We’re not going to look back. It is too traumatic. Shudder. There is too much carnage in the rear-view mirror for 2017.
The introduction of a tax-free pension limit of $1.6 million, lower contribution limits and a lower-income threshold for punitive super tax contribution rates. All painful negatives that slapped us in the face on July 1.
Let’s look forward. Forget the spilt milk. How do we clean it up? What do we self-managed super fund trustees need to be looking out for in calendar 2018?
While almost all of the big changes came into effect as of 1 July, 2017, it will be in the next six months that most of us have to deal with them.
For many SMSF trustees, the changes won’t directly impact on them. But for so many – much, much more than the estimated 4% the government claimed, in my opinion – there is going to be significant impact.
It’s December now. But in my last column for the year, I’m going to tell you what you need to be thinking about as soon as you emerge from your holiday haze.
Your last tax return without a $1.6m cap
You’ll need to submit your last SMSF tax return under the old rules without the $1.6m transfer balance cap (TBC) in the next six months, if you haven’t done so already.
While the tax-free limit didn’t kick in until 1 July, this will be the last tax return, for those with larger balances, that won’t also have an accumulation portion.
But that’s not the biggest part of this tax return for those affected. They will also need to …
Decide on capital gains tax concessions …
Before, or at, the time you put in your fund’s return for FY17, trustees will need to make decisions regarding what they wish to claim the CGT rollover relief.
Those with pre-1 July pension balances above $1.6 million will need to sort through, asset by asset, to determine which investments they are going to apply a CGT discount for.
The CGT rollover relief was introduced to stop a mass selling (or renewing of cost bases) of CGT-free assets in the lead-up to 30 June last year for funds in pension phase.
But to claim the relief, the assets need to have been held continuously between 9 November 2016 through until “just before” 1 July 2017.
At it’s most basic, the decision being made is about whether your asset will likely have a gain at your likely point of sale (therefore claim the relief) or a loss (don’t claim the relief, to be able to claim the tax loss). But this can be a very difficult decision, particularly with equity holdings.
You need to lodge the CGT relief form, listing the assets you will claim for, with the ATO before or with your tax return for FY17. You decision is final – you can’t change your mind once lodged. Start putting thought into it now.
TTRs – can you convert?
As of 1 July 2017, transition to retirement pensions will be taxed. So, if you can convert your TTR to a regular pension, then you probably should.
How do you do that?
By showing your super fund trustees that you met a condition of release. Turning 65 is an automatic condition of release, so if you turned 65 at some point, your TTR will automatically become an allocated pension.
However, there are other conditions of release. The important one here is turning 60 and either retiring, or changing jobs.
If you retired from age 60, then you can (should) notify the trustee (yourself or the trustee of your APRA-regulated fund) that you have done so.
If you changed jobs some time after turning 60, or found yourself out of work for a period, then it is important to update the trustee on that event. There will be paperwork and you may be required to show proof. Most APRA-regulated funds that I have asked the question of said they will do it historically, if proof can be provided.
But converting a TTR into an account-based pension can be a significant tax saving.
Five-year catch up provisions
The five-year catch up rules don’t come into force until 1 July, 2018. And it only starts to build as of that time. Being able to make contributions to make up for a period five years ago, won’t be possible until the fifth year of operation until the 2022-23 financial year.
But some should be thinking about the ability to use those catch-up provisions now.
Broadly, these new provisions will allow you to put in extra concessional contributions (for those with balances below $500,000) to make up for previous years where the full $25,000 CC limit was not used.
For example, if no contributions were made in the FY19 to FY22 years, then it would be possible to contribute $125,000 in FY23.
This will be of particular benefit to property investors. For further information, see this recent column (29/11/17).
Sell home, add to super
Legislation only passed the parliament this month to allow older Australians (over 65) to put up to $300,000 into super when they downsize their homes.
And that’s per person, so it could be $600,000 for a couple. To make the contribution, you don’t need to pass the “work test” normally applicable for the over-65s to make a contribution.
That can create a handy tax-free income stream. For further detail on this new strategy, click here (13/12/17).
Check your asset allocation
The Dow Jones Industrial Average is up nearly 25% in the last year, the S&P500 about 18% and our own ASX200 is up around 8.4% (not including dividends). Europe is up around 10% and Japan is up north of 17%.
It’s been a good 12 months.
Check your asset allocation. Check it against your SMSF’s investment strategy. Sit down in January and have a look to see if it’s within the strategy’s outline and, even more importantly, if you’re comfortable with the amount of equities you’re holding.
After the Christmas rush and the January lull is often a good time to take stock of the entire SMSF portfolio.
Spouse splitting
For a decade, it didn’t matter if one spouse’s super balance was huge, while the other’s was pitiful.
But the $1.6 million pension account limits have caught a lot of people off guard.
There are strategies that couples should be adopting, starting from a relatively young age, to make sure that both members of the couple have relatively even super balances, to maximise (up to $3.2 million) the tax-free income stream from super.
The biggest of them is spouse splitting of the $25,000 concessional contribution limit, allowing a member to transfer their own $25,000 CC made for a year (less the 15% contributions tax) to their spouse, even if the spouse has also completely used their own CC cap.
This can only be done up to the end of the following financial year. That is for the FY17 year, it would have to be made before the end of the FY18 year.
I went through this and more strategies for couples in this column (19/4/17).
Ho, Ho, Ho and a tax deductible contribution to all!
Towards the end of this financial year, huge numbers of Australians will have their first opportunity to make a tax-deductible contribution without having to salary sacrifice.
That is, they might get to June, decide that they’ve had a good year financially, or have sold an asset and are looking for a tax deduction, and just make a tax deductible contribution to their super fund.
It’s come via the removal of he “10% rule” for super contributions. And it’s one of the few fantastic, positive changes made in recent times.