Month: September 2017

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New super laws and age pension tests are discouraging long-term saving for those on low to moderate incomes

IN BRIEF

  • New super laws and age pension tests discourage saving for those earning average wages
  • Case studies show the sweet spot between super assets and pension income
  • We need a savings system that offers no disincentive to keep working

This article was originally published on SMSF Adviser website on 15 August 2017, featuring an interview with Tony Negline, Superannuation Leader, Chartered Accountants ANZ.

New super laws and age pension tests are discouraging long-term saving for those on low to moderate incomes. Those earning between $65,000 and $150,000 would be better off living in the best home they can afford than saving anything more than compulsory super.

Supporting case studies

Let’s look at case studies on the effects of superannuation at different income levels, based on an individual in a relationship with both parties aged at least 65, who own their own home without debt.

According to Tony Negline, the main focus is the person’s super assets and he assumed they will want a super pension from a non-public sector super fund paying 5% income. All income is paid tax-free.

For simplicity, Tony will further assume that this super pension started after December 2014 which means the account balance is deemed under Centrelink’s income test.

Apart from the home and super, the person owns $50,000 worth of personal use assets. The case studies consider the asset test thresholds that applied from 1 January 2017.

  • If there are $200,000 in super assets, the super pension will pay $10,000 and the recipient will be eligible for the full age pension of $34,382 including the pension and energy supplements. The total income is $44,382.
  • If there are $500,000 in super assets, the total income is $45,732 – a part-age pension of $20,732 and $25,000 (5% X $500,000) from the super pension.
  • For $700,000 in super assets, a super pension of $35,000 (5% X $700,000) and a part-age pension of $5,132 will provide total income of $40,132.
  • If the same individual had $1 million in super assets, they receive no age pension and need to live off all their super pension of $50,000.
  • For those with $1.6 million in super assets, there is no eligibility for an age pension and the income from the super fund is $80,000 a year (5% X $1.6 million).

Where is the sweet spot?

The government says it is changing the super system to make it fairer and more equitable.

These are the reasons for the $1.6 million pension cap, the $250,000 income threshold for higher contributions tax, the lower contribution caps and the refund of contributions tax for lower income earners.

But based on the cases above, the new changes discourage saving especially for those earning average weekly wages.

“The sweet spot would seem to be about $339,143 in super assets. Here, the total income from both the super fund and a part-age pension is $50,236.”

Anyone earning $50,000 each year (with an increase at 2% each year) and super that grows by 5% after all taxes, fees and charges, and who receives compulsory super, will have $400,000 in super assets after working 31 years. If retiring at this point, they would receive 100% of their pre-retirement income from both their super fund and a part pension.

“Clearly, there is a disincentive for people in this situation to work for longer or try earning a higher salary. Why would you bother saving anything more than compulsory super and living in the best home you can afford?”, says Tony.

Time for a new system?

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Tax Practitioners Board releases draft Practice Note on outsourcing services

The Tax Practitioners board (TPB) has released for comment a draft practice note which aims to assist registered tax practitioners understand obligations under the Code of Professional Conduct in relation to the use of outsourcing and offshoring.

The TPB has developed this practice note to assist tax practitioners to understand their obligations under the Code, raising awareness of relevant considerations when entering into arrangements involving outsourcing and offshoring and providing a consolidated listing of further reference information.

The TPB suggests that registered tax practitioners may wish to consider the following general factors:

  • if there is a clear definition of duties, obligations and responsibilities of the parties involved in the arrangement, including sufficient detail and review provisions to provide assurances for security and confidentiality;
  • the details of any limitation of liability and indemnity insurance arrangements for the parties (for example, clauses contained in the terms and conditions of outsourced provider agreement(s) or terms of use);
  • if the outsourced provider is allowed to unilaterally change relevant terms of the agreement (that is, without input from the registered tax practitioner), including in relation to change in business and/or ownership structure, how or where data is stored or managed, and review processes;
  • if there is flexibility to allow for changes / developments in technology and operations;
  • how  information is being transferred between various systems and whether data integrity is being maintained;
  • how information is being stored and accessed;
  • the processes in place in relation to the backup and archiving of information (such as multiple backup servers);
  • if there are any relevant legislative and regulatory requirements associated with having any information held offshore (that is, information stored or processed in equipment not located in Australia).

The Board notes that while the Code does not specifically deal with outsourcing and/or offshoring, a number of its obligations are relevant eg Code item 6 (disclosure by a tax practitioner), Code item 7 (provision by practitioner of service competently), Code item 9 (taking reasonable care in ascertaining a client’s affairs) and Code item 10 (taking reasonable care to ensure tax laws are applied correctly to the circumstances in relation to which they are providing advice to a client).

Comments

Comments on the draft are due by 12 October 2017