HOW CAN THE NEW FEDERAL BUDGET AFFECT PROPERTY INVESTORS USING SUPER TO INVEST?
This year’s federal budget includes several changes to superannuation that may force property investors using self-managed super funds to rethink their retirement strategy. As part of a larger reform that will allow the government to redirect tax concessions from the very wealthy to those at the bottom end, the shake up to superannuation that has been outlined in the 2016 budget has come after a surge in the industry’s growth – an acceleration prompted by the 2007 legislation that allowed borrowing through SMSFs. Ridhwan Hannan from One Path Accountants outlines the impact of these changes to super that will limit those looking to invest in property through their SMSF.
What are the changes?
Within the 2016 federal budget, there are three changes to super that stand out for very high-income earners and those who pour income streams into their funds:
Reduced cap on concessional contributions
Currently, Australians can salary sacrifice up to $30,000 each year if they are under 50, or $35,000 if they are over 50. The new budget has reduced this figure to $25,000 a year, over a cumulative five-year period. This means if you don’t sacrifice the full $25,000 in the first year, the remaining balance will roll over to the next year and so forth, up until five years (for people with less than $500,000 in their super).
A lifetime cap has been imposed on non-concessional contributions
Currently, if you want to make after-tax contributions into your super fund, you can make up to $180,000 each year. The 2016 federal budget has slashed this amount to a $500,000 lifetime cap, starting from mid-2007.
Maximum of $1.6 million allowed within tax-free pension phase
Currently there is no limit on the amount that can be moved into this tax-free phase that allows retirees to access a pension through their super. Once the new federal budget comes into effect, there will be a limit of $1.6 million, meaning any more than this will attract a 15 per cent tax.
How will this affect property investors?
For the average wage earner, these restrictions probably don’t make much difference. However, if you are close to retirement and have spent the past eight or nine years pouring as much as you can into super, the 2016 budget may have sent you running to your accountant for answers – especially if you have used a self-managed super fund to invest in property.
Firstly, with current property prices in Sydney around 12.2 times the average income, having more than $1.6 million in your self-managed super fund is not as impossible as it sounds. If you have more than this amount, your generous yearly pension will be affected by tax. Economists have predicted a possible move to property investment as an alternative to superannuation for those affected by this. Those who have invested in property through their self-managed fund, however, may be moved to sell in order to redistribute taxable funds into other types of investments.
Secondly, if you were planning to sell your family home before retirement and pour the proceeds into your super, you will now be limited.
Ridhwan Hannan, from One Path Accountants, says this strategy has been quite common for retirees in recent years. He says, many people approaching retirement will “sell their own personal home because it has got no tax on it, and then they contribute up to the allowable CAP to maximise what is contributed to super in the most tax friendly way. Aside from the $180,000 yearly cap, there was previously no lifetime limit to the overall amount an individual could contribute in this way. The $500,000 lifetime cap imposed by the budget is set to change this. “We’ve got a situation now where people who are on pensions or people who are considering going on pensions will have to restructure how they are looking at doing this,” says Hannan. The proposed cap restricts the amount of money that can be contributed into super, which in turn, restricts the amount available to invest through a self-managed fund. “In terms of being able to invest,” says Hannan, “this cuts the leg off super.”
How can you deal with these changes?
If these changes are likely to affect your retirement plan, Hannan says it is important to discuss your concerns with your accountant. He says, for those who have planned to invest through a self-managed fund, but haven’t done it yet, now is a good time to do so. “The budget hasn’t been passed yet,” he says, meaning there is still time to carry through your plans before these changes come into effect. He advises contacting your accountant or financial advisor to help you carry out your strategy. He also says, if you have set up a self-managed fund but haven’t invested yet, it is important to make sure it is still compliant with current legislation. Speak to your advisor to see if you need to update your trust deed.
Most importantly, says Hannan, “make sure your investment strategy is correct.” He says, it is extremely important to understand the tax implications of all of your investments. “It’s always important to speak to your financial advisor to make sure that the investment strategy that you have, irrespective of the rules that are coming in and out, is correct,” and that it will help you reach your retirement goals in a beneficial way.
Changes to the way SMSFs are administered.
Hannan says, as of the 1st of July, there will be a change in the way self-managed super funds are administered by accountants and financial advisors. “It’s very, very important that all clients have a sound financial advisor attached to their fund at all times,” he says. Although many accountants will no doubt attempt to wear both hats in order to earn more in fees, Hannan advises fund members to choose two different professionals, who both have a proven track record in helping clients with similar needs to your own. An established, independent financial advisor who has had a lot of experience in the industry will bring more to your strategy than an accountant who has just become an advisor, says Hannan.