Tax outlook: navigating super reforms

While advisers need to strategise around the myriad of superannuation changes tabled in the 2016 Federal Budget, they should not implement changes just for the sake of it, Hope William-Smith finds.

Strategic advice around year-end tax decisions at the close of this financial year would mostly focus on tying up loose ends from the 2016 Federal Budget as tax agents and advisers looked to help clients navigate the minefield that is superannuation reforms.

With tax time around the corner and the release of the Government’s 2017 Federal Budget by the Treasurer Scott Morrison on 9 May, tax experts said super had taken the reigns as the be-all-and-end-all of the tax strategy focus heading into financial year 2017-2018. 

Decisions around the transfer balance cap, concessional contributions tax cut, spousal super tax, and the expansion of tax deductible contributions would be the dominant focus for advisers, along with strategising around the introduction of catch-up concessional contributions, and the extension of exemption for various retirement products.

As the changes to superannuation are yet to fully play out, advisers should continue to look at strategising to each client’s individual needs and be careful not to implement strategies for the sake of doing so, according to Westpac senior financial planner, Diana Saad.

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“Explore all the available circumstances for these options,” she said.

“You have to take a lot of things that come out of the budget with a grain of salt until they do get enacted into legislation.”

Super and pensions

The concessional contribution changes outlined in last year’s budget will be the biggest change to come into effect on 1 July.

Superannuation members have been given until 30 June to make extra concessional contributions under the current caps of $30,000 and $35,000.

Hall & Wilcox lawyer, Krishna Skandakumar said advisers had a lot to consider on that front when it came to regulatory compliance.

“Prudent advisers will need to consider: (a) whether clients are able to take advantage of the higher cap that applies until 1 July 2017; (b) whether the transitional rules which apply for those who trigger the ‘bring forward’ [rule] before 1 July 2017 could be used to achieve a higher cap over the transitional period; and (c) whether clients with a balance above $1,600,000 should make non-concessional contributions this financial year under the existing rules,” he said.

“It makes sense to consider maximising contributions for this year – both concessional and non-concessional contributions. It also makes sense to use the CGT [capital gains tax] relief where changes are required to comply with the new laws.”

There was a risk of getting bogged down in the nitty-gritty of regulation, which Berry Financial Advice owner and Tax Practitioner Board (TPB) director, Julie Berry, said could limit strategy outlook.

“Your main tax things such as your negative gearing and your concessional super contributions will obviously be lower in the new financial year so it’s really looking at getting the best for a client that you can before the rules change,” she said.

“When you sit back and wait you might miss out on some opportunities that won’t be there.”
Skandakumar said it also made sense to use consolidation as a retirement strategy.

“Investors and advisers should be considering whether multiple superannuation funds now makes sense with the loss of segregation, after considering the costs incurred with running two funds,” he said.

“There is also more focus on strategies around the pensions to see if they can be restructured. This applies equally to legacy pensions which will be significantly affected by the changes which come into effect.”

Despite some uncertainty on how reforms could play out, adviser sentiment was positive and it was now a matter of housekeeping rather than consistent re-strategising, according to Saad.

“Take a long-term approach as to what you are doing and how it’s going to affect you in five or 10 years from now, don’t implement tax strategies just for the sake of it,” she said.

“There’s no point just putting money into super if you know you’re going to have to pull it out again. You need to look at the clients… and what they are trying to achieve and if we can do that in a safe way.”
Skandakumar said advisers should aim to be ahead of the game on this and implement new practices now.

“It’s a touch point for advisers to contact their clients and discuss long-term objectives and goals, as the new superannuation reforms may mean strategies need to be implemented now before the new changes come into effect,” he said.

Investments and property

Advice on gains and losses of investments in the current market also needed to be looked at in the lead up to the end of the financial year.

Berry said advisers had to be realistic when it came to putting strategies into action.

“If the client’s got a particular goal in mind, the tax consequences are just one part of the advice you’re providing; it might not necessarily change what you’re going to do for the client,” she said.

Strategising for diversification was also important considering the pronounced geopolitical volatility in offshore markets which Perpetual Private strategic advice manager, Catherine Chivers, said would likely play a major role in next year’s tax advice.

“Understand what your strategy is, stick to your strategy, and seek advice when it comes to tidying up or balancing your portfolio to achieve a diversified income,” she said.

While the spotlight had been on negative gearing for a long time and many pushed it under the rug as an outdated strategy, Skandakumar said it still had some use for clients with a steady cashflow.

“It provides significant tax efficiencies for individuals but requires individuals to have the capacity to bear significant interest and other costs,” he said.

“Advisers need to be wary of an individual’s capacity to bear the costs associated with these strategies, without it burdening their standard of living, in order to enjoy the tax efficiencies of the strategy.”

However, Chivers was more cautionary on the strategy despite the benefits.

“It would be a brave government to tinker too much with negative gearing,” she said.

“[It] is a very popular strategy and one that’s been utilised by clients that are across the full strata of Australian society… so changing at that level how negative gearing works would affect a lot of people.”

Skandakumar said negative gearing could also still find its use in super as a viable option for funding contributions, and said recourse borrowing arrangements were also a potential strategy to effectively circumvent changed super contribution rules.

Accessing superannuation to buy property would also be a key feature in tax planning moving forward, and Saad said planners would have to wait and see how best to strategise.

“We would need guidance from the government on how they were going to tax it,” she said.

“At the moment it’s just conversation but from a strategic point of view… I can see so many people tapping into their super and then not looking to rebuild it when it comes to retirement time.”

Chivers said the removal of the tax exemption future income stream would make negative gearing close to redundant.

“Most clients understand that it was a fairly generous benefit and now that it’s been crimped from 1 July, I haven’t heard from anyone or come across any clients who have been upset by that,” she said.
TTR

The 2016 Budget announcement of the removal of the tax exemption from 1 July 2017 for fund earnings derived from assets supporting a transition-to-retirement (TTR) plan has caused many advisers to reassess the credibility and importance of this strategy.

“You’ve got to consider whether a TTR pension is going to be the right choice for a client going forward with the new 15 per cent tax on earnings,” Berry said.

“Make sure [clients] really do need that income drawdown and they are really taking from that and if that strategy is still relevant for them given that the tax situation will change.”

TTR had also previously been used as a strategy to reduce tax within the superannuation environment, but Saad said that was no longer a viable plan.

“We are reviewing and revisiting strategies for clients aged 65 plus… look at the clients’ full picture and what else is happening in their life where you can do some tax planning,” she said.

“It’s not a set-and-forget strategy, we don’t just utilise all the tax strategies we have available to us as a one-off.”

Chivers said: “Transition-to-retirement incomes streams… will absolutely survive; people say transition-to-retirement income streams are dead, but I think that’s probably premature to say”.

“The issue has now become do I need an income from the transition-to-retirement income stream or not,” she said.

Aged care

With the population set to live longer, new pension and income issues are set to be an area of interest for government strategy. 

A total of $17.5 billion has been invested in the aged care sector in Australia through 2016 to 2017, and is expected to grow to over $21 billion in the financial year 2019-2020 as advised at the Mid-Year Economic and Fiscal Outlook (MYEFO). 

Berry said associated costs would naturally increase in line with the average age of the population, and that advisers had to warn clients against the tax implications of selling assets for equity.

“That’s not always the best strategy so again, just getting advice and probably talking to people who are experts in that field, because it’s become quite a complicated area,” she said.

“Aged care is always a minefield… look at what other alternatives there are out there before you take that step for people.”

Chivers said advisers should hit the ground running early and periodically discuss effective tax strategies with clients to minimise complexities in the future.

“When it comes to aged care, knowing the family dynamics and how that works and who are the people within that family group that may benefit from aged care,” she said.

“Navigating through that to achieve the best outcome is often where an adviser can be very useful.”