The following legal overview provides a guide on how the present regime operates. It does not take account of particular personal circumstances. Individual investment decisions should always be the result of specific advice from your legal and/or financial adviser.
In brief - Be prepared to be flexible about superannuation and other investments
Regardless of the outcome of the 2013 federal election, governments will continue to tinker with tax and superannuation. Your best strategy is to remain flexible about investing in superannuation and outside it.
What are the government's proposals?
Minister for Employment and Workplace Relations Bill Shorten has recently announced that the government will split the proposed changes to superannuation into two parts.
The positive aspects will probably be dealt with in the current Budget session (an Exposure Draft Bill was released on 6 May 2013) and the rest will be dealt with later.
The positives are:
- the raising of the maximum tax deductible contribution for the over 60s to $35,000 in the 2013/2014 year and for the over 50s in the 2014/2015 year
- the introduction of non punitive scheme for excess contributions
The negatives are:
- the taxing of income (including capital gains) in superannuation fund in pension phase above $100,000 per annum starting on 1 July 2014 with some grandfathering for assets held as at 5 April 2013
- 30% "entry" tax for high income earners
Actions you can and should take now - be flexible
All governments will continue to tinker with superannuation, so maximum super flexibility should be maintained. Don't put all your eggs in one basket.
Splitting your superannuation with your spouse or partner
Spouses should engineer a 50/50 split in their super balances as soon as possible.
Using the tax free threshold
Once assets in your fund or funds reach the $100,000 income level (say about $1.5 million), future assets should be held outside super, up to an amount sufficient to produce about $20,000 per annum (currently the individual threshold is $18,200 which was to rise to $19,400 in 2015/2016, but has now been postponed indefinitely).
After the tax free threshold it is still better for assets to be held in super, i.e. at 15% tax rather than 19% tax.
Revisiting negative gearing
Reassess geared investments in super to factor in capital gains tax on realisation. Just because you can borrow in your superannuation fund doesn't necessarily mean you should.
More detailed reasons for these recommendations are set out below.
Taxation of earnings of super funds changes yet again
Even though legislation has only been passed relatively recently to allow borrowing in super funds, the game has once again been changed by the proposed taxation of earnings of superannuation funds in pension phase, announced by the government on 5 April 2013.
There are some grandfathering provisions, but for all new investments after the 5 April 2013, one has to assume that unlike the position that had previously applied, income and capital gains will now be subject to taxation on any increase over their 30 June 2014 value even in pension phase for high balance funds.
As yet there is no legislation to consider and there may not be before the federal election, but as they say, the devil is in the detail.
It pays to remain flexible.
Splitting your super with family members
Consider the following scenario.
Dad is 62 next birthday and has a superannuation balance of $2,600,000. Mum is 60 next birthday and has a superannuation balance of $200,000.
Dad progressively withdraws funds from his super fund which mum uses to make undeducted contributions to her super fund.
Using this strategy mum makes contributions of:
- $150,000 on 30 June 2013 (this figure is set to rise but with the government postponing so many promises, in this example we have not factored in any increase)
- $450,000 on 30 June 2014 (being three years undeducted contributions)
- repeat the process three years later ensuring the last payment of $450,000 is made before the end of the financial year in which mum turns 65, which is the last opportunity to make undeducted contributions on a bring forward basis under the current rules
Thus, ignoring any deducted contributions and capital growth, mum's super will be increased to $1,400,000 and dad's super will have decreased to $1,400,000.
They should then both be within the proposed $100,000 per annum tax free income threshold and will save dad's super fund tax at 15% on the earnings and capital gains on $1,200,000.
Property in super funds should be revisited
The superannuation strategy that had been developed by many advisors was to purchase properties in self managed superannuation funds on the basis that because of the long lead times applicable to these funds, any tangible assets would be likely to appreciate in dollar value over time.
In pension phase these gains were tax free.
The potential taxation of these gains in the future should cause all taxpayers at least to reassess the viability of the purchase of real estate assets in a superannuation fund.
In superannuation in the future, so-called "lumpy" assets like property should perhaps be avoided, as you will need to be able to realise capital gains progressively to avoid a big tax payment in one year.
With negative gearing still intact and assuming the 50% discount on capital gains for individuals is retained in the future, negatively geared investments may be a better option than superannuation for some people.
Consider assets that can be realised progressively
Rather than lumpy assets like real estate, consider investments like listed shares and units in property trusts that can be sold down progressively over a number of years. This may produce a better tax result for the taxpayer.
Contrast the following two scenarios:
- A $500,000 post capital gains tax home unit with an unrealised capital gain of $200,000 can really only be sold in one taxable year. In the case of an individual, this would result in a $200,000 taxable capital gain less the 50% discount, giving a result where tax on $100,000 is payable at the taxpayer's marginal rate.
- $500,000 in listed shares or listed units with $200,000 capital gains which could be progressively realised over several years to take advantage of the taxpayer's tax free threshold (currently $18,200 and potentially increasing to $19,400 in the 2015/2016 taxation year).
Now that all super funds will potentially be taxed in pension phase, the same principle potentially applies to investments in super in funds where managing the taking of capital profits progressively can give a much lower tax rate.
The above examples assume that the law is not changed for tax payments received from superannuation funds in the hands of the recipient, or otherwise to deny the threshold to a taxpayer.
Investing outside super
In addition, the taxation of income in pension phase on investment earnings exceeding $100,000 per annum (to be indexed to the CPI) should cause taxpayers to readdress the desirability of building up large superannuation balances that would deliver more than $100,000 per annum income per member in retirement phase. An account balance over about $1,450,000 showing a combined income and capital gains return of about 7% would begin paying tax at the rate of 15%.
Alternatively and again assuming taxpayers can rely on no more changes to the rules, a taxpayer would aim to enter pension phase with a balance in super sufficient to generate $100,000 per annum and then sufficient funds outside super to reach the tax free threshold and have the rest in super which is still taxed at a lower rate than the 19% rate that kicks in after the tax free threshold is reached.