In this weeks Blog, McMahon Osborne Director, Tim McCarthy talks about the importance of how Generation X need to act now and become actively involved in their retirement plans, to secure long term benefits.
It seems inevitable that the Australian taxation system will undergo some form of overhaul and change in the next ten years. Quite simply, as a country we can’t continue to spend more than we bring in and maintain strength in our underlying economy. It appears less and less likely that spending will be reduced significantly – voter power and all political parties wanting to hold office fights against that proposition. Show me the major Australian political party seeking to make signification spending cuts and I’ll show you the Pot of Gold at the end of the rainbow.
So, if we can’t reduce what goes out we need to increase what comes in – pretty simple equation – and the number 1 tool that Governments have at their power is tax revenue, hence the inevitability of change. Changes could come in the form of structural change, haircuts on existing tax planning opportunities or, more likely, a combination of both. Areas that could come under scrutiny are Capital Gains Tax, a tightening of negative gearing laws, changes around foreign income, Medicare and other “levies”, GST (both what GST is payable on and the GST rate) and superannuation.
Without knowing what the change will be we can quite reasonably work on some key principles when it comes to planning for the longer term to secure a financially successful future . Let’s look specifically at super.
What to expect
- Later access to funds – commencing from 1 July 2015 the preservation age is on the rise from 55 to 60 years of age. With the average lifespan of Australian’s increasing and the age pension access age increasing, it stands to reason that the superannuation preservation age will continue to increase
- Limits on Lump Sum Benefits – currently a taxpayer can hit 65 years of age (or 60 if permanently retired) and take unlimited funds from their super with no tax payable. Whenever we present this to a client the first reaction is “are you sure that’s right – sounds too good to be true”. We know the old saying about if it sounds too good to be true it probably is. This surely lends itself to some tightening over the next 10 to 20 years where lump sums will have some form of limitation.
- Taxation on Large Super Balances – the Labour Party, prior to the last Federal Election, announced that they would tax the earnings on larger superannuation balances in pension mode. Currently any super balance in pension mode does not pay tax on those earnings. It makes sense that in a progressive taxation system (as we have with personal tax rates in Australia) that a similar principle will be applied at some time to superannuation. Specifically the greatest impact under that proposal would have been on Capital Gains within superannuation funds for large member balances (two birds with one stone!)
What can we do now?
Many taxpayers fear change and in such an environment do nothing for fear that they will make a move which will backfire. However to do nothing is most likely the greatest risk of all. Here’s my general version of how to attack this issue and the methodology that Melissa (my wife) and I are currently employing for our own financial life and our three children.
- Continue regular contributions to super over the mandated employer contributions – it stands to reason that superannuation will still be a tax preferred option in Australia. The government needs to provide incentive to put away for the future and their number one tool is tax. In short, don’t give up on super – keep contributing
- Work a plan to build an asset portfolio (beyond the family home) outside of super – this can provide tax benefits right now if gearing is involved (remember – gearing can apply to any investments that derive income, it does not have to be limited to property as is a common misconception). More importantly this will create the opportunity for financial choice and flexibility if you are looking to retire or reduce work prior to reaching the age where funds can be accessed from superannuation.
- Spouse Super Splitting – perhaps one of the least used forward thinking tax planning strategies. In many families there is one spouse with a higher super balance than the other for all manner of reasons. We have the opportunity for a taxpayer to reallocate a proportion of their super contributions to their spouse on an annual basis. This is a great way to future proof against large super member balances as the super balance is split more evenly across two taxpayers.
- Create a Capital Growth Plan – regardless of any changes in tax it will be irrelevant if there is no plan to grow capital over the next 20 years. Frankly, too much money in the bank makes little sense for most, with of course exceptions for specific circumstances. A plan to make your money work for you is as important as any tax plan.
- Understand Daily Spending – the power of compound interest can never be understated. A little bit regularly can make a huge difference. By understanding our spending we know that there is some money that can be tucked away regularly. Whatever that number is using this in creating a capital growth plan can make a huge difference for years to come.
If you would like to know more about how we can help you future proof your retirement, please contact Lynda on (03) 9744 7144 or email firstname.lastname@example.org today.