A Federal Election is looking more and more likely for May 2019, with a Labor victory on the cards.
The lead up to the election is an important opportunity to discuss with your SMSF clients what a Labor victory could mean for their retirement.
The primary Labor party policy causing concern is in relation to the removal of franking credits that place clients in a refund position.
It has been estimated by the SMSF Association that this policy would likely result in a 10 per cent reduction in retirement income for most SMSF members in retirement phase.
So, is there anything that your SMSF clients can be doing now?
In the lead up to the election, we strongly recommend you consider the following strategies in your discussions with SMSF clients:
1. Review of investments
This is especially relevant for SMSFs that hold a significant allocation to Australian shares and look at diversifying their portfolio to other income-yielding assets. Australian shares will still be appealing to SMSFs looking for income to fund pensions should the franking credit policy proceed, but diversification is important. By spreading an SMSF’s investments across different asset classes and markets offering different risks and returns, SMSFs can better position themselves for a secure retirement. SMSF trustees could also consider looking at holding their Australian share portfolio outside of their SMSF, to a fund that will be able to pass on the full franking credits to its members in retirement phase.
2. Adding adult children to an SMSF
This will increase the taxable income of the fund to better take advantage of the franking credits. It is vital that SMSF clients seek specialist advice in relation to this as needed, to ensure that any new members and trustee/s are suitable for the SMSF and prepared to act accordingly.
3. Geared investment strategy
With Labor proposing to ban new limited recourse borrowing, SMSF clients who have been considering a geared investment strategy should look at this sooner rather than later. Generally, any arrangements entered into before any policy changes, are grandfathered.
Consider maximizing contribution opportunities under the current rules. Labor has signaled if they are elected, they will look to:
- reduce non-concessional contributions from $100,000 to $75,000
- remove ability to carry forward unused concessional contributions
- reverse ability to contribute to superannuation and claim a tax deduction for doing so (personal deductible contributions)
5. Estate planning and SMSF exit strategies
SMSF members should consider this in light of the death benefit requirements, placing focus on documentation and advice provided. This has typically been an afterthought for SMSF clients in the past.
Clients are looking for leadership from their advisors
It is important to note that even if elected, there is no guarantee that the Labor’s proposed policies will go through.
With the current volatility with investment markets, clients are looking for advisors to be proactive and lead. Many of the above suggestions are recommended regardless of policy, as they form an integral part in effective retirement planning.