Key measures include:-
A reduction in the amount you can contribute from work related activities to $25k per annum.
Clients with taxable income above $250k will pay a 30% contribution tax.
A maximum amount of $1.6m that can be transferred from the accumulation stage to the pension stage where there is no tax on earnings or the drawdown once you have reached 65.
A lifetime cap of $500k on after tax money contributed into Super back dated to 1/7/2007 which qualifies for favourable tax treatment on fund earnings.
Clients aged from 65-74 can make further superannuation contributions below these caps irrespective of meeting any work requirements.
Transition To Retirement clients will pay a 15% tax on earnings within their fund with their drawdown taxed at their marginal rate of tax.
For lower income earners up to $37k a version of the 15% Government rebate will earn that no tax is effectively taken from contributions.
As you can imagine there is some frantic lobbying now going on in Canberra particularly with the retrospective nature of the after tax cap of $500k and in my view there will be further changes made, so best to hold off doing any major planning till past the election. A significant amount of Australians sold assets and paid capital gains tax to bolster their super through taking advantage of the contribution rules over the past decade and will expect to be compensated. Larger Self-Managed Funds with Commercial Property will also be disadvantaged if these assets have to be restructured by selling back into other entities particularly where there are some borrowings involved.
In relation to the increase in earnings tax of 15% most clients have a good asset allocation in Australian Shares paying a 30% franking credit on dividends. These credits can still be used to eliminate the proposed increase in earnings tax so this is not as bad as the headlines suggest. The Government has also just legislated Venture Capital limited Partnerships (VCLP) which will offer a 20% refundable tax credit up to $50,000 for retail investors (higher for our wholesale/sophisticated clients) and again I would expect that some of your Superannuation could invest in VCLP’s and get the associated tax credit.
The probable effect of these proposed Super changes in aggregate will be a greater use of investments via gearing (both shares and property) and the use of Family Trusts to direct income through to lower taxed entities. Naturally we will look at each client’s circumstances on its merits and make strategic changes once the actual legislation is finalised. With interest rates so low and a real fear of deflation both here and overseas we are entering unchartered waters locally so need to look overseas for some history.
I did spend several weeks in Japan recently looking at their economy which has been stagnant for several decades with negative interest rates where high Government spending is funded by high personal savings with zero interest being paid. Japan continues to have an ageing population with high personal savings but minimal expectations of investments appreciating, making it hard to see how this vicious spiral can be broken.
The reality is that purchasing power is improving with access to goods and services via the internet and mobile phones, meaning that your money may actually be going further than in the past. Coupled with low interest rates benefiting borrowers and penalising savers, there is much to ponder as we approach an important election.
We will be holding our next client function on the evening of Thursday the 16th June at the Radisson in the City with invitations to follow shortly. At this function I will provide an update on market conditions and tax planning issues for both this financial year and longer term issues.
I hope to see as many of you as possible on the night.
Sincerely
Tony
