The start of financial year 2018/19 is an appropriate time to consider what new strategic opportunities the year brings for pre and post retirees. It also gives clients and advisers the opportunity to review how plans are tracking towards goals and objectives.
1. Contribution opportunities
Downsizer contributions present an opportunity for clients to implement a re-contribution strategy
Since 1 July 2018 contribution opportunities for those aged 65 or over has expanded to include downsizer contributions. These contributions enable eligible individuals to contribute up to $300,000 from the sale of one eligible property to super within 90 days of change of ownership, without needing to satisfy the work test. This is in addition to the concessional contribution (CC) and non-concessional contribution (NCC) caps and is not restricted by a person’s total superannuation balance (TSB).
An eligible property must have been owned by the individual, their spouse or their former spouse for 10 continuous years just before the sale of the property. Additionally, the individual must satisfy all the requirements to qualify for a full or part capital gains tax (CGT) exemption for that property.
Downsizer contributions also present an opportunity for clients to implement a re-contribution strategy. This enables them to increase the tax-free component of their superannuation which can help reduce the tax liability on death benefits paid to non-dependant beneficiaries.
Age Pensioners should consider that selling the family home then making a downsizer contribution may reduce their Age Pension entitlements. This is because the principal home is an exempt asset for Centrelink purposes whereas superannuation is counted as an asset for clients who are of Age Pension age.
Clients who utilise this strategy and leave the contribution in accumulation phase, for example those who have exhausted the full transfer balance cap (TBC), will pay tax of up to 15% on their earnings. This may be higher than the marginal tax rate for some seniors, considering that they can have the additional benefit of the senior and pensioner tax offset (SAPTO), low income tax offset (LITO) and low and middle income tax offset (LMITO) for individual income.
The general NCC cap will remain unchanged at $100,000 for 2018/19. For those under 65, the maximum contribution amount continues to be $300,000 under the bringforward rule.
An important consideration is that the maximum amount that can be contributed as an NCC is linked to a client’s TSB at 30 June 2018.
An important consideration is that the maximum amount that can be contributed as an NCC is linked to a client’s TSB at 30 June 2018, as per Table 1. In cases where a client’s balance may have reduced due to market movements or withdrawals from the superannuation system, they may have a different bring-forward cap in 2018/19 compared with 2017/18, providing a new contribution opportunity.
Table 1 - Bring forward provision for 2018/19 financial year
|TSB on 30 June 2018||Maximum NCC cap for first year||Bring-forward period|
|Less than $1.4 million
|Greater than or equal to $1.4 million and less than $1.5 million
|Greater than or equal to $1.5 million and less than $1.6 million
||No bring-forward period, general NCC cap applies
|Greater than or equal to $1.6 million||Nil||n/a
The general CC cap will remain unchanged at $25,000 for financial year 2018/19.
Clients who are eligible to make a personal contribution to superannuation can also generally claim a tax deduction for their contribution, subject to limits. This provides greater flexibility for employees and self-funded retirees (aged less than 65) around how they make tax effective contributions, for example as ongoing contributions or as a single lump sum at the end of the financial year.
A new opportunity for clients is that they may be able to carry forward unused CCs from 2018/19 to be used from 1 July 2019. Clients will be able to make catch-up CCs in 2019/20 providing their TSB is less than $500,000 on 30 June 2019. Unused amounts can be carried forward on a rolling basis for a period of five years and will expire after five years. Catch-up CCs mean retirees who are eligible can accumulate CC cap space to be used in future years when assessable income may be high. For example, clients planning on selling an investment with capital gains could use carried forward CCs to claim a deduction for personal super contributions made in the same financial year as the CGT event. Those who meet these criteria can claim a deduction for super contributions of up to $50,000 in financial year 2019/20 if they do not make CCs this financial year.
Also, it is proposed from 1 July 2018 that clients with multiple employers whose income exceeds $263,157 per annum can apply to the ATO to nominate that their wages from certain employers are not subject to the compulsory Superannuation Guarantee (SG) contributions. This would prevent inadvertent CC cap breaches. If this proposal becomes law, eligible clients could negotiate to receive additional income instead of the SG contributions from their employer. Benefits of utilising this option include avoiding the excess concessional contribution charge (ECCC) and reducing the administrative burdens associated with excess contributions.
2. Retirement advice opportunities
Preservation age increases to 57
The Government’s Personal Income Tax plan is now law and includes two changes which may affect your client’s tax assessment in 2018/19.
Those born between 1 July 1961 – 30 June 1962 started turning 57 from 1 July 2018. Once they are 57 they can access their superannuation when they permanently retire. For those born after 30 June 1962, their preservation age will be at least 58.
Age Pension age
Those born between 1 July 1952 to 31 December 1953 have an Age Pension age of 65 years and 6 months. Therefore, 30 June 2019 will be the last day someone will turn Age Pension age at 65 years and 6 months. Those born from 1 January 1954 will have an Age Pension age of at least 66.
3. Personal income tax changes
The Government’s Personal Income Tax plan is now law and includes two changes which may affect your client’s tax assessment in 2018/19. The new LMITO was introduced from 1 July 2018, available for those with taxable income up to $125,333 as follows:
Table 2 - Low and middle income tax offset
|Up to $37,000||$300,000
|$37,001 to $48,000
|$48,001 to $90,000||$100,000
|$90,001 to $125,333
||$530 less 1.5 cents per $1 over $90,000
|$125,334 and over
This offset will be in addition to the LITO. Those eligible for the LITO, i.e. those earning below $66,667 per annum, will be eligible for both tax offsets. The LMITO is temporary, available until 30 June 2022.
From 1 July 2018 the 32.5% tax threshold also increased from $87,000 to $90,000.
Table 3 - 2018/19 individual resident tax rates
|Taxable income||Tax||% tax on excess|
The effective tax-free threshold for seniors is now $32,914 per annum for singles and $29,609 per annum for couples. This considers the SAPTO, LITO and LMITO. Strategies to reduce a client’s assessable income below their respective threshold can assist clients to reduce their income tax payable.
4. Social security
The Government has proposed standard means test rules for lifetime income streams commenced on or after 1 July 2019. These rules provide clarity and certainty about the future treatment of lifetime products and create a foundation for the development of new retirement income stream products. The proposed rules won’t affect existing lifetime income streams in place prior to 1 July 2019, account-based pensions (ABPs) or term income streams.
In summary, it is proposed that from 1 July 2019 new lifetime income streams which meet a declining capital access schedule will be assessed as follows:
- Income Test: 60% of all lifetime income stream payments assessed
- Assets Test: 60% of purchase price assessed until age 84 (min 5 years), 30% thereafter.
There is an opportunity for clients who benefit from a lifetime income stream under the current rules, for example income-tested Age Pensioners can commence a lifetime income stream before 1 July 2019 to benefit from the current deduction amount treatment.
An upcoming issue of Challenger Tech News will provide a detailed analysis of this proposed measure.
4. Review existing clients
The start of the financial year provides an opportunity to review existing clients and if there have been any changes in their situation. For example, has their family situation changed? Have they spent more or less than expected? Are their goals still the same? For clients focussed on retirement income goals it provides an opportunity to see if they are still on track to meet their objectives.
Each financial year presents new opportunities for advisers and their clients. Advisers also have the opportunity to test their client’s current retirement income strategy and consider how new developments in the strategic environment affect their objectives. Downsizer contributions and the proposed means-testing of lifetime income streams are new, key strategic opportunities for 2018/19 which advisers can use to improve their client’s retirement income capability.