SMSF Adviser Technical Strategy Day 2 wrap: New work test changes to set strategic contribution changes for advisers
With major changes to the work test possibly coming next year, advisers will need to be cognisant of the re-evaluation of new sets of contribution strategies to be utilised for different clients.
On day 2 of the SMSF Adviser Technical Strategy Day, IOOF senior technical services manager Julie Steed provided a deep dive on navigating the changing contributions landscape that will shape upcoming strategy for clients.
One of the biggest changes from this year’s federal budget is in relation to the changes to work test requirements. This will relax work test requirements for most contributions from age 67 to 74.
Ms Steed pointed out that whilst the onset strategy is to help clients grow their super, advisers must consider the way to utilise the various quirks across different contributions rules and the different strategic effects on different client situations.
“Don’t just think about this for clients who are looking to grow their super; think about it for clients who may be able to benefit from increasing their tax-free component,” Ms Steed said.
For example, consider Amos, who is 70 and retired five years ago. His only dependent is his adult son Marci, and Amos’ super balance is $800,000, and before he started his pension, he did a recontribution strategy.
“He’s got a $300,000 tax-free component and a $500,000 taxable component, so Amos isn’t intending to make any additional contributions to super,” Ms Steed said.
“But under this proposed announcement, he can withdraw and recontribute $110,000 each year until he’s aged 75, so that will increase the tax-free component.
“If he’s increasing the tax-free component by $110,000 each year, that’s a little over $18,000 less tax that Marci will pay in the event of Amos’s death. Reducing that 17.5 per cent tax that is payable can really be quite valuable.”
Ms Steed noted that the new measures may also change strategic considerations, especially for situations with older clients who are working less and are highly paid but still don’t meet the work test.
“Now, some employers have limits to the amount that you can contribute but subject to their consent, clients may be able to actually salary sacrifice that whole amount and grow their super by those amounts each year,” Ms Steed noted.
These changes can especially work for many clients that moved from salary sacrifice to personal deductible from 1 July 207 since the abolition of the 10 per cent eligibility test, according to Ms Steed.
“If we had clients who moved away from salary sacrifice to personal deductible contributions, then this may be an advantage for clients who are over at 67 if this proposed announcement is enacted to actually return to a salary sacrifice arrangement,” she continued.
“So, again, if you’ve got employer clients, you can consider looking at the option to offer salary sacrifice to older clients.”
Another key issue that clients can often face with the new changes is in relation to small business CGT contributions, according to Ms Steed.
In an example, Rob and Jo are both aged 70 when they sell the farm that they’ve owned for 42 years, and they sell that for $5 million in September next year, assuming that the legislation has passed.
“In this instance, the asset sale meets all the small business capital gains tax criteria, but as we commonly see with a lot of large farm sales, they’ll receive the instalments over a period of time.
“Instead of receiving the $5 million in one hit, they’re going to receive a $1 million in September on the date of sale and then they’re going to get a $1 million on 1 July each year for the next four years.”
In these types of common arrangements, Ms Steed said there could be situations where they won’t meet the work test, and in this instance, they’re not going to meet the work test from 1 July 2023.
They’ve each got $350,000 in super, so they’re also not eligible for the work test exemption because they’ve got more than $300,000.
“But if this proposal was enacted, then they could make non-concessional contributions and small business CGT contributions in that 2022-2023 and possibly even 2023-2024 financial years,” she explained.
“That’s definitely one to watch out for advisers in relation to the small business CGT criteria.
“I can’t tell you how often I see the accountants just do absolutely fantastic work, but the small business CGT eligibility criteria are very complex, and it often takes a lot of effort to actually work out that someone is eligible.
“So, all those plans can just completely fizzle out because they forget the fact that there’s still a contribution to super and, therefore, people have to meet the superannuation law criteria to be eligible for making contributions.”
Day 2 was then followed by a session from Accurium’s head of education, Mark Ellem, who provided his top five tips for helping SMSFs maximise their ECPI.
The day ended with a session from Cooper Grace Ward partners Scott Hay-Bartlem and Clinton Jackson, who provided critical insights on the need to deal with discretion due to the increasing number of court cases involving death benefits in SMSFs.
This includes dealing with the benefits and challenges presented by the trustee’s discretion in paying death benefits and how to best evaluate discretion or direction approaches when it comes to death benefits.
The agenda for Day 3
Day 3 of the SMSF Adviser virtual strategy day will begin with Colonial First State head of technical Services Craig Day, who will arm practitioners with the knowledge to safeguard their practice and clients in the wake of the new NALI reforms.
This will then be followed by a session from Lee Eaton, national head of business development at Independent Reserve, which is designed to give financial planners, advisers, and accountants a solid understanding of the basics of Bitcoin and cryptocurrencies, assets that have seen exponential growth as retail, sophisticated and institutional investors continue to pour in.
The day will end with an essential ATO update for SMSF advisers from ATO director Kellie Grant, which will provide an overview of the key projects, top compliance issues and initiatives affecting SMSF advice the ATO will be focusing on in FY21–22 and beyond.
More than 1,400 delegates have registered so far for the virtual strategy day, with registrations open until Friday 9am.
Tony Zhang is a Journalist at SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2020, Tony has covered various publications across the legal, financial and professional services sectors including Lawyers Weekly, Adviser Innovation, ifa and Accountants Daily.