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Sunday, 7 April 2013

Changing the super rules will affect SMSF trustees superannuation strategies

As pointed out in this SMH article, the government's claim that the proposed 15% tax hike on self-funded retirees earnings above $100,000 pa would only impact the richest 20,000 or so retirees (those having super balances above $2m) is a bit misleading. In reality, many retirees will keep their superannuation invested in 'growth' asset classes (shares and/or property) even after their fund moves into pension mode, so it is unlikely that their funds income will be a nice, neat 5% pa every year (not all retirees immediately shift their super into fixed interest options when they stop working). For those that remain directly or indirectly invested in the stock market, some years will produce a negative return while others can produce a total return of 20% or more. So some self-funded retirees with a balance of around $500,000 might be affected by this 'tax on the rich' in a 'good' year, if their fund earnings (plus capital gains) happen to exceed $100,000. And it's not as if this tax is based on the pension payment received by the self-funded retiree, it is the tax rate paid by their super fund on fund 'earnings' above $100,000, regardless of the actual amount being distributed to the retiree as a pension payment. So in the early years of retirement, when the legislated minimum withdrawal rates are lower and self-funded retirees often take the minimum pension payment from their superfund (in order to avoid their fund running dry before they die - 'longevity risk'), the fund may be paying 15% tax on some of the 'retained' earnings, even though the pensioner is only receiving a small pension payment from the fund and is actually still working part-time to try and preserve their superannuation balance for their 'old age'. Hardly a tax that will apply only to the 'fabulously wealthy', as some Labor politicians are trying to spin this savings raid (hence Abbott's reference to the tax proposal being similar to the tax raid on savings accounts over 100,000 Euros being used by Cyprus to pay off a huge government deficit).

This tax change would therefore make tax-planning necessary well into retirement for many self-funded pensioners (at least those with a SMSF that have to pay attention to the tax implications of their investment decisions as trustee), not just the 'fabulously wealthy' - hardly the 'simple super' concept intended when pension incomes were made tax-free by the coalition. And, as is always the case with capital gains, it will sometimes be impossible to know before-hand what the most tax-effective strategy may be. While those holding investment in direct shares or property can often pick and choose when they sell an asset and trigger a capital gains tax event, and can therefore plan to realise capital gains in those financial years when they would remain below the $100,000 threshold, the situation is more difficult for those investing in managed funds. Even though you can choose when to sell units in a managed fund, some years the managed fund's annual tax statement will include realised capital gains (due to active asset reallocations by the fund manager) even when the actual cash distribution paid out to the superannuation fund is minimal.

Perhaps the unforeseen consequence of this particular tax change (if it is ever passed into legislation) will be to provide yet another incentive for self-funded retirees so withdraw and spend their retirement savings as large 'lump sums' during their early years of retirement, and after a few glorious years of world travel and partying, live off the old age pension.

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