The potential future of superannuation - a worked example
'There will be no changes to super, no adverse changes to super in this term of Parliament, and we have no plans to make adverse changes to super in the future.' Prime Minister Tony Abbott 12th May 2015
While the Coalition is holding to the pre-election promise (for now), there is increased pressure on government to change certain rules in super funds, including SMSF’s. Many lobby groups including the ALP are proposing to review the tax treatment of super funds, particularly those in pension phase, that enjoy tax fee status on earnings and capital gains.
There have been a number of proposed changes. As part of the ALP’s 2015 budget response, a tax-free threshold of $75,000 per member in superannuation in pension phase was proposed.
How could this work? Consider the following:
Bill and Sue are 63, married and retired. They are drawing pensions from their self managed super fund and have minimal assets (other than their home) in their personal names. The SMSF returns an average of 6% earnings. Bill and Sue’s balances in super are as follows:-
Bill $1,800,000
Sue $ 500,000
As a result of the proposed changes Bill and Sue would pay tax of $4,950 on earnings of $138,000. This equates to a combined effective tax rate of 3.6%. If the same scenarios was repeated but the asset base was in Bill & Sue’s personal name, tax of approximately $30,000 would be payable.
Under this example, if Bill and Sue would like to reduce the impact of the proposal they could consider the following:
- Bill could transfer (via a pension payment to Bill and contribution for Sue) an amount of his superannuation (up to $540,000) to Sue. Sue’s earnings are increased and more of her tax-free threshold is used.
- Bill and Sue could elect to transfer an amount of SMSF assets to their personal names. Earnings on these assets would be subject to personal tax-free thresholds (up to earnings of $18,200 per person) without attracting income tax.
While we do not know for certain if or how rules within super could change, we are regularly reviewing any proposals or amendments to legislation so that, if a change was to occur, we will be able to structure a clients affairs in a way to reduce the impacts of such change. Until then, watch this space!