There has been lots of talk in the media about the May 2016 Federal Budget proposed superannuation changes. All the talk centres on 3 changes:
For some reason, nobody is talking about the change that will affect the most people each year, and will raise the most revenue. In fact so few people are talking about it, that many accountants and financial advisers aren't even aware of it. What is this change? From 1 July 2017, investment income earned on TRIS pensions will no longer be exempt from tax.
There are 3 important questions you should be asking:
1. Why does Greg think that this will be so significant?
Its quite simple: I've done the numbers. What's more, this is an important issue to me because it will affect the demand for Actuarial Certificates. So I have put a lot of thought into it.
Ask yourself this: What proportion of your SMSF clients have TRIS pensions? For most accountants it will be 10-20%. Every one of them will be impacted.
Then we can look at the extent to which they will be affected. Here is a simple rule of thumb. If the average fund earns 6.7% p.a. in an average year, and the tax rate differential is 15% (currently 0%, will increase to 15%), then the additional tax will be 1% of the TRIS balance each year. If a fund has $1m in TRIS then the extra tax will be $10,000 p.a.
The other 3 changes pale into insignificance.
2. So why isn't anyone talking about this?
It all starts with Treasury getting the numbers wrong. When they estimated the additional tax revenue from this change, I understand they only included TRIS members aged 56-59. However most people with a TRIS are 60-64. The additional tax was estimated as around $500m over the forward estimate period. I estimate it to be 10 times that amount.
Treasury got this so badly wrong that when the Treasurer delivered his budget speech, this change didn't even rate a mention. So when journalists report on the proposals, this change is overlooked.
What should you and your clients do?
I'm not sure there's much your clients can do. All you can do is warn them so they are prepared for the additional tax they are about to start paying.
Then you can look for other ways to reduce the cost of running your clients' funds. Using more efficient and cost effective Actuarial Certificates would be a great start :)
THIS ARTICLE WAS CORRECT AT THE TIME OF WRITING. SMSF RULES CHANGE OVER TIME AND THE ARTICLE MAY BE LESS RELEVANT IN THE FUTURE.
Greg Einfeld has over 20 years’ experience in the Australian Superannuation and Financial Services industry. He has MEc and MBA degrees, is a licensed financial adviser, a qualified actuary, and specialises in Self Managed Super Funds (SMSF’s). He regularly presents on a variety of SMSF topics including investment, tax, estate planning, pensions, administration and strategies.