Looking through our clients’ DIY superannuation portfolios, you can see that the Labor Party’s proposed tax changes will really mean that you need to organize your tax affairs to avoid losing your excess franking credits.
As previously mentioned, as of June 2018 there were 596,225 SMSFs with 1,118,650 members managing $750 Billion. The average assets per SMSF member was $652,000. As an example, one of our typical portfolios has a value of $840,000.
The annual cash dividend on this portfolio is $39,000 plus the client receives $13,500 in franking credit rebates, for a total joint income of $52,500, or about a 6.25% return. Under the Labor Party’s proposed tax changes, this couple’s income will fall from $52,500 to $39,000 unless the fund has at least one pensioner or allowance recipient.
In this case, the investor receives $100 per fortnight allowance, so therefore they avoid the loss of $13,500 in annual franking credits. It’s a bit sudden death, if you receive any allowance, however small, you will receive the full benefit of $13,500 franking credit rebate or you get nothing.
There is another sudden death threshold in Labor’s tax policy, the division 293 tax. If your income is above $250,000, then your superannuation contributions are taxed at 30% rather than 15%. Labor is planning to reduce this threshold to $200,000. For example, your 9.5% superannuation contributions on $200,000 is $19,000. So, again, if your income is just under $200,000, the contributions tax is 15% ($2,850) but if it is $1 above, the contributions tax is 30% ($5,700). This $200,000 threshold is not being inflation indexed by the Government (as they would normally do), so bracket creep will push more individuals into this higher tax.
A One-off capital gain could also push you over the threshold for that tax year. If you make $100,000 in Capital Gains, normally $50,000 is added to your taxable income (ie 50% discount). With Capital Gains discount being lowered to 25%, you will be paying more marginal tax. In addition, the higher income of $75,000 may push you over the division 293 threshold. Also, a rental property loss will not lower your income in assessing the tax.
Additionally, Labor is lowering the non-concessional contributions cap from $100,000 to $75,000 and will not allow employees to make personal contribution to super unless it is in a structured salary sacrifice arrangement.
Any tiny mistake in your tax affairs may become very costly.