Australia: ALP superannuation proposals - what should high balance or high income taxpayers do?

In brief - All possible capital gains should be realised sooner rather than later

You should maintain flexibility, make use of the tax free threshold, split your superannuation with your spouse or partner and realise capital gains now if you are a high balance taxpayer.

Changes to be implemented if Labor returns to government

Recently Opposition Leader Bill Shorten announced Labor's latest proposed policy on superannuation, which is stated to target pension phase superannuants and high income earners. The policy would come into effect on 1 July 2017 on the assumption that Labor returns to government before then.

The first change is to drop the threshold for the 30% contribution tax to $250,000 per annum. There is little one can do about this tax other than earn less!

The second is a 15% tax on income accruing to individual pension accounts over $75,000 per year. There is no mention of this sum being indexed. It should be noted that in Labor's previous policy in this area, "wealthy superannuants" were defined as people earning more than $100,000 per year in their pension account.

Labor proposal will tax the high years but give no credit for the low years

For self funded retirees, one problem is that superannuation returns are "lumpy" by their very nature. This means that in a good year, funds may show very high returns and then in a bad year, relatively low returns.

It would appear that the current Labor proposal will tax the high years, but give no credit for the low years.

For example, if you had $1 million invested in super and it gave a 10% return of $100,000 in the first year, then $25,000 (the difference between $100,000 and the threshold of $75,000) would be subject to 15% income tax.

If in the following year the return was down to 5%, you would pay no tax, but you would get no credit that you could carry forward against future income from the fund.

For self managed funds that hold assets like real estate or interests in real estate, it may not be possible to do anything other than to take a large capital gain in one year, i.e. you sell a factory, home unit or commercial premises owned by the fund and all the capital gain happens at one time. Labor's last revision of this policy area two years ago contained significant grandfathering provisions, but it is unclear if these will be included in any future legislation.

What can trustees of self managed funds do in light of this proposal?

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.

Split your superannuation with your spouse or partner

Spouses should engineer a 50/50 split in their super balances as soon as possible. This may mean that some reshuffling of super funds is necessary. You should seek specific advice about what this means for you.

Use the tax free threshold

Once assets in your fund or funds reach the $75,000 income level (say about $1.4 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).

Above the tax free threshold, it is still better for assets to be held in super, i.e. at 15% tax, rather than the 19% minimum personal tax rate.

Realise capital gains now

For any funds where members are already in pension phase, there is a strong argument to say that, within reason, all possible capital gains should be realised sooner rather than later, so that the cost base of assets is as high as possible, with no accrued but unrealised capital gains available.

Obviously it is not always possible to realise assets in this way within the time available (i.e. prior to 30 June 2017). Trustees have a bit of time up their sleeves to deal with these situations, but trustees and members alike should always be vigilant in respect to the possibility of future changes.

Erosion of public confidence in the superannuation system

The biggest problem that has emerged is that the constant tinkering with super by both political parties erodes confidence in the whole system.

The Prime Minister Tony Abbott has recently reiterated that there will be no adverse changes prior to the next election and that any proposed changes would be taken to the election, but, like Bill Shorten, he is a politician and his party's policy could change.

The above comments in regard to the ALP proposals are, of course, made on the basis of available information and as always the devil will be in the detail. Until Labor sets out exactly what they are proposing, it is hard to comment in greater detail.

If people have not already done so, they should take every necessary step to equalise superannuation fund balances between spouses or partners with a view to making sure that, at least, both $75,000 thresholds are utilised to the greatest extent possible.

Splitting your superannuation with family members

Consider the following scenario.

Dad is 62 next birthday and has a superannuation balance of $2,920,000. 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:

  • 180,000 on 30 June 2015
  • $540,000 on 1 July 2015 (being three years of undeducted contributions)
  • repeat the process three years later, ensuring the last payment of $540,000 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 $1,460,000 and dad's super will have decreased to $1,460,000.

They should then both be subject to the proposed $75,000 per annum tax free income threshold and will be better placed for future changes.

When the government's policy for the period after the next election is announced, or if there are any significant changes in the forthcoming budget, we will provide a review of the respective impacts of both the government and the opposition proposals.

For further information, please contact:

John Bowman
Trusts and estates
CBP Lawyers

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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