“Nobody told me there’d be days like these. Strange days indeed – most peculiar mama” John Lennon
There is a good chance that we will look back on Monday 14th September as the eventful day that signalled the end of superannuation investors’ nirvana.
No one will have missed what happened – a Liberal Party spill motion was called by Malcolm Turnbull in which he defeated the incumbent Prime Minister, Tony Abbott, 54 votes to 44. Step forward Malcolm Bligh Turnbull, Australia’s 29th Prime Minister.
Only 3 months earlier in July Prime Minister Abbott had categorially stated:
“We made a very clear commitment prior to the last election that there would be no adverse changes in superannuation under this government in this Parliament and we have made a very clear decision that we aren’t ever going to increase the taxes on super, we aren’t ever going to increase the restrictions on super, because super belongs to the people.”
“Ch-ch-ch-ch-changes. Turn and face the strange. Ch-ch-changes” David Bowie
Fast forward to early October when Prime Minister Turnbull convened a business summit where the Government gave the green light to target tax concessions in superannuation as economic reform. After being categorically taken off the table, changes in super are well and truly back on the agenda.
In February 2015, Quantum Financial advisor Tim Mackay was asked to present at the Self Managed Super Fund Professionals Association’s national conference in Melbourne. At that time he said the following:
“Today is as good as it gets in the SMSF industry. There are serious challenges coming towards us…The Government is under massive budgetary pressure and super will be an obvious place to look for revenue.” Tim Mackay
So now everyone knows that change to super is coming but at this stage no one really knows what specific changes will be made. However, based on our experience, we believe the following principles will apply:
- Those who already have made decisions (such as contributions made to super) may be grandfathered.
- Some adverse changes will be means tested with a disproportionate impact on those with higher super balances and higher incomes from super. We don’t know what those amounts may be – they could be in the range $1.5m to $2.0m, for super balances or on income greater than $100k to $150k per annum. Note: We estimate $100k here as we don’t believe the LNP will choose a level as low as Labor’s currently proposed $75k.
- Some adverse changes (eg such as the introduction of tax in pension phase) may be introduced over time giving people a chance to plan and not adversely impacting those near retirement too much.
- Some adverse changes may apply from the day of the announcement (eg the introduction of a life time cap on super contributions) so the changes don’t immediately skew investor behaviour.
Hands off of my stack
“Money, get back. I’m all right, Jack, keep your hands off of my stack. Money, it’s a hit. Don’t give me that do goody good bullsh*t.” Pink Floyd
In the economic boom times of the last days of the Howard Government in 2007, Federal Treasurer Peter Costello opened up the most wonderful Pandora’s box. In a surprising announcement in his pre-election budget he announced that all superannuation pension income would be tax free for those aged over 59.
In the 8 years since and despite the Global Financial Crisis, superannuation assets have nearly doubled from $1.15 trillion to $2.02 trillion. In the same period, assets in Self Managed Super Funds have increased from $317 billion to to $572 billion.
In the latest ATO SMSF statistics released, we know that $38 billion in annual pensions were paid from super in 2013 largely tax free (for those over 59), with half of those pension payments ($19 billion) going to SMSF members. In addition, the ATO has revealed that 5 SMSFs each hold more than $100 million in assets.
With this background to the tax free status of super and the ongoing government budgetary problems, we have long believed that change was inevitable.
So what should you do?
“You can’t stop the waves but you can learn to surf” Jon Kabat-Zinn
Well first of all don’t panic. We believe super will always be a better environment to invest in from a tax perspective than outside of super. Otherwise there would be little incentive for people to save for their own retirement (which would cause the government significant other budgetary problems on the social security side).
Having said that, we don’t think super will continue to be the effective tax free nirvana that it can be today. In a nutshell – today is as good as it gets, change is coming but super will still be the best place to invest.
Secondly, if you were going to make contributions or shift to pension mode this financial year (ie up to June 2016), come and talk to us ASAP. It may be in your best interests to bring forward these actions so they are potentially grandfathered under the existing rules.
If you’re a couple you can currently potentially put in $1.08m after tax (concessional contribution) and $70k pre tax. If you intend to do this and a lifetime superannuation cap comes in, then you may be better placed bringing this forward.
Thirdly, given any changes are likely to impact on individual balances, as a couple you should focus on ensuring your balances are reasonably similar to reduce the impact of any such changes. If one person’s balance is significantly higher (eg if they are older so they can access it first), there could be longer term benefits in re-examining your respective balances (eg adopting a re-contribution strategy, super splitting, etc).
Fourthly, if you’ve reached your preservation age or you’ve hit 60 and you’re entitled to start a pension, we recommend you consider doing so immediately. The ability to easily start a concessionally taxed or tax free pension for those aged 55 to 64 may change in the coming months.
So, if contributions are on your mind (and you have the cash available) or if you’re thinking of shifting to pension mode, please contact us today to book a detailed strategy and planning discussion.
What do you think? If you have more questions, please do not hesitate to call us today to ask for our expert SMSF and super advice in 02 8084 0453.