Financial strategies for a Labor Government
By Gareth de Maid, Relationship Manager – Financial Strategy Specialist
In light of recent political leadership changes and the subsequent plummet in the polls of the Liberal Party, it’s time to start looking at ALP superannuation policy and preparing for implementing strategies if they are elected in the next cycle. As with many government announcements, changes are often effective at the time they are announced, hence if our clients can gain advantage by crystal-balling opposition policy, then all the better.
Please note that this is an investigation of strategy in relation to government change, not a commentary regarding the rights and wrongs of Labor policy.
In fact (and to be fair), the ALP have been quite open in regard to policy, as opposed to most pre-election cycles where parties (on either side) tend to hold muted changes close until the last minute. For those looking for more detail (laced with a thick lashing of mud-slinging and chest-beating), the policy page can be found here: https://www.alp.org.au/making_superannuation_fairer_fact_sheet
For those focused on the facts, here are the mooted changes:
- Lowering the annual non-concessional contributions cap to $75,000
Currently, eligible individuals can contribute up to $100,000 per annum post-tax to superannuation, or $300,000 in one year using the “bring forward rule”; that is $300,000 now and nothing for the next 2 years. By lowering the limit to $75,000, this can have a significant impact on those transferring or planning to transfer assets to superannuation in order to take advantage of the low-tax investment environment. With the limits falling so significantly, it is worth considering using the “bring forward” rule this year in preparedness for the likelihood that the limits will fall. The ALP clearly wish to continue to allow the bring-forward rule, but at lower levels.
- Opposing the introduction of catch-up concessional contributions
Under current legislation, individuals are able to go “back in time” and utilise unused concessional contributions from prior years. The ALP is looking to end this. Clients need to begin thinking about using up deductible limits now, rather than waiting for future years where they may have even higher income to offset.
- Further lowering the High Income Superannuation Contribution threshold to $200,000
The ALP proposes lowering the threshold for the superannuation surcharge to incomes above $200,000 (from $250,000 at present). For those able to exercise control over income levels (typically self-employed and business owners) and depending on revenue to your corporate structure, it will be worth considering the impact of the lowering of the threshold. For those earning $200,000 and above, contributions made to superannuation will be taxed at 30%, instead of 15%.
- Capital Gains Tax discount in superannuation
Although Labor have discussed halving the capital gains tax discount (https://www.alp.org.au/negativegearing), they have stated there will be no change to the CGT discount in super, according to data in the Freedom of Information act, found here: https://static.treasury.gov.au/uploads/sites/1/2018/01/FOI_1876_Documents_for_release.pdf
- Franking credits within superannuation
The big one for retirees, particularly. Although not explicitly outlined on Labor websites, the ALP have mooted removing the benefit of receiving excess franking credits back to the fund as cash, and although announcing a “pensioner guarantee” which will exempt individuals on age pension or welfare payments, this change can have a material impact to retirees who do not qualify for government benefits. Clients need to consider not only their entitlement to benefits (and strategies which can secure these benefits), but also the composition of their underlying investment portfolios.
For those with SMSF’s, you should be considering NOW what to do with excess franking credits if indeed you are likely to receive them in the FY18/19 tax year. Franking credits are lost if unused, so strategies which at least make use of these benefits should be front of mind.
Whilst unable to predict changes with certainty, Cashel continues to monitor the political sphere and how shifts in government/opposition strategy shape the advice we give to our clients to help them get ahead of the curve. With this in mind, whilst not explicitly detailed in Labour policy, it is interesting to note key superannuation strategies which may come under threat, namely:
- LRBA’s (Limited Recourse Borrowing Arrangements) AKA borrowing to invest within super
Labor has been vocal in regard to their lack of support regarding borrowing to invest within superannuation. As a result, one has to wonder about the future for leverage strategies within superannuation. In fact, gazing into the tea leaves, one can certainly make an argument that Labor will look to abolish this part of the legislation relatively swiftly. Given the lack of support for gearing products from the banking community, one can almost hear the death bell tolling for super gearing.
- Minimum sizes for SMSFs
There’s an argument here that post the banking enquiry, the ALP could implement minimum balances for the establishment of SMSFs, along with minimum education standards for trustees.
- Continual raising of SG percentage
Continuing to raise the rate of Superannuation Contributions from 9.5% of salary, would seem to support Labor policy, hence understanding one’s future commitments from a cashflow perspective (along with the negotiation of appropriate staffing contracts), could be important looking forward.
- General observations
Many other limits could change as a result of Labor gaining power. One has to ask whether the super surcharge will remain at the $200,000 level, or will it fall further? Will the Transfer Balance Cap remain at $1.6m, or will this be deemed excessive by a future government? What will taxation of future income streams look like?
Clients should not only be looking to their strategies today, but what might happen, particularly in relation to the flexibility of their affairs and ability to pivot, given legislative change.
If you would like to discuss this further, please don’t hesitate to contact me or any of the team at Cashel House.
Gareth de Maid
Relationship Manager – Financial Strategy Specialist
Phone 03 9209 9000
To the extent that this document contains advice: (i) this is limited to general advice only; (ii) has been prepared without taking into account your objectives, financial situation or needs; and (iii) because of this, you should therefore consider the appropriateness in light of your objectives, financial situation or needs, before following the advice and do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and specific needs