Superannuation, the ultimate government cash cow?

[Belli]

For some reason I've never put all my available money into super. Probably as I've always somewhat sceptical of what seems to me the over emphasis by governments and the financial industry about it. It's as if they consider that income from investments outside super don't count as retirement income and I simply don't get that attitude.

So I also invest outside the super structure. The income is now sufficient to cover the cost of my household overheads, such as rates, insurances and the like while allowing me to plonk some in the sharemarket when the companies I hold (only LIC's both in and outside super) offer a SPP or I have a surplus to my material needs, which are simple. May not be tax "efficient" according to some, including the accountant I use, but then it's about me not them! One cranky curmudgeon I guess.

 

[sptrawler]

For some reason I've never put all my available money into super. Probably as I've always somewhat sceptical of what seems to me the over emphasis by governments and the financial industry about it. It's as if they consider that income from investments outside super don't count as retirement income and I simply don't get that attitude.

So I also invest outside the super structure. The income is now sufficient to cover the cost of my household overheads, such as rates, insurances and the like while allowing me to plonk some in the sharemarket when the companies I hold (only LIC's both in and outside super) offer a SPP or I have a surplus to my material needs, which are simple. May not be tax "efficient" according to some, including the accountant I use, but then it's about me not them! One cranky curmudgeon I guess.

Yes I tell my kids to invest outside of super, and only have in super what the employer puts in, it will be well and truly past its use by date when they reach retirement.IMO
My generation placed money in, as it was supposed to enhance your pension, it is now becoming obvious that is is intended to replace your pension.
I used to wonder why my workmates blew all their money, they are now on a full pension, i am now enlightened.

 

[PZ99]

Years ago I put extra into super from the sale of property, which means a self funded income after 60. Never felt comfortable with getting old and decrepit and relying on the state for food.

But I wouldn't recommend kids doing it now. The Govt says they'll live beyond 100 and therefore have to wait until they're 99 to get there own money back.

 

[Belli]

My kids are doing the same, i.e. only employer contributions and invest outside super. I get the distinct impression if the matter is raised, they understand the benefits of investing but don't have confidence "sticky fingers" won't get hold of money which has been placed in superannuation. Plus the brats know they will get whatever I leave after I shuffle off this mortal coil!! And I'm OK with that.

 

[PZ99]

Yeah, once the Govt has finished blocking workers from getting their super they'll probably start looking into death taxes again... if they haven't already.

 

[sptrawler]

In W.A they are even talking about taking the seniors card off self funded retirees, why would you bother saving for retirement?
If a blue collar working couple saved and paid of their house, then went without to save $800k, they get no pension. But earn approx $24,000 from interest.
If the same couple pay off their house, then have holidays to Bali, buy the HSV, Ford Ranger and caravan, but only save $300k for their retirement.
That's o.k because they get $9,000 interest and $34,000 pension.
It's a no brainer, unless I've got something wrong.

 

[PZ99]

No you haven't got it wrong but you've pointed out how unsustainable the system is because Australia's future is one of aged population. Which is why the original plan set up by the Keating Govt was to pay your forcibly invested super as an annuity to prevent the very example you just made.

 

[sptrawler]

No you haven't got it wrong but you've pointed out how unsustainable the system is because Australia's future is one of aged population. Which is why the original plan set up by the Keating Govt was to pay your forcibly invested super as an annuity to prevent the very example you just made.

That's probably why, the taxable and tax free component ratio, is still maintained after a pension is commenced.

 

[Belli]

In W.A they are even talking about taking the seniors card off self funded retirees, why would you bother saving for retirement?
If a blue collar working couple saved and paid of their house, then went without to save $800k, they get no pension. But earn approx $24,000 from interest.
If the same couple pay off their house, then have holidays to Bali, buy the HSV, Ford Ranger and caravan, but only save $300k for their retirement.
That's o.k because they get $9,000 interest and $34,000 pension.
It's a no brainer, unless I've got something wrong.

Those numbers are interesting. I try and avoid doing a comparison between my income and that of others, especially in general conversation, as I can't see the point of it. However, seeing it in relation to the part of your post which I have bolded, I'm comfortable overall with my position. Nothing grand but better than nothing.

 

[sptrawler]

Those numbers are interesting. I try and avoid doing a comparison between my income and that of others, especially in general conversation, as I can't see the point of it. However, seeing it in relation to the part of your post which I have bolded, I'm comfortable overall with my position. Nothing grand but better than nothing.

I agree with you, as long as people are aware of what they can achieve, everyone should be fine.
It is still one of the most generous retirement schemes, in the World.

 

[Belli]

I'm curious about some aspects concerning the legislation from 1 July 2017. While it does not impact on me, possibly others on this forum with expertise may be able to enlighten me.

Suppose an individual who is 65 yo has, say, a $2m balance in an SMSF on 1 July. My understanding is $1.6M would be considered in pension account and there is no tax on earnings and the account-based pension is tax free. The remaining $400k is commuted to accumulation and earnings are taxed at 15% (10% CGT). So can the individual simply take $100k from the accumulation account in addition to the account-based pension if they wish to do so? If they can, what is the personal tax situation come tax time? Is there to be a rebate for the tax on earnings in the SMSF? I am, for simplicity, assuming all the $2M consists of non-deductible contributions following a windfall (tattslotto win, inheritance, etc.)

I'm probably not expressing it very well but it's intriguing to me as to what happens with the $400K if the individual wishes to access it. Or does it just have to sit there forevermore until after the individual's demise?

 

[Junior]

My understanding is $1.6M would be considered in pension account and there is no tax on earnings and the account-based pension is tax free. The remaining $400k is commuted to accumulation and earnings are taxed at 15% (10% CGT).

The member has a ''transfer balance cap'' of $1.6mill. This is a lifetime limit which dictates how much of their superannuation they can use to commence a pension. In the instance you have outlined, the member will need to commute AT LEAST $400k of their super back into accumulation phase, or withdraw at least $400k from super prior to 1st July so their total pension balance is under the cap.

Any amount remaining in accumulation phase will be taxed as you have described, 15% on earnings.

So can the individual simply take $100k from the accumulation account in addition to the account-based pension if they wish to do so? If they can, what is the personal tax situation come tax time?

Yes. They can access funds from the accumulation account as per the current rules - by satisfying a condition of release. Any withdrawal will be treated as a lump sum benefit. So if the member is over 60 years old and retired, the lump sum should be tax free on withdrawal. Of course once the funds are paid out, they will no longer benefit from the 15% earnings tax rate.

If anyone disagrees with the above, please note.

DYOR, this is not financial advice etc.

 

[sptrawler]

I'm curious about some aspects concerning the legislation from 1 July 2017. While it does not impact on me, possibly others on this forum with expertise may be able to enlighten me.

Suppose an individual who is 65 yo has, say, a $2m balance in an SMSF on 1 July. My understanding is $1.6M would be considered in pension account and there is no tax on earnings and the account-based pension is tax free. The remaining $400k is commuted to accumulation and earnings are taxed at 15% (10% CGT). So can the individual simply take $100k from the accumulation account in addition to the account-based pension if they wish to do so? If they can, what is the personal tax situation come tax time? Is there to be a rebate for the tax on earnings in the SMSF? I am, for simplicity, assuming all the $2M consists of non-deductible contributions following a windfall (tattslotto win, inheritance, etc.)

I'm probably not expressing it very well but it's intriguing to me as to what happens with the $400K if the individual wishes to access it. Or does it just have to sit there forevermore until after the individual's demise?

What junior has said is spot on. There is a bit of a honeymoon period (6 months) ,if you are less than $100K over the $1.6M on July 1st, but it must be removed.

Also if the individual who has the $2M, is married, it would be possible in some circumstances to withdraw the $400K and re contribute it as a non concessional contribution in the spouses account.
From my understanding, the $400K would have to be in the account before Saturday July 1. Alternatively contribute $179K, before Saturday and use the bring forward rule next year.
But time is getting short for moving money, it has to be in the account by stumps on Friday.

Well that is my understanding, but I'm only a tradie.
As junior says, do your own research, understand the issues or get advice.

 

[Belli]

Thanks, Junior & sp.

I'm curious about the practicable application of these things even if they don't apply to me. From what has been said, I gather there is no 15% tax rebate when funds are withdrawn from the accumulation account. I think that did happen in days gone by in some instances. I assume both the pension account and accumulation account still get a refund of any franking credits which may have to be apportioned in some manner.

I'm going to be very interested to see how this is all going to actually work. I reckon there may be some hidden wrinkles which will come to light down track.

 

[Junior]

Belli, the practical application is a mess. The Government has created a thick new layer of complexity, and has basically left a lot of the administration and monitoring in the hands of the ATO.

The ATO are supposedly going to create a Transfer Balance Cap ledger for each individual, which shows debits and credits against the cap, to measure how much of the $1.6mill you have used up. Any unused amount is still subject to indexation in $100k increments, so it will be a moving target over time. I heard you will be able to eventually view this ledger online through MyGov.

There are other situations which have become even more complicated: defined benefits pensions, more rules for those who have a mix of DB pensions & account based pensions, 'CGT Rollover Relief', different rules for SMSFs based on whether assets are pooled or segregated etc. etc. And of course a whole new regime of penalties for those who do not comply.

Great for accountants and financial advisers, but a bit of a mess for everyone else!

 

[sptrawler]

I heard you will be able to eventually view this ledger online through MyGov.

"Big Brother" is alive and well, also growing every day.

 

[Belli]

I had lunch with a friend of mine who is in financial planning. He confirmed, not that I doubted Junior, the new superannuation rules have created some additional levels of complexities.

However, some of his experiences makes me wonder if some should ever be allowed near a SMSF. It seems his organisation contacted every trustee who uses the firm advising they must take certain actions before the end of the financial year, eg, make sure deductible contributions are received by the fund on or before 30 June.

Low and behold, some didn't heed the advice with one character sending off a cheque for $35k on 30 June which was only received by the fund on 5 July.

I am probably being nasty but I have to shake my head where a trustee(s) of SMSF's are oblivious to some very basic aspects and subsequently get themselves in all kinds of hot water.

 

[Junior]

I am probably being nasty but I have to shake my head where a trustee(s) of SMSF's are oblivious to some very basic aspects and subsequently get themselves in all kinds of hot water.

You are correct on this. SMSFs are far more common than they should be, and it's because there are many players who benefit by encouraging the uptake of self managed super funds.

You can invest in direct property

This means estate agents, developers, mortgage brokers & anyone who flips off-the-plan property all stand to benefit by encouraging anyone and everyone to set up their own fund. Superannuation is a huge pool of money there to be tapped by the real estate industry. All of the 'professionals' I have just listed generally have a very poor understanding of the legislation surrounding SMSFs themselves, so it's no wonder that the majority of trustees don't quite understand the risks & responsibilities involved - they just see the opportunity to purchase another investment property without having to reach into their personal cash flow and it's an easy sell.

Setting direct property aside, accountants love SMSFs, as it means they get to set up a trust & trustee company and charge for it, and then charge for an extra tax return and set of financials each year.

SMSFs have their place for sure, but they have become too prevalent in my opinion.

 

[sptrawler]

You are correct on this. SMSFs are far more common than they should be, and it's because there are many players who benefit by encouraging the uptake of self managed super funds.

You can invest in direct property

This means estate agents, developers, mortgage brokers & anyone who flips off-the-plan property all stand to benefit by encouraging anyone and everyone to set up their own fund. Superannuation is a huge pool of money there to be tapped by the real estate industry. All of the 'professionals' I have just listed generally have a very poor understanding of the legislation surrounding SMSFs themselves, so it's no wonder that the majority of trustees don't quite understand the risks & responsibilities involved - they just see the opportunity to purchase another investment property without having to reach into their personal cash flow and it's an easy sell.

Setting direct property aside, accountants love SMSFs, as it means they get to set up a trust & trustee company and charge for it, and then charge for an extra tax return and set of financials each year.

SMSFs have their place for sure, but they have become too prevalent in my opinion.

I absolutely agree with Junior, I run a SMSF, because I like to know where my money is.

If I wasn't this way inclined, I would definitely use a low cost mainstream super fund.

It isn't for the faint hearted and it isn't a sure way of making money, the only thing it does IMO, is reduce costs and increase accountability.

At the end of the day, you are responsible and if you don't understand your obligations, the savings could be easily cancelled out by the penalties.

As Junior alluded to 'real estate', how are SMSF that invested heavily in property, going to reduce their balance to $1.6M and still pay a pension?
IMO they were only in it for capital gain, returns were crap and you weren't allowed to improve the property.
So they were just gambling.

Basically, a SMSF is a passion I've always loved investment, just never had much money.lol

 

[Junior]

I absolutely agree with Junior, I run a SMSF, because I like to know where my money is.

If I wasn't this way inclined, I would definitely use a low cost mainstream super fund.

It isn't for the faint hearted and it isn't a sure way of making money, the only thing it does IMO, is reduce costs and increase accountability.

At the end of the day, you are responsible and if you don't understand your obligations, the savings could be easily cancelled out by the penalties.

As Junior alluded to 'real estate', how are SMSF that invested heavily in property, going to reduce their balance to $1.6M and still pay a pension?
IMO they were only in it for capital gain, returns were crap and you weren't allowed to improve the property.
So they were just gambling.

Basically, a SMSF is a passion I've always loved investment, just never had much money.lol

If the SMSF is being run as a 'pooled' fund then they could simply reduce the pension balance to $1.6mill and retain the rest as accumulation, and therefore retain all properties. If there is more than 1 member, remember it's $1.6mill per person, so $3.2mill in total for a couple.

If the assets are 'segregated', i.e. each asset is assigned to a particular member then it can be more complicated.