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Written by Matt Kirk Published: August 21 2020 Innovation
With changes in Superannuation legislation, pessimism around the housing sector, and the government levy on bank liabilities, SMSF Trustees (Trustee) could be forgiven for feeling concerned. Saving and maximising wealth remains a priority irrespective of the changes.
Higher taxes could apply from 1 July 2017 (1); however, eligible money in super is still taxed less than in other investment vehicles. Investment principles remain the same, and for those in accumulation phase, the ability to shift unused contributions to later years will be enhanced. Maximising super up to the available caps remains a key goal.
The Australian government’s deteriorating fiscal position forced changes to Superannuation rules effective from 1 July 2017. However, the Trustees core responsibility remains unchanged. Super is first and foremost a tax incentivised investment vehicle designed to encourage self-sufficiency in retirement.
Sadly, the accumulated amount that can be transferred to a retirement fund will be capped. Reaching the SMSF limits is the first aspiration; wealth accumulation should continue outside the SMSF once the super limits are reached. Wealth maximisation in non-super investment vehicles is still an essential goal once super limits are reached.
Superannuation Rule Changes
Some of the changes effective 1 July 2017 are listed below:
|Transfer Balance Cap (TBC)||Initially set at $1.6 million, will limit how much super you can transfer to the tax-free account-based pension(2).|
|Concessional Contribution Cap||Reduced to $25,000 per annum (was $30,000 & $35,000 for those aged 48 or below & 49 or above respectively(3).|
|Non Concessional Contribution Cap||After tax (non-concessional) contributions will be capped at $100,000 per year, down from $180,000(4).|
|Total Superannuation Balance
|Consider the new capital gains tax relief provisions & reducing the value of the income stream to below $1.6M(5).|
|Division 293 tax||If combined income and super contributions exceed $250,000 you may have to pay extra tax on the excess – currently $300,000(6).|
Fundamental Trustee Obligations
Trustee obligations remain the same. Legislation requires the Trustee to attend to performance and to ensure the SMSF has sufficient funds available to fulfil obligations(7).
Putting as much into your SMSF as early as possible is still rational because earnings benefit from compounding and a lower tax rate (i.e. 15% in your SMSF whereas earnings outside super may be taxed at up to the highest marginal tax rate). You deserve to keep as much of the wealth you build in your hands by saving to the caps.
Fundamental Rules Unchanged
For many the ‘carry forward’ concessional contributions and ‘bring forward’ non-concessional contributions bring valuable flexibility to maximise contributions to your SMSF over time.
Successful performance could be thought of in terms of seeking the highest possible retirement balance along with the level of security that gives you peace of mind. To that end, many SMSF Trustees in accumulation phase might find the fundamental rules of investing are unaffected by the Superannuation rule changes.
For security driven investors, funds allocated to bank deposits for liquidity or seeking capital stability in corporate bonds in the few years before retirement, you might be maximising contributions in super to benefit from lower taxation and compounding; and
Bank term deposits risks remain within a similar range supported by sound governance, an explicit government guarantee, and the implicit government support that would come should an economic crisis occur.
The shorter end of the deposit yield curve is a strategy that is consistent with behaviour in the fixed interest market noted in earlier discussions where RIM research found that floating rate coupons now make up a larger portion of aggregate bond portfolios.
Fortunately, Trustees have access to Fintech tools that make allocating funds to the best deposit or corporate bond offer easy. Responsible Trustees can start using such tools now.
A Trustee must be ever vigilant.
Superannuation is not the only significant change that was announced in the 2017/2018 Federal Budget. Trustees must consider the new bank liability levy. How will the new bank tax affect term deposit rates? What about bank hybrid bonds? Future blogs will consider these factors.
2. Excess transfer balance rate is set at 15% for breaches in the 2017/2017 FY and increases to 30% for subsequent breaches. A couple cannot share a TBC – SMSFs will have to use the proportionate method to calculate exempt pension income across all members.
3. A concessional contribution cap can be increased by the unused amounts from the previous five years if your total superannuation balance is less than $500,000 at the end of 30 June of the previous FY.
4. Bring-forward available < $1.4M, 3years ($300,000); <$1.5M,2 years ($200,000); $1.5M to < $ 1.6M, 1year ($100,000), $1.6M (nil).
5.You can do this by transferring excess back into an accumulation account or withdrawing the excess or making additional pension payments prior to 1 July 2017.
7.Superannuation Industry (Supervision) Act 1993 – Section 52.