Superannuation changes and their impact on estate planning and succession: Ed Chan

GUEST OBSERVER

The countdown to 1st July 2017 begins and people need to act now.

Starting 1st of July, superannuation legislation will change in Australia and everyone needs to understand how the changes will affect them.

Australians are encouraged to plan ahead with the upcoming super changes such as the $1.6 million transfer balance cap, removal of tax exemption for transition-to-retirement pensions, cut in annual concessional (before-tax) contributions cap to $25,000 and catch-up concessional contributions over 5 year period from July 2018, among others.

One advantage to the annual concessional before-tax contributions cap cut is the catch-up concessional contributions.

However, it will not start until 1st July 2018. Unused portions of the concessional cap every year will be allowed to be carried forward for up to five years if you have an account balance of $500,000 or less.

Australians who consider making super contributions starting July 2017 should know that the annual concessional before-tax contributions cap will be a lot lower than previous years, dropping to $25,000 from $30,000 for people under 50 and $35,000 for those over 50.

Starting 1st of July 2017, more Australians will pay double contributions tax (15% + 15%) because of the lowering of the income threshold from $300,000 to $250,000.

Those with adjusted taxable income of over $250,000 will have extra contributions tax and all concessional contributions will have 30% tax instead of 15%. Those in certain public sector funds will be hit with this extra tax which will raise $2.5 billion in four years.

According to the government, only a small number of affluent Australians will be affected by the superannuation changes.

The 2016 budget claims that the changes will affect only 4% of people in super but some disagree, saying it will impact a lot more people than the government expects.

Other issues include estate planning and succession.

Where the death benefit exceeds $1.6 million in estate planning, the excess should be cashed out as a lump sum. Those who wish to retain the superannuation benefits through reverting or paying a pension to their dependents upon inheritance will also be affected.

Those who are in second marriages and wish to make provision for children from a previous marriage will also be impacted.

People have already structured their estate to give pension to their children from their superannuation while the spouse can access the balance as well. With the $1.6 million cap, funds may no longer be enough to sustain the pensions and spouse’s standard of living.

The superannuation changes may be plugging revenue holes instead of building a sustainable system, which can provide for retirement adequately.

This may even result in bigger demands on public finances down the line. People may be discouraged to build their super and find other investment vehicles instead. They may turn to residential property investment but housing affordability remains an issue.

The good news is that superannuation will be more flexible for those with different work patterns as the new caps will be eligible for tax deductions.

This will be beneficial to those who salary sacrifice, who are self-employed and have part-time work.

Ed Chan is the founding partner of Chan & Naylor.