Way back in May the Government released a Budget with changes to several areas of interest to Investors. It caused some serious discussion, even consternation, about what exactly the outcome of the changes would be.
Of course, the legislation required to make these changes has yet to be passed and whether the changes remain in the same format as announced will depend on the support the Government receives. At the time of writing no announcements have been made about any potential amendments to the Budget.
From an investor’s point of view, the changes announced for Superannuation and scheduled from either Budget night or for introduction on 1 July 2017 are in many ways controversial and with many unintended outcomes. Nevertheless, there are two changes affecting PROPERTY investors that provide the most consequence & opportunity. The first is the Lifetime non-concessional Contribution cap has been reduced to a $500k limit.
In case you are wondering, Non concessional means money contributed to your super from money that has already been taxed and is in your pocket or bank account.
Previously, it was not uncommon for retirees to sell assets and put the proceeds into Super. This cap is designed to limit that type of activity. Opportunities still exist in Super, it’s still a very attractive vehicle, but these measures mean you cannot put as much in.
Thus being able to progressively contribute large amounts of money into super in the lead up to your retirement using the 3 year, $540,000 bring forward rule, will not be available if this change is passed. The result is that one must now plan for retirement much earlier using a combination of non-concessional and concessional contributions to get money into super.
This now increases the relevancy of one using leverage to supercharge growth in super, as GROWTH does NOT count towards caps.
While SMSF borrowing is not for everyone this is now quite an attractive strategy. Given that position it might be wise to seek advice by investing with growth assets using a gearing strategy.
Naturally, you should seek advice about whether it is relevant to your circumstances.
Now for the best bit. Concessional contribution limits have changed from $30k (or $35K if over 50 years of age) to $25k per annum, regardless of age. However, remember that the Employers contributions contribute to that amount.
Why I’m excited, is because there has been an allowance made to carry forward the unused Concessional cap over a 5 year period. This has the potential to allow greater forward planning!. By using this strategy one could potentially Offset CGT on any planned sales of assets in the lead up to retirement to convert a leveraged portfolio of non-super property assets into a tax effective vehicle such as super paying a tax effective income stream through retirement. Clearly this enables you to plan ahead for a CGT event year for the first time.
Contributing to super means you have to be working. This was defined as meeting the “work test”. These restrictions have been removed under the changes flagged in the Budget. The removal of the work test means someone who is asset rich and cash flow tight in retirement may be able to release assets that produce a CGT event and thus contribute to super to potentially eliminate a lot of tax using the 5 year bring forward rule.
With these changes it is sensible to make the unutilised cap work for you by planning ahead. Thus mapping a pathway looking forward is a very much alive and a critical part of retirement strategy. Doing it by yourself is not simple anymore. Naturally, how these changes, and others I haven’t touched on, affect your personal position will vary. I strongly recommend you come and see us so we can discuss the full impact and what opportunities they present for you.