Opinion – Consider super options as 1 July approaches

02-Jun-2017

By Neil Rogan

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There are two groups of Australians most likely to be impacted by the 1 July super changes: those with large superannuation balances, either in the accumulation or retirement phase, and those on the highest marginal tax rate.

For both groups, who may find themselves with excess funds they are unable or unwilling to keep in their super, it’s a question of assessing the alternatives.

Some of the key changes include restrictions on non-concessional contributions to super.

Previously non-concessional contributions of $540,000 over three years were allowed, but from July they will be capped at $100,000 a year, up to a maximum of $300,000.

This is because non-concessional contributions are tax-advantaged once in super, even though they have had tax paid on them before they enter the system. Moreover, non-concessional contributions are only allowed for those with a balance of less than $1.6 million.

Additionally, Australians with large super balances are a target. The government has ruled that super should be a way for all Australians to fund their retirement, not a way for the wealthy to accumulate large sums in a tax-advantaged environment.

This means that those with large super balances will need to transfer excess funds back to an accumulation fund, or outside the system altogether.

High earners will also face higher tax rates. Anyone earning more than $250,000 a year will pay 30 per cent on contributions to super; double the usual contributions tax.

In addition, the general concessional contributions cap will be lowered from $30,000 to $25,000 a year.

It is worth considering the investment of excess funds into an alternative tax-effective structure if your clients have more than $1.6 million in a retirement phase account, or have hit the limits on what they can contribute.

One option is to create a private company that can invest and hold investments on the client’s behalf. Returns from these investments are taxed at the company rate of 30 per cent rather than at their marginal tax rate.

Alternatively, there is the option to create a family or discretionary trust. Unlike a company structure, this kind of trust does not offer tax benefits due to the structure itself, but it does offer flexibility in distributions.

Trustees can distribute to whoever they choose each year, including family members on lower marginal tax rates.

An investment bond is also a flexible, tax-effective option, and at Centuria we are not surprised to have seen strong demand from advisers and individual investors for this type of vehicle over the past 12 months.

An investment bond operates like a tax-paid managed fund. Tax on earnings from an underlying investment portfolio is paid at the company rate of 30 per cent within the bond, and distributions are re-invested in the bond.

After 10 years, all funds in the bond can be distributed entirely tax free. There is no limit to the amount which can be invested in an investment bond, and additional contributions can be made every year, up to 125 per cent of the previous year’s amount.

Funds can be accessed earlier if need be, but this would involve potentially foregoing some of the tax benefits. Because they don’t form part of an estate and thereby bypass a will, investment bonds are also highly suitable for estate planning.

When deciding which is the best option for clients affected by the changes, advisers need to consider issues such as the client’s investment objectives, risk profile, and how the client feels about the risks involved in each individual strategy. You also may need to consider whether the chosen strategy is flexible enough to deal with unforeseen circumstances, whether it offers ease of management and the tax implications.

Different options will suit different circumstances, but it’s important to have these conversations with clients sooner rather than later given how fast the deadline is approaching.

Neil Rogan is general manager of investment bonds for Centuria

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