In the 2016 Federal Budget, the government proposed widespread reforms to Australia’s super system. If legislated, your SMSF clients may need to rethink their super strategies before the changes take effect.
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In the 2016 Federal election, the Coalition government returned to power with only a small majority, which means its super reform proposals now hang in the balance. But Craig Day, Colonial First State’s Executive Manager of FirstTech, says accountants and financial advisers should start preparing for the likelihood of these reforms becoming law.
“Based on recent public statements, it appears the Labor Party may be willing to accept some of the prosed super changes.” he said. Until legislation is passed, it’s difficult to know exactly how individual investors will be affected. But in the meantime, here are four key reforms Craig says are likely to have an impact on your SMSF clients.
1. A $500,000 lifetime cap on personal contributions
As SMSF trustees typically have higher super balances than the average super fund member, they may be hit harder by the lifetime non-concessional contributions cap.
“A disproportionate number of SMSF trustees may have already used this cap,” Craig said. “In those cases, it could impact a member’s ability to make future non-concessional contributions to their SMSF.”
The Coalition wants this reform to take effect as of Budget night, 3 May 2016, and factor in all non-concessional contributions made from 1 July 2007. However, Labor has raised concerns about the retrospective nature of the proposal — and this uncertainty could have a domino effect on other super reforms.
Craig commented: “If we see a change to the effective date, less revenue may be raised as a result. In this case, the government could look at recouping the loss by making changes to some of the other super proposals.”
2. A new transfer balance cap of $1.6 million
According to Craig, the introduction of a transfer balance cap from 1 July 2017 could force a change of strategy for SMSF trustees with high super balances.
Trustees forced to move amounts out of the pension phase may need to consider what assets they want to maintain in the tax free pension phase and which assets they should move back to the taxed accumulation phase. “For example, trustees may maintain high-growth or income-producing assets to the pension phase, and allocate those that don’t generate as much income or aren’t expected to grow as much to the accumulation phase,” he said.
Craig also says SMSF trustees will also need to consider the fund’s CGT position and may wish to consider maintaining assets with large unrealised gains in the tax-free pension phase while transferring assets with unrealised capital losses back to accumulation.
3. A reduced Division 293 tax threshold of $250,000
Since many SMSF trustees are also high income earners, this cohort could be disproportionately impacted by the government’s proposal to lower the Division 293 tax threshold from $300,000. If legislated, those with incomes of $250,000 or more will pay an additional 15% tax on their concessional contributions.
“Both the government and the opposition have effectively adopted the same policy in relation to the reduction to the threshold,” Craig said. “As a result, we are highly likely to see this measure get through with more people being impacted.”
4. The end of anti-detriment payments
The proposed removal of anti-detriment payments on lump sum death benefits may help to level the playing field between SMSFs and their competitors.
Under the current rules, the fund has to first make the payment and then recoup the money from the ATO. For large funds this isn’t an issue, as they have extensive cash reserves on hand to cover their tax obligations, which they can draw from as needed for anti-detriment payments. For SMSFs, this is significantly more challenging.
“In the past, it’s been extremely difficult for SMSFs to fund additional payments because they simply don’t have pools of money available,” Craig said. “So if anti-detriment payments are removed, larger funds will lose that competitive advantage over SMSFs.”
Advice is the key
While there is still some uncertainty around these super reforms, Craig says it’s an important time for accountants and advisers who are authorised to provide SMSF advice to demonstrate their knowledge and add value for their clients.
“There’s a lot of complexity in the rules, so clients will need assistance to place themselves in the best possible position,” Craig said.
“Since many of the proposals likely to take effect on 1 July 2017, there’s an opportunity to revisit strategies before then so clients can benefit and achieve great outcomes.”