There were a number of proposed changes to the superannuation rules announced in the May 2016 Federal budget. Whilst these changes are still being debated in Parliament, and may therefore be modified, or potentially not passed into law at all, it is still worth contemplating some possible strategies to deal with these potential changes.
If the reduction to concessional, (tax deductible), contributions caps to $25,000 is passed, combined with a tightening of non-concessional contributions limits, the question for those in their 40’s and 50’s with low superannuation balances might be, is how will it be possible to accumulate sufficient funds for retirement?
One option to consider is the use of a gearing strategy within a self-managed superannuation fund, in other words, using a limited-recourse borrowing arrangement, or LRBA for short. This will facilitate the purchase of a single asset, (such as a property), or a group of identical assets with the same market value, (such as a parcel of shares), with borrowed funds, which will ideally generate income on a regular basis and also a healthy capital gain. Income received on the investments combined with contributions made to the fund on behalf of members would be used to service the loan. The interest charges on the loan would also be allowable deductions against the funds income.
The desired outcome with a borrowing strategy such as this is that the total income and capital appreciation of the asset will be acceptably greater than the costs of the borrowing arrangement. For a couple with low balances in their self-managed fund, this provides the opportunity to acquire a high quality asset now with a market value significantly higher than their current member accounts. This would not be possible if they relied on their existing balances alone.
Clearly, the decision to enter such an arrangement and the asset choice should not be taken lightly and not without seeking expert advice beforehand, as the assumption is always that such loans can be serviced by continued contributions and does not necessarily allow for changes in circumstances.
One of the more significant superannuation related announcements in the Budget was the proposed limit on superannuation funds that could be applied towards pension accounts to $1.6m. This limit will be applied on a per member basis, not per fund, so for a husband and wife fund, the challenge will be to get as close to this limit for both members, rather than have unequal member balances, with one member significantly over the $1.6m limit and one below. Should this be an issue, there are a couple of ideas to consider:
This allows up to 85% of your taxed contributions, (ie the initial contribution after 15% tax has been deducted), to be then be transferred to your low balance spouse in the financial year following the one in which the initial contribution(s) were made. In addition, the split amount does not count towards the transferee’s contribution caps, so there is scope for additional amounts to be contributed for the transferee in the usual manner. There are a number of conditions which must be satisfied to allow a contribution split – so seek advice first.
Maximise the use of the low rate threshold
This is an amount, (currently $195,000) which can be withdrawn from a super fund by a member who is over their preservation age, but less than age 60, and is effectively free of tax. Bear in mind however, that a condition of release, such as retirement or permanent incapacity is required to access funds below age 65. These funds can then be contributed by the low balance member to boost their account.
Alternatively a member who is over age 60 and satisfies a condition of release, can withdraw any amount from their balance free of tax, under the current rules. This amount could then be contributed for the low balance member, bearing in mind the contribution caps for non-concessional contributions, which are currently $180,000 per financial year, or $540,000 under the three year “bring forward” rule, will be restricted to $100,000 per year or $300,000 over three years from 1 July 2017 under the recently announced changes to the Government’s planned superannuation amendments.
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