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Planning beyond 2020
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- 2. | netwealth Other awards: •Best client portal • Best transaction tools • Best decision support tools • Best reporting • Best online business management • Best new functionality: mobile authorised ROAs Planning beyond 20202 Best Platform overall – 3rd consecutive year Investment Trends results
- 3. | netwealth • Viewclient account & personal details • View client account balances, details of investments, performance and unit holdings – See linked super and investment accounts together • View cash transaction history • Secure and easy access with 4-digit PIN and/or Touch ID • Available on iOS and Android Planning beyond 20203 Netwealth mobile app Netwealth on the go
- 4. | netwealth • Automaticallygenerate a ROA for one or many of your clients when a model is rebalanced • Clients can approve ROAs online with the click of a button – No signature required • Removes friction from customer experience Planning beyond 20204 Netwealth SMART Produce automated Records of Advice Netwealth SMART – Automated ROA example
- 5. | netwealth Adviser canmake payments to any Australian bank account on behalf of their clients. • Clients log onto the Netwealth platform and provide authorisation to their adviser. • Adviser and nominated staff can then easily and efficiently make ad hoc payments to a third party Australian bank account upon instruction from your client. Planning beyond 20205 Pay Anyone Make payments to any Australian bank account
- 6. | netwealth • Aportfolio of low-cost index funds • Available on our low-cost Super and Wealth Accelerator Core accounts • 4 managed accounts - choose from conservative to high growth • Powered by BlackRock Planning beyond 20206 Netwealth GSS Managed account (coming soon) Low cost managed accounts
- 7. | netwealth CPD points •A feedback survey will be emailed in the next few days • Tick off your name at the registration desk Posting to social? • #planningbeyond2020 or @netwealthinvest Mobile phones • Turn off / Silent Access today’s resources and more • www.netwealth.com.au/2020 Planning beyond 20207 Things to note
- 8. Planning beyond 2020 Presented by Keat Chew,Head of Technical Services March 2018
- 9. | netwealth9 The materialin 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.The audience is cautioned to not place undue reliance on these forward looking statements. 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 22/02/2018. Disclaimer Planning beyond 2020
- 10. | netwealth Agenda Death isa super pain The fourth pillar of retirement Use it or lose it – unused caps Streaming earnings for a better position The crystal ball: Beyond 2020 10 Planning beyond 2020
- 11. | netwealth11 Death isa super pain Planning beyond 2020
- 12. | netwealth It isa worry • First we worry if we can accumulate enough • Then we worry about spending it all • And if we didn’t spend it all, we worry about who to give it to We then worry about how to give it away effectively • The best structure and mechanics to pass on Clients just keep refusing to tell us when they are going • Pre-death giving - optional • Post-death giving - compulsory Planning beyond 202012 And a super worry Death is a super pain
- 13. | netwealth Overrules trusteesdiscretion • Trust deed must allow binding nominations • Legislatively binding on trustee • Must be valid and current at date of death • Payment mode (LS or IS) can usually be nominated at time when payable To be valid (Reg 6.17A) • Payable to SIS dependants or estate (this will take it out of the system) • In writing, signed and dated • Witnessed by 2 individuals age over 18 (who are not beneficiaries) • Reviewed every 3 years Non-lapsing • Not constrained by 3 year rule i.e. non-lapsing • Trust deed provisions allow non lapsing provisions • Danger of not reviewing 13 Binding nominations Planning beyond 2020
- 14. | netwealth Cannot benominated in accumulation phase Benefits of reversionary • Income stream payments continues, certainty of it happening • Not going through estate, reduced risk of challenge • Centrelink benefits • Can commute (partial or full) the reverted pension • Little downside – Can always remove the reversionary feature Only specific dependants can be reversionary beneficiaries • Excludes for example: adult child and estate What if there is a binding nomination in place on a pension with a reversionary order? • According to some lawyers, binding nomination overrides reversionary • ATO view (applying only to SMSFs) - reversionary takes precedence • To be certain, please don’t have binding nominations for reversionary pensions 14 Reversionary Planning beyond 2020
- 15. | netwealth Reversionary orbinding nomination and commence new death benefit pension – which is more superior? • Unfortunately, death benefit can only remain in super system as a pension • A death benefit pension (regardless of how it comes about) counts to a beneficiary TBA – Government’s newest ‘anti-estate planning’ weapon A binding nomination to commence a new death benefit pension • Immediate Credit as at the date it becomes payable (ASAP) – Amount Credited is the balance at the date payable 15 Is there a preferred death instruction? Planning beyond 2020
- 16. | netwealth A reversionarypension to continue the deceased pension • Credit arises only after 12 months after the date of death – Amount credited is the balance as at the date of death There are many good TBA reasons to have reversionary • Easy and payments continue – Additional 12 months in retirement phase tax free earnings environment – Earnings in 12 month period excluded from TBA • “Breathing space” after death to get affairs sorted – commute own pension to make cap space • Beneficiary could have $3.2m in retirement phase for 12 months after death – Could be an important consideration for those thinking about CGT relief 16 Is there a preferred death instruction? Planning beyond 2020
- 17. | netwealth The deathscene changed forever • Death benefits never change to ‘member benefits’ – post 1 July 17 no more “prescribed period” (3/6 month rule) • Death benefits converted pre 1 July 17 to member benefits remain member benefits (until another death) – Those not converted (e.g. death benefit pensions) will remain death benefits under new rules – Death benefits cannot remain in accumulation, member benefits can • Any death benefit not taken as income stream, must be paid out as a lump sum – Death benefits can now be rolled over to another fund to start income stream by eligible person • Death benefits will always be taxed as a death benefit – Totally tax-free to dependants, otherwise taxable element taxable to non-dependants 17 There is no coming back from death Once a death benefit, always a death benefit Planning beyond 2020
- 18. | netwealth Some deathplanning objectives • At least try to die in pension (rather than accumulation) • Retain as much in super as possible – Commute own pension to accumulation – Debit to TBA – create space for death benefit IS – Must be done before the death benefit pension is Credited to your TBA • A wrong move and death benefit must be paid as a lump sum – exits super forever 18 Once a death benefit, always a death benefit There is no coming back from death Planning beyond 2020
- 19. | netwealth Case Study– BDBN death benefit pension or reversionary: • On 1/7/2017, Bob & Jan started reversionary pensions (RP) with $1.6m and $400k respectively • Bob died on 1/9/2017. With earnings, Bob’s RP valued at $1.8m & Jan’s valued at $600k • As at 1/9/2018, with earnings, Bob’s RP is valued at $2.1m & Jan’s pension is valued at $800k Question: Is there a benefit with reversionary pension compared to a BDBN pension commencing on death? 19 Lessening the pain of death Planning beyond 2020
- 20. | netwealth20 Lessening thepain of death Option 2 Account record Transfer balance account record Date Accum. Jan’s Pension Reversionary pension Total in Super TBA debt TBA credit TBA balance TBC Excess 1/7/2017 - $400k - $400k - $400k $400k $1.6m - 1/9/2017 - $600k $1.8m $2.4m - - $400k $1.6m - 1/9/2018 - $800k $2.1m $2.9m - $1.8m $2.2m $1.6m $600k 1/9/2018 $600k $200k $2.1m $2.9m $600k - $1.6m $1.6m - Planning beyond 2020 Option 1 Account record Transfer balance account record Date Accum. Jan’s Pension BDBN pension Total in Super TBA debt TBA credit TBA balance TBC Excess 1/7/2017 - $400k - $400k - $400k $400k $1.6m - 1/9/2017 - $600k $1.8m $2.4m - $1.8m $2.2m $1.6m $600k 1/9/2017 $600k - $1.8m $2.4m $600k - $1.6m $1.6m - 1/9/2018 $800k - $2.1m $2.9m - - $1.6m $1.6m - Jan – Pension via BDBN Jan – Reversionary
- 21. | netwealth Child pension(in super) or testamentary trust (out of super) or possibly both? • TT needs to distribute earnings (taxed at MTR of beneficiaries) • ABP earnings tax free but pension payments (taxable proportion) taxed at MTR with 15% rebate (tax free if > age 60) TBA advantage with child pension • Child inherits a “modified” TBC – Child’s own TBC not affected in the future • Modified TBC ceases when either: – Child turns 25 or capital exhausted, whichever earlier; – If disabled, whenever the capital is exhausted • For deceased parent with no IS in retirement phase, child’s modified TBC = $1.6M – If child the only beneficiary, then $1.6m available – If child not the only ‘person’ receiving super interest, then child’s share of super interest x $1.6m (general cap) • For deceased parent with IS in retirement phase, child’s modified TBC = share of deceased parent’s IS – E.g. died with ABP of $200,000. Split 60% to child A and 40% to the child B, modified TBC = $120,000 and $80,000 respectively – Unfortunately if another $1.4m in accumulation, cannot start child pension with this – Child can have own transfer balance cap if meet a condition of release e.g. personal injury but not death benefit 21 Family planning Planning beyond 2020
- 22. | netwealth22 Child ABPvs testamentary trust (tax consideration) John, aged 45 and married with 2 children, 8 and 6 years old. His wife, Betty, does not work. John dies with a super fund balance of $100k plus $1.5m insurance cover in the fund. Assume 100% taxable component – which option is better - child pensions + spouse ABP or testamentary trusts? Strategy option Amount invested Earnings accruing in trust @ 8% Tax on fund earnings Min pension / drawings required Tax on pension / drawings Pension tax rebate available Total tax levied Scenario 1: Super ABP’s for all Split 50% Betty /25% for each child Betty ABP = $800K (earning $64k) Child 1 ABP = $400k (earning $32k) Child 2 ABP = $400k (earning $32k) Total min pension payments @4% = $64k $1.6m $128,000 $0 $64,000 $2,622 $9,600 $0 Scenario 2: Testamentary trust with 3 dependent as beneficiaries 100% to a Testamentary Trust (2) with all 3 as beneficiaries $1.6m earning 8% = $128k/3 = $42,667 each Total drawings = $64k $1.6m $128,000 $16,241 $64,000 $0 $0 $16,241 1. Tax calculations exclude Medicare Levy 2. While a Testamentary Trust gives you the benefits of discretionary distribution and allows minors to be taxed as adults, all income and realised capital gains must be distributed to avoid being taxed at the highest marginal tax rate. This compares to using ABP (including child pensions) where you can elect any pension above the minimum, are not forced to distribute any earnings, pay no tax on the funds earnings. Only the taxable component of any pension payment is taxable at marginal tax rates (where both deceased and recipient where under 60 at point of death), with a 15% rebate available. In addition, minors receiving child pensions will be taxed as adults. Planning beyond 2020
- 23. | netwealth23 Modified TBC– super interest shared spouse/child (<$1.6m) Scenario 1 Scenario 2 Super interest $1.6m $1.6m Spouse share of interest 100% 50% Child 1 share of interest 0% 30% Child 2 share of interest 0% 20% Scenario 1 Spous e Child 1 Child 2 Totals Share of Super Interest 100% 0% 0% 100% TBC (modified) $1.6m - - $1.6m Share of actual $ $1.6m - - $1.6m Pension account $1.6m - - $1.6m Lump sum payable (out of super) - - - - Scenario 2 Spous e Child 1 Child 2 Totals Share of Super Interest 50% 30% 20% 100% TBC (modified) $1.6m $480k $320k $2.4m Share of actual $ $800k $480k $320k $1.6m Pension account $800k $480k $320k $1.6m Lump sum payable (out of super) - - - - Planning beyond 2020
- 24. | netwealth24 Modified TBC– super interest shared spouse/child (>$1.6m) Scenario 3 Scenario 4 Super interest $3.2m $3.2m Spouse share of interest 100% 50% Child 1 share of interest 0% 30% Child 2 share of interest 0% 20% Scenario 3 Spous e Child 1 Child 2 Totals Share of Super Interest 100% 0% 0% 100% TBC (modified) $1.6m - - $1.6m Share of actual $ $3.2m - - $3.2m Pension account $1.6m - - $1.6m Lump sum payable (out of super) $1.6m - - $1.6m Scenario 4 Spous e Child 1 Child 2 Totals Share of Super Interest 50% 30% 20% 100% TBC (modified) $1.6m $480k $320k $2.4m Share of actual $ $1.6m $960k $640k $3.2m Pension account $1.6m $480k $320k $2.4m Lump sum payable (out of super) - $480k $320k $800k Planning beyond 2020
- 25. | netwealth Can twodeath benefit income streams be consolidated? • Yes, for example 2 rollovers from 2 different funds and consolidate to 1 death benefit income stream • Likewise, if 2 income streams within the same fund • No part of it can be rolled back into accumulation though If a reversionary pension prior to 1 July 17 is rolled over to new income stream, does it remain a reversionary pension? • No, it will be a new death benefit income stream (a death benefit is always a death benefit!) Can trustees rely on binding death benefit nomination to make a pension reversionary? • Binding death benefit nomination not sufficient to make it reversionary • Governing rules must expressly imply the pension to be reversionary If both parents die (after 1 July 17), what is sole surviving child’s modified transfer cap? • Will receive an amount from each parent i.e. max of $3.2m • E.g. if both parents died and each had $1.8m in accumulation – Child could receive 2 x $1.6m income streams and need to take $400k lump sum payment 25 Death benefits and reversionary income streams - FAQ Planning beyond 2020
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- 27. | netwealth The fourthpillar of retirement Planning beyond 202027
- 28. Would you paya one-off lump sum of about $1,600 to get $2,560 per annum (all approx.) for life?
- 29. | netwealth How: UKstate pension (Centrelink equivalent - not UK QROPS) Why are we looking at this? • A great source (cheap) of income stream, to top up retirement income – Subject to meeting conditions, we can buy! • A UK pension for our clients who don’t qualify (and even those who do) for Centrelink • Not wasting what your clients may have accrued in the UK • Source of new clients (and value add advice for our clients) Who is our target audience? • British clients • Clients that you have done QROPS transfer for • Clients who had at some point in time in the past worked in the UK • Clients who are returning back to the UK • Basically, anyone who has ever worked or lived in the UK could be a potential opportunity 29 How, why and who? Planning beyond 2020
- 30. | netwealth30 Snapshot ofEstimated Residential Population (ERP) Country of birth Median age Estimated Residential Population Population position United Kingdom 55 1.2m 1 New Zealand 40 611k 2 Italy 69 198k 7 Germany 64 126k 10 Greece 70 118k 11 Netherlands 67 84k 18 Source: Australian Government Home Affairs (Immigration) 2015 Live in Australia historical migration statistic Planning beyond 2020
- 31. | netwealth Not incomeor asset tested (unlike our Centrelink) • Their rules are as bad as ours • Not to be confused with company/private pension plans (which are QROPS transferable) • State pension not transferable to Australia, only payable at their UK pension age as a pension – 65 for men and progressively increasing to 65 for women – Both will from Dec 18 start to increase together to reach Age 66 by Oct 2020 – Then further increase from Age 66 to 67 between 2026 and 2028 – https://www.gov.uk/calculate-state-pension • Importantly, UK pension is payable to recipients abroad Payable purely based on National Insurance contributions or NI credits • No asset or income test • Based mainly on UK employment - qualifying years of contribution – Must meet minimum amount of contribution in each qualifying year 31 Brief framework of UK State Pension Planning beyond 2020
- 32. | netwealth If reachUK State pension age on or after 6 Apr 2010, but before 6 Apr 2016 • For full pension requires 30 qualifying years of contribution record – Stuck with old system • Qualifying years based on NI contributions made (usually as a result of work) or credited each year • Minimum of 1 year, if less than 30 years pension will be proportionate • For married couple, if no record can even use working spouse record • Different rules apply if retired before 6 Apr 2010, more qualifying years required Full basic pension is £122.30 per week + Additional State pension (earnings related) + various other allowances • Full 30 years of contribution gives full pension (£6,360 or approx. $11,000) • For years less than 30, pension will be proportionate e.g. if 10 years qualifying – Pension will be 10/30 * £122.30 = £40.77 per week 32 How much pension is payable – old system Planning beyond 2020
- 33. | netwealth If reachUK State pension age on or after 6 Apr 2016 • A man born on or after 6 April 1951, a woman born on or after 6 April 1953 • For full pension requires 35 qualifying years of contribution record • Minimum of 10 qualifying years, otherwise get nothing • If accrue NI qualifying years before 6 Apr 2016 – Calculate ‘starting amount’ pension as at 6 Apr 2016 (based on higher of pension based on old rules and new rules) – Plus further pension amount based on qualifying years accruing after 6 April 2016 Full basic pension is £159.55 per week • Full 35 years of contribution gives full pension (£8,297 or approx. $14,350) • For married couple, each member of couple must now build up their own records • For each additional qualifying year – Pension will be 1/35 * £159.55 = £4.56 (or approx. $7.89) per week 33 How much pension is payable – new system Planning beyond 2020
- 34. | netwealth Starting point,need to have a record of 35 qualifying years of contribution for a full pension If an individual has been unemployed or move abroad for example, • Could result in gaps in contribution – Hence, not able to achieve max 35 qualifying years and max pension – Or even worse to get a pension, the new rule of 10 minimum qualifying years not met Unless makes voluntary contribution every year – purchase extra qualifying years • Can only be made before UK State pension age • Special rules apply for those abroad to make voluntary contributions and buy extra years – Conditions to be met 34 Gaps in National Insurance contribution Planning beyond 2020
- 35. | netwealth Ability tocontribute and buy years until UK pension age • Must have lived in UK for 3 years (or paid NICs for 3 years) • Must apply (not automatic) to buy back • If not contributed a number of years may be able to initially make a lump sum back payment to ‘buy’ up to 6 years back – Due to time limits for each year NI contribution • Annual contribution from then on until achieve UK State pension age • Each qualifying year of contribution will give an additional 1/35 of pension per week Deciding whether to pay • What is the cost? • Are you going to get there? • Whether maximum 35 years been achieved • Have to get at least 10 qualifying years under new rules (if reach UK State Pension age on or after 6 Apr 2016) 35 Buying qualifying years for those outside UK Planning beyond 2020
- 36. | netwealth Main Nationalinsurance classes (current approx. costs for Class 2 & 3, amount payable can vary every year) • Class 1 (employed) 12% of salary • Class 2 (employed or self-employed) £148 per annum • Class 3 (all others incl. unemployed) £741 per annum • UK tax year- 6 Apr to 5 Apr If paying from Australia, can certainly pay Class 3 or Class 2 if (self or) employed • Paying for 1 year (£148) provides extra 1/35 * £159.55 = £4.56 per week (or £237.12 pa) for life • Class 3 obviously more expensive but still good If not contributed last 6 years, can at least ‘back buy’ 6 years immediately • Paying 6 years catch-up for Class 2 ((£888) provides extra £27.36 per week (or (£1422.72 pa) for life • Unfortunately, Class 3 will cost more at 6 x £741 = £4,446 for same number of credit years 36 Cost of buy back Planning beyond 2020
- 37. | netwealth Remember clientsmay not even know they are entitled to a UK pension • If can reach 35 years, full pension of £8,297 (approx. $15k) p.a. Once you have identified a client • Get them to get a UK State pension statement – indication of number of qualifying years • International Pension Centre UK Work out if worthwhile to make voluntary contributions • Class 2 preferably, if not Class 3 • Must make application to pay lump sum payment (6 years) and every year forward (Form NI 38) • Make payment- either cheque to HMRC or international transfer • Risks – Rules change – Not getting to Pension age 37 What next Planning beyond 2020
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- 39. | netwealth Use itor lose it: Unused caps Planning beyond 202039
- 40. | netwealth Both CCand NCC caps, if not used will be wasted • NCC ‘brought forward’ 3 years, CC ‘carry forward’ 5 years rolling (from 1 July 18) With the removal of 10% employment income rule, makes CC strategy easier • Reduced unfortunately 1 July 17 to $25k but balanced by ability to carry forward unused cap (from 1 July 18) • Main condition - TSB must be < $500k just before the start of FY that the unused cap is to be utilised – First year available will be FY19/20 – Must have unapplied CC cap amount from previous year(s) • Drops off after 5 financial years if not used and when utilised use earlier years unused cap first • A most powerful tool – 5 shots at claiming deductions – Flexibility to claim against highest MTR • Defer contributions to deduct in higher income years (highest MTRs) – Up to $150k contribution deduction (5 x previous years plus 1 x current year) • A crucial 5 year plan – Defer 5 year contributions to the year when a huge capital gain is realized (or a bonus year or promotion) – Works extremely well in conjunction with investments through family trusts • Even if no planning forward, from 1 July 19 should always check if any unutilised CC that could optimise position 40 Use it or lose it – unused cap Planning beyond 2020
- 41. | netwealth41 How toutilise unused caps Jane makes regular concessional contributions of $10,000 p.a. As the concessional cap is $25,000 p.a., she has an unused concessional cap amount of $15,000 p.a. accruing from 2018-19 FY, available for use from 2019-20 FY onwards. In 2021-22 FY, Jane makes a $40,000 concessional contribution and is able to use part of her unused concessional cap amount. She is able to make a further $60,000 concessional contribution in the 2023-24 FY. 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 Concessional contribution – incl. SG $10k $10k $10k $40k $10k $60k Available unused cap $15k $15k $15k - $15k - Cumulative available unused cap $15k $30k $45k $30k $45k $10k Planning beyond 2020
- 42. | netwealth 1. Facts –Husband & wife have a family trust with an investment property which is escalating in value quickly – Wife does not work so net rental income is distributed to her – Cost base is $300k – Plan is to sell at a profit 2. In the 2024/25 financial year the property is sold (1 July 24) for $600,000 3. Planning ahead: Accumulate max unused concessional contribution cap in wife’s name. Distribute gain to wife who has no income. After applying 50% CGT discount, use cumulative available unused cap to offset CG. 42 A 5 year special event planning Concessional cap strategy Planning beyond 2020
- 43. | netwealth43 Concessional capstrategy Strategy 1 July 19 1 July 20 1 July 21 1 July 22 1 July 23 1 July 24 Available unused cap $25k $25k $25k $25k $25k $25k Cumulative available unused cap $25k $50k $75k $100k $125k $150k Facts and assumptions Concessional contribution cap $25k Cost base $300k Sale price $600k Distributed to husband 0% Distributed to wife 100% Tax-free threshold $18,200 Results With Super deduction No Super deduction Capital gain in family trust $300k $300k Distributed to wife $300k $300k Taxable gain to wife (after 50% discount) $150k $150k Taxable income to wife (after tax-free threshold) $131,800 $131,800 Super deduction taken $131,800 - Personal tax payable (includes ML) - $46,132 Contributions tax payable $19,770 - Estimated tax payable $19,770 $46,132 Planning beyond 2020
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- 45. | netwealth Streaming earnings for abetter position Planning beyond 202045
- 46. | netwealth Remember thechanges • Disregarded small fund assets SMSF’s cannot segregate: – At least 1 super interest in “retirement phase” in an income year – Just before the start of the income year – A person has a TSB that exceeds $1.6m – That person is in receipt of a retirement phase pension (in any fund not just the SMSF) – That person has a super interest in the SMSF at a time during the income year • Alternatively, using SIS Reg 5.03(2) not new but important: “… the trustee must determine investment return in a way that is fair and reasonable …to credit to members accounts” How does it work – streaming earnings • “Segregate” certain assets to specific member accounts (perhaps according to risks) • Make use of SIS Reg 5.03(2) to stream earnings on the basis of account ownership of assets • Proportionate method for tax purposes (ECPI) still used but progressively tax free earnings (pension) proportion increased But lets not forget the other easy option - Netwealth being ‘naturally segregated’ 46 Segregation dead – what next Planning beyond 2020
- 47. | netwealth Some suggestthat I can set up a reserve to ensure that I do not exceed my transfer balance cap (or total super balance) • We are currently monitoring the use of reserves • Whilst the use of reserves by SMSF is not prohibited, we consider only limited circumstances warrant reserves – Use of reserves beyond these circumstances suggest intention to circumvent new rules – Further guidance expected to be issued Where my SMSF uses unsegregated method for tax purposes, can I segregate assets for investment return? • The change limiting SMSF to using segregated method is only for the purpose of claiming ECPI i.e. tax purposes • Though SMSF is required to use proportional method for ECPI, trustees can decide which assets support pension accounts • In essence, returns on segregated assets would continue to be allocated to respective pension accounts – Allocation of any tax would be done proportionately 47 Reserving and streaming of earnings ATO’s views on reserving and earnings streaming Planning beyond 2020
- 48. | netwealth Details • Johnand Betty have a SMSF. John in pension mode, has a very high risk appetite and has invested in real property. At 1 July 2017, it was valued at $1.6m but by 30 June 2018 has increased to $3.2m paying $250k p.a. in rent. Betty is very conservative and has $1m invested in cash at 2% p.a. earning $20k p.a. • From 1 July 2017, the fund can no longer segregate assets when calculating ECPI • John’s pension a/c forms 61.5% of the fund • Normal strategy would be to treat as pooled assets and allocate total fund earnings on a 61.5/38.5 basis Questions • Is this fair and reasonable? • Should Betty benefit from sharing in John’s greater risk appetite? • Is there a case to segregate the property investment and its income to John and bank interest to Betty? • Does it make a difference? 48 Case study – streaming earnings to best effect Planning beyond 2020
- 49. | netwealth49 Case study– streaming earnings to best effect Planning beyond 2020 1 July 17 30 June 18 Accum. Pension Total Revaluation Accum. Pension Total Streamed proportion John $0.0m $1.6m $1.6m $1.6m $0.0m $3.2m $3.2m 77.2% Betty $1.0m $0.0m $1.0m $0.0m $1.0m $0.0m $1.0m 22.8% Total $1.0m $1.6m $2.6m $1.6m $1.0m $3.2m $4.2m 100% Assumption: Property value increases by $1.6m in first year and remains constant thereafter. 1 July 17 30 June 18 Accum. Pension Total Revaluation Accum. Pension Total Pooled proportion John $0.0m $1.6m $1.6m $0.984m $0.0 $2.584m $2.584m 61.5% Betty $1.0m $0.0m $1.0m $0.616m $1.616m $0.0m $1.616m 38.5% Total $1.0m $1.6m $2.6m $1.6m $1.616m $2.584m $4.2m 100% Pooled position Streamed position
- 50. | netwealth50 Case study– streaming earnings to best effect Pooled proportion Streamed proportion Earnings p.a. John 61.5% 77.2% $250k Betty 38.5% 22.8% $20k Total 100% 100% $270k Assumptions: Constant $270,000 combined earnings throughout the period Year John’s % = ECPI Betty’s proportion Taxable earnings Tax 1 61.5% 38.5% $103,846 $15,577 2 61.5% 38.5% $103,846 $15,577 3 61.5% 38.5% $103,846 $15,577 4 61.5% 38.5% $103,846 $15,577 5 61.5% 38.5% $103,846 $15,577 6 61.5% 38.5% $103,846 $15,577 7 61.5% 38.5% $103,846 $15,577 8 61.5% 38.5% $103,846 $15,577 9 61.5% 38.5% $103,846 $15,577 10 61.5% 38.5% $103,846 $15,577 $155,770 Year John’s % = ECPI Betty’s proportion Taxable earnings Tax 1 77.2% 22.8% $61,611 $9,242 2 78.1% 21.9% $59,241 $8,886 3 78.8% 21.2% $57,126 $8,569 4 79.5% 20.5% $55,227 $8,284 5 80.2% 19.8% $53,514 $8,027 6 80.8% 19.2% $51,959 $7,794 7 81.3% 18.7% $50,542 $7,581 8 81.8% 18.2% $49,245 $7,387 9 82.2% 17.8% $48,054 $7,208 10 82.6% 17.4% $46,957 $7,043 $80,021 Option 1 – Pooled strategy Planning beyond 2020 Option 2 – Streamed earnings strategy
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- 52. | netwealth The crystalball Beyond 2020 Planning beyond 202052
- 53. | netwealth Pure crystalball gazing, highly speculative but we can never be too ready • As and when it happens, may be too late • There may be some grandfathering of rules but as we know not necessary applying Looking into the beyond 2020 crystal ball • Further restrictions on contributions – Although on the plus side, a further increase in SG • Personal assets may no longer be able to be contributed in specie • A tax on the end benefits • An increased tax on the earnings • Requirement to purchase lifetime income streams (only a certain portion) • Further increase in preservation age • Tightening to reduce estate planning opportunities Work with current rules (and ever-changing rules) • Bearing in mind potential speculative changes and be prepared as much as possible • Rules may not all change at the same time, work with what we know, we strategize as we go 53 Beyond 2020 The crystal ball Planning beyond 2020
- 54. | netwealth Increased taxon lump sums and pensions (currently tax free for over 60) • Tax free part will always be tax free • Could be just a small amount of tax payable eg 10% Increase the tax free age from Age 60 to 65 (or even 70?) Tightening of rules to discourage estate planning • A death tax (increase as above) in disguise – tax free part will always be tax free • All super balance on meeting condition of release must be in pension (and subject to transfer balance cap) 54 Predictions Prediction 1: A tax on the end benefits Planning beyond 2020
- 55. | netwealth If thereis going to be a tax on lump sums and pensions, likely to increase tax free threshold for each individual e.g. to $400k • Super split and equalisation with spouse to reduce impact Recycle and re-contribution to increase tax free part (including re-contributing to spouse) Lock in tax free part by commencing a pension (including a TTR) • Also by starting pension within cap and growing in pension phase Not every single dollar needs to be in super e.g. $1m could be outside if not too tax ineffective Effective estate planning • Take out of system day before death! • If not, might have to give to kids a bit earlier 55 Prediction 1: A tax on the end benefits Getting ready for them Planning beyond 2020
- 56. | netwealth Increased taxon super fund earnings • Could be just a small increase e.g. 5% • Can also apply on contributions (not NCC) The increase could apply to earnings in both accumulation and pension phase • But not necessarily at the same rate of increase • Would make super less tax effective 56 Predictions Prediction 2: An increased tax on earnings Planning beyond 2020
- 57. | netwealth We mayneed to think ‘outside super’ - some clients may benefit by having some funds outside super • Where their individual tax free threshold not been fully utilized – Even more planning opportunities with couples – Further assisted by other investment structure e.g. family trusts • Particularly if end benefit on death taxable if paid to non dependants Realising capital gain as we go Taking CGT relief where appropriate (like those available last year) Please at least aim to die in pension phase! 57 Prediction 2: An increased tax on earnings Getting ready for them Planning beyond 2020
- 58. | netwealth Reduce furtherthe level of contributions allowable A plus - increasing of SG to at least 15%, might take a couple of decades Disallowing the in-specie of personal assets into super 58 Predictions Prediction 3: Further restriction on contributions Planning beyond 2020
- 59. | netwealth Max thecurrent limits as we go • Both CC and NCC where possible • Particularly CC where 10% rule no longer a hindrance Small business CGT contributions, spouse contributions, downsizing contributions Encourage in-specie contributions of personal assets (listed shares primarily) now whenever we can • Especially if a tax deduction required in the year • A good way to crystallise capital losses if needed • Also in conjunction with 5 year plan on CC carry forward 59 Prediction 3: Further restriction on contributions Getting ready for them Planning beyond 2020
- 60. | netwealth Aligning withincrease in Centrelink Age Pension (currently 65) to Age 67 by 1 July 23 Proposal to increase Centrelink Age pension Age to 70 by 1 July 35 Preservation age currently approaching Age 60 • Maintaining a 5 year differential could see preservation age increasing to age 65 60 Predictions Prediction 4: Increase in preservation age Planning beyond 2020
- 61. | netwealth Any amountwhich is unpreserved should remain unpreserved • Remember that an amount unpreserved (it is a figure, not proportion) at a point in time • Any new contributions and earnings will remain preserved until next meet another condition of release Re-contribution can cause the amount contributed to be preserved Where client meets a condition of release now, make request for the amount to be unpreserved • Hit preservation age and declare to be retired – Even only at that point in time and subsequently may end up back in workforce • After Age 60, employment arrangement terminate and release all super (from all funds) at that point in time 61 Prediction 4: Increase in preservation age Getting ready for them Planning beyond 2020
- 62. | netwealth At leasta part of super balance (could be up to 50%) must be taken as lifetime income stream – 50/50 rule The remaining amount could either be in accumulation or account based pension or a combination 62 Predictions Prediction 5: Compulsory purchase of lifetime income streams Planning beyond 2020
- 63. | netwealth May notsuit all clients to have to purchase lifetime income streams • Can create similar problems to those at the moment with TAPs and not able to get out If it is not too tax ineffective for clients to have some funds outside super e.g. $1m out of super • This reduces impact of requirement to purchase an inflexible income stream Could be some grandfathering rules applying • For example those already in account based pensions allowed to keep outside 50/50 rule perhaps 63 Prediction 5: Compulsory purchase of lifetime income streams Getting ready for them Planning beyond 2020
- 64.
- 65. Contact Thank you Keat Chew Headof Technical Services 1800 888 223 keat@netwealth.com.au Nigel Smith Technical Services Consultant 1800 888 223 nigel@netwealth.com.au
Editor's Notes
- #2 Thank you for joining us, it's fantastic to see you all here. We're very excited to have two great speakers with us this morning. We have our own Head of Technical Services Keat Chew sharing new technical strategies as a result of the super changes and Tim Noonan direct from the US (Jonita Boothman) from Russell Investments discussing how to future-proof your business. Before we begin I firstly would like to thank you for your ongoing support. The past six months have been very exciting for Netwealth, with our listing on the ASX in November and the positive reception from the market that followed. It’s the start of our next chapter as a business – with our focus squarely on advisers as they continue to deliver high standards of financial advice to their clients. On the back of feedback from you – the financial advice network - we have recently introduced a number of innovations to our platform:
- #4 Last month we launched a mobile app for use by both you and your clients. This gives you the ability to access key information and manage clients on the go.
- #5 This new feature is something of a game-changer: We launched an enhancement to SMART - our Model portfolio and Rebalancing technology to allow you to automatically generate a Record Of Advice for one or many of your clients when a model is rebalanced. The ROA can then be simply approved online with the click of a button, removing the need for signatures. We believe this will help remove a lot of friction from the client experience, removing a pain point and allowing you to focus on more important matters such as a clients goals and objectives.
- #6 Coming very soon is our Pay Anyone functionality. With this your clients can log onto the Netwealth platform and provide authorisation for your to make payments to any bank account on their behalf.
- #7 Lastly, we have partnered with one of the world’s most recognised ETF managers to create a low-cost managed account solution accessible to all. Powered by Blackrock, there will be a number of managed account models made up of ETF's available on our low-cost Core accounts. These managed accounts are a terrific option for your low-balanced clients or clients looking to access the benefits of both ETFs and managed accounts.
- #8 Before we begin there are a couple of housekeeping items that you need to be aware of: There are 3 CPD points available for attending this event. These will be provided to you once you complete the post event survey which you will receive in an email after the event. Please make sure your name was ticked off at the registration desk. If you would like to post about the event on social, please use the hashtag #planningbeyond2020 To access any of the resources from today plus more articles, please visit the URL on the back of your lanyard - www.netwealth.com.au/2020 There will be a 10-minute break after the first presentation where we will service tea and coffee. Finally, we would appreciate it if you could please turn off your phones or put them on silent.
- #9 Now it time to kick off the show. I am delighted to introduce Keat to the stage. As the Head of Technical Services with Netwealth, Keat is responsible for the delivery of financial planning technical advice to Netwealth's network of advisers. Let's thank Keat and give him a warm welcome.
- #66 Thank you Keat! It is really interesting that although there were plenty of legislative changes last year, as result there are plenty of planning opportunities that have arisen for advisers. And with the inevitable future changes, there are likely to be more opportunities for us. Let's thank Keat again. We will now take a short break, so we would greatly appreciate if you could be back in your seats in 10 minutes for Tim's (Jonita's) presentation on what it takes to be a winning adviser in the new world. Russell Intro Tim We are very pleased to have Tim Noonan from Russell Investments join us direct from the USA. Tim is the Managing Director of Capital Market Insights at Russell and we are extremely fortunate to have him here today so please join me in welcoming him. Jonita We are very pleased to have Jonita Boothman from Russell Investments join us present to you today. Jonita is Russell Investments’ National Key Account Manager and we are sure you will enjoy her presentation. Please join me in welcoming her.