Speaking at SMSF Adviser’s SMSF Summit 2019 in Melbourne on Thursday, Colonial First State executive manager Craig Day said high-income earners who were not salary sacrificing could particularly benefit from using a combination of the two strategies over the next few years as they built up high amounts of unused concessional contributions.
“If you look at your typical clients, they are usually in their 50s, so their earnings are probably up around $100,000 and they are going to accumulate quite large levels of unused cap quite quickly if they’re not salary sacrificing,” Mr Day said.
“For someone on about $105,000 who is receiving $10,000 of SG contributions, for 2019 their concessional cap would be $25,000, and in 2020 it’s already up to $40,000 because they get the $25,000 standard cap plus the $15,000 unused amount from last year.”
Mr Day said allowing for five years’ worth of unused contributions to be carried forward, it was common for high-income earners to have cap amounts in the hundreds of thousands by the sixth year, which they could then salary sacrifice into super while commencing a TTR to make up for the lost income.
He gave the example of Bob, a 60-year-old with $450,000 in super who has an unused cap amount of $77,500 in the financial year 2021.
“In this case, Bob’s options are, firstly, we could do nothing and do SG all the way through to the point he retires, or we could implement a standard salary sacrifice TTR strategy, so we are salary sacrificing up to $25,000 and we start a TTR income stream and take enough income to leave him in a net neutral position.
“Or the final option is to salary sacrifice so that his total concessional contributions are $77,500, then push the full $450,000 into a TTR income stream to give him enough income to replace all that money he’s salary sacrificed.”
Mr Day said while the strategy involved “a bit of work” from advisers, given the salary sacrifice amount was a one-off that would need to be adjusted the following year, it could create substantial financial benefits for the client.
“If Bob does nothing, with a projected 6 per cent rate of return, he will retire at age 65 with $633,000. The standard strategy takes his benefits up by approximately $18,500, so it is still well worth doing. But the third strategy gives him an additional $10,000 above the standard strategy, so over the five-year period, you are giving him a net benefit of around $30,000,” he said.
“Interestingly, if you went back and plugged Bob’s circumstances into the old TTR rules with a zero tax rate on the underlying assets, you’d get about the same results. So, what these rules are doing is bringing the benefits of TTR strategies for certain members back into the realms of what they used to be.”
Again, to help manage the $500,000, long-term planning needs to be undertaken. Using the time frame in the article, split all the Concessional Contributions made on behalf of the member leading up to the age of 60.
TtR income swap strategy has often been a “hook” to get first time clients in the door.
Carrying forward unused concessional contributions cap <$500,000 is only going to make this hook a lot stronger for the first time client. Arguably, for ongoing advice clients, more often than not, if they are over 60, they are likely to be using the concessional cap fully so perhaps not as much value for existing advice clients
There is no reason you couldn’t realistically do this with a TTR as it stands, the problem is that noone really wants to go to that effort
Isn’t there an issue with the bring forward contributions cap once the members balance is over $500k ?