Super Sea Change

More than a few planners would sympathise with Labor leader Kim Beazley in considering a request by Treasurer Peter Costello last week for him to throw his support behind the new super proposals.

Calling for bipartisan support in Parliament to free the proposals from legislative risk in years ahead, Costello reportedly complained it was unclear yet if Beazley would support the changes announced in the Federal Budget on May 9.

This would surely have raised a wry smile from the financial planning community, still struggling to come to terms with the implications of the proposals on their clients’ current retirement and pre-retirement strategies.

More so seemingly than Costello, they would understand that Beazley’s support is presumably also contingent on his policy advisers assessing the proposals’ potential to require new retirement strategies and render existing ones redundant.

To his credit, Costello has subsequently publicly retreated from his statement on Budget night that the new proposals had effectively spelled the end of the need for financial advice, and consequently financial planners.

New strategies

In fact, most sources for this report believe the proposals — which have also unanimously been welcomed as a positive step forward — will require an abundance of new financial strategies to ensure clients receive the maximum benefit.

Adding to the average planner’s workload is that these strategies must be devised both for the interim period leading up to legislation of the proposals on July 1 next year for both before and after its implementation.

Grant Thornton Melbourne director business advisory services Michael Sutherland is also not alone in suggesting that the “main strategic game is to simply get as much dough in super as you can and as early as you can”.

Claiming that the changes have “made the best investment structure in town even more attractive”, he says the issue now for planners is how to work with the new set of rules to access more funds and build up client super balances.

Super dash

A lot of attempts are underway at Grant Thornton to devise creative strategies for those clients to build up their super funds “quick smart”, he says.

“In particular, we have a window of opportunity between Budget night of May 9 and 30 June next year to get clients to put $1 million in super as undeducted contributions.

“From then on under the new proposals, clients can only put in $150 000 a year, unless under 65, and/or they can satisfy a work test.

“In this instance, they can put three years of averaging into super, pushing the total allowable to $450,000, and agree not to put anything else in for the next two years.”

Sutherland says “lots of clients” are also cashing in assets, such as properties and direct shares, as a strategy to contributing these funds into super as undeducted.

In particular, he says clients are gifting their ‘business real property’ to their super fund, providing it’s no more than $1 million, or $2 million for a husband and wife.

“That way they can build up their super while they still get their capital appreciation, and it’s the super fund that will ultimately be taxed on this.”

Transitional phase

However, Sutherland acknowledges that it is “really hard to advise clients when we are in a transition stage where the super proposals are not yet legislated”.

He says, for example, that Grant Thornton has “a number of clients whose retirement strategies have been compromised by the proposals”.

“These clients were part way through disposing of property from companies to themselves to put that into their super as undeducted contributions.

“However, it has been very frustrating for them that we can no longer do that under the new proposals, because the property was worth more than the $1 million cap allows for.”

Grant Thornton is now looking at a strategy to perhaps have the super fund buy the property under a terms contract, and simply pay it off over a number of years, he says.

Another Grant Thornton strategy to increase client funds in super involves the proposal for employers, and also self-employed people, to contribute up to $50,000 per person per annum or $100,000 for people over 50.

For the 2007 financial year there is the facility for clients to claim an employer contribution and, if structured appropriately, also a self-employed contribution, he says.

Individuals that work at one of more unrelated workplaces can make employer contributions from each workplace, provided the contributions from each employer are not in excess of $100,000.

“So, for example, if you have five different employers, you could effectively get $500,000 into super for this year.

Grant Thornton is also working on a number of strategies for clients aged over 55, who can access a pension at any time, to avoid capital gains tax.

“If these clients have a looming big capital gain, we would commonly suggest to them that they retire,” he says.

“This makes the fund become a nil tax payer, so they don’t pay any tax on their capital gain, albeit they will pay tax on their pension.”

In addition, Sutherland says, many clients from age 60 have a “lot of dough” in super at that point, so the earnings of the fund are quite significant.

“In these instances, it is likely we would also retire them, converting the fund to pension mode, so that they pay nil tax on the earnings”.

The Budget proposals mean the pension is tax free from 60 years of age, which also creates a whole range of possible retirement strategies for clients, Sutherland says.

“You have got cash coming out of super which you can then do things with, such as putting it back into super as an undeducted contribution, or pay off business debts with it.

“You could also opt to live off the pension receipts, and then salary sacrifice money you would have received from your employer directly back into super,” he says.

IOOF technical manager Sam Rubin agrees a key interim strategy for planners is to get clients looking to retire within the next 12 to 24 months to make the $1 million undeducted contribution limit, or $2 million for couples.

“Planners would want to move as much non-super money as possible (up to the limit) into super for those higher wealth clients, given the pension benefits that come into force from July next year.”

One strategy of doing this, Rubin says, is for clients that have direct share investments, but who don’t even want to sell them, to look at utilising an in-specie transfer into their super fund.

Another strategy may be for clients at pre-retirement who still have their family trust structure, but use it only for investment purposes and for tax, to wind up the structure and transfer those funds into super.

Small business concession

Yet another strategy lies in the Government increasing the small business concession for retirement exemption from $500,000 to $1 million this financial year.

Rubin says the concessions basically allow for small business owners to effectively get a lot more money into super prior to retirement.

“Therefore, if a client is close to retiring, and looking to sell their business, it may be beneficial to sell it this financial year to avail of the new $1 million small business concessions limit.”

“The concession will still be available to clients next financial year (2008), but the surplus cash they receive from the sale of the business (this year) may be able to be incorporated into the $1 million undeducted contributions limit.

“So, by combining these two limits a husband and wife that sell a business this financial year could feasibly put $4 million into their super by July next year.”

There will be a lot of strategies moving forward to accommodate a whole new range of pension products that are going to become available, Rubin says.

This is because the Government (in its September 5 update) has signalled a change from July 2007 in the way death benefits in super are going to be treated.

“So what you are going to see is a lot of money that was meant to stay in the super environment and should be a non-estate asset, automatically be moved into an estate asset.

“This is because it will be compulsory to pay death benefits to non-dependants into an estate.”

By the same token, Rubin says, you may also see more opportunities for super proceeds trusts to be established in the estate sector.

Planners will also have to consider the importance of a recontributions strategy for estate planning to pay for non-dependants, he says.

“When the new changes were announced people were saying why would anybody want to do a recontributions strategy.

“However, there is still a major reason under the new proposals for doing a recontributions strategy for estate planning benefits for non-dependants.”

This is because clients will increase their exempt component in super, which means non-dependants will still be able to get that tax free.

“But it’s the new taxable component they will have to pay the 15 per cent on, so you want to try and reduce the taxable and increase the exempt.

“So, you may see a lot of people prior to death just taking the money out themselves, and holding it in a cash account.

“Then when they die, their adult children can get it tax free, as opposed to having to pay some tax on those funds.”

Peter Townsend Lawyers special counsel Michael Hallinan says the proposals will move the emphasis away from using the ETP rules or RBL rules, which will cease to apply from July 1, 2007, to a client’s advantage.

“There is going to be a change in emphasis on manipulating the tax rules on end-benefits to an emphasis on getting money into super and keeping it in there,” Hallinan says.

The dollar values of these ETPs components will have to be notionally calculated on June 30, 2007, to “work out how much of it is exempt and how much is taxable”.

Flowing from this he says, is that people who can should use a recontribution strategy before June 30 to put as much money into the pre-1983 component and into the undeducted component.

“So by doing that recontribution strategy you are trying to maximise as much of the account balance on to exempt side as against the taxable side.”

Of course, this is assuming that on July 1, 2007, the whole concept of super benefits having pre and post components and undeducted components will be abolished and replaced by the exempt component and taxable component.

Hallinan says the proposed abolishment of RBLs will remove all limits on the amount of life insurance people can take out.

He says that it has previously been “fairly expensive to hold risk cover in excess of your RBLs in super, in the sense it wasn’t that tax effective”.

“But now with RBLS abolished from July 1, 2007, you can hold any amount of risk cover — which will effectively be tax free.”

TAPs turned off

Term allocated pensions (TAPs) have no future under the new proposals, Hallinan says, because “obviously these were designed to circumvent legally the RBL limits”.

Provided the abolition of RBLs and also the 50 per cent asset test exemption are legislated next year as planned, there will be no need for TAPs, he says.

“For those people who took out a TAP before Budget night, it appears they can continue on with that arrangement post-July 1, 2007, and they will get the benefit of the advantageous tax treatment.

“However, the Government has considered and declined the opportunity of unbundling them,” he says.

There could still be a role for true complying pensions under the proposals, in that these are guaranteed for life, for those pensioners concerned about the longevity risk.

But he cautions that acquiring a complying pension from a life office is not necessarily the most cost effective solution of doing this.

“They do serve a need, but a very expensive solution to that need,” Hallinan says.

This is because the current capital requirements that a life office has to have to sell those pensions are “just so horrendous” that the return on the pension is fairly minimal, he says.

Hallinan also wonders whether life offices under the proposals will begin to devise “some sort of long-deferred annuity products” (see boxed report above).

“These would probably cater for a person happy to run an account balance for 20 or 30 years, but who want to deal with the prospect they could survive their account balance by five or 10 years.

“So, they might buy some sort of annuity contract when they retire but with no payments required until the end of a 30-year period.”

Mariner Financial Services head of technical services Kate Anderson says a key interim strategy that planners are considering is “whether there’s a window of opportunity to benefit from a greater age pension for the period”.

“In other words, is it better to go into a TAP now as part of your retirement strategy and lock in your 50 per cent asset test exemption, which is going to be abolished on September 20, 2007.

“I did a comparison, for example, of someone with $450,000 in super, looking at committing either $200,000 or $300,000 into a TAP now, compared to putting the full amount into an allocated pension.

“After crunching the numbers, it works out that the difference per week after July 1 next year would be about $100 per week per retiree, which is quite significant.”

Another question that has come up quite a bit among clients, according to Anderson, is whether super splitting is still going to be a worthwhile strategy for clients.

“Would you still split your money with clients when you know that the only reason you were doing it before was probably for RBL purposes?”

Anderson said she “definitely would still be considering this as a strategy, and the biggest reason for doing so is the legislative risk”.