As EOFY approaches and your clients are focused on getting their taxes sorted, there’s one aspect of their finances they might be overlooking: their super. But with new reforms kicking in on 1 July this year, some of your accounting and financial advice clients may need to rethink their super strategies, especially if they're using the current contributions caps to build up their retirement savings.
That’s why it’s so important to make sure your clients are prepared well before the changes take effect. As their trusted adviser, you’re ideally placed to help your clients understand how the new rules might impact their tax position and retirement planning.
So rather than wait for your clients to ask for help, why not use this opportunity to engage them in their finances – and help them get on the front foot for FY18?
Last year’s Federal Budget included a raft of proposed superannuation reforms. After some back-and-forth between the major parties, many of these reforms have now been legislated.
Here’s a recap of the most significant super changes that will (unless otherwise noted) take effect on 1 July 2017:
A lower cap for concessional contributions. The cap for pre-tax contributions will be reduced to $25,000 a year for all age groups – down from the current caps of $30,000 for people under 50 and $35,000 for those aged 50 or older. But the good news is that from 1 July 2018, your clients will be able to carry forward any unused concessional cap amounts to the next financial year, for up to five years. They just need to make sure their total super balance is less than $500,000 immediately before the year they want to carry forward to.
Cap reductions for non-concessional contributions. The current annual cap of $180,000 for after-tax contributions will be lowered to $100,000 a year from 1 July 2017. Your clients who are under 65 will still be able to trigger the ‘bring-forward’ rule, but this will now limit their non-concessional contributions to $300,000 during any three-year period. From 1 July 2017, clients will also have their non-concessional cap reduced to nil if their total super balance just prior to the year is $1.6 million or more. Meanwhile, clients who are eligible for the bring-forward rule may see their bring-forward cap reduced if their total super balance is $1.4 million or more.
A new $1.6 million transfer balance cap. From 1 July, your clients will only be able to transfer up to $1.6 million into ‘retirement income streams’ where earnings are tax free. This includes the 30 June 2017 value of existing retirement income streams and the starting value of new retirement income streams commenced from 1 July onwards. Clients will need to move any excess back to the accumulation phase, where it will be taxed at 15%, or else withdraw it from super. Note that retirement income streams include most super income streams, but exclude transition-to-retirement (TTR) pensions.
Changes to TTR income streams. From 1 July, earnings on assets supporting a TTR income stream will no longer receive a tax exemption and will be taxed in the same way as accumulation phase assets. This is likely to significantly reduce the overall benefits of a TTR strategy.
Helping your clients prepare
With the new super rules looming, it pays to be proactive about contacting your clients and ensuring they’re ready for the changes. Here are 5 ways you can take action.
1. Contact clients nearing their $1.6 million transfer balance cap
As a priority, you should get in touch with any clients who are approaching or have already exceeded the new transfer balance cap. SMSF clients may need to work out which assets to keep in the tax-free pension phase and which assets to transfer back into the accumulation phase, as these decisions could affect the client’s tax position. Your SMSF clients are likely to need your guidance in determining whether they need to take advantage of the transitional CGT relief to reset the cost base on assets that are moved back to the accumulation phase.
2. Explain the changes
Make sure your clients understand the changes to contributions caps, and any potential impacts on their tax position, super balance or TTR strategy. The best way to inform your clients will depend on their individual preferences, but it could be as simple as an email or phone call. You could also raise the issue at upcoming client meetings – as long it will leave your clients with enough time to adjust their strategy if needed.
3. Discuss the consequences
Even if your clients already are aware of the impending changes, they might not realise the consequences of exceeding the new caps. You should let them know that any excess concessional contributions will count towards their assessable income and they may also face an excess contribution charge. For non-concessional contributions, the excess could be taxed as high as 49%, so it’s important that your clients understand the potential impact of over-contributing.
4. Be clear about the timeframe
For clients who have the means to boost their super now, they may want to take advantage of the currently higher caps while they still can. For clients who haven’t yet hit their annual caps or who are thinking of triggering the bring-forward rule, it might be a good idea for them to act before the rules change.
If a client plans to apply the bring-forward rule this financial year (or if they’ve triggered it last financial year but still have some cap left), it’s important where appropriate to make full use of the bring-forward cap before 1 July 2017. Otherwise, the client’s remaining bring-forward cap will be reduced under transitional rules that apply from that date.
5. Provide ongoing guidance
While some of your clients may be immediately affected by the super reforms, there may be others who won’t feel the impact until later. For example, if a client receives a lump sum down the track from an inheritance or a property sale, they might not be able to put the whole amount into super as they’d hoped. In these cases, you should be ready to guide your clients through alternative options, such as investments outside super, so they can find the best retirement strategy for their circumstances.