The importance of managing legislative risk
Labor’s proposed changes to the tax concessions within superannuation are a timely reminder that trustees need to manage legislative risk when building wealth for retirement.
With the announcement by Labor to confront head-on the fairness and sustainability of tax concessions within superannuation, it’s clear the only certainty we have when it comes to government is that change will occur at some point in the future.
The recent proposed changes announced by Labor hark back to reforms proposed by the party when they were in government in 2013. This commitment by Labor would, if they are elected, aim to reallocate some of the tax concessions by introducing a tax for pension recipients who have attributed earnings of more than $75,000 (previously $100,000). In addition, they have flagged lowering the Div 293 tax threshold for individuals whose “income for surcharge purposes” is greater than $250,000 (currently $300,000).
This potential for change always leads me back to one fundamental thing that trustees and their professional advisers should always be looking at: how do we best manage legislative risk?
By this, I mean how do you try and limit the impact of any future change in government policy? Whilst not always possible, there are clearly some levers that can be pulled. Within a family situation ('mum and dad' SMSFs), the focus on the equalisation of member account balances (as much as possible) should be top of mind.
Within the legislative framework, members can employ a range of strategies to best manage some of this legislative risk, including:
- Considering how to allocate any non-concessional contributions among members;
- Contribution splitting – up to 85 per cent of employer contributions;
- Recontribution strategies (lump sum and spouse contribution) – subject to the member having met a condition of release; and
- Use of reserves (giving consideration to concessional contribution cap issues)
To look at a simple example based on Labor’s proposal, if Doug and Jill had $2.5 million within the SMSF and Doug’s balance represented 70 per cent of the fund, the assumption would be that Doug’s associated earnings would be greater than the $75,000 threshold. This would mean any earnings over this amount would be subject to tax at 15 per cent. However, through some simple, yet effective strategies to manage such a risk, a reallocation of benefits amongst members (e.g. recontribution) could re-weight the balances to a 50/50 basis and most likely avoid the 15 per cent tax threshold that would have been applied on some of the pension earnings.
Whether the measure announced by Labor ever sees the ‘light of day’, we don’t know. However, what we can be certain about is that change in the long term will occur to address the Budget deficit and redistribution of superannuation tax concessions. It is for this very reason that you should always keep one eye on how to best manage legislative risk.
Aaron Dunn, managing director, The SMSF Academy