With super contribution caps proposed to be reduced in 2017, now’s the perfect time to connect with your clients and guide them through the potential changes.
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In May’s Federal Budget and in subsequent announcements, Federal Treasurer Scott Morrison proposed a series of widespread reforms to Australia’s superannuation system.
With this deadline looming, if these changes are legislated, many Australians may need to adjust their financial strategies — particularly those who are making the most of the current contributions caps. Some will also be looking for guidance from their accountant or financial adviser on how the changes might impact their tax position or retirement plan.
But that doesn’t mean you should wait for your clients to come to you. Instead, think of the proposed changes as an opportunity to engage your clients in discussions about their financial situation and goals. By taking a proactive approach, your clients will see that you have their best interests at heart, which is an essential foundation for a strong adviser–client relationship.
Here are some conversation starters about how your clients might be affected by the proposed changes.
A lower cap for concessional contributions
The cap for concessional contributions is proposed to be lowered to $25,000 per year for all Australians eligible to contribute to super. As this is a $5,000 annual reduction (or a $10,000 reduction for clients who are over 50), it’s worth considering how your clients might take advantage of the currently more generous caps before the proposed reduction takes effect.
Also keep in mind that your clients may not realise the consequences of exceeding their cap. So make sure you explain that any excess they contribute will count towards their assessable income, and also their non-concessional contribution limit if not withdrawn. They will also be faced with an interest charge.
New restrictions on non-concessional contributions
Although the government was proposing a lifetime cap of $500,000 on non-concessional contributions, this has been scrapped. However, the Government has now proposed reducing the current $180,000 annual cap to $100,000 from 1 July 2017. Clients who are under 65 will still be able to apply the ‘bring forward’ rule, allowing them to contribute up to $300,000 at any time during a three-year period.
Importantly, current rules continue to apply until 1 July 2017, so clients who are eligible to use the bring forward rule could look to make a $540,000 this financial year while they remain able to do so.
The Government has also proposed from 1 July 2017 no longer allowing clients to make any non-concessional contributions once their total super balance (at 30 June prior to the relevant financial year) reaches $1.6 million.
If any of your clients are expecting to make significant after-tax contributions to their super after this financial year, this change could have a major impact on their retirement strategy. So if you’re licensed to give investment advice, you might be able to recommend alternative strategies instead, like investing in assets outside super.
A new $1.6 million transfer balance cap
The introduction of a new transfer balance cap could force your clients with high super balances to consider a change of strategy. If legislated, anyone with more than $1.6 million in the tax-free ‘retirement phase’ after 1 July 2017 will have to move the excess back to the accumulation phase, where their earnings are taxed at 15%, or alternatively withdraw the excess from super (if they are eligible to do so).
Accountants and advisers will have an important role to play as they help clients work out which assets to keep in the pension phase and which ones to shift. For example, it might make sense to keep high-growth assets where they are and move the ones that are likely to earn lower returns back into the accumulation phase.
Stay in the picture
Of course, every client’s financial situation is different, and some will be impacted more by the proposed super changes than others. The most important thing is to position yourself as a trusted adviser who can guide them through the changes and help them achieve the best financial outcomes.
Here are five things you can do to keep your clients engaged – before and after the proposed changes take effect:
- Communicate the proposed changes to your clients via an email or newsletter, or face to face at their next meeting.
- Ask your clients to contact you if they’re unclear about any of the proposed reforms.
- For clients who will be impacted, explain what the changes could mean for their financial strategy or tax position.
- Invite your clients to meet with you so you can review their situation and discuss alternative strategies — or refer them to an adviser in your network who can provide the advice they need.
- Guide your clients through their options so they can make confident decisions.