What I’m telling my clients to do next

Mind blown by super changes? Think about these strategies as soon as possible.

Summary: Significant changes to superannuation in budget 2016 will require strong planning on the part of super savers: the impact of couples strategies will become more important as ever, and it’s important to make sure your fund and your spouses are as balanced as possible to make sure you both make the most of the new tax-free limits and contributions caps. Consider whether you need to transfer your pension funds back to super accumulation to avoid the $1.6m tax free limit.

Key take out: There are some positive changes in this budget, like the removal of the 10 per cent rule preventing those who are self employed part time from making super contributions to themselves – in coming weeks we’ll look at some more strategies to face new changes.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Welcome back to 2006. Last night’s budget set superannuation back a full decade.

But arguably it’s far, far worse. Getting money into super – from 7.30pm last night when the Treasurer stood to speak – has become much, much harder.

The changes announced last night by Scott Morrison were mind-blowing. While several changes had been predicted (by many) and I’d covered most possibilities in various columns in recent years, the scale, the big-bang nature of the changes, and their impacts, will go far, far further than even Chicken Littles might have believed possible.

I had probably covered eight to ten possibilities, thinking they might do two or three of them. They seem to have done all of them! Plus a few more!

Super is now harder to get money into than it was 10 years ago. The strategies that are going to be required for anyone with large super balances, and anyone who has aspirational aims of making their super balance big, will require more thought and advice.

But doing your strategies too well will mean you potentially having a fund that’s “too big” and taxed anyway!

“Strategies for couples” is going to become a critical theme going forward. The cuts to various limits (pension funds, contribution strategies, etc.) will require partners to work as a team. More on this in a later column.

Retrospective taxation #1

Probably the biggest change is the retrospective nature of how super pensions will be taxed from July 2017.

Those who had taken advantage of the laws, as they stood previously, to build large super balances will be wondering why “grandfathering” wasn’t adopted.

If your super pension fund is bigger than $1.6 million, you will have to roll back any excess to the super accumulation account by July 1 2017, or take the money out of the superannuation system completely (subjecting it to full marginal tax rates).

In the accumulation fund, it will be taxed at 15 per cent (or 10 per cent for capital gains). Some people with some very large pension balances are going to be paying tens, even hundreds of thousands, of dollars in tax, even at 15 per cent, if they roll it back to accumulation.

This will still, usually, be better than taking the money out of super.

Three strategies for this:

Transferring pensions back to super

If there is a pull back in markets, you might want to take that timing to transfer your pension back to super, ahead of the July 1 deadline to reduce your pension fund to $1.6m.

Why? Let’s say you have a $2m pension, but markets have a big pull back and on January 1 2017, your fund is now worth $1.8 million. If you believe markets are likely to bounce back again, you might wish to turn back $200,000 back to accumulation. If markets rise (we’ll assume evenly) back to where they were by 30 June, the $1.6 million you had in pension will have increased to $1.778 million, while your accumulation account will have risen to $222,222.

(You won’t be taxed on gains above $1.6m in the pension fund after starting it.)

If there is a bigger fall and your super fund falls from $2m to $1.6m, during this coming financial year, consider switching immediately. If it grows back to $2m by 30 June… the whole $2m pension fund should be safe.

However, if you didn’t make that change until June 30, when markets had recovered, you would end up with $1.6m in pension and $400,000 being taxed in the accumulation account.

Super splitting

Super splitting strategies will become critical. SMSFs will have to do whatever they can to get their member balances roughly even, particularly if they’re going to be getting close to the $1.6m limit each.

It would be a costly mistake to have, say, $200,000 in one spouse’s name, and then $3m in the other spouse’s name, with $1.4m to be transferred back to accumulation and taxed.

Spouse splitting (see my article from 2012 for the general gist of what’s done, but things will be changing considerably with last night’s budget - click here: Spouse splitting makes super sense, September 19, 2012) will become even more important for people approaching the $1.6m cap. And for those looking to make non-concessional contributions (the new $500,000 lifetime NCC cap is $1,000,000 in total for a couple) will need to put thought into this.

Consider selling assets

If you are having to transfer considerable amounts back from pension to super ahead of the introduction, you may wish to consider selling those assets first (to lock in tax-free gains) and transferring cash back, to create fresh cost bases for the new assets bought in the accumulation fund. But be wary of the “wash sale” rules – the ATO doesn’t like this and if you buy back the same assets, you might incur their wrath.

Retrospective taxation #2

Transition to retirement (TTR) pension funds will also be taxed. With no grandfathering.

If you are on a TTR, then your fund will start to pay tax again at normal super tax rates (15 per cent or 10 per cent).

TTRs for the under 60s have become even harder to justify. They were neutered several years ago, as a straight tax strategy, but maintained some value, particularly for the pension fund itself, which didn’t pay tax. It now will.

For those over 60, the income received from the pension fund (that is, between four and ten per cent) will still continue to be tax free. But the pension fund itself will pay tax on earnings.

Often people might turn on a TTR while working, but not remember to change it to a full-allocated pension when they finish working. Switching to a full AP at the right time will become important now from a tax perspective.

And so will making the “break” from employment, for those over 60. If you retire, or change jobs, after age 60, you will want to turn on an allocated pension, or switch your TTR to an AP, to allow the fund itself to become tax-free. (Though some further detail/discussion will be required here, because this part is not crystal clear.)

Cutting contribution caps and five-year catch-up provisions

From July 1 2017, the $30,000 (for the under 50s) and the $35,000 (for the over 50s) caps will be gone. They will be replaced with a flat $25,000 for all.

Anyone with the available cash flow should consider making larger contributions for this financial year (FY16) and next (FY17). If you were making, say, $18,000 a year and you’re under 50, consider making the sacrifice to go to $30,000 or $35,000 for the two financial years.

You won’t have a choice afterwards.

The big cruelty about lower limits has usually been that often those in their 40s would want to make bigger contributions, but have monster mortgages and children’s education to look after, sucking up any available cashflow.

This is where five-year catch-up provisions will be beneficial. If you’re unable to make your full $25,000 contribution, you will be able to make up for it in the future.

Potentially. For some.

The ability to use the catch up provisions ceases once a person has a superannuation fund balance of $500,000. However, this feels a little bit like the failed 50-50-500 rule of the Rudd Government, which was considered impossible to implement, so was pushed back by a few years, then dropped by the incoming Abbott government. So, we’ll need to wait to see whether industry believes enough has changed on that front, with regard to super fund reporting, that this will be implementable.

For many, particularly those who think their incomes may rise in the next few years to allow them to make bigger contributions, getting in the extra $5000 or $10,000 a year in FY16 and FY17 could be worth the short-term cash-flow pain.

But if you’ve reached your late 40s, early 50s, and have only been able to put in $10,000 a year for the last four years, you will be potentially be able to pump in $85,000 in the fifth year at concessional rates.

The cut to the CC limits aren’t great. But they will be partly made up for, for those who will be able to use the five-year averaging provisions.

Non-concessional contribution lifetime limits

We’ll now be restricted to $500,000 per person for NCCs. As of 7.30 last night. No warning. If you were planning anything, it’s too late, if you’ve previously put in more than $500,000, no more NCCS for you.

The $180,000 annual limit, and ability to put in $540,000 in a three-year pull forward of that limit, are gone.

I was contacted by one Eureka Report subscriber last month who asked if a change on Budget night (at 7.30pm) was possible, as he was planning to make considerable NCCs to his super fund. I said it was possible.

I checked in with him last night and he said that he had made the contributions. A winner.

I have another client who was preparing to put in $540,000  July 1 2016. She could not put it in any earlier, because she had previously tripped the NCC pull-forward provisions to put in $540,000, which stopped her making any further NCCs until after 30 June this year. She will not be able to make those contributions, as she’s already gone over the $500,000 lifetime limit. But, there was nothing she could do about it before the budget. Her plans are now shot, which might also have broader impacts on other strategies she was considering.

There will be a lot of SMSF members in this position.

Obviously, this will require couples to manage those NCCs. If one has already gone well over, then use the room in the other person’s NCC cap to make further contributions.

As this limit is simply a measure of $500,000 of cash, it will be easier for super funds and the ATO to monitor. They say they have good records from 2007.

It appears that if you made NCC contributions prior to July 1 2007, then they won’t be counted. If you haven’t made any contributions since, and are able to, you might be able to contribute another $500,000 (each). Don’t rush into this one yet, as it’s not completely clear.

If you have previously put in NCCs, then you will need to ascertain the rest of your lifetime limit before making any further contributions.

For those closer to 60 or 65, putting in the sale proceeds of a sold investment property will become a bigger strategy. But you’ll need to also consider the $1.6m pension fund limit.

Removing the 10% rule

A strong positive change.

As I wrote last month (read more here: Avoid these superannuation accident, April 20, 2016), the 10 per cent rule often cruels the ability of people who are part-employee, part self-employed, from making contributions, or effectively hitting their concessional contribution limits.

This is particularly wrong where the employer refuses to process salary sacrifice requests (employers are not legally obliged to do so).

The 10 per cent rule is going as of July 1 2017. From then, those with a foot in both camps will be able to make concessional contributions from their personal earnings. This is usually done by making a non-concessional contribution, then telling the super fund, before you’ve put your tax return in, that you are going to claim a deduction, so that the super fund can remit the correct tax to the ATO.

Contributions for those 65-74

A major win. Older Australians will not have to meet the “work test” (40 hours in a 30 day period) in order to contribute to super.

If you want or need to make concessional or non-concessional contributions, you will be able to make them now, within the new limits of $500,000 for NCCs and $25,000 for CCs.

I can see this being a great boon for those who have held on to their investment properties beyond 65, but haven’t sold them because they couldn’t get the money into super.

Selling the property will still incur CGT as an individual, but potentially you will be able to use the five-year catch-up provisions to make concessional contributions to reduce the CGT payable.

For example, if you had two 70-year-old members who haven’t made contributions for more than five years, they could potentially sell a jointly owned property or two and use the new $500,000 NCC cap (times two is $1m), plus the five-year catch-up provisions ($125,000 each, or $250,000) to get up to $1.25m into super and wipe out up to $250,000 of the capital gains by making CCs.

But largely, this will simply be good for those over age 65 who want to get money in to super. It effectively turns the old rules for under-65s into rules for those under-75. This doesn’t come into force until July 1 2017.

LISC and spouse tax rebates

To heckles from the Opposition, Treasurer Morrison effectively announced the continuation of the low income superannuation contribution (LISC) last night, but renamed it the low income super tax offset (LISTO). The Coalition was dropping it from 2017, but it will now continue.

And the tax rebate of up to $540 for those earning up to $10,800 has been blown out to those earning less than $37,000.

More on what both of these mean later.


In the coming weeks, I will go into more detail on other strategies and other smaller changes that were announced.

A big one that will be impacted will be geared property in SMSFs. There’s nothing specifically attacking geared property, but rules such as the $1.6m pension limit and contributions limits will have significant impacts on it.

I’ll go into the tax changes for defined benefit funds and the removal of the anti-detriment provisions in a later column. Also, the lowering of the $300,000 threshold for the extra 15 per cent contributions tax is reasonably straight forward, but I will return to this.


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 managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.

Related Articles