Keat Chew explored four alternative super strategies, to get financial advisers thinking differently about superannuation.

1. Outside the
super square
Presented by
Keat Chew, Head of Technical Services
Netwealth
March 2019

2. | netwealth
The material in this presentation has been prepared and issued by Netwealth Investments Limited (Netwealth),ABN 85 090 569 109,
AFSL 230975, RSE L0000192). It contains factual information and general financial product advice only and has been prepared
without taking into account your individual objectives, financial situation or needs.The information provided is not intended to be a
substitute for professional financial product advice and you should determine its appropriateness having regard to your particular
circumstances and seek any independent financial or other professional advice you may require.The relevant disclosure document
should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an
investment in any Netwealth product.
Information in this presentation may contain forward looking statements regarding our views with respect to potential regulatory
changes.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person,
including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any
person arising from reliance on this information.
Unless specified, all information in this presentation is at 7/02/2019.
Adviser Use Only – Not for further distribution
Disclaimer
Outside the super square2

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Super savvy savings for the first home
A small business owner retirement pathway
Death by the untaxed element
Don’t unfrank the franking credits
Outside the super square3
Session outline

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Super savvy savings
for the first home
Outside the super square4

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Previously First Home Saver account
RIP (1.07.08 – 30.06.15)
• Doomed to fail from start
– Complex and no ‘out clause’, few providers,
cumbersome timeframes, overall just too hard!
The new First Home Super Saver Scheme (FHSSS)
• Simple process
– No special product required
– Can use existing super account or start new one
• No need to tell receiving fund of the FHSSS
contributions
Why I am excited, and so should you
• It is so easy… and definitely a tax benefit to consider
• Flexible time frame
– No ‘lock in’ period, available for immediate churn or
longer term accumulation
• Simple ‘out’ clause
• A great marketing tool
– Open special purpose FHSSS, and consolidate all
super accounts
The best attempt yet
First Home Super Saver Scheme (FHSSS)
Outside the super square5

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Start dates for contribution and withdrawal
• Contributions made after 1 July 2017
• Withdrawal any time after 1 July 2018
– No lock in period!
Contributions that can be withdrawn
• Voluntary CC and NCC
– CC include salary sacrifice, personal deductible
contributions but exclude SG
• Usual contribution caps apply when contributing
The eligibility conditions (to withdraw)
• Only those age 18 or above
• Have never owned a property in Australia
• Have not previously requested a FHSSS release
(withdrawal) authority
• Assess on individual basis
– Couple (siblings or even friends) access super
separately to purchase same property
• Special financial hardship withdrawal may apply if lost
ownership of all property interests and suffer hardship
Basic scheme details
Outside the super square6

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Process to withdraw
• Apply to the ATO for a FHSSS determination (as many
times as required) but for a release (once only)
– Determination confirms how much can be released
– Can request for lower amount to be released
– Takes about 25 days for fund to release payment to
ATO and subsequent payout to member
• Must get ATO to release the payment before signing
contract
What is the maximum release amount
• Contributions from 1 July 2017
– 100% of eligible non-concessional contributions
– 85% of eligible concessional contributions
– Limited to an annual limit of $15,000 and total across
all years of $30,000 in contributions
– FIFO contributions rule applies - if same day
contribution (NCC & CC) NCC taken to be withdrawn
first
• Plus associated earnings on these contributions at
deemed rate of return (90 day Bank Bill rate + 3%)
– Actual earnings could be higher or lower than
associated earnings
What can be withdrawn
Outside the super square7

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On contributing
• If NCC, no tax implications when contributions made
– Only advantage is earnings on NCC in tax
concession environment
• If salary sacrifice or personal deductible contributions
– Tax deduction at marginal tax rate (and Medicare
levy)
– 15% contributions tax on entry (as per normal)
• Earnings on net CC in tax concession environment
On withdrawing
• Any amount released which is assessable (not NCC)
will be taxed at MTR and Medicare levy
– 30% non refundable tax offset allowed
– Will receive amount net of PAYG (ATO will provide
PAYG statement)
• Amount released will not affect HELP repayments,
family tax benefits and child support
Tax impact on contributions and withdrawals
Outside the super square8

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Purchase requirements
• Must contract to buy or construct home within 12
months (unless apply for extension) of release
– Notify ATO within 28 days of purchase
• Must genuinely intend to occupy property as a home,
evidenced by
– Occupy or intend to occupy ASAP after purchase
– Occupy home for at least 6 of the first 12 months
If no purchase (or has not met requirements) – the
very important ‘out’ clause
• Make NCC equal to assessable FHSSS released
amount (less PAYG) to super
• Keep released amount and subject to FHSSS tax of
20% (on assessable FHSSS released amount)
– Similarly, if ATO not notified of purchase, may be
subject to the FHSSS tax
What if there is no purchase
Outside the super square9

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S1. The basic strategy - those saving for their first
home
• Strategy benefitting from tax savings over medium to
long term
S2. Have already saved an amount outside super (in
bank account) for first home
• Recycle (contribute) the deposit through super and
withdraw soon after
• Personal deductible contributions will create the tax
benefit
S3. Parents wanting to provide a deposit for their
adult child first home
• Instead of paying deposit to a bank account, pay into
super and withdraw soon after
• Personal deductible contributions – Dad paid up, child
receives a tax refund EFT!
S4. Parents/grandparents wanting to set aside a
deposit amount for minor child
• Pay NCC of up to $30,000 ($15,000 each year for 2
years)
– Most cases no personal tax deduction available for
minor child
• Withdraw in many years time say 20 years later
FHSSS strategies to consider
Outside the super square10

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Strategy 1: FHSSS versus normal savings account
Year 1 2 3 4 5 6 7 8 9 10
Annual salary
sacrifice
$15,000 $15,000
Deposit available
post-tax - FHSSS
$12,292 $25,355 $26,115 $27,327 $28,597 $29,927 $31,321 $32,782 $34,312 $35,915
Deposit available
post-tax - no
FHSSS
$9,713 $19,554 $19,808 $20,065 $20,326 $20,590 $20,858 $21,129 $21,404 $21,682
Additional deposit
as a result of
FHSSS
$2,579 $5,801 $6,307 $7,262 $8,271 $9,337 $10,463 $11,653 $12,908 $14,233
Source: https://www.budget.gov.au/estimator/
Assumptions
Salary $70,000 Marginal tax rate 32.50%
Deposit interest rate 2.00% FHSSS rebate 30.00%
FHSSS earning rate 4.78% Super tax rate 15.00%
Outside the super square11

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Strategy 2 & 3: Recycle existing cash through FHSSS
Scenario A
Contribute $30,000 (already saved) to super
over 2 FYs (June/July), claims tax deduction
and immediately withdraw.
Scenario B
Parents help children with deposit by gifting
$15,000 in June & $15,000 in July. Child
contributes and claims tax deduction and
immediately withdraw.
30 June 1 July 2 July
Pre-tax amount $15,000 $15,000
Tax Payable ($2,250) ($2,250)
After-tax amount $12,750 $12,750 $25,500
Release amount $25,500
Release amount tax ($1,350)
Amount for deposit $24,150
Add back tax refund +$10,350
Total recycled deposit $34,500
Original deposit $30,000
Deposit gain $4,500
Assumptions
Salary $70,000
Marginal tax rate 32.50%
Super tax rate 15.00%
FHSSS earning rate 4.78%
FHSSS rebate 30.00%
Outside the super square12

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Details
Grandparents make NCC in grandchild’s name,
accumulate and withdraw FHSSS 20 years later.
If actual earnings > FHSSS associated earnings, excess
super balance kick starts super retirement benefit for child.
Outside the super square13
Strategy 4: Grandparents put money aside
for grandchildren

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Strategy 4: Grandparents put money aside for grandchildren
Years since contribution 1 2 3 4 5 10 15 20
NCC super contribution $15,000 $15,000 - - - - - -
FHSSS available balance $15,741 $32,260 $33,853 $35,526 $37,281 $47,445 $60,380 $76,842
Release amount $76,842
Release amount tax ($2,108)
Deposit amount available $74,734
Actual account balance $16,200 $33,696 $36,392 $39,303 $42,447 $62,369 $91,640 $134,650
Balance remaining in super having withdrawn FHSSS deposit $57,808
Assumptions
Contributions Non-concessional FHSSS rebate 30.00%
Investment term 20 years Actual earning rate 8.00%
FHSSS earning rate 4.94% Grandchild MTR at end* 32.50%
*Assumes 2018 Federal Budget tax rates are legislated
Outside the super square14

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A small business owner
retirement pathway
Outside the super square15

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Small business lifetime CGT cap – what you need to
know
• Available to small business owners on sale of eligible
assets
• Our focus is different to the accountants
• 2 elements of small business CGT concessions
– Reduce CGT on sale of business assets
– Ability to contribute to super (outside normal caps) –
normal work test applies
• Allows super contribution up to lifetime CGT cap of
$1.48m for 2018/19
Only 2 of the small business CGT concessions can
use this super CGT cap
• 15 year exemption: total proceeds (subject to CGT cap)
can be contributed
• Small business retirement exemption: only capital gain
(up to $500k, subject to CGT cap) can be contributed
• Therefore, $1.48m CGT cap can only ever be fully
utilised by the 15 year exemption
– Or combination of both exemptions
The $1.48m other cap
Lifetime CGT cap
Outside the super square16

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Super changes of 1/7/17 did not impact the small
business concessions and contributions
• Separate new integrity measures to ensure access by
small business only (applying from 8/2/18)
Super changes and lifetime CGT cap
• Can use lifetime CGT cap in addition to NCC and CC
caps
• Regardless of TSB, small business CGT contributions
(and CC) can be made
– NCC needs TSB < $1.6m, so contribution order can
be important (if doing NCC and small business CGT
contribution)
• Once contributed, they all impact and count towards the
TSB at the end of the year
– They all count towards the TBA when moving into
retirement income stream
• If small business CGT exemptions not sufficient to
eliminate CG, can use CC
Outside the super square17
Super changes impact on lifetime CGT cap

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Small business sole trader, age 63, sells business for
$2.1m
Bought business 14 years ago for $100,000
• Can reduce capital gains using the small business CGT
concessions and general 50% discount
– Capital gains (before any exemptions or discount) of
$2m
– Having owned business > 12 months, the 50%
general individual discount brings gain down to $1m
– Next, 50% small business active asset exemption
reduces gain to $500,000
– Finally, the small business retirement exemption
eliminates the $500,000 to zero
Small business CGT exemptions together provide a
powerful solution – no tax payable
• CGT completely eliminated, giving the owner a clean
$2.1m
• However, only $500k can be contributed to super plus
$300k NCC (assuming all required conditions met)
If the sale of business was deferred for an extra year
• CGT fully eliminated in ‘one hit’ with the 15 year
exemption, giving a clean $2.1m
• However, can now contribute $1.48m to super plus
$300k NCC (assuming all required conditions met)
Strategy 1: Best small business CGT exemption
Outside the super square18

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Small business sole trader sells business for
$1,100,000
Bought 6 years ago
Cost base of $100,000, with resulting capital gain of
$1,000,000 (before any discount or exemptions)
Scenario B: Utilise only general 50% discount and
small business retirement exemption
• No tax payable
– 50% general individual discount reduces gain to
$500,000
– Elect not to use small business active asset
exemption, leaving gain still at $500,000
– Instead, use small business retirement exemption to
allow remaining $500,000 gain to be tax free
• Now this will allow $500,000 contribution to super under
small business CGT concessions
Strategy 2: 50% active asset exemption
Outside the super square19
Scenario A: Utilise general 50% discount, active asset
exemption and small business retirement exemption
• No tax payable
– 50% general individual discount reduces gain to
$500,000
– Next, using 50% small business active asset
exemption brings gain further down to $250,000
– Finally, small business retirement exemption allows
remaining $250,000 to be tax free
• Only $250,000 contribution to super allowed under
small business CGT concessions

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Death by
the untaxed element
Outside the super square20

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Public sector superannuation schemes - untaxed funds
• Not subject to 15% contribution tax, will always have
untaxed element
Taxed funds (untaxed element) – Death is the problem
• Untaxed element arises on death benefit lump sum
payment
– Where it includes an amount of life insurance
proceeds
– Taken tax deduction for premium for the life cover (in
any or current FY)
• No untaxed element if no death lump sum payout
– E.g. if proceeds used to start pension in original fund
• No issue if death lump sum (though there is untaxed)
paid to dependants as completely tax free
– Higher level of tax if paid to non dependants
Has not been a problem in the past – for dependants
• But now as a death benefit (lump sum) can be rolled over
- the untaxed element crystallises
• When rolled over, a 15% tax clip taken by receiving fund
to convert ‘untaxed to taxed’
The untaxed element is calculated based on a formula
– not simply the amount of insurance proceeds
Outside the super square21
Untaxed element taxable component
A hidden death tax

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Member super account can be made up of
• Tax free and taxable components
• Tax free component is fixed $ amount and consists
generally of NCC
• Taxable component = Any remaining amount other than
tax free amount
• Taxable component can have taxed and untaxed
element (even in taxed fund)
Quick calculation of the untaxed element on payout
(death lump sum)
• Untaxed element = Taxable component – Taxed
element
• Taxed element = (LS death benefit* x Service
days/(Service days + Days to retirement)) – Tax free
component
*Lump Sum (LS) death benefit includes insurance proceeds
– If result is zero or negative, then taxed element is
zero which means all the taxable component will be
untaxed
Understanding the components and elements
Outside the super square22

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Untaxed element – calculation example
Amount Days
Tax-free component $10,000 Service days
(1/1/13 –
30/8/18)
2,067Taxable component (pre-
death)
$40,000
Taxable component –
insurance (post-death)
$1,000,000 Days to
retirement
(1/9/18-
30/3/48) (i.e.
age 65)
10,803
Total death benefit $1,050,000
• Adrian died aged 45 on 30/8/18 with $50k ($10k tax free component) in super and $1m life cover
• Eligible service start date is 01/01/13
• How much untaxed element is created and what are tax implications if paid out or rolled over?
Calculations
Taxed element of Taxable Component:
$1,050,000 x 2,067 / (2,067+10,803) - $10,000
= $158,636 (taxed element)
Outside the super square23

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Untaxed element – tax implications
• Adrian died aged 45 on 30/8/18 with $50k ($10k tax free component) in super and $1m life cover
• Eligible service date is 01/01/13
• How much untaxed element is created and what are tax implications if paid out or rolled over?
Components $ Amount
Tax to non-
dependant*
To spouse (exit
super) – any age
Spouse rolls over
to begin pension
Tax-free $10,000 0% 0% 0%
Taxable taxed element $158,636 15% 0% 0%
Taxable untaxed element
(Balance of taxable component)
$881,364 30% 0% 15%
*Adult children of the deceased
Medicare applies
Outside the super square24

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S1. Increasing service period relative to days to
retirement
• Can be done by rollover from another fund if a longer
service period is available
– The ratio of Service days/(Service days + Days to
retirement) will be increased
• Situation improves (more taxed resulting in less
untaxed) as approaches retirement
– Days to retirement decrease
S2. Maintain the insurance cover in a second fund
• This ensures that the accumulated balance is not
tainted
• NOTE: Issues may arise if an insurance only fund is
used and it is intended to run a death benefit pension
S3. Avoid making NCC to fund where untaxed element
is expected
• Tax free component reduces taxed element ie increase
untaxed element
3 strategies to reduce untaxed element
Outside the super square25

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Strategies 1 and 2: reducing untaxed element
Strategy options
Service
days
Days to
retirement
Member
balance at
death
Insurance
payout
Tax free
Taxable
taxed
element
Taxable
untaxed
element
Tax
payable to
non-
dependant
(inc. M/C)
Do nothing 3,650 7,300 $200,000 $2,000,000 $50,000 $683,333 $1,466,667 $585,500
Rollover past benefit with
20 year eligible service
period ($1 would do!)
7,300 7,300 $200,000 $2,000,000 $50,000 $1,050,000 $1,100,000 $530,500
Rollover past benefit with
20 year eligible service
period AND structure
insurance in a separate
“clean fund”
7,300 7,300 $200,000 $2,000,000 $50,000 $1,000,000 $1,000,000 $515,500
• John is 45 and has been with current employer for 10 years at his death
• Died with an employer fund with balance of $200k ($50k tax free component) and $2m in death cover
• Also has a personal super plan which has been running for last 20 years.
Outside the super square26

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Don’t unfrank
the franking credits
Outside the super square27

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Dividend imputation (franking credits) system
introduced in 1987
• To avoid double taxation, idea is for income to ‘flow
through’ and be taxed in hands of final recipient
• Franking credits attached equivalent to tax already paid
by company
• No cash refunds
• As an example, $70 received as dividend, this comes
with $30 franking credits
– $100 included in tax return and taxed at MTR with a
$30 non refundable credit (if insufficient tax liability)
Change to the franking credits system from 1 July
2007
• Becomes a refundable credit, and eligible for a refund
of excess franking credits if
– Received franked dividends directly or through a
trust or partnership
– Basic tax liability less than franking credits (after all
other tax offsets)
– Meet anti-avoidance rule
Franking credits can only be used by tax residents
A quick history
Franking Credits
Outside the super square28

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What we know so far – franking credits still available,
but
• Unwind Howard’s government policy – remove cash
refunds on excess not used to offset tax liability
• No impact on individuals (entities) with tax liability
exceeding franking credits
Main groups impacted
• Individuals on low or zero income
• Super funds in pension phase with 0% tax rate (fund as a
whole will not have any tax liability)
• Possibly funds in accumulation (or mix
accumulation/pension) where tax at 15% or lower
– Where the tax on earnings and contributions is lower
than the franking credits received
Exceptions
• Pensioner guarantee
– Every Centrelink pensioner will be exempt individually
or in an SMSF (if there is at least one pensioner in the
fund before 28 Mar 18)
Outside the super square29
Labor’s proposal – speculative of course!

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Impacts on SMSFs
• Will most certainly lose out if:
– In full pension with no tax liability to absorb the
franking credits
– In a mix of accumulation and pension, then part
recovery likely
• Despite early days, we are already seeing SMSFs
being wound up
Impacts on retail funds
• Depends on the structure of the fund – accumulation
and pension
– If separate structure the pension side of fund have
same recovery problem
• Most retail funds are structured as one entity
– Likely net tax paying position so can absorb any
excess, so better position than SMSFs
– Provided that there are more accumulators (which
contribute to fund tax liability) than pensioners, and
depending on level of franking credits received
Likely impacts on super funds
Outside the super square30

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S1. Individuals with low taxable income (resulting in
nil or low tax liability)
• For retirees, Centrelink planning to ensure receive a
pension
• Restructure share holdings between couples
– Remember in transferring between couples, capital
gain/loss arises
S2. Self managed superannuation funds
• Move to retail funds
• Add members who are in accumulation phase
• Depending on level of franked dividends, even SMSFs
fully in accumulation could have excess
S3. Retail funds
• Ensure entity structure appropriate to recover the
excess imputation credits
S4. Family trusts should assist with streaming of
franked dividends
• Provided trust deed allows, franked dividends can be
streamed to particular beneficiaries
Restructuring strategies to consider
Outside the super square31

32. Contact
Thank you
Keat Chew
Head of Technical Services
1800 888 223
keat@netwealth.com.au
Nigel Smith
Technical Services Consultant
1800 888 223
nigel@netwealth.com.au