The announcement by the Labor opposition to confront head-on the fairness and sustainability of tax concessions within superannuation is a timely reminder for trustees to be thinking about the management of legislative risk when building wealth for retirement. With uncertainty amongst Government, the only certainty we do seem to have is that change will occur (at some point in the future).
Many of these changes announced by Labor auger back to proposed reforms whilst in Government in 2013 (see previous blog post). This commitment by Labor if re-elected aim to re-allocate some of the tax concessions by introducing a tax for pension recipients who have attributed earnings of more then $75,000 (previously $100k). In addition, they have indicated lowering the Div 293 tax threshold for individuals whose “income for surcharge purposes” is greater than $250,000 (currently $300,000).
This potential for change always leads me back to one fundamental thing that trustees and their professional advisers should always be looking at… how do we best manage legislative risk?
By this, I mean how do you try and limit the impact of any future change in Government policy? Whilst not always possible, there are clearly some levers that can be pulled… Within a family situation (Mum & Dad SMSF), the focus on the equalisation of member account balances (as much as possible) should be top of mind. Within the legislative framework, members can employ a range of strategies to best manage some of this legislative risk, including:
- Considering how to allocate any non-concessional contributions amongst members;
- Contribution splitting – up to 85% of employer contributions;
- Re-contribution strategies (lump sum and spouse contribution) – subject to the member having met a condition of release; and
- Use of reserves (giving consideration to concessional contribution cap issues)
To look at a simple example based on Labor’s proposal, if Doug and Jill had $2.5m within the SMSF and Doug’s balance represented 70% of the fund, the assumption would be that Doug’s associated earnings would be greater than the $75,000 threshold. This would mean any earnings over this amount would be subject to tax at 15%. However, through some simple, yet effective strategies to manage such a risk, a re-allocation of benefits amongst members (e.g. re-contribution) could re-weight the balances to a 50/50 basis and most likely avoid the 15% tax threshold in that would be applied on some of the pension earnings.
Whether the measure announced by Labor ever sees the ‘light of day’, we don’t know. However, what we can be certain about is that change in the long term will occur to address the budget deficit and redistribution of superannuation tax concessions. Therefore, it is for this very reason as to why you should always keep one eye on how to best manage legislative risk.
You can read details of Labor’s superannuation plan here.