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Budget

Budget 2016 - A proactive look at Superannuation implications

The purpose of this communication is not to express whether we too have a bee in our bonnet about the proposed changes, as indeed most of the advisory community do. Instead, it is to help dissect what the changes may actually mean from a strategic wealth advisory perspective. Whilst the recent amendments create unwelcome uncertainty, superannuation remains in our view, the most tax effective vehicle for retirement savings by a country mile. However, there is now added complexity for a certain wealth bracket to most effectively accumulate and structure assets for retirement. Thankfully for us, the Government has a handy knack of making changes that keep the advisory industry in high demand. And it is times like these when we have a chance to do our best work. So here goes..
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Please note that no aspect of this publication should be taken as advice. It is critically important that your personal circumstances are taken into consideration when making important financial decisions and seeking advice. We are of course only too happy to discuss how this may apply to you and welcome you touching base with our team.

Whilst the stage was set for sweeping changes to an arguably over-generous tax regime for self-funded retirees (i.e. superannuation), no one really anticipated the retrospective and far reaching nature of the changes announced.

For those not overly familiar with the actual details of the proposed changes, please take a look at this budget wrapprovided by the Financial Planning Association®.

The purpose of this communication is not to express whether we too have a bee in our bonnet about the proposed changes, as indeed most of the advisory community do. Instead, it is to help dissect what the changes may actually mean from a strategic wealth advisory perspective. Whilst the recent amendments create unwelcome uncertainty, superannuation remains in our view, the most tax effective vehicle for retirement savings by a country mile. However, there is now added complexity for a certain wealth bracket to most effectively accumulate and structure assets for retirement. Thankfully for us, the Government has a handy knack of making changes that keep the advisory industry in high demand. And it is times like these when we have a chance to do our best work. So here goes..

Superannuation – should I even bother?

Up to the maximum pensionable limit of $1.6m per person, the answer is most likely, absolutely yes. Over that amount, the numbers need to be crunched. Assuming an earnings rate of 4% income on assets held outside of superannuation, retirees will be able to hold over $1m (in fact nearly $1.2m) of assets before the effective rate of personal tax on earnings exceeds 15% (which is the rate of tax that applies on superannuation assets above $1.6m p/person). For those who have more than $1.6m within superannuation, the strategic decision will be faced as to whether to retain all funds within superannuation or look to withdraw some capital to be held/invested outside of super.

There is no one size fits all answer to this quandary and good advice is critical.

Superannuation contributions – earlier rather than later

The last round of sweeping superannuation changes (2007) made the Government’s intention clear. Superannuation was not a vehicle in which to dump large chunks of capital, leading into retirement. For the system to be more effective, superannuation needs to be considered from a younger age and be utilised more effectively as a wealth accumulation vehicle rather than just a retirement structuring tool. The latest round of changes have taken this even further. Without the ability to backload superannuation in the last 5-10 years before retirement, considering superannuation from an earlier age will most likely lead to a far better long-term outcome.

If you or other family members are in the 30-50 year old age bracket where superannuation investment and contribution strategies rarely featured during dinner party discussions, now may be the time to rethink this mentality going forward.

Superannuation ‘splitting’ – to split or not to split?

Some of you may be asking what this question is even referring to!

This under-utilised strategy involves transferring some types of contributions to (or from) your spouse. Up until now, this was primarily utilised to boost the superannuation savings of the person closer to retirement (yes there was a benefit to being the older one). However with the changes proposed recently, the use of this strategy might be more so focused on ‘balancing’ superannuation capital between spouses, given the $1.6m cap on tax free pension funds that applies to each individual.

We have not seen any commentary that affects this opportunity.

Assets currently held within pension phase with large capital gains – sell, sell, sell?

From 1 July 2017, the tax-free status of superannuation pensions will be limited to $1.6m p/person. Until then, the tax free status remains irrespective of the balance. For those holding large assets within tax-free ‘pension phase’ and who are considering a sale sometime in the coming years, pre 30 June 2017 may well provide an opportune time to trigger tax free gains.

Remember, it is critical to seek advice regarding a potentially game changing decision such as this. Like the rule book says - you should never make an investment decision based purely on tax.

Limitations on super contributions – is there another way?

There will be many planning opportunities that arise for various circumstances given the limitations on getting funds into superannuation. Acquisition of assets with high potential for capital growth (e.g. share portfolios and property with development potential) or assets where income can be cranked up (within regulation) to higher levels (e.g. business owned property) will most likely become a higher focus of strategies that we look at.

Potentially balancing a higher growth superannuation strategy during the accumulation phase with a more conservative outside-of-super approach, commensurate with you overall investment risk profile, is another planning opportunity.

Getting the business involved – a continuation of the above..

What hasn’t changed are the Small Business Capital Gains Tax Concessions. These rules, whilst very complex and requiring specialist accounting/tax, wealth and legal advice, potentially allow for additional Superannuation contributions to be made when selling down some business linked assets that will trigger a taxable Capital Gain. These contributions are not counted towards the $500,000 Lifetime Cap on personal after tax contributions.

Definite planning opportunities exist here for business owners.

Self-Managed Superannuation – will it still be cool to pool?

Potentially not. This is getting a little deep for a written communication but the topic of pooled and segregated assets will possibly become a very real one for some. Investments held within Self-Managed Super Funds typically support members and pension/non-pension balances on a pro rata basis, without specifically allocating those assets to particular individuals or pension accounts. Considering that balances above $1.6m will attract earnings tax of 15%, there is an opportunity to look at holding higher income earning assets (such as commercial property and Australian shares) within ‘pension phase’ with higher growth/lower income earning asset such as international shares and certain property assets within the accumulation portion of the super fund. Fine art, commonly held within superannuation, doesn’t typically generate income and might be nicely displayed in the taxable zone of superannuation where total balances exceed $1.6m.

Transition to Retirement – is the party over?

Maybe. Or maybe not.

For those over the age of 60 with material amounts of wealth held within superannuation, the strategy of converting your fund into a pension was a no brainer. Tax free investment earnings along with a tax free pension which could be contributed back into superannuation - you guessed it - tax free, was a gravy train that many of our clients were rightly using to their advantage. Unfortunately for many, that will end as of 1 July 2017.

Transition to retirement strategies will still be beneficial for what they were originally intended (sounds bizarre) - allowing people to semi-retire whilst supplementing their reduced income with an income from superannuation.

The strategies that do remain? Those unable to contribute the ideal level of salary sacrifice due to cash flow constraints can still utilise a Transition to Retirement Pension to boost income and therefore the ability to salary sacrifice. And for those in the advantageous position of being able to ‘retire’ and potentially return to work at a future date if circumstances change? The gravy train may well continue…

Getting the cash flow right.

Given that many will now hold a split between pension funds and accumulation funds in retirement, the mix between what pension you draw and what capital (if any) you access from your accumulation portion, will have significant long term implications.

Ensuring you have a long term focus when making short term decisions, will again be critical to getting the mix right.

What else?

For fear of information overload, we have elected to hold fire on too much else at this point. However, here a couple of extra little snippets of what else we will be factoring into our strategic financial advice:

  • Estate Planning – the use of Reversionary Pensions as an Estate Planning tool may become an even more effective and critical tool considering the $1.6m cap; this could be a massive opportunity that will be overlooked by many;
  • Capital Gains Tax Planning @ retirement - the ability to strategically utilise 5 years’ worth of concessional contributions in one go (via ‘catch up‘ provisions); with the removal of the work test, planning to sell assets with lump capital gains post retirement and offset gains via a $125,000 Concessional Contribution ($250,000 for a couple), may become a very effective strategy indeed; tread carefully and seek good advice around how this will actually work;
  • Borrowing arrangements within super – given the caps on contributions, gearing up what available capital in superannuation to accelerate the growth of the fund’s balance will obviously come with risk, as it does opportunity.

It is fair to say that given the breadth of changes announced in the 2016 Budget, particularly those to superannuation, strategic financial advice will more than ever play an increased role in ensuring you adequately prepare and structure yourself for retirement.

The team at BlueRock Private Wealth work tirelessly to ensure, that in times of noise, all of what we do is centred on helping our clients achieve clarity.

Please note that no aspect of this publication should be taken as advice. It is critically important that your personal circumstances are taken into consideration when making important financial decisions and seeking advice. We are of course only too happy to discuss how this may apply to you and welcome you touching base with our team.

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