Budget changes make superannuation less attractive; boosts role of family trusts

From
Michael Hutton

Michael Hutton

The changes to superannuation announced in the Federal Budget make superannuation less attractive and are likely to result in family trusts increasingly becoming part of investors’ arsenal, says Michael Hutton, wealth management partner with HLB Mann Judd Sydney.

“Many of the changes announced in the Budget make superannuation less attractive and less accessible for many Australians.

“The $500,000 lifetime limit on non concessional superannuation contributions is a massive change on the current allowable amount of $180,000 a year. This will severely inhibit middle-income earners who receive an inheritance or sell an asset.

“The fact that these changes apply from Budget night and dates back to 1 July 2007 is unprecedented. People looking to make a large non concessional contribution sometime soon have been blindsided.”

Mr Hutton said the quality of the ATO records will be a large determinate of whether these changes can be efficiently monitored.

“The ATO will very shortly be hit with requests from a few million of their best customers for a summary of non concessional contributions made over the past nine years. Let’s hope their records are good.”

Mr Hutton said the $1.6 million pension limit will be subject to some interesting industry consultation over the next year.

“This strikes me as administratively very difficult as daily pricing is not always available. It will lead to strategies like segregating assets so the best performers are in the pension part and worst performers in accumulation.”

He also raised questions about the structure of the $1.6 million pension account limit per person.

“Presumably this equates to $3.2 million for a couple. But what about the situation where one member has $4 million in super but the stay at home partner has $200,000. Is this disadvantaging that couple? Will there be any opportunity to equalize the accounts?”

Another issue to be addressed is what will apply with the death of a spouse.

“If one spouse died, and their death benefit pension is being paid to the other spouse, it is unclear as to whether the two pensions have to be reduced to $1.6 million in total.”

Reducing the concessional contribution limit for those over aged 49 from $35,000 to $25,000 is a retrograde step and will result in a significant reduction to the final super balance, Mr Hutton said.

“Our calculations based on a 50 year old working for a further 15 years with a current super balance of $100,000, who is now in a financial position to maximise concessional contributions – and would have been able to build a super balance up to over $1 million (assuming 7 percent earnings rate) – provide an interesting comparison.

“Under new rules she will build a super balance just short of $800,000, an amount that is more than a 20 percent reduction in her super balance.

“Even a final non concessional contribution of $500,000 will only increase the above super balance to $1.3 million, which would provide a retirement income of approximately $65,000 a year.

“It will be difficult for many people who are now reaching a point in their life when they can commence making larger super contributions to reach the $1.6 million pension cap.”

With further regulations and uncertainty over superannuation, family trusts will look increasingly attractive to many families, Mr Hutton said.

“With the rise in popularity of SMSFs in recent times, there has been a tendency for family trusts to be overlooked as a way of managing wealth.

“Yet family trusts have a number of advantages over SMSFs – and these advantages have increased with the budget changes – meaning they are a vehicle that may now make even more sense to manage family wealth.”

The advantages of family trusts over SMSFs include:

  • Asset protection options;
  • Intergenerational wealth transfer;
  • No limit on contributions to the trust, and the ability to increase capital;
  • Income splitting to all family members, giving substantial tax benefits particularly where there are low income earners in the family;
  • No age limits to access funds;
  • Ability to hold personal use assets, such as a holiday home;
  • Ability to run a business through the trust; and
  • Estate planning flexibility.

“Even before the federal budget changes, family trusts had far fewer restrictions and rules than SMSFs and were simpler to operate. Now they are even more so,” Mr Hutton said.

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