Tax with Max: Super and the election
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Summary: The coalition's super proposal works as a 'reasonable benefit limit' on pension accounts over $1.6 million, adjusted in line with CPI. The Labor policy appears to set a limit of $1.5 million, but this is actually less because combined super pension accounts earning more than $75,000 would pay 15 per cent on the excess - effectively paying tax on accounts of more than $1.165m. |
Key take out: Super is going to change regardless of the election outcome. |
Key beneficiaries: General investors. Category: Superannuation. |
As a result of the coalition bringing out their superannuation policies in the 2016 federal budget, no matter who wins the federal election on July 2, the tax treatment of superannuation accounts paying pensions will change.
Under the coalition proposal a Reasonable Benefit Limit on pension accounts will be set at $1.6 million. This amount will work as a limit on what can be in pension accounts from July 1, 2017, and a limit on how much superannuation can be transferred from accumulation accounts into pension phase after then. The $1.6m limit is set to increase in $100,000 increments in line with increases in the CPI.
By contrast, the Labor party policy appears to set an RBL limit of $1.5m. Once you get into the fine print of the policy the actual limit is a lot less. Under Labor's changes, a person's combined superannuation pension accounts that earn more than $75,000 in a year will pay tax at 15 per cent on the excess.
The average return for super funds according to published superannuation industry average benchmarks for the last 10 years is 6.44 per cent. When this return is applied to the $75,000 limit, superannuation pension accounts with more than $1.165m will pay tax on the excess income.
Are defined benefit funds affected?
How would the proposed $1.6 million limit apply to someone receiving a pension from a defined benefit fund? Would there need to be an actuarial calculation?
Answer: Under the coalition's change to the taxation of superannuation pension accounts members in defined benefits schemes will also be affected. Because defined benefits do not work on a member's account balance, the proposal is to change the taxing of defined benefit pensions received in excess of $100,000 from July 1, 2017.
Understanding changes to the work test
I am unclear if I can make tax-deductible contributions to super. I am in my late sixties and retired on July 8, 2015 so meet the work test for this year. I took a redundancy at the time. I have made two contributions to my super since then and wanting to know if they would be tax deductible?
Answer: Your ability to claim a tax deduction for the contributions made during this year will depend on how much you received as employment income up to July 8, 2015. Under the current legislation to make a tax-deductible super contribution you must either have not received or be eligible to receive employer contributions, or your employment income must be less than 10 per cent of your total assessable income.
This means if your employment income up to July 8 was $1000 you could make a tax-deductible self-employed super contribution as long as your total income for the 2016 financial year exceeds $10,000.
The coalition's policy changes to superannuation were not all negative, as one of the proposed changes will help people in your situation. The combination of two policies, removal of the work test for making super contributions for people 65 up to 74 and removal of the current tests on making tax-deductible personal super contributions, will make it easier for people once they are retired to add to their superannuation.
The removal of the work test will also mean that people that have not maximised their superannuation during their working life, and receive a large lump sum from the downsizing of their principal residence or the sale of a holiday home, will be able to contribute up to the new $500,000 lifetime non-concessional contribution limit.
Re-contribution limits
My wife and I are now 60 years old with an SMSF in pension phase. Based on advice we received last year we have been accumulating cash to commence a re-contribution strategy, my wife re-contributing pre-30 June 2016 and myself on 1 July 2016, what are the rules?
Answer: The re-contribution strategy mentioned here is more than likely designed to increase the tax-free component of your superannuation. This has been a popular strategy to ensure that tax payable on superannuation left upon the death of a member, that will pass to a nondependent, is minimised.
Under the current legislation taxable super that passes to a nondependent is taxed at 17 per cent whereas tax-free super has no tax paid on it. The re-contribution strategy increases the tax-free super within a member's account by a lump sum being withdrawn that is then re-contributed as a non-concessional contribution.
The strategy is made more tax efficient when the lump sum has been withdrawn from an existing pension account, and the non-concessional contribution is made to an accumulation account with a nil balance. Once the non-concessional contribution has been received by the fund the accumulation account is then converted to a pension account that is effectively made up of 100 per cent of tax-free superannuation.
To ensure that the tax free super is maximised a pension is drawn at the minimum annual pension amount from the account made up of mainly tax free super, while the pension account with mainly taxable super is used if extra pension payments are required above the minimum that must be taken.
The harshest aspect of the new lifetime limit of $500,000 on non-concessional contributions is how it will retrospectively apply to all non-concessional contributions since July 2007. Those super fund members that have used the re-contribution strategy, and by budget night had exceeded the new lifetime limit, will not be unable to make any further non-concessional contributions under this policy.
If there is a chance that you would be unable to make extra non-concessional contributions to your super fund do not carry through with the re-contribution strategy until you have checked with your advisor.
How do we plan?
SMSF trustees have been put in an almost impossible situation because of the conflict between existing legislation, the LNP's announcements on budget night, and the Labor party's policy on superannuation.
As I see it we have NO choice but to "play by the whistle” and act in compliance with existing Law. If the rules are changed and new Laws come into effect, then we may have to reverse the re-contribution transactions, probably by reallocations within the SMSF. Standing still and waiting for clarity around the ‘new' law will mean wasted opportunities.
What are the risks in applying the existing Law on re-contributions rather than waiting for new laws to be passed?
Answer: With regard to the coalition's non-concessional lifetime limit, if you have already exceeded the limits as at budget night you will not be disadvantaging yourself if you make further non-concessional contributions. At worst you would need to withdraw all the new contributions made.
On the other hand if you have not exceeded the new lifetime limit you would severely disadvantage yourself by using a re-contribution strategy, which provides no benefit to you but only benefits your nondependent beneficiaries, I would not do anything before the election has been decided.
General Advice warning: Eureka Report Pty Ltd: ABN: 84 111 063 686 AFSL No: 433424. This article may contain general advice and has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider if it is appropriate for your circumstances. Where the information relates to the acquisition of a product, you should obtain the PDS and consider this before making your decision.
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