Non Concessional Contribution Changes – Planning Ahead


On July 1, 2017 the maximum allowable non-concessional contribution room will reduce from $180,000 pa (or $540,000 under the current bring forward rules, over a rolling three (3) year provision period) to $100,000 pa, or $300,000 under the new three (3) year bring forward provision rules.


While this may not appear to be a significant issue for younger clients, there is a couple of considerations Advisers may wish to look at for clients who are approaching retirement age (55-65) and who are considering retirement over in shorter term.


There is a high probability that a majority of these types of clients will be considered to be ‘empty nesters’. This means that their children have left home and are no longer financially dependent. These clients generally no longer have the increased costs associated with the day to day expenses of raising a family and it is also highly possible that many within this age bracket are debt free (or close to) and have begun to accumulate investment assets in their own personal names, either via way of inheritance or personal savings.


Given they are still working and reasonably fit, there is every chance that they may have accumulated wealth, due to accessibility restrictions within superannuation environment, in their personal names in case of a 'rainy day' or simply to ensure that they continued to retain access to the funds at any time.


The issue Advisers may begin to see with some of these clients is that the new reductions to the non-concessional contribution caps will impact the level of funds individuals are able to contribute to the concessionally taxed superannuation environment in the final years leading up to their retirement.


Where clients have an excess amount of funds accumulated in their personal names, especially if aged above 60 years of age, (i.e. above $350,000 for an individual or $700,000 for a couple), Advisers may wish to consider utilising the current bring forward provisions of up to $540,000 prior to June 30, 2017 as follows:


Scenario 1:


John and Mary are aged 63 and 62 respectively and plan to retire once John turns 65 on April 26, 2018. Currently they hold $960,000 in a personal term deposit following the sale of their investment property two years ago and have accumulated $20,000 in a bank account as a cash reserve. They would like to keep $10,000 in their cash reserve just in case. John currently has $472,851 in super and Mary $327,562. John and Mary’s current Marginal Tax Rate (MTR) is 32.5% each.


Example 1 – John and Mary’s Adviser decides to recommend contributing funds to super prior to June 30, 2017.


Current investment total - $980,000


Less Non Concessional contribution to Super for John - $485,000 (using 3 years bring forward provisions)

Less Non Concessional contribution to Super for Mary - $485,000 (using 3 years bring forward provisions)

Balance - $10,000


Outcome

Super Balance – John $957,851 | Tax on earnings (assume 7% return) - $10,574

Super Balance – Mary $812,562 | Tax on earnings (assume 7% return) - $8,532

Cash Reserve - $10,000 | Tax on earnings (assume 5% return) - $163

Investment Portfolio - $0 | Tax on earnings (assume 7% return) - $0


Total Tax Payable Pre Retirement - $19,269

Total Tax Payable Post Retirement - $163



Example 2 – John and Mary’s Adviser decides to recommend holding off on contributions until just prior to John’s 65th birthday on April 1, 2018)


Current investment total - $980,000


Less Non Concessional contribution to Super for John - $300,000 (using 3 years bring forward provisions)

Less Non Concessional contribution to Super for Mary - $300,000 (using 3 years bring forward provisions)

Balance - $10,000


Outcome

Super Balance – John $772,851 | Tax on earnings (assume 7% return) - $8,115

Super Balance – Mary $627,562 | Tax on earnings (assume 7% return) - $6,589

Cash Reserve - $10,000 | Tax on earnings (assume 5% return) - $163

Investment Portfolio - $360,000 | Tax on earnings (assume 7% return) - $8,190


Total Tax Payable Pre Retirement - $23,057

Total Tax Payable Post Retirement - $8,353


Comparison – Pre June 30, 2017 vs Post July 1, 2017

Pre-Retirement Post-Retirement

Example 1 – Pre June 30, 2017 $19,269 $163

Example 2 – Post July 1, 2017 $23,057 $8,353

Potential Tax savings (pa) $3,788 $8,190


Scenario 2:


Peter turns 60 on 20 June 2017 and plans to retire once he turns 65 (June 2022). Six months ago he received an inheritance from his mother which is currently sitting in a Cash Management Account and now worth $1,047,256 and held in his own name. He would like to keep $30,000 in a cash reserve. Peter currently has $748,569 in super and his Marginal Tax Rate (MTR) is 37%.


Example 3 – Peter’s Adviser decides to recommend maximising the non-concessional contribution room he has available pre June 30, 2017 while also making post July 1 contributions in three (3) years’ time.


Current investment total - $1,047,256


Less Non Concessional contribution pre June 30, 2017 -$540,000 (using 3 years bring forward provisions)

Less Non Concessional contribution post July 1, 2019 - $300,000 (using 3 years bring forward provisions)

Balance - $207,256


Outcome

Super Balance – Peter $1,588,569 | Tax on earnings (assume 7% return) - $16,680

Cash Reserve - $30,000 | Tax on earnings (assume 5% return) - $555

Investment Portfolio - $177,256 | Tax on earnings (assume 7% return) - $4,591


Total Tax Payable Pre Retirement - $21,826

Total Tax Payable Post Retirement - $5,146


Example 4 – Peter’s Adviser wasn’t prepared and missed the June 30, 2017 change over regarding the reduction of non-concessional contributions. He recommends that Peter makes a post July 1, 2017 maximum non-concessional contribution as well as a follow up contribution in 3 year’s time.


Current investment total - $1,047,256


Less Non Concessional contribution Post July 1, 2017 - $300,000 (using 3 years bring forward provisions)

Less Non Concessional contribution post July 1, 2019 - $300,000 (using 3 years bring forward provisions)

Balance - $447,256


Outcome

Super Balance – Peter $1,348,569 | Tax on earnings (assume 7% return) - $14,160

Cash Reserve - $30,000 | Tax on earnings (assume 5% return) - $555

Investment Portfolio - $417,256 | Tax on earnings (assume 7% return) - $10,807


Total Tax Payable Pre Retirement - $25,522

Total Tax Payable Post Retirement - $11,362


Comparison – Pre June 30, 2017 vs Post July 1, 2017

Pre-Retirement Post-Retirement

Example 3 – Pre June 30, 2017 $21,826 $5,146

Example 4 – Post July 1, 2017 $25,522 $11,362

Potential Tax savings (pa) $3,696 $6,216


Assumptions for both scenarios:

Examples are based on MTR’s less Medicare Levy.

All personal assets are either held in cash or fixed interest investments and have no capital gain.

Do not take into account potential Capital Gains Tax Implications.

Assume no previous non-concessional contributions have been made


To view these scenario's in PDF format - click here


It is important to note that both these scenarios use cash or fixed interest investments that have little to no capital gains. It is important when considering the transition of clients’ funds that are invested in a portfolio that may have significant capital gains, that you also take into account the potential capital gains tax implications (CGT) of your recommendation.


As you can see from both these scenario’s pre planning on your clients’ behalf will not only have a big impact on their annual tax payable but will also provide further savings once a client transitions into pension phase, where tax on retirement assets (superannuation assets) are subject to nil tax on earnings.


We all know that the superannuation environment, although fairly restrictive up until a client reaches their preservation age, offers investors the ability to invest funds which are taxed at the reduced concessional rate of 15% (compared to the client’s Marginal Tax Rate) and taking advantage of this can significantly better a clients or clients’ positions over the longer term.


The four (4) main criteria of clients that Advisers and support staff should be checking in order to filter their client base are:

  1. Aged between 55 and 65 years of age.

  2. Are planning to retire at age 60 or up to age 65

  3. Have access to in excess of $350,000 invested in their personal names (individuals) or $700,000 (couples)

  4. Have not made any or any substantially large non-concessional contributions to super in the past three (3) years.

For further information of help in regards to project work to filter these clients from your client base, please do not hesitate to contact Janine at Financial Planning Support Solutions at 0457 161 958 or via email at Janine.fpss@gmail.com.



This post was written by Janine McLean, Owner and Paraplanner at Financial Planning Support Solutions.


Janine holds a Diploma in Financial Services (Financial Planning) and has in excess of 14 years’ experience in the Financial Planning Industry. Financial Planning Support Solutions provides contracting and outsourced paraplanning services to Advisers Australia wide and can help, not only with your Statement of Advice preparation, but also Strategy Planning, Compliance, Administration and Project work as required. For further information in relation to Janine or Financial Planning Support Solutions, please refer to our website fpsupportsolutions.com.au.



Disclaimer: The information provided in these articles is general in nature only and based on the interpretation and understanding of the writer. All information should be clarified with the appropriate parties, legislative offices or government departments prior to providing advice to your clients. If, as an individual, you are reading this post for the purposes of your own personal financial knowledge, you should seek guidance from your Financial Adviser, Accountant or Solicitor prior to implementing any changes to your own personal position.


Copyright 2016 Financial Planning Support Solutions, All rights reserved.

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