool where the pension assets have a tax-exempt status and therefore do not pay tax on the investment earnings or realised capital gains. The alternative method applies a proportioning approach taking into consideration the percentage of the fund that is tax-exempt based on the balance of pension interests to accumulation interests.

From 1 July 2017, SMSFs will no longer be able to use the segregation approach for tax planning purposes if a member’s balance exceeds $1.6 million in the sum of any superannuation structure, be it the SMSF, retail or industry funds. This essentially prevents SMSF members cycling assets between accumulation and pension phase in order to maximise tax concessions available when a Capital Gains Tax (CGT) event arises.

On that note, there is the need for careful planning when transferring the excess amount from pension to accumulation before the end of the financial year as CGT relief may be available.

For the impacted members who have assets supporting pensions before 9 November 2016, you may wish to review the underlying assets and ‘reset’ the CGT cost base before 30 June 2017 to receive tax concessions on the capital gains that would otherwise apply if you had sold the pension asset. You don’t have to sell the asset to reset the cost base and apply the CGT relief.

The CGT relief should not be applied to all assets as those currently on unrealised capital losses may be better off to continue carrying the original cost base whilst the assets on large gains, (particularly bulk assets such as property) may benefit from revaluing the cost base before 30 June 2017. If you have an asset sitting on a large gain, it may be worth considering the CGT relief but it is an irrevocable election which means there may be some tax liability when you sell the asset in the future.

4. What happened to Transitioning to Retirement (TTR)?

Remember the days where you could access your super at 55 (or older), continue to work, pay less taxes but keep the same cashflow? Well, the government has caught up to all the smart people employing the TTR and salary sacrifice strategy, meaning there is no longer any tax arbitrage from transferring your super balance to a TTR pension as opposed to retaining the funds in accumulation phase. This is because the 15% tax on investment earnings will continue to apply up until the age of 65 (the magic age where everything becomes unrestricted). If you have a TTR pension, you will need to decide whether to roll into an account-based pension or to roll back into an accumulation account. You’ll also need to determine whether you have met the SIS definition of ‘retired’ (it’s not a definition you might expect).

5. Is it time to switch to an OPP?

If you don’t currently have a financial planner and you are in the group of the so-called ‘1% of impacted pension members’ (we believe Mr. Turnbull would refer to this as a ‘post-truth’), then it may be time remove yourself from the DIY nature of managing your SMSF and switch to an OPP (Other People's Problem).

An OPP is a complex structure that involves the stimulatory process of removing and spending all your excess super balance to take you just above the new age pension assets test threshold of $250,000 and so entitle yourself to the maximum age pension (this strategy sometimes goes by the less familiar term of PQE - the People’s Quantitative Easing). This kills two regulatory birds with one stone, as the assets test taper rate will double on 1 January 2017 to $3 per fortnight per $1,000 of assets (that is, if you exceed the threshold by $100,000, your pension drops by $300 a fortnight or $7,800 a year). Unless you can find a risk-free way to beat a return of 7.8%, an OPP is worth considering.

Merry Christmas, Mr Morrison

Whilst it’s fair to say that Scott Morrison has cut short the Christmas holidays for financial advisers and accountants, his poster hangs on all our bedroom walls.

alice2It may be worth pointing out that the childcare industry is a warning not an instruction manual. If you make a service so expensive and complex by regulating it to within an inch of its life, and you then have to offer taxpayer subsidies just so that these same taxpayers can afford to use it, you are officially on the road to hell. Or, as Alice remarked, “if you drink much from a bottle marked 'poison' it is certain to disagree with you sooner or later.”

“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?”

We do, Alice. It would be so nice if something made sense for a change.

 

Diana Chan is Head of Compliance and Jonathan Hoyle is Chief Executive Officer at Stanford Brown. This article is general information and does not consider the specific circumstances of any individual, and is based on a current understanding of the legislation.

 

13 Comments
Ian McKenzie
December 13, 2016

ha ha @ Super Scott Santa. Yes, does not say much for "simple super" does it..? !! When will there be an election fought on "Super Re-Write",?? LOL> ha.

Donal Griffin
December 13, 2016

Great article. Not the usual dry technical approach. Love a literary quote!

Jonathan Hoyle
December 09, 2016

Indeed it has, Frank. I agree with you - it's a travesty.

Michael, in a similar vein, i like the old PJ O'Rourke joke that the 'Republicans are the party that says government doesn't work, get elected and prove it.'

Thank you Stella - very kind

Brian
December 09, 2016

If a SMSF currently fully in pension mode is going to be completely rolled back to accumulation mode from 1/7/20017 (because pensions from another SMSF come from assets close to $M1.6 member balance), can selected assets in that first SMSF use the reset of CGT base provision?
I ask because some commentary implies that the CGT base reset provision applies ONLY if some assets in a pension paying SMSF are rolled back to accumulation, with the other assets continuing to pay a pension.

Diana Chan
December 09, 2016

Hi Brian,

CGT reset only applies if your assets where in pension phase as at 9 Nov 2016 (date this was tabled in parliament). It recognises that some impacted pension members will be in a detrimental position post 1 July 2017 and therefore allows a short window to review their tax positions before D-day.

You can select which assets to apply the CGT relief but since segregation being removed (funds > $1.6m), you will need an actuarial certificate to determine the tax-exempt percentage.

Peter
December 09, 2016

Industry funds are known to be well aligned with The Labor Party and fellow "self interest" retail super funds have long festered over and lobbied about their CEO's and other highly paid employees withdrawing their super entitlements and taking personal control via SMSF structures, set up and advised on by the Accounting Profession. These lower cost structures have "challenged" and brought about competition and 'lower costs' within the super industry. RESULT: Accountants have now been stymied and must be licensed to provide advice on SMSFs. The coalition government has dismantled "simple super" and made it obligatory to seek, cost wise, inhibitive financial advice and the very likely prospect of the demise in popularity of SMSFs because, of being burdened by the weight of compliance 'red tape'. Superannuation Conspiracy between the major political parties - you bet! Witness, the controlling purchase of the NSW Electricity Generation assets by Australian Super as a 'thank you' for their future retention of higher dollar value personal accounts, within the "in political environment". The "in political environment" consists of the main political partied have set up a voting structure for the House of Representatives which weight the scales most favourably to them.

Stella
December 08, 2016

Diana, Jonathan, this is a delightful piece of writing. Thank you.

I'm glad I'm not a financial planner!

Stan
December 08, 2016

For someone in pension phase,"resetting" the CGT cost base simply defers the tax,whereas selling now in an un-taxed environment and re-purchasing the asset avoids CGT entirely, so long as there is a "reasonable" time gap between the two transactionsso as not to upset the ATO

Kym
December 08, 2016

There are anti avoidance measures designed to catch this behaviour and with 'siper computer data matching', it will get caught.

Sid
December 10, 2016

Not so, Stan. Part of the process of resetting the cost prices of assets is that you must pay tax this year on the gain made on the difference between the original cost and the higher reset price. As the fund is in pension mode, the resulting tax payable is likely to be zero.
This will reduce the fund's CG tax in the future when the asset is sold since its cost has been reset at a higher level than the original cost without the need to physically sell and repurchase.

Phil
December 08, 2016

I've just tried to expalin all the changes to a client that has a Market Linked pension, and the way it'll be assessed under the transfer cap rules, along with asset cost base resting. Simple Super is well and truely dead!

All the client and I could do was remember the the complicated fiasco that was Super Surcharge or the RBL rules and reporting. Morrison has completly stuffed the changes, and all becuase the government has some twisted attitude that they don't want to simply tax pension income.

I know taxing pension income can be an emotive issue, but the pre 2007 system treating taxable components of a pension as income but adding a tax rebate,working fairly well, it was understood and cheap to run. These latest changes are going to increase cost for all super members and as well as the ATO, it wouldn't suprise me if in a few years they realise, like the super surcharge, what they collect in extra tax is offset by the cost of running the changes!

Its like most things in tax and compliance, if you won't people to comply, make it easy for them to comply, if you make it too difficult, then people give up and you drive them to non compliance or out of the system.

A quote from Laurel and Hardy, that is what the people of Australia could say to Scott Morrison and the government: "Well , here's another nice mess you've gotten me into".

Michael Langtry
December 08, 2016

I remember the stated goal of the Government was to 'make superannuation cheaper, simpler and accessible to all'. I also remember with FOFA, the Government's intention was the similar- 'Make financial advice safer, understandable and affordable'.
Look what happened - just the opposite.
Remember friends - when someone says "I'm from the Government and I'm here to help you" - JUST WALK AWAY! Don't get sucked in.

Frank W
December 08, 2016

It's come to this. So complex that a financial planner calls it a Christmas present because everyone will need advic to understand the best options.

 

Leave a Comment:

     

RELATED ARTICLES

Reducing the $5,300 upfront cost of financial advice

New role for outcomes test and member goals

Final sprint to three major super changes

banner

Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.