Wealth Intelligence

May 2016 Federal Budget - What do you need to know?

The Federal Budget has changed the superannuation regime, considerably.

Firstly, it is important to understand that none of these changes are yet legislated. And there is also a little matter of an election in July. Detail will only be known once the legislation has been put to Parliament (possibly after September this year). 

Secondly, even if all of the proposed changes become law, superannuation will continue to have a preferred tax status for your investments over the long-term (in most cases). Certainly the default strategy of "just put it into super" is now history. It may become more appropriate to look at investing via a (combination of) family trust, personally or even considering some gearing strategies, just to name a few.

Whichever party wins the election, there is little doubt that wealth management has become much more complicated.  

Superannuation proposals haven't made life easier

'Superannuation advice' has become redundant.  It is now 'wealth advice'; because of the need to fully embrace, as First Samuel has always done, strategies and investment outside of superannuation.  

And we repeat our recent observation: be intentional. 

Proposals to apply from 3rd May 2016 (Budget night)

3 May 2016 v2

The proposals

Implications & possible actions or alternatives

Introducing a lifetime cap on non-concessional contributions of $500,000 per person.

Excess non-concessional contributions can be refunded but we suggest speaking to your Client Strategist before making any additional non-concessional contributions. 

This cap will include any non-concessional contributions made since 1 July 2007.

It may now be appropriate to consider a family trust (or personal accounts) for future investment purposes.

Proposals to apply from 1 July 2017

1 July 2017 v2

The proposals

Implications & possible actions or alternatives

Transition to retirement pensions (TRAPs) will have earnings taxed at up to 15% i.e. the same as the rate which applies to superannuation benefits in the accumulation phase.

For those taking a TRAP, no change until 30 June 2017.

For others, it may still be appropriate to commence a TRAP in FY-17.

Thereafter we will need to consider the merits or otherwise of continuing transition pensions (especially where there has been a tendency to re-contribute the pension back into superannuation).

Reducing the concessional contributions cap to $25,000 per annum for all ages.

It may be appropriate to look at other wealth generating strategies, like gearing, for surplus cash-flow.

A lifetime transfer benefit cap of $1.6 million to apply to current and future tax-free pension accounts.

Excess amounts above $1.6m may need to be converted back into accumulation and the earnings on this excess will be subject to the (up to) 15% tax rate which applies to all superannuation in the accumulation phase.

It may be appropriate to consider moving funds to a lower balance member (where possible) or out of superannuation and investing personally or via another entity. 

Applying a 15% additional tax on concessional contributions for those who have income over $250,000.

This tax currently applies to those who have taxable income over $300,000.

Consider restructuring income to come under the relevant threshold.  This of course may not be possible.

Allowing a catch-up of concessional contributions.

Those with a superannuation balance of less than $500,000 can utilise a rolling concessional contributions cap for a period of 5 consecutive years.

Effectively this allows those with interrupted work patterns or cashflow fluctuations to benefit by making additional concessional contributions. 

Removal of the "work test" for those aged between 65 and 74.

The "work test" required you to be employed for 40 hours over a 30 day period before you could contribute.

This is much more flexible and with the proposal below it may mean individuals can lower their tax on non-superannuation investment income by making tax deductible superannuation contributions well after retirement.

Tax deduction for personal super contributions up to the concessional contributions cap of $25,000 is now available to everyone.

Much more flexible and means it is open to all individuals to make a top up contribution towards their concessional cap and get a tax deduction. 

Abolishing anti-detriment payments.

An additional death benefit payment amount to compensate for contributions tax paid throughout a member's lifetime.

This change is likely to affect retail and industry funds. Many self managed superannuation funds (SMSFs) were not structured to make these payments, as it requires the payment of a lump sum in excess of the deceased member's benefits. No effect for most SMSFs.

What now?

The First Samuel Wealth Strategy Team will continue to consider the impact of the proposed changes.  Once the detail is known and legislated we will work with you to implement tailored strategies that will ensure you are structured optimally within the new rules.

Because of earlier recommendations, we believe that almost all clients made their FY-16 contributions prior to the Budget.  But if you had planned or were advised to make a superannuation contribution (concessional or non-concessional) before 30 June and had not done so, please speak to us before so doing. 

As always, if any matters are of concern, or you would like further clarification, please contact your Client Strategist: Nikki, Simon, Jack, Jenny or me. 

-     Chris Tsatrafilis, Senior Client Strategist

Important notice: Any advice contained in this article is of a general nature only and has been prepared without taking into account your personal objectives, financial situation or needs. Because of that, before acting on any advice in this article, you should consider whether it is appropriate for you having regard to your objectives, financial situation and needs. Further, we recommend you seek personal financial advice before acting on any advice in this article.