Get ready for new super contribution rules, SMSFs told

3 min read

Tim Boreham, Criterion columnist.
Published in The Australian 16 March 2017.

The nation’s 600,000 self-managed super funds have been urged to prepare themselves for tighter contribution rules that come into effect on July 1 — but the good news is they’re in a better position than other super investors to comply with the new requirements.

There’s a lot of work to be done, but self-managed funds are in the best place,’’ BT Financial Group head of financial literacy and advocacy Bryan Ashenden said.

Speaking on the sidelines of the Building Wealth seminar, Mr Ashenden said fund custodians needed to devise a plan to limit balances to avoid extra tax, especially in relation to the new $1.6 million cap on pension balances.

But unlike the situation with members of retail and industry funds, there is less likely to be a need to exit any particular investment.

Under a transition arrangement, for instance, any amounts moved from a pension to an accumulation balance are subject to capital gains tax relief. Self-managed funds also have more discretion over what assets this concession will apply to.

“It’s more a case of the accounting and the bookkeeping,” Mr Ashenden said.

“You don’t have to physically dispose of an asset to get to the right outcome.”

But Mr Ashenden said while the sector appeared well prepared for the changes, the $1.6m limit was creating confusion.

“It’s not a limit as to how much you can have in the super system overall,’’ he said.

“You could have money sitting in a retail fund or an industry fund, or you could be receiving a defined benefit pension.

“So make sure you know where all your super is.”

In another key measure, the government has also reduced the current $180,000 cap on annual after-tax contributions to $100,000, but investors are able to bring forward three years of contributions.

He said members should consider contributing extra after-tax contributions up the current annual limit of $540,000 (three years of contributions) before this cap drops to $300,000 after July 1.

Mr Ashenden told the seminar the pension cap highlighted the need for funds to include more growth stocks rather than yield plays.

With the dividend staples such as Telstra and the banks under pressure as interest rates rise, pension fund accumulations are more likely to come from capital gains.

“We’re hearing a lot of advisers starting to talk with their retiree clients about the need to hold growth stocks inside their retirement portfolios,” he said.

“If we have this new limitation on how much we can start a pension with, we want to make sure that we’ve got to focus on keeping that balance as high for as long as we can.

“Yield is not going to just do it on its own because we’re paying that out to a large extent, so we need growth.’’

While the Reserve Bank is reluctant to raise official rates, bond rates have been falling (and thus interest rates rising) in line with offshore trends.

“I don’t think you should be looking for growth in dividend-paying stocks,’’ said Alan Kohler, founder of the Constant Investor newsletter. “In fact if you’re looking for growth, you want companies that aren’t paying dividends at all.”

Mr Kohler said the climate of rising rates meant investors should be wary of locking in to long-term deposits even if the return currently appears attractive.

Conversely, now is the time for mortgage holders to consider at least partly fixing their loans. “This is the time to get some protection,’’ The Australian’s financial commentator Robert Gottliebsen said.

“Certainly (fix) 50 per cent (of the loan) and maybe I would be creeping up to 70 per cent.”

Mr Gottliebsen said while the chase for yield stocks was not necessarily over, previously unpopular growth stocks “will start to be seen as an attractive thing.”

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This information current as at 16/03/2017.

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