If the government gets its 2018 Budget measures passed, by 2024 anyone earning between $41,000 and $200,000 will find themselves on the same marginal tax rate of 32.5 per cent. Changes to personal income tax rates, while addressing the perceived problems of so-called “bracket creep”, inevitably lead to changes in the relative attractiveness of certain investment structures.
In superannuation, for example, fund earnings and certain contributions are taxed at 15 per cent. The difference between that tax rate and the new tax rate for an individual earning $200,000 – and hence the relative attractiveness of superannuation as a savings vehicle - will be less from 2024 than it is now. Currently, an individual earning $200,000 pays $54,232 plus 45 per cent of every dollar over $180,000 that they earn.
But while the full impact of those proposed changes remains some way off, the Budget delivered on Tuesday evening by the Treasurer Scott Morrison has some real and immediate issues that can lead to useful and productive conversations with clients.
It includes measures that affect superannuation generally, self-managed super funds in particular, those looking for expanded retirement income options, and issues related to elder abuse.
Integra Financial Services director Deborah Kent says the Budget contains “some good initiatives for aged Australians, with aged care packages increasing to assist them in staying at home”.
And the announcement of $10 million for the Australian Securities and Investments Commission (ASIC) to support female financial capability is “great news”, Kent says.
“However, it's disappointing that there was not more in the budget for women, such as addressing gender pay gaps and more on superannuation,” she says.
“The Minister for Women, Kelly O'Dwyer, flagged earlier this week that there would be more packages to assist women which will be revealed in September this year. I look forward to seeing what comes out of this.”
The “Protecting Your Super” measures in the Budget impose a maximum 3 per cent a year fee on super fund accounts with balances of less than $6000. And inactive accounts (those that have not received a contribution for 13 months) with balances of less than $6000 will automatically be swept to the Australian Taxation Office, which will seek to consolidate the lost funds with members’ current, active accounts.
Profile Financial Services managing director Philip Win says this is “a big win for those not engaged with their super or unaware of where all their super accounts may be held”. It will help prevent small account balances from being eroded over time by fees and taxes.
“The ATO will be relying on data matching via members’ Tax File Numbers to ‘reunite’ various accounts,” Win says.
But he adds that it is not compulsory for a super fund member to give their tax file number to a fund, so “the reunification may be a great idea, but unable to be implemented”.
Win suggests that mandating the provision of a TFN when opening a super fund account in future could make the reunification measure more effective.
Integra’s Kent says the banning of exit fees on superannuation funds will make switching and consolidating funds less expensive
"Many consumers are locked into old superannuation funds due to exit fees,” she says.
“This will enable them to consolidate their funds into a more suitable super fund that meets their long-term needs.”
Kent says that from July 1, 2019, people aged between 65 and 74 will be exempt from work test for a period of 12 months from the end of the financial year in which they last met the work test.
"This is a great initiative for older Australians who have superannuation fund balances below $300,000,” Kent says.
“It gives them the ability to top up super, subject to existing caps, for their retirement income streams – especially women and small business owners who have not been able to save enough for retirement.”
Access to the Restart Wage Subsidy for Australians aged over 50 years will be expanded, providing up to $10,000 to employers to support workers in continuing their careers. Kent says this is “great news for older Australians wanting to continue working, encouraging employers to consider them, especially women over 50, and providing the ability to work and contribute to super and increase their retirement balances”.
DPR Wealth director David Rae says a Budget measure to increase the maximum number of members allowed in a self-managed super fund or a small APRA fund, from four to six, is a positive step for larger families who want to combine their superannuation benefits. This is especially useful, he says, if the fund wants to acquire business premises.
“Caution will be needed, however, as more members increases the risk of the risk of disputes arising,” Rae says.
Profile’s Win says lifting the number of members allowed could allow more efficient cashflow planning, “with the possibility that younger member’s contributions assisting to meet parent’s pension drawings, thereby minimising the need to sell assets to replenish cash at inopportune times”.
Win advisees SMSF members to consider issues around control and heading off disputes.
“We would encourage trustees inviting their children into their existing SMSF to ensure that they have a Binding Death Benefit Nomination in place,” Win says.
“It would also be prudent to review the SMSF trust Deed to determine how voting works. Is it based on member balances or simply membership? We’re sure that the surviving spouse would not be pleased if their children decided to out-vote them and decide to distribute the deceased member balance to themselves!”
Rae says SMSFs that have strong compliance track records move to three-yearly audits is a welcome move (for funds, rather than audit service firms) to reduce red tape, particularly where funds are operating in a very similar manner from year to year.
Rae says a measure to allow certain high-income earners to opt-out of the Superannuation Guarantee system is “a sensible approach as lower contribution caps have caused some high-income earners to be forced to exceed the limit due to multiple contributing employers”.
Elsewhere, says Profile’s Win, the ATO will receive additional funding to improve the integrity of the “notice of intent” (NOI) processes for claiming personal superannuation contribution tax deductions.
Win says some taxpayers currently receive deductions on their personal superannuation contributions but do not submit a NOI, despite being required to do so.
As a result, the fund does not apply the appropriate 15 per cent tax to the contribution – and since the contribution came from an employee’s pre-tax income, it means it’sgone into the fund without any tax being paid at all.
“Given the change in last year’s budget to allow employees to claim a personal tax deduction for superannuation contributions, this is an increasing issue for taxpayers and the ATO,” Win says.
“If a NOI is not lodged and tax deducted, the contribution will be deemed as non-concessional and could inadvertently lead to a taxpayer exceeding the non-concessional cap. The NOI is still a very manual process and hopefully it can become more automated in the future.”
DPR Wealth’s Rae says the Budget sets the scene for a welcome wider choice of retirement income products. Super fund trustees will be required to offer fund members a Comprehensive Income Products for Retirement (CIPR), which provides an income for life.
“This is in development and consultation phase,” Rae says.
Product development in the retirement incomes space has been slow and needs to pick up, Rae says, because current annuity and lifetime income offerings have limited appeal.
“I see longevity as the least-considered risk factor in long-term planning, and the traditional approach could see too many people outliving their superannuation,” he says.
Rae says trial funding for elder abuse support services represents a much-needed investment in a growing problem for older Australians.
“The are a number of factors at play causing elder abuse,” he says.
“Research suggests a staggering 80 per cent of Generation X and Y will fall short of a comfortable retirement. Increased longevity and the substantial wealth of older Australians is causing children to become impatient and put pressure on elderly parents to start distributing their estate sooner.”
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