After six months of discussion the revised superannuation rules have finally become law – now we are faced with the challenge of making them work. Unfortunately, any change in the superannuation rules feeds into the general public distrust of super, but it's important to look at the facts objectively and not get carried away by the hype.
Yes, a few people will find their tax breaks are going to be reduced, but for most people, little has changed. In fact, the ability for employees to claim a tax deduction for their own contributions from July next year is a brilliant initiative that will enable ordinary Australians to build wealth in a more tax-efficient manner — more about that another day.
![Any change to the super system feeds public distrust.](/web/20161204121625im_/http://www.theage.com.au/content/dam/images/g/r/f/8/h/r/image.related.articleLeadwide.620x349.gt1k3s.png/1480718005581.jpg)
But, human nature being what it is, there are some people who will see the changes as a threat, and without taking proper advice, will make major decisions which could have huge long-term financial costs.
Let's think about Bill's situation. He is a retired businessmen, aged 65, who is married and has built a self-managed super fund worth $6 million. A major asset of his fund is a quality commercial building worth $4 million, leased to secure tenants, and returning $350,000 a year clear. Because the fund is in pension mode the assets are held in a zero-tax environment and Bill and his wife are drawing a tax-free income.
From July 1 next year the most they will be allowed to have in the tax-free area is $1.6 million per member. As Bill and his wife have roughly equal balances in the fund, it means their maximum balance in pension mode will be $3.2 million, with the balance of $2.8 million to be cashed out or held in accumulation phase.
Bill is hot-headed, prone to making hasty decisions. He tells his wife that he is "sick of those money-grubbing politicians in Canberra trying to get their hands on his hard-earned cash", puts the property on the market, and when it sells withdraws the entire balance in superannuation tax-free before the rules change next year.
He is very proud that he has avoided any future capital gains tax bill on the property and finally exited the "crazy superannuation system". He doesn't realise that he has dumped at least $400,000 of income into the household, where it will be taxed at marginal rates. To make matters worse, he has lost any capital gain the building might achieve in the future.
But what if Bill remembered the importance of talking to experts, and discovered the situation is not nearly as bad as he has been painting it? He would learn that rollover relief is available, which means for capital gains tax purposes, the base cost of the building will be its value at June 30, 2017. He would also learn that there is no need to sell the building because the assets in the fund can be treated as "un-segregated", with an actuary doing the apportionment at June 30 each year.
By not panicking, Bill and his wife would be able to make an informed decision to stick with the status quo. So they would now hold $3.2 million of assets in a tax-free environment and the balance of $2.8 million in an environment where tax is just 15 per cent a year and capital gains tax 10 per cent. They would also get to retain the building and the income and future gain it may provide.
Even though the scenario described above is hypothetical, it is typical of what is happening around Australia right now. As always, the well-informed make the best of any changes — the ill-informed almost invariably take the wrong action and pay the penalty.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au