Advice for our turbo charger clients

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Independent financial planners at Quantum Financial

We summarise the key issues for our clients in their mid 40s to mid 50s following the material super changes announced in Budget 2016. 

Note: This is general advice and takes no account of your personal circumstances. Please contact your Quantum Financial advisor for personal advice. 

 

Typically at Quantum Financial our ‘turbo-charger’ clients are aged in their mid 40s to mid 50s who are doctors or lawyers established in private practice; company head or divisional directors; financially fabulous women; and business owners.  If this is you, this is what Budget 2016 means for you.

The changes that potentially impact me

  • The income threshold for when additional super contribution tax applies (30% on contributions instead of standard 15%) drops from $300,000 to $250,000
  • If your spouse earns less than $37k, from 1 July 2017 the Low Income Superannuation Tax Offset (LISTO) can result in a concessional contribution tax refund up to $500
  • Concessional (ie pre-tax) contribution caps fall to $25k from 1 July 2017 (this includes 9.5% superannuation guarantee payments paid by your employer)
  • Concessional (ie pre-tax) contribution caps can be carried forward for 5 years up to $125k from 1 July 2017 if your total super balance is less than $500k
  • Non-concessional (ie post-tax) contribution caps set at $500k lifetime cap (including any non-concessional contributions made in the period 1 July 2016 to now)
  • If you have already exceeded the $500k lifetime cap as at Budget night, then this money can safely remain in your super.
  • Transition to retirement (TTR) pension strategies may no longer be as beneficial from 1 July 2017
  • Tax free pension balances are now capped at $1.6m per member

What do I need to know?

1. It’s much harder for you to get money into your super so you must start planning earlier and you should now consider alternative investment vehicles

The old concessional caps of $35k per annum (for those aged over 49) and $30k per annum (for everyone else) are cut to $25k per annum.  We estimate this reduces your ability to contribute to your super by $100k over your last 10 working years.

The old concessional caps of $180k per annum (or $540k if you triggered a bring forward) are cut to a $500k lifetime cap. Importantly, any non-concessional contributions you’ve already made between 1 July 2007 and now count towards this $500k cap.  For someone aged 55, 10 years away from their planned retirement, we estimate this reduces your ability to contribute to your super by $1.6m over your last 10 working years.

Under the old higher super contributions caps, the ideal investment vehicle for wealthy retirees was a Self Managed Super Fund. Under the new rules, it may be appropriate to invest via other structures such as a trust or a private company.

2. Understand how much of your $500k lifetime you have already used

Currently we are in the period between the new rules being announced, an election, a new Parliament passing the new rules and the new rules coming into effect. Despite this uncertainty, you must continue taking positive actions in your super being mindful of the current and new proposed rules. Before you make a non-concessional contribution, seek advice from your super fund and / or the ATO on how much of your $500k cap you have already used.

Be mindful that this is not as simple as it sounds. Either speak to your Quantum Financial advisor, delegate this task to your tax agent or allocate 2 frustrating hours on the phone to the ATO.

3. Equalise you and your partner’s super account balances

If you have a partner – As your tax free pension balances are now capped at $1.6m per member at retirement, seek to minimise the tax you will pay in retirement by equalising yours and your partner’s balance via contribution and contribution splitting strategies.

If you don’t have a partner – We believe the new proposed super rules unfairly penalise single clients.  Your ability to contribute and take advantage of potential strategies is significantly less than that of couples.  Speak to your Quantum Financial advisor to discuss the opportunities available to you.

4. If you are using super to fund expensive life insurance policies, re-evaluate the benefit

As the new rules restrict how much you can contribute to your super, expensive premiums funded in super can eat up a significant portion of your contributions. There can still be cash flow benefits and savings in having your insurance held in your super but ensure the savings are material.

5. Make smart use of your rolling 5 year concessional contribution cap up to $125k

While we will typically advocate regular super concessional (ie pre-tax) contributions of up to $25k, there may be situations where you may wish to ‘save up’ your concessional contributions and use up to five of them as a deduction in a single year such as when you sell a property at a capital gain.  This strategy will only be appropriate in the years following 2017 and only if you have a super balance less than $500k.

6. The 10% rule will no longer apply from 1 July 2017

Under the old super rules (which will apply up to 30 June 2017), the self-employed (or substantially not employed) who were also an employee, could only claim a tax deduction for super contributions when their employee income was less than 10% of their total income.  From 1 July 2017 anyone can claim a tax deduction for concessional contributions up to their cap of $25k (including their SG and salary sacrifice contributions).

What can I do pre 30 June 2016?

  • Make a $35k concessional contribution if you are aged over 49 and $30k if you are aged under 50.  This applies to the self employed who meet the 10% test.
  • If your balance is higher than your spouse, elect to split your concessional contribution to your spouse.
  • Check with your super fund or the ATO how much of your $500k lifetime cap you have already used between 2007 and 2016.
  • Make appropriate non-concessional contributions mindful of your lifetime cap.  If your balance is higher than your spouse, consider making the contribution in your spouse’s name.

What can I do longer term?

  • In 2016/17 make a $35k contribution if you are aged over 49 and $30k if you are aged under 50. This applies also if you are self employed and meet the 10% test.
  • If your balance is higher than your spouse, elect to split your concessional contribution to your spouse.
  • Re-evaluate your retirement planning strategy to maximise your superannuation position towards retirement. Review if a Transition to Retirement strategy is appropriate after 1 July 2017 and the attractiveness of alternative investment vehicles (eg trusts, company, etc).
  • Have a plan for your Self Managed Super Fund and for alternative investment vehicles.
  • Have a plan for your rolling 5 year concessional (ie pre-tax) contribution cap if you are intending on realising capital gains on an investment or property.

If you want to know more, request a copy of our Budget 2016 Survival Guide.

About Quantum Financial

Quantum Financial is Australia's most awarded financial planning practice. We advise a select group of successful professionals, business owners and jet setting retirees. Our website is here

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