SMSF trustees and superannuation accountholders. Superannuation.
At the moment the superannuation environment is fairly easy to navigate. Your employer contributions and salary sacrifice contributions (up to the contributions limits) attract a 15 per cent contributions tax. Once a superannuation fund starts paying a pension, all earnings in the fund are taxed at zero per cent. After the age of 60, superannuation withdrawals are tax-free.
There are, however, signs that things are not going to remain this simple. In fact, there are suggestions that all of these concessions might be reduced. The future of superannuation might include taxable superannuation pensions (as has happened in the past), higher superannuation contributions tax (based on a person’s income tax rate) and some tax paid by a superannuation funds paying a pension on fund earnings (one proposal discussed has been on amounts over a certain threshold).
This adds up to a potentially very different superannuation environment that we could face in the future.
The simplicity of the current superannuation rules means that we might be forgetting about some of the strategies that can be used to better position our superannuation for the future – regardless of what changes (or “legislative risk”) we might face in the future.
Here are four strategies that might help position a superannuation fund for future legislative changes:
Strategy 1: Withdrawal and re-contribution strategy
This was a common strategy when superannuation income streams were taxed. A person would withdraw the maximum tax-free amount that they could from their superannuation, and “re-contribute” it to their superannuation fund prior to starting a pension. This would increase the amount of tax-free income that would be paid from the superannuation fund.
Completing a withdrawal and re-contribution strategy at the point of retirement was done to increase the tax-free element of a person’s super income stream. This is a strategy still well worth considering, as it might help provide a more tax effective income stream if the rules around superannuation change and income streams become taxable again.
This strategy also provides some potential tax benefits for some death benefits paid from a superannuation fund.
There are various layers of complexity to consider with this strategy, including anti detriment payments (the strategy reduces access to these), contributions limits, any tax paid on withdrawals before the age of 60 and age and any work restrictions for making superannuation contributions. It is certainly worth seeking further advice when considering this strategy as there are a number of areas of complexity. That said, it potentially puts a superannuation fund in a better position to pay a tax effective income stream if rules on the taxation of superannuation pensions change.
Strategy 2: Superannuation contributions splitting
Each year employer superannuation contributions, salary sacrifice contributions and personal contributions where a tax deduction has been claimed (contributions by a self employed person) can be split with a spouse.
If superannuation pension income becomes taxable, or if the earnings of a superannuation pension fund with assets at above a certain level become taxable, it may be advantageous for a couple to have their superannuation balances roughly split between themselves. In the case of superannuation pensions becoming taxable in the future, having roughly equal superannuation balances will allow income to be split and access two zero per cent tax free thresholds (up to $18,200 of income), and then two 18 per cent thresholds (up to $37,000 of income) and so on. If all the superannuation pension income is in one person’s name only, $18,200 will be tax-free, whereas taking advantage of two people’s tax-free threshold potentially allows $36,200 to be earned before any tax is paid.
Another proposed superannuation change is that the earnings of superannuation pension funds might become taxable over a certain asset level. Splitting superannuation assets between a couple might allow a greater level of assets before this tax on superannuation pension fund earnings has to be paid.
Other elements to think about with this strategy include age differences between members of a couple (this can effect when superannuation benefits can be accessed, and when superannuation might be counted for Centrelink purposes) and the spread of assets outside of superannuation.
Further information about contributions splitting can be found here: ATO contributions splitting.
Strategy 3: Salary sacrifice now
Another mooted change to superannuation is an increase in the superannuation contributions tax rate. Currently most people face superannuation contributions tax of 15 per cent. Suggestions have been made that the contributions tax rate might increase, and be based on a person’s marginal (highest) income tax rate. One proposal that has been modelled and discussed is that a person’s superannuation contributions tax rate would be their marginal tax rate, minus 15 per cent.
With bracket creep pushing more and more income earners into the $80,000 income tax bracket (37 per cent tax), this means the superannuation contributions tax for these people would be 22 per cent (37 per cent - 15 per cent), a significant tax increase from the current rate of 15 per cent.
The simple reality is that we might be getting toward the end of making superannuation contributions that are taxed at a 15 per cent tax rate and, if we can (keeping in mind superannuation contributions limits), now might be a “last chance” to top up superannuation balances with a 15 per cent contributions tax rate.
Strategy 4: Transition to retirement income stream
Transition to Retirement Income Streams allow people to access their superannuation once they are over their preservation age, even if they are still working. They often provide very tax effective income, allowing increased salary sacrifice contributions to superannuation and reduced overall tax.
If you are close to, or past, your preservation age, this is a strategy worth considering. There have been indications that transition to retirement income streams might be stopped, however starting a transition to retirement income stream before that happens might allow it to be kept in place (“grandfathered”).
You can read more on these changes in my piece here: Last chance: Act now on transition to retirement plans, February 10, 2016.
The challenge with trying to plan for “legislative risk” is that we don’t know what future superannuation changes will be. However, taxable superannuation pensions, taxable earnings on superannuation funds paying a pension and higher taxes on contributions are all realistic possibilities at some time in the future. It makes sense to carefully think through strategies that might combat these future changes. Given the complexity of trying to deal with possible future changes, professional personal advice to set out the benefits and risks of any strategies, related to your own situation, is recommended.