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Workers reaching 60 face super shock

Few in the industry saw it coming. There was a general consensus that a looming election would temper any changes to superannuation in the Federal Government’s 2016 Budget. We got it badly wrong. The Government decided superannuation was up for grabs, and proposed the most wide-ranging changes to the system since 2007. With Labor also embracing change, those 2013 commitments by both political parties to leave superannuation intact have joined the growing scrap heap of broken promises.

For advisers, it has meant a frantic reading of the Budget papers to come to grips with the enormity of the possible changes, and advising clients accordingly. Make no mistake, reducing the before-tax contributions cap to $25,000, setting a lifetime after-tax contributions cap at $500,000, and placing a $1.6 million cap on the total amount that can be transferred into a tax-free retirement account have moved the goal posts – to the wing.

While each of these changes has received extensive exposure, another significant implication has slipped under the radar. It will affect far more people than the Government expects.

What were the main benefits of TTRs?

The Government plans to alter the transition to retirement (TTR) rules that were introduced in 2005. Before Treasurer Scott Morrison announced the changes, TTR was considered an excellent strategy for those coming to the end of their working lives and easing their way out of the workforce.

The main benefits were:

  • Pay less tax: the TTR pension environment was tax exempt, meaning all income earned and capital gains were tax-free
  • Ease into retirement: taking a TTR pension from your super fund could supplement your employment income by topping up your bank account while you reduced your work hours.

The new proposal is to tax the earnings on the assets that support the TTR at 15%. The number of trustees affected is significant with the latest ATO statistics showing that the greatest number of SMSF members is in the TTR age bracket of 55 to 64. About 250,000 SMSF members would have become eligible to benefit from the old TTR rules over the next decade.

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What’s the big change now?

Prior to 3 May 2016, many ‘retirees’ had a plan to leave their superannuation in an accumulation account until they reached the age of 60. Often, they did not start a TTR pension at age 55 (or 56 based on their preservation age) because pension payments would be taxed at their marginal rate less 15%, notwithstanding the tax on earnings in their pension fund would fall to zero. However, on reaching the age of 60, the tax on their pension earnings could also cease, and so the accumulation fund would be switched to a TTR pension fund.

Now, on reaching the age of 60, there are two scenarios possible:

Scenario 1: Continue some form of employment

If a TTR pension is commenced, the earnings on the entire fund will be taxed at 15% until the age of 65, not 60, under the proposals. The $1.6 million limit on tax-free earnings is irrelevant.

Scenario 2: Cease employment

For the earnings in the pension fund to be exempt from tax (on balances up to $1.6 million), the retiree needs to meet a 'condition of release', usually ceasing employment.

This change is not a consequence of the much-publicised $1.6 million limit, but the new TTR rules. Many people expect to continue some form of work after reaching the age of 60, and now their entire earnings on their super fund will be taxed at 15%, not only the amount above $1.6 million. This will continue until reaching another ‘condition of release’ – the age of 65.

That’s five years of tax at 15% on all earnings in super which was previously exempt.

To my mind, the Government was strongly influenced by a Productivity Commission report that found TTR strategies were increasingly being used to minimise tax and were not genuinely supporting people wanting to ease their way out of the workforce with many still working the same hours.

But under the proposed regime, from 1 July 2017, all earnings within the TTR pension will be taxed at 15%. In addition, individuals will no longer be allowed to treat certain superannuation income stream payments as lump sums for tax minimisation purposes, with the Government’s rationale being to ensure that access to TTR income streams is primarily for the aim of substituting work income rather than tax minimisation.

The tax-free lump sum cap

In December 2015, the ATO released a private binding ruling which allowed members who are drawing a TTR income stream to take their minimum pension requirement out of their fund as a lump sum instead of as a pension payment. This ruling gave members who were between the age of 55 and 59 an advantage in the tax stakes.

The ATO stated that a member could elect to have this minimum pension amount count towards their tax-free lump sum cap. At present, this cap is $195,000 which meant that members could pull at least $195,000 out of their fund tax-free even if they were under the age of 60. If a member had a tax-free component to their pension this would be even more.

The removal of the tax-free lump sum limit paired with a reduction in the concessional contribution cap and removal of the tax exempt status in the fund will probably mean the end for TTRs. To complicate matters, if we throw in the $500,000 non-concessional lifetime cap, any money we don’t need is going to be tough to get back in.

More questions and doubts

One final question we have relates to the $1.6 million pension income stream cap. Is a TTR income stream arrangement part of this cap even though it isn’t receiving the pension exemption? Do we really want to be switching one on pre-retirement knowing that the cap is going to be indexed and we might be inhibiting ourselves from commencing a larger pension later on?

It seems to me that the Government has thrown the baby out with the bathwater in this latest ‘reform’. By all means police the system to ensure it is being used as the policy makers intended, but to punish trustees who were using TTR to manage the lifestyle change from full-time work to retirement seems overkill.

There are already suggestions that some of the measures won’t stand the test of time, irrespective of which party wins the election. With this mind I am just hoping that no politician promises no changes to superannuation during the course of this election campaign. After the 2016 Budget, we need some change.

 

Olivia Long is Chief Executive Officer at SuperGuardian. This article is for educational purposes only and does not consider the circumstances of any individual. It is based on an understanding of announcements in the 2016 Budget which may change during the legislation process.

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16 Comments

Ramani

May 21, 2016

Daniel

Bereft of detail yet to come (if indeed the law comes), market value at the time of any movement would appear to be the logical response. Absent that, all types of manipulation to game the system, and equity issues, might ensue. There seems to be no escape from marking to market.

Daniel

May 20, 2016

In light of the changes and if they progress, what happens to the cost base of TTR assets if they move back into accumulation? is the asset value at the time of movement back to accumulation counted as the cost base or is the original cost base pre the TTR used?

bigjulie

May 20, 2016

Libs and Labor MPs have catastrophically colluded to inveigle the Fiscal Fiend into our superannuation nest egg so to pay for their own gargantuan pensions. "We need your money more than you do".

The State has abandoned its morality and trust by breaking its promise made to the retired obedient exhausted retirees. These overwrought taxpayers survived 18% interest on their loans from banks, 50% plus tax rate and now just threepence return on their saved tenuous nest egg.

This two faced grab is a duplicitous bilateral conspiratorial heist by Lib-Lab plus it disrespects previous PMs and Treasurers who assured us that compliant citizens' piggy banks would not be raided. "Do abcd and we will do xyz." Manners! Rudeness!

Noddy and Big Ears have raided the Tribal Elders of Toy Town by retrospectively breaking a promise that thrifty savers could be self-sufficient if they followed the rules to achieve the nirvana of no tax on their arduous piddling savings. So now the Grasping Lords and their respective Circus tours the Nation's arcades, flipping out more money merely to embellish themselves as generous and wise. I shall not vote for either of them, rather placing an S with a super-imposed X on the ballot paper. From that budget announcement moment and Labor's instant complicity, Australians should never trust Government's forked tongue.

One morning we will wake up and find the Treasurer above our bed saying sadly "Look, he is dead now so we will take his super as he will have no need for money where he is going". What an awakener. At that moment, you will realize you were always really an exploited serf in a hell called Australia.

Self funded retirees are entitled to live in outraged austerity but the State should leave us alone as we have run the hard yards whilst neither greedy party can be trusted with our subjugated vote.

AMJ

May 25, 2016

I agree with all BigJulie has to say. Video to watch "Requiem for the American Dream".

Ramani

May 20, 2016

Paul, how does the taxpayer riot retrospectively for some reducing taxes through salary sacrificing, abolition of RBLs, TTR regime exploited as Total Tax Rort, multi million dollar tax-concessioned bequests and tax free post 60 benefits? Any spare time machine you could spare?

Olivia

May 20, 2016

Hi Geoff, Changing jobs does count as 'ceasing employment' thus satisfying a condition of release. But in reality, it's not easy for most people to change jobs as they’re about to approach retirement. It's likely to be difficult to find another at that age. After age 60 one does not have to 'permanently retire' but merely resigning from the existing employment arrangement will entitle the member to a full account based pension. Whether or not the individual takes up another employment opportunity does not affect the condition of release.

CAF

May 20, 2016

'That’s five years of tax at 15% on all earnings in super which was previously exempt.'

Yes and no. This assume the funds are returning income each year. One would have thought that in those early years, age 55-60, much would be in longer term investments. These would generally be taxed at 10% upon sale, often many years later.

So, whilst I can see the point, it is not as bad as being described for many people.

'The tax-free lump sum cap'
This could have been resolved by taxing at marginal rates where the income if over say $150k. This would help deal with tax 'rort' issue, and at the same time allow the concession for those who do actually reduce their hours to part time.

The $1.6m transfer cap.
What to do with couple who have loaded one partner? The high balance will be capped, and the low balance may never get the chance to make it up. It may have made sense to allow a one off transfer to bring each partners account to the $1.6m. BTW, it should have been $2.5m each if at all.

b0b555

May 20, 2016

Even if TTR pensions were really designed to save tax, the end result, at least in our case, would be to have more funds in our super and therefore less reliance on the age pension. That seems to me to be a worthwhile endeavour - in fact I believe it is to be enshrined in legislation.

phil brady

May 20, 2016

Not sure which part of which industry, but ttrs allow greater wealth creation in later years retirement, due to tax savings. It was introduced because that demographic didnt have compulsory super for as long or at high rates. The rort you suggest is hardly rort when its a sensible strategy under current law. Some of those who choose lower hours do so because physically they are buggered from hard work all their lives. Unintended consequences yes, but not people using a tax rort.

David

May 20, 2016

A ridiculous rort gets withdrawn, and the people who can no longer milk that rort are described as being "punished".

No Olivia, this change is just one small step in reducing the amount of punishment ordinary taxpayers who can't or don't rort the system have to endure.

Sam

May 19, 2016

I can't fathom how such dramatic changes in super could have been made without even knowing what the implications would be. Does the Treasury know what they are doing? Hope Turnbull will withdraw the changes and seek proper consultation with all stakeholders before making any changes.

Geoff Burgess

May 19, 2016

Quite a few people will clearly be worse off if the changes are introduced as announced on Budget night. However, as someone working in the industry, most of the TTR pensions I have seen were really designed to save tax rather than supplement income as the recipients reduced their working hours. I can't see any reason why taxpayers in general should subsidise such people. (I declare an interest here. I am adversely affected by the proposed changes because currently I draw a TTR while still working.) In any event, a significant proportion (but not all) of those who move from full-time to part-time after age 60 and genuinely wish to supplement their income, would probably change jobs to do so and thereby satisfy a condition of release. As I understand the proposals, this would allow them to set up an allocated pension (max. $1.6m) and still receive the tax benefits.

Ashley Owen

May 19, 2016

The ‘changes’ to super are just budget proposals (ie future potential changes if and when they ever get into law sometime in the future) or the legislation passed by both houses and promulgated into law by the crown. I recall things like the introduction of CGT on budget night on 19 September 1985 had to pass through parliament and when it did eventually get into law months later the operation was effective from budget night (19 September – ie retrospective), but only after trade-offs and amendments (eg changes to depreciation and capital allowances to partially offset the negative impact of CGT)

· So until they are actually passed into law – especially with a hostile senate, possible change of government at the upcoming election, almost certain change of ministers even if the government is returned, and certain change in balance of power in the Senate – they should be referred to as ‘proposed changes if and when they ever get passed into law, and subject to any amendments and trade-offs along the way’

· So, since I am not a legislator, nor do I have one in my pocket, I will wait for the legislation when if it finally gets through, if ever.

· TTR/re-contribution schemes are must sanctioned paper-shuffling to avoid tax – They should be banned under Part IVA anyway

Phil Brady

May 20, 2016

The ATO has/had sanctioned TTR's, in fact introduced policy to encourage them - Part IVA ban, you've got to be kidding. The primary purpose is to enhance retirement assets. Most TTR's are set up not by wealthy people because of their already high MTR's.

Darren W

May 20, 2016

Agree Phil. It is not the "wealthy" they are hitting with this. It is everyday people in their final working years trying to secure enough super to retire. I was counselling a distressed client about this last night. She is a late 50's single mum of 4 and a nurse. She has scrimped and saved over the years to scrape together a nest egg. She was relying on a TTR strategy to help her get to the decent retirement she wants, and now it won't be so easy. This change (and reduction of concessional cap) will hit her and the thousands like her the hardest.

Paul

May 19, 2016

Super changes! We should all be rioting in the streets!


 

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