02
Jun 2016

Budget changes to super not all doom and gloom

Budget changes to super not all doom and gloom

Written by Hudson Adviser Kris Wrenn

I will still admit that the proposed changes to the Superannuation system announced on 3rd May were a surprise, and that the implications may be significant. However, given time to reflect on them, I believe there are not only several positives to take away from it, there are potentially several strategies that could be employed using the new rules, some of which the Government may not have considered when announcing the plans.

What if I were to tell you, for example, that in theory you may be able to sell an investment property that has a $572k capital gain on it and pay only $37,500 in tax and then put all the proceeds into super in one go, all at the age of 70, or even 74; at a time when you may have been retired for over 10 years?

This would be through utilising three of the planned changes from the budget:

  • Firstly, the ability for any individual to make concessional or non-concessional contributions between ages 65 and 75 without having to satisfy “the work test”.
  • Secondly, through the new “lifetime cap” of $500,000.
  • And finally, through potentially using the “catch up” concessional contributions which roll over across a five-year period.

Case Study:

John and Julie own an investment property in joint names, which will have a capital gain when they sell of exactly $572k. They both retire at age 67 and for the next five years neither of them make any concessional contributions. At age 72 they sell the investment property, which they have obviously now owned for more than 12 months, hence they get a 50% reduction in capital gains to $286,000. Since they own the property in joint names this is $143,000 of capital gains to go on each of their taxable incomes. They each then make a concessional contribution of $125,000; $25,000 for the financial year in question and $25,000 p/a that they have not used in the preceding four years. This leaves them both with an $18,000 taxable income, which is within the tax-free threshold so no income tax paid. The only tax paid was $37,500 contributions tax paid on the $250,000 paid into super concessionally. This is as opposed to paying $86,706 in income tax if the new super rules were not used and John and Julie were forced to pay income tax on the whole capital gain. That's a tax saving of $49,206, nearly fifty thousand dollars.

As well as getting the $250,000 (combined) of concessional contributions into super, they can also potentially use the proceeds from the sale to put another $500,000 each into their super funds; assuming they have not made any other non-concessional contributions since 1st July 2007. It is worth noting that under the current rules anyone over the age of 65, assuming they carry on working, can only put $180,000 into super each year because they cannot use the bring forward rule. So in this sense, although the $500k lifetime cap will limit what some individuals wanted to achieve, for others it will now allow them to make larger contributions in retirement than they perhaps could have done, possibly after the sale of a property or share portfolio.

I would also note that the intention behind the “catch up” concessional contributions was to aid those individuals with varying levels of income, such as those who are self-employed, or women that may go on maternity leave. As such they may in the future impose some form of new rule to prevent it being in such a manner as above.

How else can we take some of the proposed changes in a positive light?

1/ One change was that there will now be personal concessional contributions for all. I.e. you will no longer need to be self-employed, and despite potentially earning employment income all year long, you could potentially top up your concessional contributions to $25,000 using your own cash and reduce your taxable income accordingly. This could be very tax effective for those that are perhaps approaching retirement and decide to sell down shares or property and wish to mitigate some of the capital gains tax implications.

2/ TTR pensions no longer experience tax-free earnings. Okay it is difficult to see the silver lining on this one, and this will impact many investment strategies already in place. TTR pensions may still have their part to play however. I.e. If you are not currently maximising your concessional contributions to Super.

Case Study:

Paul earns $62,000 and his employer pays in the 9.5% Super Guarantee or $5,890 p/a. This means he is $19,110 short of the proposed new concessional cap of $25,000. He has $130,000 in his super. He instructs his employer that he wishes to salary sacrifice $735 per fortnight, or $19,110 per annum. This will reduce his “take-home” pay by $481 p/f, or $12,517 p/a. Since he needs this income for day-to-day living expenses he converts $125,200 of his super to a TTR pension and draws the maximum allowable of 10% p/a, or $12,520. He has it paid fortnightly and it perfectly covers the shortfall in his pay.

The difference is that he avoids income tax of 34.5% on the extra $19,110 he is salary sacrificing and instead pays 15% contributions. This is a difference of 19.5% and an annual tax saving of $3,726 p/a for as long as Paul continues to work.

Final consideration of the proposed changes

You may have heard of the strategy of “re-contributing the taxable component” of someone’s super so that their children will inherit it tax-free. Most of us have a large “taxable component” in our super, as concessional contributions throughout our lifetime form part of this taxable component, and it is present regardless of age. You can be 100 years old and still have 100% “taxable component”. So what some financial planners will advise, if possible, is to pull out some, or all, of your super and put it back in as a non-concessional contribution, which can have the effect of reducing the taxable component and meaning that your children may inherit the super tax-free.

Something which used to conflict with this strategy was the possibility of the deceased receiving an “Anti-Detriment Benefit”. This is an additional payment made to certain beneficiaries of a deceased member, as part of the death claim. It is essentially a refunding of contributions tax paid by the deceased throughout their lifetime and it is only paid on the taxable component.

One of the less publicised changes to super proposed in the budget was the abolition of this “Anti-Detriment Benefit”. As such, it is more important than ever to consider the re-contribution strategy.

As always, book in with your Hudson adviser to discuss this and all of the proposed changes to superannuation.

 

Read in full + comments 0 Comments

02
Jun 2016

What am I worth?

What am I worth?

Written by Hudson Editor Hayley Mcleod

When I completed university I of course thought my starting salary should have been a lot higher than what it was. I had a degree and life experience, what more could an employer want? Like many graduates and those who have been in the same position for a long time it can be hard to put a value on what you think your salary should be. There is also often a discrepancy between what you think you are worth and what an employer thinks you are worth.

Well wonder no more there is now a new and FREE service available called Value my CV:  http://cv.adzuna.com.au/value-my-cv/ Once you have uploaded your CV this new website uses scientific data in its backend to analyse your CV. It uses “text mining” to extract your work history, skills and education, job titles and location and then compares the information against 50,000 CV’s with the end result being a figure the computer believes you are worth to an employer.

The service has been very popular in the UK and is said to help improve people map out future career pathways based on their qualifications and can be particularly helpful for women transitioning back into the work force. The service also provides you with suggestions on how you can improve your CV.

Another feature of this service is its ability to email your boss telling them why you deserve a pay rise based on the information provided to you, a service I’m not quite sure employers will appreciate.

This is a new service so there is no supporting data of its success rate in Australia and it is also hard to put a value on an employee with years of knowledge in one particular industry but if you are looking for a career change, are curious about future career prospects or are entering the workforce this may be a useful tool for you.

Read in full + comments 0 Comments

Do you have a
'Dear Adviser' question?

Ask a question
Get in touch with Hudson and one of our advisers may be able to answer your question.

Ask our advisers now

Issues by month/year

Special Edition

May-2017-(C)

June-2017-(C)

June-2016-(C)

Insurance

February-2017-(C)

February-2016-(C)

December-2017-(C)

August-2016-(C)

2020-10-19

2020-09-25

2020-08-28

2020-07-31

2020-07-23

2020-07-03

2020-05-29

2020-05-01

2020-03-27

2020-02-28

2020-01-31

2019-12-20

2019-11-29

2019-10-25

2019-09-27

2019-08-30

2019-07-31

2019-06-28

2019-05-31

2019-04-30

2019-03-29

2019-03-01

2019-02-28

2018-12-21

2018-11-30

2018-10-26

2018-09-28

2018-08-31

2018-07-27

2018-06-29

2018-05-25

2018-04-27

2018-03-30

2018-02-23

2018-01-26

2017-12-15

2017-11-24

2017-10-27

2017-09-29

2017-08-25

2017-07-28

2017-06-30

2017-05-26

2017-04-28

2017-03-31

2017-02-24

2017-02-16

2017-01-27

2016-12-16

2016-11-30

2016-11-18

2016-11-11

2016-11-04

2016-10-28

2016-10-21

2016-10-14

2016-10-07

2016-09-30

2016-09-23

2016-09-16

2016-09-09

2016-09-02

2016-08-26

2016-08-19

2016-08-12

2016-08-05

2016-07-29

2016-07-22

2016-07-15

2016-07-08

2016-07-01

2016-06-24

2016-06-17

2016-06-10

2016-06-03

2016-05-27

2016-05-20

2016-05-13

2016-05-06

2016-04-29

2016-04-22

2016-04-15

2016-04-08

2016-04-01

2016-03-25

2016-03-18

2016-03-11

2016-03-04

2016-02-26

2016-02-19

2016-02-12

2016-02-05

2016-01-29

2015-12-04

2015-11-27

2015-11-20

2015-11-13

2015-11-06

2015-10-30

2015-10-16

2015-10-09

2015-10-02

2015-09-25

2015-09-18

2015-09-11

2015-09-04

2015-08-28

2015-08-21

2015-08-14

2015-08-07

2015-07-31

2015-07-24

2015-07-17

2015-07-10

2015-07-03

2015-06-26

2015-06-19

2015-06-12

2015-06-05

2015-06-02

2015-05-29

2015-05-22

2015-05-15

2015-05-08

2015-05-01

2015-04-17

2015-04-10

2015-04-03

2015-03-27

2015-03-20

2015-03-13

2015-03-06

2015-02-27

2015-02-20

2015-02-13

2015-01-30

Topics


Search all issues

Enjoy reading the Hudson Report?

Let us know your views on our news.

Contact Hudson Online