Advisor Q&A: Addressing your super challenges

Responses to the questions we didn't get to answer in our most recent Advisor Q&A.

Another great webinar with Eureka Report readers last Thursday. Thanks again for joining in, and if you wish to watch the webinar please click here.

Some of the questions present us with challenges, partly because we are having to make educated guesses until such time as we see the legislation. There's common sense … and then there's meddling with super. Unfortunately, some of the laws made in the past have made little sense.

But there were a number of questions that Carol Tawfik and I didn't get to answer last week. And a few others that I think are worth returning to. So, today's column is turned over to providing responses to some of those questions, which I know will have a broader appeal.


Excess contributions

Q: One of the draft changes is that employees can make tax deductible contributions up to $25,000 less what their employer has contributed. Can this “excess” contribution be deducted against any other taxable income? Like rent, dividends, etc? Will the “excess” contribution still be subject to tax at 15 per cent inside super? -James

Answer: Yes, the intention of the legislation is to get around the almost universally silly "10 per cent rule" that currently exists. This rule means that if you earn more than 10 per cent of your salary as an employee, you can only make concessional contributions via your employer.

If you worked part-time somewhere (say, two to three days a week as a teacher) and had a part-time business, or consultancy, that you could only make deductible contributions via your employer.

If you earned, say, $100,000 a year, half as an employee and half as self-employed, then you would get $4750 (9.5 per cent Superannuation Guarantee on $50,000) in super from your employer, but you couldn't make a tax-deductible contribution to super from your self-employment (unless you were a bona fide employee of your business).

Worse, if you did want to make some salary sacrifice contributions to super, you could only do so if your employer offered salary sacrifice. And there was no law that said they had to.

The new rules will allow virtually anyone to make a tax-deductible contribution to their super at some stage during the financial year. Most would be wise to do this in the latter part of the financial year.

But, yes, you will still be limited to $25,000 (from next financial year). So, if your employer puts in $12,000 a year as SG into your super fund, you will need to know this and will be limited to putting in $13,000. Yes, it will be deductible against other income.

And yes, it will still then pay 15 per cent tax on the way in. But you will then get a tax deduction on that amount.

Say you put in $10,000 into your super. Your super fund will pay $1500 in tax, leaving $8500 to invest in your super fund. But outside of super, you will get a tax return equal to your marginal tax rate on that. If you earn between $37,000 and $80,000, your tax return will be $3450. If you're above $80,000, your tax return will be boosted by $3900. And those on the highest marginal tax rate will benefit even more, but will likely be limited as to what extra amounts they can get into super.

Tax strategies (I)

Q: The new legislation says that income on balances that are less than $1.6m will be tax exempt, and any excess can be taken out. Presumably it makes sense to take all the low-yielding assets out as there is no cap on the income that can be made from the $1.6m? -Brian

Answer: As I briefly discussed during the webinar, this is going to be a very personal decision. And one that will be based on your risk tolerance. And something I will do a longer piece about shortly.

Let's assume you have well over this $1.6m transfer to pension (TTP) cap. Assume $2.5m or more. And you've got a reasonable spread of assets. There's some cash, some fixed interest, property and shares (both Australian and international).

What do you want to keep in the pension fund and what do you want to send back to accumulation?

This will depend on what sort of a risk you're prepared to take.

If you are prepared to take some risks and leave your growth assets in pension, perhaps you leave more of your shares/property in the fund. At least initially. They may grow in value from $1.6m to $3m over a period of time. If you're a particularly good stock/property picker, even more.

You may get your SMSF to a point, even after drawing a pension, via a growth strategy, that you're comfortable with the balance. You may then decide to sell some/all those assets and turn them into higher-yielding, lower-growth, assets (more fixed interest and property, or cash if interest rates turn higher in a few years).

Others may wish to have a lower-growth strategy, where they keep some high-yielding income assets in super, where they will pay no income tax on those assets. If you're managing to earn 5-6 per cent in income (fully-franked dividends, higher-yielding bonds, high-rent properties), you may decide to keep those assets in pension.

But the bigger your super balance, the bigger decision you are going to have to make about what assets are kept in pension and what assets are pushed back to accumulation (for those with bigger existing pensions now). For those who will turn on pensions in the future, you will be making big decisions from what you put into the pension.

Proportioning assets

Q: If you were fortunate enough to have more than $1.6m in your super account, is it allowable under the new rules to not segregate the fund into taxable and non-taxable, but to proportion the earnings according to the ratio of $1.6m to the total balance? Tax would then be levied on the taxable ratio. This would overcome the problem of selecting which assets to place in the non-taxable component. -George

Answer: It's possible, even likely, that a proportionate rule will be allowed.

But my feeling is that you're going to have to nominate which assets are backing the pension and which ones aren't, when it comes to your SMSF.

If you're in an APRA-regulated fund, you will have two very different funds with two very distinct pools of cash/assets. There will be an amount of money invested in the pension fund and another amount of money invested in a super/accumulation fund.

But whatever is invested in the pension fund will likely be very clear cut, or may be best for you to choose what to put in there.

I can't see the government allowing a situation where it's not clear what assets are in the pension fund and what assets are in the accumulation fund. It leaves open the ability to manipulate what assets are where, based on the best tax outcome at the time of income being earned, or a capital gain being made.

The rule about the tax-free nature of a pension fund has generally been about "the assets backing the pension". Up until July 1 next year, this hasn't mattered too much, because the size of the pension fund was limitless and a minute from the trustees about moving any accumulated assets in the super fund to the pension fund was generally sufficient to allow the SMSF to pay nominal tax on whatever was in the fund in its entirety, if the member/s were predominantly in pension.

But, George, if you're talking about what element is considered 'taxable' versus 'tax-free' when you have to move some money from pension back to super, I would think that, absolutely, this would be done proportionately, unless it had been previously segregated.

Tax strategies (II)

Q: It seems like the Government is limiting the effectiveness of superannuation as a tax shelter. Should I be looking at alternative methods of reducing my taxable income for 2016-17, such as margin lending, and negative gearing on property for this year, or next year? -Lily

Answer: Please have a look at the webinar. I'm not sure if I answered this question directly, or one that was similar. But this is what I have referred to as a 'three pots' strategy.

It really should be 3.5, maybe four, pots. See below.

What I think people are going to have to do is to build their $1.6m in super, which will be tax-free.

Then they will need to build another pot of assets outside of super. Given that you can earn at least $18,200 tax free outside of super, you should probably have an amount of assets that will earn you this money outside super, tax free.

The third pot, on which you will pay a maximum of 15 per cent tax (but 10 per cent on capital gains) should probably be in accumulation/super.

If there's a fourth pot, then it is in negative gearing/margin lending strategies for those that these strategies are relevant for, which is those who have a high-risk tolerance, or those who have plenty of time to make a gearing strategy work.

Depending on your age, and willingness to accept investment risk, which gearing necessarily includes, you may well be a candidate for maximising your wealth strategies via the three main pots, plus the fourth pot that includes gearing strategies outside super.

But this fourth pot is fully taxable. While gearing strategies can make for good short and medium-term outcomes, it is generally designed to make for a big capital gain later, which will be taxable (at 50 per cent of the gain).

The suitability of gearing as a strategy in your situation will require you to talk to a knowledgeable financial adviser. Someone who can talk you through the risks and help you understand how this may assist your wealth creation strategies in the longer term.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is a licensed financial advisor, a mortgage broker and an expert on self-managed super funds. He is a regular contributor to Eureka Report. To contact Bruce, please click here.