The Australian

15 December 2016

James Kirby

Steve

It’s time for Australia to do away with the means test for retirees, like New Zealand. Until we do, this nation’s saving’s policy will become totally stuffed

James

There has been a great interest in overseas pension systems since it became clear this year that our own superannuation system is now dreadfully complex, regularly inconsistent and in patches – unfair. ie the example cited in the answer to Sean below which is surely a classic ”unintended consequence’.

In fact your idea has been given some academic weight recently in a new report from the ANU Tax and Transfer Institute – however you might be disappointed to know the authors conclude a straight copy of the NZ system here would be ‘unsustainable” due to our aging population…NZ does seem to win on many key scores such as older worker participation.

My personal view is that the superannuation system has been fixed by band aids too many times now – including the latest band aids from the Turnbull government – as a result politicians are very unlikely to be willing to open this subject up again so soon.

Sean

Hi James. My wife and I have about $800,000 in assets and currently receive a modest part pension. We understand our entitlement will be much lower from January.

I have been told there may be some Centrelink benefit over time by investing some of our money into a long-term annuity (say $200,000), but it seems to me that locking in current low annuity rates for many years just to get a small Centrelink dividend over time is far inferior to investing the same amount “in ourselves”.

By that, I mean taking a number of domestic and overseas trips and generally living it large while we are both still quite healthy and active. I reckon we can spend about $200,000 making the next two years the best of our lives.

For doing so the Government is happy to give us an immediate guaranteed effective return on our “investment” of 7.8% (additional $15,600) each and every year for life.

Given current market conditions, this is more than we can sustainably draw off our capital if it remains invested as is in our allocated pensions (let alone an annuity), so we will actually increase our annual cash-flow by making this investment.

Further, if we travel mostly within Australia, we are unrestricted in the length of time we can be away from home (and not lose our Centrelink) as well as stimulate the local economy to boot. (We can even rent out our home on airbnb while we’re away to offset our travel costs and keep the dream alive even longer!)

This seems like a win-win-win. Am I ready you ask? You bet I am. Am I missing something?

James

Your extensive question gets to the heart of what is wrong with the current system – but to answer you directly first: Yes you will certainly lose a lot of the access you currently have to a part pension when the new changes come into effect on January 1.

Take a look at a feature we ran in the WEALTH section on Oct 4 called Saving or Slaving: Finding the sweet spot in super we found that someone with $700,000 in super assets did not do as well as someone with $500,000 in super assets under the new system – by this I mean the combined income they get from their super and their pension access was better with the lower savings than the higher savings …this is a most unfortunate outcome of the super changes and many people – like yourself – will likely find it to their advantage in some fashion to spend more and save less….

One observation though of course – in terms of missing something – is that an individual with higher super savings will always be in a stronger position in terms of total wealth – and should be less dependent on changes to government welfare policy…I will try and give a more specific answer to you Sean if we have time today…

The Australian

14 December 2016

Jack the Insider

That great sector of the Australian community, retirees, is being set upon again by government. The issue has passed barely noticed in the media but the political consequences for the Turnbull Government are sure to be profound.

On January 1, 2017, changes to the aged care assets test will see more than 100,000 Australians lose their part pension payments in entirety.

More than 300,000 will have their pension payments cut.

There is a perception many retirees are rolling in money. They have assets many could only dream of. Perhaps that’s why the media has shunned the issue.

Let me ask the question, who among us could lose 20 per cent of our household incomes and come away unscathed?

It gets worse. With the loss of the pension, the government will also cancel retirees’ pensioner concession cards which allow them to enjoy discounts on council rates, car rego, energy bills and public transport tickets. Back of the envelope, that’s three grand per annum retirees will have to find.

Those in the gun on New Year’s Day 2017 are fretting. They have worked and paid their taxes all their lives. They are in their 70s and 80s. They have no other income or indeed any prospect of it other than their investment returns. This group of nearly half a million Australians are facing grave financial uncertainty with its contingent anxieties and worry.

Under the new arbitrarily determined figures, the government will start reducing pensions for retirees with assets, excluding the family home above

$250,000 for a single homeowner (up from $209,000); $375,000 for a homeowner couple (up from $296,500); $450,000 for a single non- homeowner (up from $360,500) and $575,000 for a non-homeowner couple (up from $448,000).

The cut off for any pension payment is now $542,500 for a single homeowner (down from $793,750); $816,000 for a homeowner couple (down from $1,178,500); $742,500 for a single non-home owner (down from $945,250) and $1,016,000 for a non-homeowner couple (down from ($1,178,500).

Many would view these figures and wonder why these retirees should receive any assistance from the government. It’s important to remember retirees at this sort of level are often asset rich but cash poor, living off modest returns from their investments. With interest rates at all times lows, they may as well keep their cash in a shoebox under the bed. With equities markets smacked by two global economic crises over the last twenty years, anyone who can grow their investments by more than the rate of inflation deserves a medal.

In practical terms those who have saved more for their retirements and managed their investments well are being punished. Assuming a 3.50 per cent rate of return on investment, a home owning retiree with $600,000 in assets excluding his or her home who now has no access to a pension payment stands to earn $21,000 a year, while a home owning retiree with $300,000 in assets excluding his or her home and a part pension of $18,904.60 will receive $29,404.60 annually. Go figure.

The government says these savings will reduce the budget deficit by $2.4 billion over the next four years. I think any sensible person would agree budget repair needs to be addressed but there is an in-built retrospectivity at work here. Retirees who used the existing limits to manage their income have found the goalposts have been moved.

Now that the rates and cut off points have been recalibrated, what does the government expect will happen? Clearly, many retirees will sell down their portfolios, cash out their super or spend it down. Some will sell their dwellings and tree or sea change it. Not that the cost of the family home comes into the calculations. It is only whether the retiree owns a home or not. Those with homes in the inner cities will have to contemplate a shift to places where crucial services like health care are scarce.

For the next generation of retirees, there is an active disincentive to save. There is a form of social engineering going on here. The government is telling the punters, don’t save or at least don’t save very much for your retirement or we will be into you.

This is the sort of policy we might expect to see in post-GFC Greece or Italy but here it is in Australia. The Turnbull government has fiddled with a retirement system to a point where they have actually provided a disincentive for people to save for their retirements.

I spoke to one retiree who has assets just below $600,000. He owns his own home. As of January 1 next year, he will lose his part pension and is staring at a loss of one fifth of his household income. I know the man well and I would not describe him as either rich or a rorter. He had saved sensibly for his retirement.

“I’ve voted Liberal all my life. What am I supposed to do now, vote Green?”

“Let’s not say anything we can’t take back, mate,” I joked. I had to tell him the Greens voted for the changes with the government while Labor opposed them.

“Well, my vote would have to go sideways.” he said.

There, in essence, is the problem with our political system and it signals the death of pluralism in this country. The culprits, the major parties, are the architects of their own demise but this issue is one the Coalition will carry like fetid baggage for years to come.

If a dyed-in-the-wool Liberal voter, who has voted Liberal all the way from Menzies to Turnbull is jumping off, I’d suggest the Coalition are in deeper trouble than they realise.

The Australian

13 December 2016

Judith Sloan

You know, I have a rule that if something looks wrong, it almost certainly is wrong. There is another rule I find useful: if the industry super funds put out a piece of research, it is almost certainly misleading and definitely self- serving.

This month, the lobby group for the industry super funds, Industry Super Australia, and CBUS, the industry super fund covering construction workers and chaired by former Labor premier Steve Bracks, issued a report, Overdue: Time for Action on Unpaid Super.

It’s not entirely clear how an individual super fund gets away with sponsoring this type of research. After all, the trustees are bound by the sole purpose test of maximising the retirement benefits of the members. It’s not as if the research were confined to the construction industry or following up unpaid superannuation contributions on behalf of individual members.

But let me return to the report: the numbers quoted in it are essentially made up. According to the panic-stricken summary, 30 per cent of employees miss out on their full super entitlements and, on average, each of them misses out on four full months’ super. Pull the other one.

Raising the tone from yelling to full-throttle screeching, did you know that “without action, unpaid super and lost earnings will reach $66 billion by 2024”? Yes, that’s right: $66bn. Industry Super Australia may have to employ Demtel’s Tim Shaw to make some advertisements on this diabolical state of affairs.

Let me go through the methodology used to arrive at the scary estimate of 2.4 million workers missing out on their full super guarantee entitlements. (The appendix does at least use the term “apparent underpayment”.)

Take the Australian Taxation Office’s 2 per cent sample of individuals and matched member contributions statements, add numerous contentious assumptions and settle on a really big figure. I particularly like this one: “Create an estimate of ordinary time earnings from the salary and wage data on the ATO individual tax returns”.

The errors in this exercise alone are enormous and fail to take into account diverse patterns of employment and job switching that occur in the workforce during a financial year. Whenever I read the term “sham contracting” in the report, I think this description is very much in the eye of the beholder.

It also should be noted that employers have up to four months to lodge the superannuation guarantee contributions they make on behalf of their workers. So just because a superannuation contribution doesn’t appear in the same financial year as the worker’s earnings it does not mean the contribution hasn’t been paid.

We know the figure in the report is wrong because there is a very high degree of compliance with the pay-as-you-earn tax system (more than 90 per cent). Employers who are disciplined in deducting workers’ tax liability are also likely to be disciplined in forwarding their workers’ superannuation entitlements.

But here’s the kicker: when businesses pay their own tax liabilities, it is possible to deduct the costs of superannuation contributions from taxable income only if it is demonstrated that the superannuation money actually has been paid. You see the government has thought of this issue in the past and has devised a low-cost means of ensuring that employers do pay the superannuation contributions on behalf of their workers.

Don’t get me wrong, there are instances where the superannuation guarantee is not paid. But this will be mainly in the case of failing businesses, and these businesses may not be paying the wages of contractors or the bills of suppliers. Workers may even be missing out on their full wages.

It is sad but true that some businesses will fail and, of course, workers become creditors in the event of a firm becoming bankrupt, at which point they may recover their superannuation entitlements. There is also scope to recover superannuation guarantee payments through the ATO.

The other estimate contained in the report relates to the cash economy. Again, what figure would we like here? Let’s face it, some workers are quite happy to participate in the cash economy because they avoid paying income tax. It is entirely possible that they are better off even if there is no superannuation component in the cash handed over.

But according to the arbitrary estimate contained in the report, there are 277,000 workers in the cash economy who are not receiving their full superannuation entitlements. And the average effect on workers is close to $3000 a year.

Of course, there is no doubting that the cash economy is alive and well, but no reliability can be attached to these estimates. Moreover, the report contains nothing sensible in terms of doing anything about the cash economy, which is of course a topic much larger than unpaid superannuation.

There is a funny loophole in the system that allows employers to use a modified salary base (after voluntary salary sacrifice payments to superannuation) to calculate their 9.5 per cent superannuation guarantee obligation. It’s not clear that it’s a really big deal, but workers would be well advised to check their pay slips and ensure that the SG is paid on the unmodified salary base.

In due course, it may be a good idea to combine SG payments with PAYE tax payments, to be paid by employers monthly. No one wants workers to miss out on their super entitlements.

But before this happens the government needs to sort out the default fund arrangement that provides the industry super funds with a quasi-monopoly position for award and agreement covered workers.

The Productivity Commission is investigating alternative methods whereby workers who fail to nominate a superannuation fund can be allocated one. It is important that the vice-like grip of the industry super funds is broken. As all economists know, monopolies are bad. It also will create a more even playing field in which all super funds are required to manage liquidity as well as maximising investment returns for members. Superannuation guarantee payments should not just come in like the tide for one group of super funds while others are locked out of the game.

In the meantime, the industry super funds would be well advised to stick to their legislated role of maximising the retirement benefits of their members and cease releasing questionable research.

Australian Financial Review

13 December 2016

Sally Patten

In less than three weeks, more than 300,000 retirees will lose all or part of their government pension.

While 220,000 pensioners stand to benefit from the changes by receiving an increase in age pension payments, some 91,000 part-pensioners will be cut off entirely from claiming the age pension. Another 236,000 part-pensioners will have their payments reduced by an average of about $130 a fortnight.

For those on the wrong side of the pension reforms, the next few years could require some adjusting. For one thing, retirees might need to get used to the need to draw on their savings, potentially a big adjustment, given that many Australians are determined to bequeath as much money as they can to their families. Some might need to rein back their spending. Most should use the rule changes as a trigger to review their investment portfolios and check that their money is working as hard as they are – as they sip cappuccinos at the local cafe and look after the grandchildren.

The changes mean that retirees who lose a portion of the part-pension will have to earn at least 7.8 per cent on each extra $1000 of assets over certain thresholds to maintain their capital.

“If you have cash and fixed interest, you have nowhere near that. You need to think about the fact that you might need to be more aggressive ad think about allocating more [of your savings] towards Australian and international shares,” says Don Hamson, managing director at Plato Investment Management.

Under the new regime, from January 1, the upper threshold for a couple who own their own home to receive a part pension will fall to $816,000 from $1.2 million. For a single home owner, the threshold will fall to $542,000 from $794,000.

Taper-rate hit

The changes in the so-called taper rate will further hit part-pensioners. From January 1, 2017 an individual’s pension will be reduced by $3 a fortnight, or $78 a year, for each extra $1000 in assessable assets. Currently the amount of pension falls by $1.50 for each extra $1000 of assets. It is a significant reduction in the income part-pensioners will receive from the public purse.

Moving up the risk spectrum needs to be done with great care, particularly with any money that retirees might need to tap in the short to medium term.

But with that in mind, the good news is that the Australian market is a solid income generator. The S&P/ASX 200 benchmark can be relied upon for producing a 6 per cent yield, including franking credits, says Hamson.

He adds: “If you have a portfolio that is tailored for yield, you should be able to generate between 7 per cent and 8 per cent.”

Sam Morris, a senior investment analyst at research firm Lonsec, concurs. “You should be able to get about 2 percentage points above the market yield,” he tells Smart Investor.

For investors who like to do it themselves, looking at the composition of share income funds can be a useful starting place to study how best to construct a high-yield portfolio – bearing in mind that professional fund managers will use trading strategies to bolster returns.

The top 10 holdings in the Plato Shares Income Fund are: Westpac Banking Corp (10.6 per cent of the fund), National Australia Bank (8.7 per cent), Commonwealth Bank of Australia (6 per cent), BHP Billiton (5.5 per cent), Macquarie Group (4 per cent), Telstra (4 per cent), ANZ Banking Group (3.9 per cent), Woolworths (3.7 per cent), Scentre Group (2.7 per cent) and Wesfarmers (2.6 of the portfolio).

Morris and Hamson both warn that one of the dangers of creating a yield portfolio is the risk that it will be overly concentrated in a limited number of shares. Hamson holds 90 stocks in his fund, but says 20 are sufficient for most investors to achieve diversification.

Exchange-traded funds are another convenient way to achieve a high-income portfolio, but again it is essential for investors to look at the underlying shares, the sector concentration as well as capitalisation or size biases. The use of franking credits from dividends can also give a useful boost to returns. The VanEck Vectors Morningstar Wide Moat ETF (MOAT) and the ANZ ETFS S&P/ASX 300 High Yield Plus ETF are two listed vehicles that are recommended by financial advisers.

Lonsec divides the high-yield actively managed fund universe into two – those that use a standard long- only investment strategy and those that use derivatives to enhance returns – and has four funds on its recommended list. They are the IML Equity Income Fund, the Antares Dividend Builder, the Legg Mason Martin Currie Equity Income Trust and the Plato Australian Shares Income Fund. Only the IML product, managed by Investors Mutual, falls into the second category, using derivatives to boost returns.

While high-yield shares may have fallen out of favour because of the threat of interest rate rises, they are still generating decent income, Morris says.

“The stocks have come off but you are still getting higher yield than cash,” he says.

Performance patterns

The IML fund comes with an investment fee of 0.993 per cent and turnover is relatively low, according to Lonsec.

“The conservatism of its investment approach has historically given the fund a very defensive performance pattern. Lonsec notes that over the past five years the fund has outperformed the index in 90 per cent of months in which the market fell. Conversely, Lonsec expects the fund to underperform during strong ‘bull’ markets,” Lonsec says.

The Antares vehicle has a wholesale management fee of 0.6 per cent, “one of the lowest in the Lonsec peer group”. Lonsec notes: “The bias to high-yielding, large-cap industrial stocks may result in absolute volatility of returns that is lower than the broader market.”

The Legg Mason fund comes with a wholesale management fee of 0.85 per cent and “explicitly values franking benefits on the assumption that individual investors are 0 per cent tax payers”.

The Plato vehicle has a 0.9 per cent management fee. “The fund has been specifically designed to be tax effective in the hands of a 0 per cent rate tax payer by capturing franking credits and exhibiting high portfolio turnover, about 150 per cent a year,” Lonsec notes.

The Australian

12 December 2016

Tony Negline

The new super changes come into effect in July next year. In explaining them, the government has consistently claimed these changes impact very few people. And if you look across all super accounts, this is correct — if you define the group by the relatively small proportion of the population that makes large after-tax superannuation contributions.

But this is only part of the story. Super fund trustees face myriad costs to implement these changes — administrators need to adjust their systems, accountants and financial advisers need to make sure they have correct information to provide their clients with appropriate advice and guidance and so on.

What’s more, the ATO will now have more work to perform. All this additional red tape costs a lot of money to implement and these costs are shared equally among all super fund members.

The best thing for any investor to do in these circumstances is to understand as best they can the changes coming down the track.

Making personal after-tax super contributions has become much trickier now the new super changes have been legislated.

The complexity applies to anyone who was intending to make large after-tax contributions — officially called non-concessional contributions — between July 1, 2014 and July 1, 2020.

The situation occurs for two reasons:

• The government has put complex transitional rules in place, and

• A new rule has been introduced that further restricts how much money can be put into

Transitional rules

Those aged under 75 have a restriction on how much after-tax money they can put into super. Those aged at least 65 but under 75 need to satisfy a work test before making any contributions. From July 1, 2017 this annual amount is $100,000 each year and before that date the annual threshold is $180,000 per annum.

Those aged less than 65 before the start of a financial year can spread three years of non-concessional contributions unevenly over a three-year period. You start a three-year period by making after-tax contributions of more than that year’s annual threshold. Knowing what point you’re at in a three-year period is very important.

I have tried to explain how the transitional rules work in the table. However, even this table needs some explanation.

Two key questions are: what can be contributed before July 2017? And what will occur as we transition into the new regime?

If your three-year period begins during the 2014-15 financial year, then you can make non-concessional contributions of $540,000 between July 1, 2014 and June 30, 2017.

If you contributed more than $180,000 in the 2016 financial year and in total less than $460,000 during the 2016 and 2017 financial years, then the most you can contribute during the 16, 17 and 18 financial years is $460,000 and nothing can be contributed until July 1, 2018.

However if you contribute more than $380,000 but less than $540,000 in 2016-17 year then you cannot contribute anything until the 2019-20 financial year.

The good news is that if you go above these contribution caps the ATO will give you the ability to take the money out of super with only a small penalty. (In past years excess contributions were taxed at the highest marginal rate.)

Total super balance

From July 1, 2017 anyone wanting to make non-concessional contributions will need to know their total super balance. A number of items are used in determining this amount:

• Total super account balances not being used to pay a pension

• Pensions — the market value of any of your account-based pensions and a special value is used for pensions paid from defined benefit super funds

• Other amounts transferred between funds

• A concession will affect payments you might receive because of court or legal proceedings after suffering a serious

Now here’s the tricky rule — after-tax contributions to super will only be permitted if your total super balance at June 30 in the previous financial year is less than $1.6 million and you can only contribute what will push your super balance up to $1.6m.

So the caps mentioned above are the maximum you can put in subject to your total super balance. Next year, super funds trustees are going to face myriad costs to implement these changes. In addition, the ATO will have even more work to perform. It’s going to cost a lot of money for everyone involved in the system.

The Australian

17 December 2016

Glenda Korporaal

The year may be winding down, but for people approaching retirement and wanting to protect their financial future, there will be some hard decisions to be made over the next few months.

After a year of changes and uncertainty for super policy, the first point is that for most people with middle incomes, super is still the best option to save for their retirement.

The new limit of $1.6 million on the amount that can be transferred into the tax-free retirement “bucket” from July 1 next year will still be high enough for many ordinary people.

In fact, the challenge for many people now, particularly in lower age groups, will be to get to the $1.6m in the first place. Here’s why:

• The lower concessional (pre-tax) super contribution levels, which will come down to $25,000 a year from July 1 (including SG payments) and the tightening up of non-concessional (post-tax) contributions, down to $100,000 a year, will make it increasingly hard for many people to get to this level over time.

• Where they can, people need to take advantage of the situation that will prevail for the next few months, which allows concessional super contributions to be made up to $35,000 a year for people over

• More significant will be the last chance between now and June 30 for people to contribute $180,000 a year, or a potential $540,000 over three years, out of their post-tax

These are still basically good ideas, but for people with super balances above or approaching $1.6m, there are more complex decisions to be made.

Any savings older investors have in a super fund above $1.6m, at the time of retirement, will be taxed at 15 per cent from the first dollar of earnings.

While this sounds lower than the lowest marginal tax rate, which starts at 19 per cent, at the moment the first $18,200 of an individual’s earnings are tax- free.

For people over 65 there is the potential to effectively improve their tax situation with the use of the senior and pension tax offset.

This offset scheme has specific rules and limitations, but for people making the decision on whether to put more into their super above the $1.6m level this year, it is worth getting advice on what their long-term tax position will be on their earnings outside of super.

Though the super changes kick in on July 1 next year, a range of cutbacks to pension access will be introduced much earlier — they commence on January 1.

Those who are still working and have available cash outside super should think about taking advantage of the higher contribution caps this financial year anyway, on the basis that the funds can be taken out later.

Capital conundrum

But the real issue for some people will be where they may have to sell shares and other assets that incur capital gains tax to put into super between now and June 30.

With the new $1.6m “transfer balance cap”, these people will need to work out whether the reality of a capital-gains tax bill for this financial year is worth the amount of tax they may save over the longer term getting their retirement money into an environment where they could be paying up to 15 per cent tax on earnings.

There are many issues individuals will need to be aware of in the transition to the new regime from July 1.

Those with more than $1.6m in super who are already in pension mode should get some advice on how they will be affected as, from July 1, their fund will be (actuarially) split into two buckets.

More accurately, any assets over $1.6m as of July 1 (indexed annually in increments of $100,000) will be moved back into accumulation mode.

The $1.6m is the limit that can be transferred into super retirement mode over a person’s lifetime from July 1.

Once in the retirement “bucket”, the amount can go up or down with the market or as a result of withdrawals.

There are many bells and whistles to the changes, with each person’s situation being different. Colonial First State’s First Tech super reform update points out that there is potential for individuals to have a different transfer balance cap over time because of the indexation arrangements.

For those with super funds above $1.6m which are currently in retirement phase, the government has allowed some transitional capital gains tax relief on the amount over $1.6m which has to be moved from the retirement phase back into the accumulation phase.

Under the changes, the government has allowed super fund trustees a one- off chance to elect to reset the cost base of their assets to their current market value.

So if the super fund has bought shares in XYZ Corporation for $1 each some years ago, which have a market value of $5 as of June 30, the trustee can elect to reset the cost base to $5 when the assets are moved back into the 15 per cent tax accumulation mode on July 1.

The CGT relief only applies to assets held between November 9 and June 30.

People with self-managed super funds in this situation should get advice on how the CGT election can work for them.

In short, for most ordinary people, super is still the best way to save for their retirement and they should think about taking advantages of higher contribution opportunities before June 30.

But people with super balances above $1.6m should get advice on the best contribution and investment strategies going forward.

It’s worth thinking about it now as financial advisers and accountants will be under increasing time pressure to answer questions about the changes as the June 30 approaches.

Australian Financial Review

13 December 2016

Sam Henderson

Resetting an asset’s cost base under new CGT relief rules can mean big tax savings but you’ll need careful documentation, writes Sam Henderson who answers your questions on super.

Q: I am 67, have a self-managed superannuation fund (SMSF) in pension mode and, as I am still working part-time, I am also in accumulation mode. My wife is 65. We both exceed the $1.6 million cap. We have a commercial property in our fund that has a purchase (book) value of $1.23 million and a declared value (through an apprail requested by the auditors) of $1.45 million. I suspect the market value is around $2.1 million. My impression is that getting a current valuation, before June 30, 2017, would mean no capital gains tax (CGT) for our investment. That’s unless it exceeded the valuation when it sold, in which case the fund would only have to pay CGT on the difference. Is this the case, or is the fund still liable for CGT on the difference between the original purchase price and the valuation done before June 30, 2017? John

A: John, in the first instance, my understanding is that you will need to be in pension phase or have up to $1.6 million in pension phase before June 30 to take advantage of the CGT relief provisions (that also need to be effected by June 30, 2017 via valuation on your property). The CGT relief provision may be applied in two different instances in your situation.

First, if your pension assets are set at $1.6 million or less and you can get a valuation on the property to incorporate it in the $1.6 million, then you’ll be fine. It is perfectly plausible for a valuation on a commercial property to be valued conservatively despite a potentially higher market value – usually a valuer will give you a valuation range providing some discretion on your part.

Alternatively, if your assets will exceed the $1.6 million cap as you suspect, then the valuation used will become the new cost base assuming you keep the property for another 12 months. It’s my understanding that the CGT reset value provisions will not apply to assets sold within 12 months of the revision of the cost base. For the proportionate percentage of the property in accumulation phase, it will attract CGT at a rate of 15 per cent less the CGT discount of 33 per cent, equating to 10 per cent CGT using the reset cost base at June 30, 2017. So yes, you will pay CGT only on a proportion of the property value, at a discounted rate and using the new CGT reset value as the cost base. Remember, you only pay CGT if you sell the asset. You will also pay earnings tax on the proportion of the net rent from the property. It’s really not that bad and probably a whole lot better than having the property in your own name!

W: Sam, I have a question relating to a reversionary pension from a defined benefit scheme. My wife and I have an SMSF. She has reached the $1.6 million cap in her pension account. I will be only allowed to keep $88,560 in my SMSF pension account after June 30, 2017 as I also receive a defined benefit pension from State Super of $94,465, which is equivalent to $1.5 million after multiplying up by 16. If I predecease my wife, she is entitled to receive 66 per cent of my defined pension amount or $63,000 a year, which is equivalent to just over $1 million when multiplied by 16. Can she transfer money from her SMSF pension account into her accumulation account to allow for the defined benefit reversionary pension she will receive? Brian

A: Brian, I’m hoping you get the tap on the shoulder from the big man upstairs long after June 30, 2017 and therefore I would imagine your lovely wife would have already had her $1.6 million pension balance cap set. This would exclude any further entrants to the asset or income pool that make up that cap. I’m thinking that the reversionary pension would therefore remain taxable to her when she eventually receives it and assuming you predecease her.

Alternatively, if you wanted to get cute about it, you could tip a large portion of her fund back into accumulation phase before June 30. In theory, she could potentially attain a higher pension cap if it’s in fact indexed between June 30 and your departure from the planet. It’s complicated enough to write such a suggestion, though, let alone implement it in any practical fashion.

The government made some positive amendments to the super legislation when it went through parliament a few weeks ago, allowing reversionary beneficiaries up to 12 months (it was going to be six months) before crediting the new income stream to the $1.6 million balance cap. Advantageously, this allows the beneficiary up to 12 months to get their affairs in order before being penalised.

These questions are answered without the full financial and lifestyle details of readers and must therefore be taken as general advice. We recommend you speak to a qualified financial adviser for complete and comprehensive advice.

Australian Financial Review

16 December 2016

Sally Patten

Some experts predict that after the death of a partner who has more than $1.6 million in super, the surviving spouse might look to pump more money into property either for themselves or for their children in order to avoid paying extra tax.

Some experts predict that after the death of a partner who has more than $1.6 million in super, the surviving spouse might look to pump more money into property either for themselves or for their children in order to avoid paying.

This is because any amount in a partner’s super account in excess of $1.6 million must be taken out of the tax-friendly savings vehicle when they die.

“You will have to find something to put the money in,” said Suzanne Mackenzie, a principal at DMAW Lawyers. “One way of dealing with this is to buy a very expensive principle private place of residence. At least you’ll get a tax break,” Ms Mackenzie said.

The changes to the super inheritance rules, which are part of a super reform package designed to make the retirement savings system more sustainable and equitable, are due to come into force in July next year.

“I think it will definitely encourage people to buy more property. It will encourage people to buy big family homes. It is ridiculous from the point of view of housing availability,” said Bryce Doherty, chief executive of UBS Asset Management in Australia.

Graeme Colley, executive manager of SMSF technical and private wealth at SuperConcepts, said that while some people who have been widowed might upgrade their homes, others might buy a home for their children, or help them to pay off their mortgage. Other experts have pointed out that people who have carefully been planning their estates under the current rules will be forced to re-visit that advice, given the raft of changes to be introduced on July 1.

The full impact of the $1.6 million ceiling on super pension transfers is not well understood.

Under the current pension rules, when a person dies their pension must be cashed out, either as a pension or a lump sum outside outside the super system. When the $1.6 million pension transfer cap is introduced, if the deceased spouse has retirement savings both in a private pension account and an accumulation account, any money in the accumulation account will need to be removed from the super system altogether and managed separately. Earnings will be taxed at the marginal tax rate rather than at 15 per cent in an accumulation account or tax-free in a pension account.

However, Mark Draper, an adviser at GEM Financial Advice, said he doubted the pension changes would lead to a property buying spree.

Australian Financial Review

13 December 2016

John Wasiliev

Putting into practice the new super rules that will apply from next July – especially what happens when you have a pension balance of more than $1.6 million – will require some careful planning.

It’s planning that involves knowing how to split the pension balance between a $1.6 million pension account (where the investment returns are tax free) and an accumulation account (where future investment earnings will be taxed).

Along with the practical aspects of this big change, another significant pension-related modification that needs to be understood is that from July 1, funds with a combination of pension and accumulation accounts and members with more than $1.6 million worth of pensions will no longer be allowed to segregate the returns from selected investments.

Segregation is a tax strategy where returns from particular investments are specifically allocated at the fund level to either pension or accumulation accounts.

An SMSF, for instance, with an investment property or shares that have sizeable capital gains will prefer to own such assets in pension accounts as any returns when they are sold will be exempt from tax.

In most cases a fund will have both pension and accumulation accounts because a member was eligible to start a pension and did so. They have an accumulation account because they are still working and saving super.

Eventually all the super ends up in one or more pensions.

In future, however, this won’t be the case where members have $1.6 million in pensions as they will automatically have a pension and an accumulation account.

With the introduction of the $1.6 million pension limit from July 1 and the increasing number of funds with a combination of pension and accumulation accounts, Meg Heffron of Heffron SMSF Solutions says a reason why segregation will be banned is because of the potential for tax manipulation.

There is concern that members might seek to manipulate their investments by switching them from the taxable accumulation side to the pension side shortly before a sale or large income distribution.

With this in mind, the future rule that will apply where a fund has a $1.6 million pension account and an accumulation account will be to proportion the investment returns according to the percentages of the fund in pension and accumulation.

The investment return allocated to the pension account will be tax-free, while the accumulation proportion will be taxable.

As far as the practical application of these new rules is concerned, a reader writes: “I am currently in pension phase but come July 1, I will exceed the $1.6 million cap and understand that some of my SMSF assets must be put into an accumulation account.”

These assets, he says, are mostly shares and managed funds. But how can he identify which shares or funds to put into accumulation by June 30, he asks, when the value of his SMSF is not determined until a tax return is lodged? Further, the tax position of some managed funds is not received until late September or early October.

On top of all this, his SMSF tax return is not lodged for at least six months or even longer after the financial year and the share value used is determined by closing prices on June 30.

Another question is who is notified which assets are identified as being put back into accumulation by June 30?

According to Peter Crump, a private client adviser with ipac South Australia, the new cap of $1.6 million is essentially a restriction on the amount that can be held in tax-free pensions.

To determine their tax entitlements at the moment, most SMSFs use what is called an unsegregated approach where there is a single pool of investments supporting member account balances within the fund. This could be a fund where there are two members or where a member has both an accumulation and pension account in place.

The other approach, the segregated approach, has different pools of investments in place for different members or for pension and accumulation accounts.

This has enabled different assets to be held in the pension process, and therefore be fully exempt from tax on investment income.

Under the unsegregated approach, only a portion of the overall fund investment income is exempt from tax, depending on a certificate from an actuary who calculates that proportion.

Essentially, the tax-exempt proportion is the percentage of the overall fund that is supporting pension accounts throughout the year.

The new arrangements from July 1 require an unsegregated investment approach to be used at all times where a member of the fund has a balance in excess of $1.6 million.

This is a protective feature, says Crump, to ensure that investment sales cannot be manipulated between the different asset pools.

So in response to the last bit of the question, says Crump, there is no need to specifically tag investments that relate to the pension account balance or the accumulation account balance from July 1.

That’s because the balance of the respective pension and accumulation accounts is an accounting or book entry, and the total of these account balances is always equal to the total fund balance.

A most important issue as far as funds with pension accounts of more than $1.6 million is concerned, says Crump, is ensuring that the June 30, 2017 balance is shaved off at $1.6 million and any surplus moved across to an accumulation account.

Fortunately this can be achieved in a fairly straightforward way through an instruction recorded as a minute before June 30 next year from the member to the fund trustee (a corporate trustee or individual member trustees).

This will request as a simple instruction that a pension account balance be established with no more than $1.6 million and any surplus be transferred to an accumulation account.

At the pre-June 30 stage, there is no need to stipulate how much must move into the accumulation account as this won’t be known for some time for different reasons, including the ones the reader has mentioned.

In an SMSF, says Crump, the administration process is often completed in arrears but what is important is that the trustee has a minute that records the need to adjust any pension balance.

Australian Financial Review

16 December 2016

Scott Morrison has given three speeches over the past couple of months setting out of the government’s economic agenda entitled: “Staying the course”.

Critics are wondering: what course?

Fourteen months after he replaced a widely criticised Joe Hockey as Treasurer, Morrison has disappointed some of the people who should be his strongest supporters, including businesspeople, economists and free-market advocates.

Styling himself as a tough, cut-through, sound bite-wielding pragmatist who would drive pro-growth policies, Morrison has failed to formally propose any politically ambitious policies, unlike several of his Liberal and Labor predecessors.

“He has done very little,” says former Liberal leader John Hewson.

“He needs to do more,” says Robert Carling, a former Treasury official who is a senior fellow at the Centre for Independent Studies, a right-wing think tank.

“He has spent far too much time advocating for higher taxes,” says John Roskam, the chief executive of the Institute of Public Affairs, another right-wing think tank.

Generating wealth

Morrison’s best shot at making Australians wealthier – and heading off a Trump-style populist backlash – is to reduce government interference in the economy and make taxation more efficient, orthodox economists believe.

Even though Hockey was criticised as an amiable but ill-disciplined government salesman – his quip that poor people don’t have cars or actually drive very far killed a modest petrol tax hike.

And he pushed several politically unpopular changes regarded by experts as good public policy. One was even implemented: an end to billions in long-term subsidies for General Motors, Toyota, the Ford Motor Co. and their suppliers.

Supporters of deregulation hoped the removal of Tony Abbott – who many in his own party perceived as sceptical of orthodox economics – would lead the new government to propose bolder policy change. And as the principal economic minister, the weight of expectations fell on Morrison.

Achievements

Morrison’s major political achievement is securing parliamentary support for about $6 billion in spending cuts and tax increases, and an agreement to reduce tax breaks on the superannuation savings of the wealthy.

While those policies are an important component of his medium-term goal of balancing the budget – which would deliver the government huge economic and political legitimacy – they don’t please Coalition supporters seeking smaller government and lower taxes.

“It’s arguable whether he’ll ever recover politically from breaking the Coalition’s promise not to increase taxes on superannuation,” Roskam says.

“Many of Morrison’s inclinations are in the right direction. But unfortunately those inclinations haven’t so far been translated into policy. And he’s increased red tape – not cut it. And he’s done very little to reduce the size of government and bring down the deficit.”

Morrison’s office points to a long list of achievements under his name. They include a tax cut for businesses with revenue of less than $10 million, toughening the rules on foreign investment and taxing big foreign companies more, banning high credit-card charges, making the rules easier for financial-technology businesses, toughening the corporate-competition rules and responding to the financial system inquiry led by David Murray, which led the banks to set aside more capital, reducing profits.

These were done “all within the constraints of the previous and current parliaments,” his office says, a reference to Senate opposition. (Morrison declined to be interviewed for this story.

Bad hand

Morrison has one of the toughest jobs in the country. He inherited a huge budget deficit and a Parliament eager to spend and reluctant to save. The fragmentation of the Senate has made negotiating hard.

“The degree of difficulty for a deepening of much-needed economic reform is higher than it has been for some time,” says James Pearson, chief executive of the Australian Chamber of Commerce and Industry.

“The notion of reform fatigue where you are trying to find budget savings is understandable,” says Hans Kunnen, an economist at St George Bank, a unit of Westpac Banking Corp.

Without the support of his boss, Turnbull, Morrison isn’t going be able to take big change very far. Hockey’s abandoned plan to charge a modest fee for seeing a doctor, which was designed to make people value the service more, was recently cited by Prime Minister Malcolm Turnbull as the kind of political mistake he wants to avoid.

With unemployment low and growth high there doesn’t appear to be much community support for change. Following Donald Trump’s election as US president, the Labor opposition in Australia is hinting it will move to the left on economic policy. That could make convincing voters to support change even harder.

Advocates for a more-efficient economy argue that Morrison needs to use his advocacy skills, honed by a career in politics, to lead the public debate. They argue that the economy is more fragile than most Australians appreciate. Most of the new jobs are part time. Low iron ore and coal prices, stagnant wages and weak profits kept growth in national real income low for several years, until the three months ended June 30 this year.

“If Morrison developed a strong economic reform agenda – which included industrial relations reform – and then advocated for it – he could yet go down in history as one of Australia’s more significant treasurers,” Roskam says.

“Too often we see him making the right noises but the actions don’t match what he has been saying,” says Carling.

Costello, Keating comparison

Any substantial changes to economic policy could be years off. In September Morrison said he would ask the Productivity Commission, the government’s independent think tank, to come up with ideas every five years to make the economy more productive.

Other high-level reviews haven’t achieved much, including a review of the taxation system under Kevin Rudd and a commission of audit of the government under Tony Abbott.

Morrison is pushing for solutions to one of Australia’s thorniest challenges: high property prices. Recently he urged state governments to relax rules that restrict the supply of land in cities, a step he argued would make housing more affordable. Another of his priorities is to help Australian companies develop technology for the finance industry.

Observers compare Morrison’s advocacy unfavourably to Paul Keating and Peter Costello, two predecessors. In speeches and in Parliament, Morrison hasn’t developed a compelling narrative about his plans or compelling one-liners that grab the public’s attention, they say.

“His greatest weakness is he doesn’t deal with the facts and he still tries to spin,” says Hewson, who lost the 1993 election proposing bold tax changes.

“‘Everything is rosy and going swingingly,’ he says. The problem in economic terms is that it doesn’t take too long for the data to embarrass you. And I don’t think the uncertainty has ever been greater than today.”

In his second “Staying the course” speech, on September 16 in Melbourne, Morrison laboriously described the current economic and budget environment and listed the government’s spending plans, including $89 billion to build naval ships and submarines, much of it in marginal seats.

“This is the type of the economy that can coax private capital out of its cave,” he concluded.

Fallen star

Today, is it easy to forget how highly Morrison was regarded as an immigration minister in the Abbott government.

Morrison ruthlessly and efficiently staunched the flow of refugees from Indonesia and elsewhere, delivering one of the Abbott’s few big political successes. He was unafraid to offend media outlets, especially the ABC, although he solicited the support of right-wing commentators and broadcasters.

Before the change in party leader, helped by Morrison switching allegiance to Turnbull, it was accepted among pro-Abbott Liberal MPs that he was Abbott’s most likely successor, according to a source with direct knowledge of events.

Today, if Turnbull resigned Morrison would not appear to be the leading leadership contender.

Right now Morrison is concentrating on next week’s mid-year fiscal and economic review, a budget update.

He still has his supporters, in part because there is no obvious other candidate for treasurer among Liberal MPs.

“When you look around the country I still think Scott’s the best man for the job,” says Graham Morris, a lobbyist and former chief of staff to prime minister John Howard. “He is still a family man with his feet planted on the ground, not some airy-fairy economist.”