A super balancing act
Superannuation has been on a roller-coaster ride to reform for the better part of 12 months. How can accountants provide value and guidance to clients in this limbo state?
For several years, superannuation has been a political football, trapped in the short-term budgetary cycle. But arguably, since the Costello years, advising on superannuation has never been less predictable or more problematic. The consistent tinkering of reforms often hit the accounting community hard, given their mantle as the trusted adviser with self-managed superannuation funds (SMSFs) in particular.
At the time of writing, three tranches of draft exposure have been released detailing the government’s superannuation reforms. Some of the proposals represent massive backflips from what was originally proposed in this year’s federal budget.
In mid-September, the Turnbull government made significant changes to its superannuation reform package, announcing it would scrap its plans for a lifetime cap of $500,000 on non-concessional contributions. According to SuperConcepts’ executive manager, SMSF technical and private wealth, Graeme Colley, the $500,000 lifetime cap has essentially been replaced with the reduction of the non-concessional contributions to $100,000 per annum from the current $180,000.
Treasurer Scott Morrison also flagged that individuals with superannuation balances exceeding $1.6 million would be restricted from making further non-concessional contributions. For now, it looks like this is here to stay.
“We’ve also got the drop in the concessional contributions cap amounts from [the current] $30,000 or $35,000 for those over 49, down to $25,000 a year for everyone. That was in the original budget announcements though,” Mr Colley says.
The $1.6 million superannuation balance transfer cap in the original announcement made it into draft legislation. The cap limits the amount of super money that an individual can transfer into the pension phase to $1.6 million.
Addressing the reforms with clients
While the government’s intended changes have now been mapped out in the draft legislation, it is still unclear whether there will be any more changes as the government attempts to pass the legislation through both houses. Without the details finalised in law, it can be difficult to know how to approach discussions about the reforms with clients.
Heffron SMSF Solutions head of customer Meg Heffron says avoiding the discussion altogether with clients is not an option, even if some accountants may have decided this might be the safest course of action. While it is still too early to start implementing a lot of strategies with clients, accountants need to start having conversations with clients about their options.
“There’s so much publicity about these reforms so it’s going to be very difficult for accountants to keep saying ‘do nothing’ to their clients,” Ms Heffron says.
“These proposed reforms are in the paper every weekend so the most important thing is to make sure that their education is coming from a source that they can trust, and that they’re being told the right things. The best way an accountant can control that is if they’re the one doing the educating.”
Failing to flag changes with clients could even place them at risk of providing negligent advice to clients.
Allens partner Michelle Levy says if practitioners fail to mention the changes or discuss the client’s options, this could result in the client missing out on certain opportunities they can take advantage of now.
“If an accountant failed to tell their client that they had a window in which to do something based on the announcements or draft legislation, I think there would be a good argument that they were negligent,” she warns.
The time constraints around these reforms is another reason why it is necessary to start talking to clients now, according to Mr Colley.
“Once the reforms are passed, we will probably only have a maximum of six or seven months and if it doesn’t make it through before Parliament rises on 1 December, then it won’t be until February before the legislation goes through,” he says.
“This leaves a very short period to think about what to do, so by getting clients to think about their super now, at least you’re ahead of the game.”
What to act on now
While accountants should hold off on implementing any strategies with irrevocable consequences until after the legislation has been passed, there is some housekeeping practitioners can do now, Ms Heffron says.
Tidying up pensions and trust deeds will not negatively impact the client in any way and will make life easier when the changes are finally legislated. The types of strategies that an accountant can implement for the client will also depend on whether the accountant is operating under a limited licence.
Tidying up TRIS strategies
One area practitioners can address with their clients now is whether their transition to retirement income stream (TRIS) is actually still a TRIS, Ms Heffron says.
“I’ll bet there are plenty of pensions around the country that are still classified as transition to retirement because the clients never thought to tell their accountant that they had actually fully retired or that their casual employment has ceased,” she says.
Under the new rules, a transition to retirement income stream converts into a normal pension once the super member meets a condition of release like retirement.
“Regardless of whether the law that proposed to wind back tax concessions on TRIS comes in or not, there won’t be any negative consequences with tidying things up and clarifying which pensions are transition to retirement and which are not,” Ms Heffron says.
Making the most of existing caps
Encouraging clients to contribute under the higher concessional caps this year is also a sensible strategy to implement now, Perpetual’s head of strategic advice Colin Lewis says.
With both the concessional and non-concessional contributions caps set to drop from 1 July 2017, Mr Lewis says accountants should ensure clients make the most of them now.
“This is especially important for those over the $250,000 income earning range that will have to pay additional contribution tax from 1 July next year,” he says.
This financial year could also be the last opportunity for certain clients to contribute money to super on an after-tax basis.
Mr Lewis says accountants need to determine with their clients whether it’s appropriate to contribute more money to super, and if it is if they should be using the bring-forward rule to maximise their position.
From 1 July 2017, the ability for clients to make non-concessional contributions will hinge on whether they’ve got less than $1.6 million in super, Ms Heffron says.
“If they’ve got $1.6 million in super now, or they’re particularly close, they may want to consider getting the money in now.”
Adjusting trust deeds
Once the changes are implemented, Ms Heffron expects there will be a lot of super members who will want to either add a reversionary beneficiary or take one away.
“There will be powerful drivers to go either direction, but ideally what you want is to be able to do that without stopping your pension. You want to be able to do that while it’s still running,” she says.
However, certain trust deeds won’t allow this and accountants may want to update their client’s trust deed now to allow clients to do this.
Ms Heffron says by making this adjustment now, when the legislation is passed and the client is potentially facing the decision of whether to add a reversionary beneficiary or to take one away, they can implement it quickly without needing to go through the process of changing the trust deed.
“Changing the trust deed is going to take a bit of time and will slow down the whole process.”
What to flag with clients
With some of the more serious changes, accountants should try to hold off on implementing strategies for clients until the legislation is passed. However, it is still important for accountants to start discussing options with clients, as this will speed the process along once the changes come into effect.
Addressing estate planning
For clients with larger super balances but less money in their personal name, they may be better off transferring some of their superannuation money into their personal name, Mr Colley says.
“The client may find by investing in those assets personally, they may still fall under the tax-free threshold, rather than paying 15 per cent tax on earnings on the other side of things,” he says.
Mr Colley advises accountants to have discussions with clients about whether it’s worthwhile withdrawing money from super for estate planning purposes.
“For some, there will be advantages in keeping the money in super, while others may want to draw it out,” he says.
“I have seen some clients with around $2 million thinking, ‘Well, should I draw that money out now and maybe gift it to the kids because it’s going to go to them anyway?’”
Responding to the TRIS changes
With the proposals set to change the tax treatment of transition to retirement pensions, there may be clients who want to remove money from super to the extent that it exceeds the $1.6 million non-concessional cap restriction amount.
Ms Heffron says it is too early to be removing the money now, but accountants will need to address this with their clients by 1 July 2017.
Under the new rules, clients with transition to retirement income streams who have met a condition of release will be pushed into the retirement phase, Mr Colley explains.
“Accountants really need to have a look at that closely with clients, particularly where they have part-time jobs because of the potential impact of the TRIS pushing them into retirement phase.”
Taking advantage of the transfer balance cap thresholds
A range of strategies will start to emerge from the super reforms as they come into play from next year, Mr Lewis says.
The thresholds with the $1.6 million non-concessional contributions cap, for example, present an opportunity for clients to maximise the amount they can contribute to super.
“If they are close to the $1.6 million cap, that will impact how much they are able to put in on an after-tax basis,” Mr Lewis says.
However, because of the way the thresholds operate, if an accountant tells the client to fractionally reduce their super balance, this may enable the client to make a larger non-concessional contribution.
“For example, if someone has $1.41 million in superannuation, when the new rules come into play from July next year, somebody in that order will only be able to contribute $200,000 as a non-concessional contribution. Whereas if they have $1.39 million they could put in $300,000,” Mr Lewis says.
“It could be that a client who is eligible to start a TTR pension might do that to reduce their balance in order to be able to put in an extra $100,000 of non-concessional contributions.”