The proposed superannuation changes included in the 2016 federal budget and their implementation has presented some strategic opportunities for SMSF advisers and their clients. Graeme Colley outlines some areas members can use to their advantage.
With the super changes taking effect at the beginning of July this year, advisers and clients need to get cracking to make sure the current opportunities available are not missed. Taking no action may prove a double-edged sword as current concessions may be missed and for many clients the lower caps could restrict contributions and amounts in retirement phase from 1 July.
On the contributions side of things, most have focused on the introduction of the new caps, which may impact on concessional and non-concessional contributions, as well as pensions. It’s the measurement of the new caps, valuation of the underlying investments and keeping an eagle eye over them that are important to make sure they don’t fall into excess. However, accessing some of the other concessions available now and in the future may prove to be the icing on the cake. This may include tax deductions for contributions, changes to spouse contributions and the low-income superannuation tax offset, which may only reveal themselves once we see the final legislation.
One thing for sure is the current rules for concessional and non-concessional contributions are in place until 30 June next year and, as such, advisers and their clients need to think about salary sacrifice and timing of super guarantee contributions, as well as maximising non-concessional contributions. On the pension side of things, anyone who has more than the proposed retirement phase cap of $1.6 million will need to consider their position in advance. It would be worthwhile to see how pension balances can be reduced to meet the limits and what investments can be used to support pensions for anyone able to use segregation.
Salary sacrifice considerations
The first thing to consider is concessional contributions and salary sacrifice arrangements. Anyone who salary sacrifices to superannuation should review the arrangement they have in place and consider that an adjustment is required to use the age-based concessional contributions cap to the maximum. Ensuring all contributions for this financial year are made by 30 June 2017, before the new rules are proposed to commence, will mean contributions are maximised in the next financial year. Once this year’s concessional contributions have been sorted, the next thing to do is write a diary note for April or May next year to review any current salary sacrifice agreement.
This will provide enough time to make adjustments if the cap is reduced from 1 July 2017. It will help to avoid any excess concessional contributions and any potential excess contributions determinations from the ATO in 2017/18.
In specie contributions
A popular strategy for SMSFs is to transfer certain investments, such as publicly listed shares, into the fund as contributions instead of cash. Making in specie contributions can be a useful strategy particularly for those who may be cash strapped. Whether the contribution takes place in this financial year or 2017/18 will depend on the circumstances. From 1 July 2017 the opportunity is likely to be open for individuals to claim tax deductions for in specie as well as cash contributions. However, don’t forget any capital gains implications on any transfers and the impact of the excess concessional contributions tax if either cap is exceeded.
Concessional contributions and reserving
For anyone with an SMSF, a common strategy is to boost super contributions in one year by allocating concessional contributions to a reserve for a short time, and then transferring that amount to a member’s account in the next financial year. There can be a number of tax benefits by using this strategy as it is possible to make a concessional contribution up to double the cap for the member in one year. However, things will change for reserving this financial year due to the proposed reduced concessional contributions cap for 2017/18.For 2016/17, anyone using the reserving strategy will need to consider the proposed decrease in the concessional contributions cap to $25,000, which is proposed to take place from 1 July 2017. Until 30 June 2017 the concessional contributions cap is $30,000 for anyone under 50 and $35,000 for anyone 50 and older. This means to avoid excess concessional contributions tax, the maximum concessional contribution for anyone using the reserving strategy in this financial year will be $55,000 for anyone under age 50 and $60,000 for anyone 50 and older. For example, for anyone 50 and above the $60,000 is equal to the concessional contributions cap for this year ($35,000) and the cap amount proposed for next financial year ($25,000).
Let’s look at an example to illustrate how the reserving strategy works.
Marco is 54, self-employed and wishes to make a concessional super contribution to maximise his concessional contribution without breaching the caps.
Marco’s adviser tells him it’s possible to obtain a tax deduction for more than the concessional contributions cap without triggering excess contributions. This can be done with the use of a reserve account, providing the contribution is made in June 2017.
If Marco makes a $60,000 concessional contribution after 1 June 2017 and before 30 June, he could allocate $35,000 to his account in the fund and allocate the remaining $25,000 to a contributions reserve account. The $35,000 would be counted against Marco’s concessional contributions cap for the current financial year. Providing the $25,000 was allocated from the reserve to Marco’s account between 1 July and 28 July 2017, it would be counted against his concessional contributions cap for the 2018 financial year.
The benefit of this strategy for Marco is that concessional contributions of $60,000 would be made to superannuation in 2016/17 and reserves used as appropriate to ensure he is not subject to excess concessional contributions tax due to the use of the reserve in June and July 2017.
Part-timers and casuals
Another opportunity coming out of the budget proposals, which takes place from 1 July 2017, will be that part-timers, casuals and those who are not currently employed will be able to claim tax deductions for superannuation contributions. Under the current rules, access to tax deductions for personal superannuation contributions is limited to anyone earning less than 10 per cent of their income from employment. This restricts personal deductions currently to self-employed people and anyone receiving most of their income from investments.Let’s look at a case study illustrating how the draft legislation could work.
Fran has had a number of casual jobs, worked part-time and is expecting a baby in December 2017, when she will stop work for the rest of the financial year. Some of the casual jobs she has had are only for one or two days, which meant she earned less than the monthly income threshold for superannuation guarantee payments. From 1 July 2017, Fran will be able to make tax deductible superannuation contributions up to the concessional contributions cap, which will provide her with the opportunity to top up her superannuation. Depending on how much she has earned during the year, she may also consider making non-deductible contributions to super if she is eligible for the government’s co-contribution. If she meets the income tests, it could provide her with up to $500 for making a non-concessional contribution of up to $1000.
The ability to carry forward unused concessional contributions up to the cap amount for up to five years is another bonus from the proposals. If Fran is unable to make contributions during the financial year in which she has ceased work to have her baby, she can carry forward the unused amount for up to five years on a rolling basis. As she intends to return to work once things have settled down, it may be possible for her to have concessional contributions up to the unused portion of the caps made to her superannuation account. The unused portion can only be accessed by Fran if the total of the balances in her superannuation funds is less than $500,000.
Low-income spouse tax offset
The potential amendments to the low-income spouse tax offset, which increases the spouse’s income threshold from 1 July 2017, provides icing on the cake for spouses earning less than $40,000 per year. Currently the maximum tax offset is available on adjusted incomes of up to $10,800, but from 1 July 2017 this will likely increase to $37,000. Anyone who makes a non-concessional contribution for their spouse of at least $3000 and their spouse has an adjusted income of less than $37,000 can receive a tax offset of $540, which is applied against the contributing spouse’s income tax. Between $37,000 and $40,000, the amount of the tax offset reduces gradually to zero.There are a number of choices available with non-concessional contributions and the available tax concessions. One choice is whether a person’s partner should make a non-concessional contribution for their spouse or it could be combined with the spouse making a non-concessional contribution to access the government’s co-contribution and the remainder be contributed by the partner for his or her spouse.
To illustrate how this strategy could work, let’s look at Phil and Emma. Phil has $3000 to contribute as a non-concessional contribution for Emma in the 2018 financial year. Emma has an adjusted income of less than $37,000. If Phil makes the non-concessional contribution of $3000 for Emma, the amount of income tax he pays will be reduced by $540 as he would qualify for the low-income spouse tax offset.
As an alternative, if Phil gifted $1000 to Emma and she contributed it as a non-concessional contribution, she may qualify for a co-contribution of $500, which would be credited to her super fund account. The $2000 of Phil’s contribution, which remains after gifting $1000 to Emma, can be made as a spouse contribution for Emma. If Emma satisfies the rules for the low-income spouse tax offset, Phil will receive a tax offset of $360, which will be used to reduce his tax payable for the financial year. Also, Emma’s superannuation account balance increases by $3500 and is made up of the $3000 non-concessional contribution and $500 from the government’s co-contribution.
Low-income super tax offset
The final change in the draft legislation is the replacement of the low-income superannuation contribution (LISC) with the low-income superannuation tax offset (LISTO). This concession provides a refund of tax payable by the super fund on concessional contributions for anyone who has an adjusted income of up to $37,000. The maximum amount of the refund is $500 and is paid to the member’s superannuation account.
LISTO compensates fund members because they would pay less tax if the contribution was paid as salary and wages or income from self-employment.The original announcements made in this year’s budget and subsequent changes in mid-September provide a number of potential opportunities for accessing superannuation tax concessions now and later on. Although there is an element of wait-and-see in it, we need to consider what can be done for this financial year. This includes ensuring the contributions caps available for this year are used in the best way possible.