SMSFs might be the target of budget backlash

With GST and negative gearing off the table, you’d have to wonder how the government plans to fill the projected potential $100,000,000,000 hole in the federal budget in a few weeks. That is $100 billion, and it is getting worse in the face of the resources crisis, given our income exposure to the highly volatile and slowing sector.

On May 3, we are expecting a federal budget that might take aim at our retirement savings system and self-managed superannuation fund members are justifiably worried. After all, if the government has taken consumption tax in the form of GST, negative gearing and the possibility of the states managing income tax off the table, what is left but our superannuation savings system? Pair that thought with the concept that SMSFs make up just 4 per cent of super funds but a whopping 32 per cent of all investment funds in the superannuation system at about $600 billion.

Participants in Australia’s $2 trillion superannuation industry are worried that the government has run out of options. Couple this with the fact that the average SMSF total balance is nearing $1,050,000, with more than 1 million member trustees, and savers are worried that their hard-earned retirement funds might be under fire in a month.

The government and the opposition have both floated several potential “solutions” to the income crisis and none of them are appealing to the SMSF sector. Few pundits would probably disagree that the about 450 funds with more than $10 million should forgo their tax concessions. After all, they’ve been on the receiving end of massive benefits such as no capital gains tax, no earnings tax and no income tax for recipients of account based or transition to retirement pension age older than 60. These are indeed generous allowances in a system that needs a little tweaking, but not too much.

ATTRACT HIGHER TAXES

The Association of Superannuation Funds of Australia (ASFA) reports that there are 210,000 funds with more than $1 million. Sixty-six per cent of those super funds are SMSFs. ASFA suggests that an excessive account balance is about $2.5 million and amounts of more than this figure should attract higher taxes.

But with the government talking about transition to retirement pensions being too generous, non-concessional limits of $180,000 a year or $540,000 using the three-year bring-forward rule being too lavish and concessional contribution limits at just $35,000 a year being exorbitant, it’s the rest of us who are worried about what might be announced in the up coming weeks.

It has become a trend in recent budgets to release all the bad news two to three weeks before the actual budget night to ensure the night goes smoothly and without any big public scares and ultimately political backlash.

With this in mind, we ought to get some announcements in the next week or two. Exactly what they will look like will be very interesting in a year of an election when Malcolm Turnbull has lost face three times on big tax reform issues. You would have to think he is crazy if he is planning on ostracising a large portion of his electorate by tampering with the sensitive superannuation system but crazier things have happened in the past few weeks.

CLEAR MANDATES FOR CLIENTS

With all this in mind, we have some clear mandates for clients in these uncertain times. Stick to what we know, and can potentially do, in the next few weeks. If you are eligible to establish a transition to retirement pension then do so. If you are older than 56 and younger than 65 and still working you might need to establish a transition to retirement pension before May 3. Only 5-7 per cent of superannuants who are eligible for these pensions are taking advantage of the right to do so. You can eliminate capital gains tax and earnings tax if you are younger than 60 and if you are older than 60 the income is also tax free, allowing you to recycle your income back into super.

If you have cash lying around outside of super, now might be the time to take advantage of the generous allowances to put $180,000 tax-free money into super via a non-concessional contribution, or up to $540,000 as a lump sum averaged over three years. These are indeed liberal provisions but the ability to obtain better returns simply from a lower tax regime inside your super fund should not be shirked. Moreover, with the potential strategies under threat I wouldn’t be hesitating for long.

Small businesses also have the ability to contribute up to $1.39 million, beyond the normal non-concessional limits, into super under the small-business retirement concessions and these have also been rumoured to be under consideration. If you’re retiring you should book a meeting with your accountant this week to see if you are potentially affected.

PENSIONS WILL BE SPARED

One reprieve is that Treasurer Scot Morrison announced recently at the Self-Managed Super Funds Association conference that pensions would not be under the microscope. This just leaves those in the accumulation phase of super and those looking to make contributions. That’s great news for those already receiving income streams from their super because their situations are potentially grandfathered.

If you are thinking about voting for Labor at the next election, it is probably worse. Labor is planning on taxing pensions at more than $75,000 a year. The assets test from the Department of Human Services Centrelink also drops from a current rate of $1,170,000 to about $825,000, so many recipients of the age pension will be cut off from January 2017. There are few places to hide!

The fact is none of us so-called experts have the foggiest idea of what the government might tamper with in three weeks but we do know that there is a big hole that needs filling and $2 trillion – and increasing at 9.5per cent of wages a year – sitting in the pool. Think about it and take action – time might be running out.

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