Australian Financial Review

16 December 2016

Sally Patten

As many as two in five self-managed superannuation funds hold either residential or commercial property, although such investments still make up a small portion of schemes’ overall portfolios.

The proportion of self-managed funds that hold residential property rose to 22 per cent in 2016 from 19 per cent a year ago, while the proportion of schemes investing in direct commercial property, and so excluding listed property trusts, rose to 20 per cent from 18 per cent, a survey by the Financial Services Council and UBS Asset Management shows.

The research also found that self-managed super fund trustees are heavily invested in property outside super.

Of those savers who either supplement their self-managed fund income in retirement, or expect to do so, 44 per cent said this would come from property investments. The figure is far higher than the 34 per cent who said their income was or would be supplemented from share investments.

The findings underpin investors’ search for income-generating assets as they combat low interest rates, plus the attraction to property thanks to soaring prices on the eastern seaboard.

But the growing interest in houses, apartments, offices and factories may put self-managed fund returns at risk if there is a correction in the market.

Returns are also likely to be crimped by bank moves to toughen interest-only lending. This week Commonwealth Bank of Australia became the latest bank to say it would increase mortgage rates for property investors and reprice interest-only loans.

One of the biggest changes in the past year was a jump in the proportion of do-it-yourself schemes owning international shares, up from 23 per cent of funds in 2015 to 30 per cent in 2016. More funds also invested in exchange-traded funds (ETFs), which are listed products that track an underlying index.

$1.5 million the magic number

The rising popularity of both asset classes suggests trustees are becoming increasingly aware of the need to diversify their portfolios away from the highly concentrated Australian sharemarket.

Given that ETFs are low-cost products, the trend also suggests investors are becoming increasingly concerned about fees in a low-return environment.

In a sign that the new restrictions on super contributions due to come into force in July will curtail the ability of retirees to rely solely on their super for income in retirement, 27 per cent of respondents said they would need $1.5 million of savings to support a comfortable retirement.

The median sum required to live a comfortable retirement was $1 million.

“How can you achieve $1 million in super savings under the restrictions that are coming in?” said Bryce Doherty, head of UBS Asset Management for Australasia.

“Reducing the non-concessional cap generates a headwind to getting to where they need to.”

From next July the amount of pre-tax money individuals can contribute to super will fall to $25,000 a year, down from $30,000 or $35,000 depending on a saver’s age. Annual post-tax contribution limits will fall to $100,000 from $180,000.

In the past year the proportion of self-managed funds using a financial adviser fell to 42 per cent from 46 per cent, while the proportion of schemes being advised by an accountant rose to 30 per cent from 25 per cent.

Australian Financial Review

16 December 2016

Duncan Hughes

More than one in three commercial property sales are a result of “panicked” self-managed superannuation fund (SMSF) investors fearing changed super rules will increase potential liabilities. This is up from one in four a month ago.

So says Rorey James, head of strip retail sales for CBRE, the nation’s largest commercial property company. He says feedback from its national network of sales teams suggests sales volumes are steadily rising as private investors divest assets.

This is despite repeated warnings that pre-emptive sales might be unnecessary and result in more costs if another property is bought.

From July next year, the tax-free status of super income generated from pension balances greater than $1.6 million will change. Further, pre-tax contributions to super will be capped for everyone at $25,000 a year.

It means SMSFs with more than $1.6 million in the pension holdings of their super fund will be required to move any excess into the accumulation holdings, where earnings will be taxed at 15 per cent. It also means SMSF trustees relying on current higher contribution caps to service loans in their super funds may have to make other plans.

Property agents warn supply of retail and office complexes is turning from a “drought to a flood” as worried super scheme trustees dispose assets ahead of the June 30 deadline.

SMSF specialists fear trustees are being panicked into selling because of misplaced fears that retail and commercial property assets could turn into expensive liabilities.

“There is no need to panic,” advises Peter Hogan, technical specialist for the SMSF Association. “There is no requirement to sell off any assets in preparation for the rule changes.”

Hogan recommends those in doubt, or needing to restructure their fund, contact a specialist accountant or financial adviser.

James estimates about 25 of 70 deals in the past two months have been initiated by SMSF owners and says numbers are increasing.

“We are expecting a pretty strong supply in the first half of next year,” says James about proposed sales in the pipeline. “Superannuation sales and pent up demand will drive the market.”

Doctors, lawyers, factory owners and business people have been making the most of generous tax concessions to buy their surgeries, chambers, factories or offices in their super schemes.

The average commercial property holding in an SMSF is about $700,000 compared with $400,000 for residential property, according to the Australian Taxation Office. In total, $70 billion is invested by SMSFs in commercial property, three times that invested in residential.

James claims there has been a turnaround from the first half of the year when lack of supply helped push up demand in a strong buyers’ market. A well-presented retail property in a popular retail spot with long leases and quality tenants potentially offers strong revenues from rental income and capital growth, particularly in Melbourne and Sydney.

Recent sales include a 350-square-metre, single-storey Centrelink office on Burwood Highway, Belgrave, about 48 kilometres south-east of Melbourne. The property, which was bought by an SMSF investor in 2012 for about $1.3 million, sold for nearly $2 million, according to CBRE.

“The seller believed there were hefty tax implications from June 30 next year if the property was retained in the fund,” says James.

‘From a drought to a flood’

A shop opposite one of the nation’s strongest performing Coles supermarkets in Melbourne’s Glen Huntly Road, Elsternwick, is another SMSF investment being being advertised for sale. The 278 square metre property is fully leased to two longstanding tenants that provide annual income of $107,000.

ANZ Bank premises at 307 Clarendon Street, South Melbourne (which a couple acquired for $1.52 million 16 years ago as a retirement nest egg), sold for $5.7 million at auction this month.

“It has turned from a drought to a flood,” James says about the pick-up in second-half sales of retail properties under $5 million. “The market is still good but a lot of people are reviewing their portfolio as they enter, or get close to, retirement.”

Hogan cautions trustees with concerns to “not act rashly and sell down assets” before receiving advice on the impact of the new super rules.

He adds investors with commercial properties in their super portfolios do not have to sell them if they are worth more than $1.6 million.

“There has been confusion on this issue,” says Hogan. “Just because a property exceeds $1.6 million in value, you don’t have to sell.”

Assets exceeding $1.6 million in an SMSF will have to be spread across two holding accounts within the fund — the pension account and an accumulation account, he says.

“It’s worth remembering there is nothing new about the process,” says Hogan. “It is common practice for actuaries to apportion values across the two accounts in an SMSF.”

Two accounts are routine in an SMSF when there are various members and some are already retired and drawing a pension.

“Another misconception among some super investors is that they will be hit with a retrospective capital gains tax (CGT) if they don’t sell a property before June 30,” says Hogan.

“That’s wrong. The government has waived the CGT liability on any increase in a property’s value up to June 30, 2017, if the asset is moved into the accumulation account.

“It’s also worth comparing how these funds would be treated outside the SMSF/super environment – 15 per cent [in an accumulation account] is still a very attractive rate.”

Those considering the sale of a property should also consider the transaction costs and time involved.

For example, agent commission for selling a commercial property is about 3 per cent, there may be CGT and the purchase of another property will attract stamp duties.

Trustees unsure about their fund’s holdings should seek advice from an accredited financial adviser and accountant with specialist experience.

Also confirm whether property fits your fund’s strategy, says Andrew Peters, managing director of Semaphore Private, an accredited financial adviser.

Investment strategies need to consider accumulation of assets, investment risks, likely returns, liquidity, investment diversity, risks of adequate diversity and the ability to pay member benefits

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.