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Amended Government superannuation package

September 29, 2016/in Financial Advice General Info /by Fil-Battisti

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The Government has released an amended superannuation package.

Note: these changes are not yet legislated and still have to be introduced and made through Parliament.

Some measures remain largely unchanged while others such as the lifetime $500,000 non-concessional cap and the removal of the work test for over 65s have been replaced or scrapped altogether.

Once legislated, most measures will take effect from 1 July 2017. There are still many unanswered questions around the practical operation of many of the measures. We await the draft legislation for further details.

Objective of superannuation

The primary objective of superannuation is to provide income in retirement to substitute or supplement the age pension.

Non-concessional contributions (NCCs)
From 1 July 2017:
• the annual non-concessional contributions (NCC) cap will be reduced from $180,000 per year to $100,000 per year
• individuals under age 65 will be eligible to bring forward 3 years ($300,000) of NCCs
• individuals with a total superannuation balance of more than $1.6 million will be unable to make NCCs.

$1.6 million eligibility threshold
The $1.6 million eligibility threshold will be tested at 30 June of the previous financial year.
This means if the individual’s balance at the start of the financial year is more than $1.6 million they will not be able to make any further NCCs.

Individuals with balances close to $1.6 million will only be able to bring forward the annual cap amount for the number of years that would take their balance to $1.6 million.

Under transitional arrangements, if an individual has not fully utilised their NCC bring-forward cap before 1 July 2017, the remaining bring forward amount will be reassessed on 1 July 2017 to reflect the new annual caps.

The $1.6 million eligibility cap will be indexed in $100,000 increments in line with the consumer price index (CPI) ie the same as the $1.6 million pension cap.

Broadly commensurate treatment will apply to members of defined benefit schemes.

Work test
As currently, the work test will continue to apply for individuals aged between 65 and 74. This was previously proposed to be removed.

Individuals aged between 65 and 74 will be eligible to make annual NCCs of $100,000 from 1 July 2017 if they meet the work test (ie gainfully employed for 40 hours in 30 consecutive days) but cannot use the bring forward option.

Worked examples (provided by the Government)
Example 1 – bring-forward rule
Kylie’s (age 58) superannuation balance is $500,000. She sells an investment property and makes a $200,000 NCC in October 2017.

As Kylie has triggered the bring-forward option, she can make a further $100,000 NCC in 2018/19.

Kylie’s NCCs would reset in 2020/21 and she could make further contributions from then.

Example 2 – bring-forward rule
Molly (age 40) has a superannuation balance of $200,000.

In September 2016, she receives an inheritance of $250,000, which she contributes to superannuation, triggering the $540,000 3-year bring forward option.

From 1 July 2017, Molly can make a $110,000 NCC in 2017/18 and $20,000 in 2018/19. She can then access the new bring forward option from 2019/20 and contribute up to $300,000 in NCCs.

Note: This may mean an individual under age 65 in 2016/17 can trigger the current bring-forward option (subject to eligibility) and contribute an entire $540,000 in NCCs. It is unclear exactly how the remaining bring forward cap will apply from 1 July 2017 where less than $540,000 is contributed.

Example 3 – work test
Gary (age 72) a retiree, works around 40 hours in September every year and has a superannuation balance of $450,000.

As Gary meets the work test, he can make a $100,000 NCC in 2017/18.

However, as Gary is over age 65 he cannot access the 3-year bring forward option.

Example 4 – $1.6 million eligibility threshold
Eamon (52) has a total superannuation balance of $1.45 million. He can make a $200,000 NCC in 2017/18.

He cannot access the full 3-year bring forward option as this would take his balance over $1.6 million.

Eamon would also not be able to make any further NCCs.

CGT cap
Separate to the NCC cap, the current CGT cap of $1,415,000 (2016/17) continues to apply for small business owners.

Concessional contributions (CCs), contributions tax and catch up CCs
The annual concessional contributions (CCs) cap will be reduced to $25,000 (currently $30,000 and $35,000 if age 50 or over) from 1 July 2017 for all individuals.

The cap will index in line with Average Weekly Ordinary Time Earnings (AWOTE).

Individuals with adjusted taxable income of $250,000 (currently $300,000) will incur 30% tax on their concessional super contributions from 1 July 2017.

Catch-up CCs
This measure has been pushed out a further 12 months.
From 1 July 2018, unused CC cap amounts can be carried forward over 5-year periods accrued from 1 July 2018 where total super balance is under $500,000.

Example 5 – catch-up CCs
Anne has a superannuation balance of $200,000 but did not make any concessional superannuation contributions in 2018/19 as she took time off work to care for her child.

In 2019/20 she has the ability to contribute $50,000 into superannuation ($25,000 under the annual concessional cap and $25,000 from her unused 2018/19 cap which has been rolled over).

Tax deduction for personal super contributions
Individuals under age 75 and not just the wholly or substantially self-employed will be able to claim a tax deduction for their personal super contributions from 1 July 2017. This means more people will be able to make concessional contributions and it provides an alternative to salary sacrifice.

Example 6 – tax deduction for personal contributions
Chris has started his own online merchandise business but continue to work part-time at an accounting firm earning $10,000 as his business is growing.

His business earns $80,000 in his first year and he would like to contribute $15,000 of his $90,000 income to his superannuation.

Chris could claim a tax deduction for his $15,000 of superannuation contributions.

$1.6 million pension cap
A $1.6 million cap will apply on the amount that can be transferred into the superannuation pension phase from 1 July 2017. There will be no restriction on subsequent earnings.
Accumulated super in excess of $1.6 million can be retained in a member’s accumulation account (with earnings taxed at 15%) or moved outside super.

The cap will index in $100,000 increments in line with the consumer price index (CPI) and is expected to be around $1.7 million in 2020/21.

Transition to retirement (TTR)
Individuals who have reached preservation age can still access a transition to retirement (TTR) income stream but earnings on the amount supporting it will be taxed at 15%.

Innovative new retirement income stream products, such as deferred lifetime annuities and self-annuitisation products will become eligible for the earnings tax exemption.

Individuals will no longer be able to elect to draw lump sums from their TTR pension to reduce tax.

The tax treatment of income stream payments remains unchanged ie; for recipient’s age 60 or over the payments will be tax free, or taxed at the individual’s marginal tax rate less a 15% tax offset between preservation age and age 60.

Spouse contributions and tax offset
As currently, individuals can only make spouse contributions where the receiving spouse is under age 65 or age 65-70 and working.

The income threshold of a low income spouse for the purposes of the spouse contribution tax offset will increase from $13,800 to $40,000, from 1 July 2017.

Low income superannuation tax offset (LISTO)
The low income super contribution (LISC) will be replaced with the Low income superannuation tax offset (LISTO) from 1 July 2017.

The LISTO will automatically refund tax paid on low-income earners’ concessional contributions. The offset is capped at $500 where taxable income is less than $37,000.

Without the offset, low income earners would pay more tax than if they earned the income directly.

Anti-detriment
The anti-detriment will be abolished from 1 July 2017 as previously announced

Source: Asteron Life

Is retirement a sustainable proposition?

September 1, 2016/in Financial Advice General Info /by Fil-Battisti

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Most Australians will be reliant on the government age pension to meet all, or a part, of their income needs for at least some of their retirement.

A small number of the population will remain self-funded retirees – for example; having no reliance on government funded income support (except for the Commonwealth Seniors Health Card).

However for the most part, at some stage in retirement, we will need to visit Centrelink and submit an application for the age pension.

The Australian age pension first became available to eligible folk once they turned 65 years of age – back in 1909. The Commonwealth age pension replaced pensions previously paid by the colonies (today known as our states and territories – before Federation).

However, the age pension is a relatively recent concept. It was in the mid-to-late 1800s that we started to see pensions introduced in parts of Europe by Otto von Bismarck, and for municipal employees (teachers, police, and firefighters), in the United States.

Like Australia – the American and European age pensions became payable to individuals once they reached a pre-determined age – generally between 65 and 70.

What was equally interesting was the fact that the average life expectancy at the time was around the same as the age of a person who would qualify for the age pension.

The governments back then worked on the theory they would only have to pay an age pension to those who survived until the qualifying age, and then it would only be payable for a relatively short period of time.

The Australian Bureau of Statistics estimated that in 2014 there were over 4,000 Australians aged 100 or older. This represented an increase of more than 260 per cent over the last two decades. In fact, today in Australia there are four living ‘super-centenarians’ (people who have lived up to, or over, 110!).

Even though we may not all live to be 100, Australians are living much longer than previous generations.

Today if someone passes away in their mid-to-late 70s it is seen as a tragedy that they died so young. Twenty years ago we would have said they lived a good and long life.

But what does a long life have to do with the age pension?

When the age pension was first introduced, it was designed to provide income in the final years of life when people were simply too old to work.

However today’s 65 year old is looking at 20 to 30 years of life ahead of them. Future governments simply will not be able to afford to pay an age pension to an increasing number of retirees who are living many years in retirement.

What might the future hold for retirement income and government support?

Expect to see the qualifying age for the age pension increase over time. The age has already increased to 67 for people born after 31 December 1956. There have been suggestions, and even draft legislation supporting increasing the qualifying age to 70.
Expect to use our own money first to support our retirement lifestyle and only then receive a government-funded age pension. Long gone are the days when we can amass large amounts of money in superannuation for the benefit of future generations.
Don’t be surprised if the value of the family home is included when determining eligibility (assets) test for the age pension.
We will all be working longer. Unless we have significant financial resources that enable us to fund our own retirement independently of the age pension, we will need to work longer.

If we desire a comfortable retirement that costs more than the age pension and our super may provide, some continued engagement in the workforce into our late 60s and even our early 70s may become a reality. Whether we remain an employee, or start our own business; and whether we work part-time or full-time; the options are endless.

Whatever we find ourselves doing – let’s make sure we enjoy it to the fullest.

Source: Peter Kelly – Centrepoint Alliance

Loans and encumbrances; a pension minefield

August 4, 2016/in Financial Advice General Info /by Fil-Battisti

For most people, being debt free in retirement is a priority. Others find the concept of ’good debt’ in retirement less stressful.

From an age/service pension perspective the correct structuring of good debt is important to ensure that any entitlement you may receive is not adversely affected.

When it comes to the Social Security Act – loans and encumbrances can be complicated and, in some cases, a little illogical. It is very important to understand that the taxation rules relating to debt are not necessarily the same as social security rules. For example; real estate investments can be considered.

So – let’s consider this real estate investment scenario:

An offer ‘too good to ignore’ comes your way and you decide to buy an investment unit down the road from where you live and rent it out. You then visit your bank (or your mortgage broker) to enquire about an investment loan.

The broker (or bank) are most impressed with you and decide that they will lend you the money to buy the unit. However; in addition to taking a mortgage out over the investment property they also need to secure the loan against your residential home as well.

From a taxation and a social security income perspective this is not an issue as (in both cases) the interest payable is deductible from the rent for the purposes of your tax and pension assessment.

However; there is one very important issue to consider. A person’s pension entitlement is also based on the value of their assets. The fact that the loan is secured against an exempt asset (family home), and an assessable asset means that the portion of the loan secured against the exempt asset (your home) is not used to reduce the asset value of the investment unit.

Care needs to be exercised here – as net rental income being received may not necessarily cover the reduction in a person’s pension in some circumstances.

When it comes to borrowing money to invest into shares or managed funds, the assessment side of things are slightly different.
The value of the asset shares, in this case, is reduced by the amount borrowed. For example – $50,000 is borrowed to purchase a parcel of shares valued at $100,000. Provided the loan secured against the shares – for the purposes of the assets test – the portfolio has a value of $50,000. The ‘hidden nasty’ here is that for the assessment under the income test, the whole value of the portfolio is viewed as a $100,000 share portfolio.
This is treated as a financial asset and it is this value that is subject to the relevant interest rates.

Unlike tax – the interest expense is not deducted from the income being deemed against the $100,000 portfolio.

“Oh…” I hear you say! And that is without even discussing the issues associated with loans to family trusts and companies, going guarantor, and associated loans.

When you are retired and receiving the Age Pension – borrowing and lending money (as well as going guarantor for loans taken out by your kids) can be a minefield with unwanted consequences.
So before you dive into the world of borrowing to invest – seek out the appropriate advice from an expert in the area.

Source: Mark Teale, Centrepoint Alliance

What will the 2016 budget hold for pre-retirees?

April 21, 2016/in Financial Advice General Info /by Shellie Fisher

In recent weeks, the media has been overrun with commentary about what the 2016 federal budget may contain in relation to superannuation.

But this year – things are a little different.

The Australian Federal Government has already departed from convention by bringing the budget forward by one week. The budget is usually brought down annually on the second Tuesday of May. But this year it has changed, and will be delivered on 3 May 2016.

To add an additional layer of complexity to these proceedings – 2016 is an election year. Prime Minister Malcolm Turnbull was quoted in question time today (and at the time of writing this article) that 2 July 2016 is the most likely date for the election.

Over the past ten years a popular strategy employed by many Australians has been affectionately referred to as ‘Transition to Retirement’ (TTR).

Recent media commentary suggests that this strategy may be in the firing line for change, or even abolition, in the budget.

So – let us unpack TTR and see what all the fuss is about.

Back in 2005 Australia was suffering from a skills shortage. As a way to slow down the departure of skilled Australians from the workforce the government introduced legislative reforms that enabled people to progressively transition in to retirement, and allowed them to access superannuation so they could supplement their income.

TTR is simply an opportunity that allows a person to access their superannuation benefits in the form of a pension, rather than a lump sum, once they reach their preservation age. You don’t have to have retired, or even to have reduced your working hours, in order to commence a TTR pension.

As a result of the TTR opportunity being introduced – many people continuing to work full-time took advantage of the opportunity to start drawing upon their super, and consequently used the extra income for other purposes.

If the current rumours suggesting that the government may abolish TTR prove to have substance – I believe it would be regrettable. A far more palatable response would be to limit the access to TTR to those who are genuinely transitioning into retirement.

That is – I would recommend restricted access to TTR to only those who are working less than approximately 30 hours per week.

The reason why the government may be looking to amend the TTR pension is not due to its original premise – but rather – it is likely to be because of a strategy that is run in conjunction with TTR.

For many financial advisers and their clients, TTR is the marriage between TTR (accessing super from preservation age) and a second stand-alone strategy; making additional contributions to superannuation under a salary sacrifice arrangement.

This results in nice little piece of tax arbitrage – particularly for people aged 60 and older.

And therein lies the problem!

I don’t believe the government is concerned about TTR per se, but my guess is that they are alarmed about the ability of individuals to make significant contributions to superannuation (up to $35,000 this year).

Both sides of politics are concerned that the current, concessionally taxed, superannuation environment favours the wealthier members of our community, and that tax concessions would be better directed towards those in greater need.

To put this in perspective – when a person sacrifices part of their wage to superannuation, the contributions are taxed at a rate of 15 per cent. If that money was paid as a salary it would be taxed at the person’s marginal tax rate which may be as high as 49 per cent.

From a government’s perspective the simplest way to manage the perceived tax advantages that arise from a TTR/salary sacrifice strategy would be to reduce the amount that may be contributed to superannuation under a salary sacrifice arrangement.

This could be achieved by simply reducing the cap on concessionally taxed superannuation contributions.

But who knows what a government might do? The answer will no doubt be revealed over the course of the coming weeks in Australian politics.

Please note: Readers who have reached their preservation age should speak with their financial planner as a matter of urgency. If a TTR strategy is appropriate it might be advisable to have it in place before 3 May 2016.

Source | Peter Kelly – Technical Advice

Centrepoint Alliance