In the wake of the recent Budget and with an election looming – What are the Government and the ALP’s policy plans for your SMSF? Here is the latest.
While many retirement savers have been seriously upset about the proposed changes to superannuation in the Budget, not many have popped up to say those plans have wrecked things for Self Managed Super Funds. That’s because they haven’t. It would be more apt to compare superannuation saving to a marathon race in which competitors have just been told by Federal Treasurer Scott Morrison that for the members with higher balances, the finishing line has moved another kilometre down the road.
SMSFs are not doomed, they’ve just found that life has got a bit harder. The critical point is that while the hypothetical move of the finishing line is bad news for everybody, SMSF trustees still enjoy advantages over the other savers in the more common pooled funds. Is that unfair or illegal? No, it’s a simple fact that it is far easier to take advantage of tax concessions relating to single lumpy assets if you have a single customised fund with, say, two members.
Let’s say you have an SMSF that along the way helped your business by buying your business premises, as is entirely allowable as long as it’s done at market rates. Then it’s entirely legal to sell it back to yourself later in life when you convert your fund to pension mode, without paying capital gains tax. You can’t do that with a pooled super fund, because all the assets are held on a pro indiviso basis. They are, as the industry puts it, unsegregated. As a member of a pooled fund you are part of a bigger enterprise and it’s simply not possible to specifically allocate assets of that type, even though those funds should and do hold real estate assets.
It’s worth noting that the proposed Budget changes, which include a lifelong cap of $500,000 in non-concessional contributions dating back to 2007, could certainly cause problems for people cashing out in the way suggested above. We’ve already heard the screams of the wounded, from people who had socked away just less than $500,000 over the years and who had for instance recently sold a premises with the intention of putting more non-concessional contributions in.
But most people at the top end of the scale may well still be better off under the proposed Coalition scheme than the ALP alternative, on the basis that they will only be paying tax on the earnings of individual pension account holdings above $1.6 million. It’s ALP policy to put a 15 per cent tax on any pension earnings above $75,000 a year. Where comparison between those two policies gets difficult is that one’s based on an account total and the other is based on earnings. Everything depends on the rate of return.
The ALP policy assumes that funds earn a 5 per cent annual return, which means their tax kicks in on accounts holding $1.5 million. But what if the canny fund member is pulling, say , a 7.5 per cent return from their holding? Then the tax affects accounts holding exactly $1 million, which is surprisingly common.
If you run a SMSF, and you hold a lot of Australian shares with franked dividends, then the pension tax is likely to kick in at an even lower level than that, due to the extra returns that franked dividends deliver.
I won’t trouble you with the number of people these measures are going to affect, because I know the Coalition’s numbers from Treasury say four per cent of superannuation savers when the reality is much higher, and to my knowledge the ALP hasn’t told us yet.
Conclusion
It’s a choice between the Devil and the Deep Blue Sea but neither policy will be the ruination of savers; merely evidence that you can’t trust politicians with your long term savings. And meanwhile, the best individual strategy is to get a good financial adviser and save the most money you legitimately can. Whatever new twist Treasurers of either stripe may throw at you in the future, no government’s yet summoned up the nerve to actually ask for the money back.
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