The biggest tweaks to superannuation policy in a decade will force many savers to adjust their affairs. However, only a small number will be sufficiently deterred to move money outside the nation's retirement savings system. Experts say the changes designed to stop investors from taking unfair advantage of the system are likely to push the wealthy into a mix of old and new strategies, including negative gearing, early-stage investment and family trusts.
For the vast majority, however, the introduction of a lifetime cap alongside changes to the concessional and non-concessional contributions will reduce but not entirely remove the attractiveness of superannuation as a savings vehicle.
Let's look at a retiree with $2 million in superannuation.
Under the new $1.6 million cap, the retiree would need only to slightly restructure their holdings to avoid the impost of an additional 15 per cent tax on earnings applied in accumulation mode. "If you assume a return of 5 per cent, or $20,000 per annum, the investor would be better off holding these assets under their own name, where they would attract no tax until they passed the taxable income threshold of $18,200," he said.
However, for investors with significantly more assets, or higher levels of income, more drastic measures will be required. The federal government's pointed protection of negative gearing will give investors looking beyond super considerable confidence in the medium-term prospects for property. "Tax-deferred investment structures will obviously attract investors. However, there's a real question as to whether encouraging people to invest outside of super and into less-regulated environments is the right thing to do," he said. Nevertheless, tax-effective investments will be sought after by the new cohort of super members hit with double contributions tax. From July 1, 2017, those earning an income of more than $250,000 will be forced to pay 30 per cent contributions tax, up from 15 per cent.
Grant Thornton tax partner Paul Banister said gearing into property and shares would return as popular strategies as investors looked to sneak in under the new $250,000 threshold. "Whether it's negative gearing or borrowing to buy shares – and pre-paying the interest – all these strategies are going to come back on stream," he said. More exotic asset classes and strategies were likely to attract the attention of high net worth investors alongside traditional fare such as property and shares, he said.
"The angel investor concessions offering 20 per cent tax offset for investments of up to $200,000 will attract more interest from high net worth investors as a result. I expect to field more questions about that." The new laws, which emerged as part of the National Science and Innovation Agenda statement and were passed by the Senate on Wednesday, seek to reward investors with additional tax benefits for investing in early-stage technology. The initiative includes a 20 per cent non-refundable carry forward tax offset on investments in qualifying companies, capped at $200,000 a year, and a 10-year exception on capital gains tax, providing they are held for 12 months or more.
Trusts are back in the ascendancy.
"Where the focus has been on people building their superannuation, now they are restricted from doing that, so asset protection and tax streamlining through vehicles like family trusts are going to come to the fore," Mr Banister said. The relative advantages of family trusts over self managed super funds was expected to lead to the once-marginalised vehicles enjoying a resurgence, HLB Mann Judd's Mr Philpot said. Flexibility of family trusts would result in them emerging as the vehicle of choice for Australia's highest earners, who would also be attracted to the protection they offered, he said.
"Trusts will make a big comeback. This is more long-term planning around building up wealth. The reason it will come back is because of the flexibility of the trust. "The flexibility to distribute income within a family trust will provide the best tax outcome for a couple in their retirement years when compared to superannuation and the new non-concessional caps of $500,000 per person. That said, $1.6 million each is still a large sum of money and most people will be able to happily live on that but if there is an amount over that sum of money, getting the optimum tax position may mean putting investments in their own name or into a family trust."