As if things weren’t complicated enough for those of us heading into our golden years, with significant life transitions; downsizing from a life of full time work to full time…well, time! And we’re faced with major decisions about our extended financial future as life expectancy rates give us even more time!
Traditionally, Australian retirees have relied largely on their superannuation fund to pay for the post-employment lifestyle they desire.
This has been particularly true since self-managed super funds were given the green light to borrow money to invest in property (albeit with a raft of Fine Print). Suddenly real estate portfolios started to expand within a very favourable tax environment. Hello golden years!
Property panic sabotages SMSF borrowing
As evident from the below table, SMSF borrowing has increased almost ten-fold over the last four and a half years, from $2.5 billion in June 2012 to $24.3 billion last December.
Of course this exponential growth started ‘housing bubble’ speculators on a witch-hunt, claiming SMSF investors were contributing to the affordability crisis and must be stopped!
Mind you, take a closer look at the graphic and it’s glaringly obvious that the majority of borrowings were for the acquisition of commercial property assets, far more than residential. But hey…the ‘housing affordability’ headlines sell more media stories.
All the noise naturally got Labor in a tizzy, with Shadow Leader Bill Shorten promising to ban borrowing within SMSFs as a part of the party’s plans to tackle housing affordability.
Not wanting to look reticent on taking the whole ‘housing affordability’ hubbub seriously, the Liberal party made haste to have another pick around in people’s superannuation, with proposed legislation changes.
The changes and what they mean for SMSF holders
Perhaps the most contentious reform is around legislation governing Limited Recourse Borrowing Arrangements (LRBAs), which is of course the only way an SMSF can borrow money.
Essentially the new draft laws, which have been upheld in the recent federal budget, mean that any debts in the super fund are added to its asset base, in order to determine the new $1.6 million limit on super pensions.
What does that sentence actually mean? Well, in essence, further legislation changes will limit the tax-free amount an SMSF can hold as it moves from its accumulation to pension phase, to $1.6 million.
And to stop people trying to get around the cap by using borrowings to reduce asset value, any debt the fund owes will be included in that $1.6 million.
This is the government’s way of restricting the tax-free amount you can have in your Super Fund throughout retirement. Once you exceed that cap, you start paying 15% into their pockets.
Further amendments that will see SMSFs suffer through additional tax losses, a slower accumulation of funds, restrictions on salary sacrifice arrangements and insurance premiums paid within super…all the small things that can add up to a significant impact on your retirement savings…include:
• A reduction in the tax-deductible contributions limit. The maximum amount you can contribute into super as at 1st July 2017 whilst obtaining a tax deduction, is down from $30,000 to $25,000 (irrespective of age).
• High-income earners subjected to higher tax liabilities. When the new financial year ticks over, the 30% tax rate (normally 15%) that’s currently applied to SMSF contributions for those earning $300,000 or more per annum will be applied to anyone earning $250,000 or more.
• Less capacity to move existing assets into super. Existing rules allow you to contribute up to $180,000 worth of assets per year from your personal name into your fund (or $540,000 in one lump sum if you bring forward three years of contributions). However, as at 1st July this will be cut to $100,000 (or a $300,000 lump sum) for a super balance of less than $1.4 million.
Any good news?
It really depends on your perspective I imagine. The pollies were putting a positive spin on things at the recent budget announcement, celebrating pensioners’ ability to sell the family home, and make a non-concessional contribution of up to $300,000 into their super from the proceeds.
These contributions that come from downsizing for anyone aged 65 or older won’t be subject to a work test, or the $1.6 million balance test for making non-concessional contributions.
At the other end of the spectrum, the government is using superannuation changes as a means to champion (or at least appear to be) that all-important first homebuyer cause.
Those desperately seeking a foothold on the housing ladder will be able to make voluntary salary sacrifice contributions into super, later withdrawing these amounts and any associated earnings for a first home deposit.
Mind you, with a cap on these contributions of up to $15,000 per year and $30,000 in total, it’s difficult to see how this will equate to a timely and sufficient deposit in most property markets, as things stand presently.
Normal salary sacrificing tax arrangements apply to these contributions, with the 15% rate applied once the contribution hits the super fund, and any tax on earnings inside the fund capped at 15%.
While this may allow first homebuyers to save a housing deposit that little bit faster, this proposal really demonstrates that lack of foresight we’ve come to expect from our one-term wonders.
For a start, it’s only open to a very narrow band of young savers who’ll be in a position to make voluntary superannuation contributions. And ultimately, this is a move that encourages people to draw on their retirement savings, removing money early from their super.
Overall, it’s likely that the clarification on treatment of superannuation borrowings will limit the appeal of acquiring further assets with any associated debt for the more than one million SMSF operators in this country.
Will the moves assist in housing affordability over the long term? Hardly I imagine. But it might earn this and future governments, who could easily determine to reduce the $1.6 million cap further, a little bit of extra tax money to play with.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).