Contributions / Federal Budget / SMSF

Things you might want to consider before budget night

thinking please wait

We have seen the discussion around superannuation tax reform increase significantly over the past month or so with the Government now disbanding the release of the tax white paper, but many of these recommendations will now form part of their tax reform package on Federal Budget night.  With the Coalition Government deciding the take the ‘long-road’ to fixing the budget deficit, rather than looking at changes to GST (amongst other things), a realignment of superannuation tax concessions is high on the agenda.  As a result, many people have started to question what we will see by way of tax reform and how they should respond in the lead up to budget night on 10 May 2016.

I’ve been giving this some thought myself and have included below a few considerations for you to contemplate:

Re-contribution strategy

Impact risk: High

The Government has been considering within the tax white paper the re-introduction of lifetime limits on super savings as a means of curtailing the tax concessions afforded to higher income earners.

This reintroduction of ‘reasonable benefit limits’ (RBL) is likely to curtail the ability to undertake re-contribution strategies that are predominantly motivated by estate planning outcomes, rather than current day benefits.

In particular, I would be looking to this strategy to ‘even-up’ account balances between spouses, in addition to improving the tax-free component a member’s account balance.

Start a Transition to Retirement Income Stream (TRIS)

Impact risk: High

There has been a growing popularity in the use of transition to retirement income streams.  According to the ATO, 20% of members receiving pensions from SMSFs are now TRIS payments.

There is genuine concern that this strategy has grown into a tax ‘loophole’ with many people taking advantage of the strategy, arguably beyond what its original intention was.  Some argue that the Government may do away with the strategy, some believe that we will see a ‘work test’ be introduced to support a reduced level of hours from full-time to part-time work.

Whatever happens, this change will apply prospectively, meaning that existing arrangements in place will be grandfathered.

Use contribution reserving in current year (if available to do so)

Impact risk: Medium

High of the Government’s agenda is a change to the taxation rate of concessional contributions.  Rather than applying a flat 15% contributions tax, it appears likely that individuals will be taxed on these contributions at their marginal tax rate (MTR) less a 15% (maybe 20%) tax offset.

Where you have the need (and ability) to double dip on the tax deduction, it would be worthwhile doing so this financial year as the contributions will be taxed in the current income year at 15%, not your MTR less an offset.

Whilst this change is expected on budget night, it would be likely that such significant changes in super tax reforms would need at least 12 months to implement, meaning a likely 1 July 2017 start date.

Start an Account Based Pension

Impact risk: High

With a ‘ceiling’ likely to be introduced on concessional tax treatment of account balances in super, it might be prudent (where possible) to start a pension prior to budget night and have the income stream ‘grandfathered’ rather than assessed against any new lifetime limit, then it would be prudent to consider this now.

Of course, you will need to consider the impact of any potential Centrelink or other related issues if heading down this path.

Bring forward any non-concessional contributions

Impact risk: Medium

With much of the Government’s focus on contributions into super and the taxation of these amounts, it may be an opportune time to re-think the timing of any post-tax contributions.

This may include looking at the transfer of listed shares or transfers of business real property (BRP) that are allowed to be acquired from members into your SMSF.

Any significant change to contribution reform is likely to have a ‘lead time’ as mentioned above.  I bank on seeing a one-off $1m contribution opportunity again like we did in 2006-07!

The Government has been conscious to appease the growing number of baby boomers now in post retirement who are concerned about changes to tax concessions on their self-funded pensions.  Scott Morrison on several occasions has confirmed that those who have ‘played by the rules’ with existing arrangements will not be detrimentally impacted by the superannuation tax reforms.  In fact, it is almost certain that the tax-free status of pensions will continue beyond age 60, in addition to continuing with tax exemption on income supporting pension assets.  I suspect only new benefits moving into pension phase (from a particular point in time) will be subject to limitations on concessional tax treatment in pension phase (which has been previously discussed at anywhere up to an account balance of 2.5m per member).

What other areas do you see as a risk in the Federal Budget?  I’d love to hear your comments…



2 thoughts on “Things you might want to consider before budget night

    • Yes, this was previously indicated as a tax ‘loophole’ to tidy up. In reality, this isn’t a big loss for SMSF sector, as the deduction is rarely used. More hype than reality give the way in which the payment needed to be funded.

Leave a Reply