We might be surrounded by “forecast commentary” in these early weeks of 2016 but whether the market moves up, down or sideways, the first thing you must do this year is ensure you have your investment strategy set for the year ahead.
In the last issue of 2015 Eureka Report offered subscribers some excellent advice on how to get ready: see Ten things you must do in 2016 (December 21, 2015).
But today I want to focus on getting your own backyard in order, with the ten things you must know in order to optimise your DIY superannuation fund.
In common with your role as an active investor, this calendar year also holds plenty of risks for your role as a self-managed superannuation fund trustee.
Many of the threats are out of your control. (That is, apart enlisting to a “SMSF grey army” and them becoming a militant mass, exerting power before, or at, the voting booth).
But we do know what the rules are now. And, given what’s potentially down the pipeline, some might wish to act under known rules, rather than risk having to take action under uncertain future legislation.
So, what are the big risks facing SMSF trustees and members in 2016?
1. Election scenario 1: Coalition Victory
The Coalition government is still acting under former prime minister Tony Abbott’s promise of “no unexpected negative changes to super” for its first term in government.
But that first term is likely to end at some stage this year. Comments from new Treasurer Scott Morrison are considerably more neutral.
Meanwhile, treasury is looking for ways to raise tax. There’s a growing acceptance – I’m not saying it’s a majority – that higher-income earners are too heavily advantaged by the current super tax arrangements.
Unless we hear something soon, specifically stating that super/pensions are sacrosanct for the next term of a Coalition government, I’d be putting money on some change to taxation arrangements for either pension funds, or income paid from pension funds under a Coalition government.
If so, would existing arrangements for pensions in place at the time be grandfathered?
NOTE: The language around pension reform has changed from “no changes whatever” under the Abbott regime and former treasurer Joe Hockey to a more open position under the Turnbull regime and Treasurer Scott Morrison.
2. Election scenario 2: Labor victory
Labor’s current policy is to tax income earned by pension funds above $75,000 a year.
How would it work?
Pension funds that earn less than $75,000 would continue to be untaxed, but would be taxed at 15 per cent on the income above that amount (capital gains would continue to be exempted). This is, essentially, a continuation of the ditched policy of Kevin Rudd, that had intended to tax pension funds that earned more than $100,000 a year. The major difference is in regards to the capital gains being exempted.
Labor’s policy document says that this is designed to hit those with, approximately, more than $1.5 million in a super account. If the fund earned 5 per cent at that rate, it would earn $75,000. If a fund of $2 million earned 5 per cent, it would earn $100,000. The last $25,000 would be taxed at 15 per cent on that excess income.
The policy of former prime minister Kevin Rudd was never effected, largely because industry said it would be too difficult to implement, particularly for those who had multiple super funds.
NOTE: The Labor Party have a clear plan to tax pension fund income in an election year.
3. Attack on non-concessional contributions (NCCs)
Under current rules, members can put in $180,000 of after-tax (non-concessional) money into super. If you have enough, you can put in up to $540,000 using the three-year pull-forward rule.
It’s a fact that wealthier Australians are most able to take advantage of this opportunity. The horrendously inaccurate pre-Christmas attack by Industry Super Australia on SMSFs (see Fact checking this SMSF attack, December 16, 2015) does, however, raise the point that wealthier Australians can get very large sums of money into super, if they start putting in $180,000 a year early enough in their working lives.
Don’t be surprised if, at some stage, the ability to make non-concessional contributions (NCCs) of this size is somewhat diminished. When NCCs were conceived, they were three times the concessional contribution limit. They are now six times that limit.
Moreover, not many people have enough cash to make that quantum of contributions. If an attack is going to be launched on the ability of the wealthy to get money into super, this is an obvious place to attack.
NOTE: If you are thinking of getting large dollops of NCCs into super, I’m not sure I’d be waiting to see the colour of the government after the next election.
4. Closing Transition To Retirement (TTR)
When originally conceived by the Howard Government, the TTR rules were, literally, designed to allow those nearing retirement to cut back from five days to four or three, and make up the pay cut difference with a pension from their super fund.
But it’s not how people are using it. It is now, largely, used to allow people to maximise contributions and reduce tax, while still working full-time (or whatever they were working previously) in the run-up to retirement.
Is it a tax dodge? Well, no, it’s simply become another legitimate tax reduction strategy. The tax office knows all about it and understands that the law is being followed.
It would be a “mean” government who closed this opportunity. Individually, it might add tens of thousands of dollars to an individual’s retirement, if maximised.
NOTE: The TTR scheme is legal now. And, in many cases, you’re being a fool if you’re not using these rules. Just remember it’s an opportunity on which the door could be shut, without notice.
5. Tax white paper
Is this long-promised review of the tax system going to be a worry? It’s still too early in the process, but this could be the launch pad for, well, almost anything.
David Murray’s Financial Systems Inquiry was accepted by the Government almost in full – with a thankful exception of a ban on limited recourse borrowing arrangements (LRBAs).
NOTE: A tax “white paper” is likely to have some spears aimed at superannuation taxation.
6. Deadline for related-party LRBAs
If you have an existing related party loan to your super fund, then you need to be aware of a very important deadline – 30 June 2016.
By that date, you need to make sure that the loan itself is likely to be considered to by the ATO to be on, effectively, “commercial terms”. See Does your SMSF loan pass the ‘smell test’? (November 4, 2015).
Related party loans are loans from you, or related entities, to your SMSF. For many years, it was considered okay – the ATO had given it tacit approval – for those loans to be non-commercial. That is, potentially with a 0 per cent interest rate, or a higher-than-normal interest rate, or with repayment terms that were outside standard, or a multitude of other terms that could be considered non-commercial.
However, in October last year, the ATO issued an ultimatum: “SMSFs have until mid 2016 to get these loans on commercial terms”.
NOTE: If you have a related party loan to you super fund, check in with your accountant and/or financial adviser immediately. It could take some time to make the changes. And there will be some pain for some, that perhaps might require asset sales, if funds can’t be raised, or loans addressed, to get them where the ATO wants them.
7. Banning of LRBAs
It would be unlikely. The former Abbott Government ruled it out after a specific recommendation from Murray’s FSI. But a ban is still possible.
NOTE: LRBAs (Limited Recourse Borrowing Arrangements), where individuals or their associated entities make limited recourse borrowing arrangements to their own super funds, are invariably under review despite a surprise clearance after the Murray Inquiry’s recommendation to ban them.
8. Further interest rate hikes for LRBA investors
The Australian Prudential Regulation Authority (APRA) has wreaked havoc in the investment property sector in the last year.
Pressure applied by APRA – on the back of tighter capital adequacy rules internationally – saw interest rates charged by lenders in our domestic market rise across the board, even more so for investors than home buyers.
But while there seems to have been some softening of growth in asset prices in the property space, there’s nothing to say that there might not be further APRA commandments that could lead to further interest rate rises from the banks.
And that’s to say nothing of the Reserve Bank of Australia potentially raising interest rates from their historic lows also.
NOTE: Investors are once again paying more than home-loan borrowers for bank loans and that gap may widen.
9. Crackdowns on property developers
Expect, or rather hope, for further action from all sorts of authorities in regards to retarding the ability of property developers to offload dud properties.
ASIC is cracking down (see Beware the property spruikers, December 2, 2015) and APRA’s intervention in the lending space is having an impact. Congratulations must go out to AMP Bank. In December, as they returned to the LRBA space, they said they would not accept loans for development property.
Property investment via developers, with LRBAs, in this space is the single biggest risk to SMSF trustees.
NOTE: Using your DIY fund for property development is getting harder with banks such as AMP Bank moving ahead of regulators and disallowing such lending arrangements.
10. With any luck, this year will be another boring year for superannuation.
But the realities of pressure being placed on the federal budget – particularly for who wins the next election – mean that we’ll need to keep an eye on what’s being promised and when, in the coming months.
NOTE: There are so many moving parts to superannuation and DIY funds we must remain vigilant on any changes – and indeed stay abreast of potential changes in case we need to take action. One key lesson from the past is that “superannuation reform never stops”…and it won’t stop in 2016.
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.