TTR changes the major challenge for advisers

Changes to Transition to Retirement (TTR) arrangements have emerged as the major challenge for financial planners resulting from last night's Budget.

Post-Budget analysis from most of the major financial services companies has pointed to the TTR changes as being a significant challenge with the likelihood being that clients will simply choose to opt out of such arrangements before the end of the next financial year.

The consensus around the consequences of the Budget announcement were reflected in the analysis provided by Perpetual Private, which said the ability to utilise superannuation as a tax minimisation vehicle would be reduced, especially for those individuals in the pre-retirement phase looking to aggressively build their wealth by utilising a combination of salary sacrifice and TTR income streams.

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"The removal of the tax-free earnings status for a client's TTR income stream will adversely affect those who are presently rebalancing their portfolio, or who were looking to otherwise change their asset mix in the near term," it said.

"As no detail has currently been provided on whether any capital gains tax relief will be available to affected clients, it appears likely that where a capital gain is crystallised from 1 July 2017, it will be taxed at 10 per cent.

The Perpetual Private analysis said that given there would be an alignment of the tax treatment of superannuation within the accumulation phase and TTR income streams from 1 July 2017, this would in all likelihood provide a disincentive for many existing clients with TTR income streams to maintain them after this date.

"Clients in this situation may elect to commute them back to accumulation phase where they don't require an income to meet their needs. Alternatively, they may choose to retire, at which time the superannuation interest ceases being a TTR and instead becomes a normal account-based pension which will receive a full taxation exemption on earnings," it said.

The analysis pointed out that clients below age 60 with room under their Low Rate Cap who maintained a TTR income stream beyond 1 July 2017 would be worse off because they would be taxed on their pension income at their prevailing marginal rate less a 15 per cent tax offset, compared to their former position where they received this income tax-free.

The Financial Planning Association (FPA) singled out the TTR changes as being a Budget negative, with chief executive, Dante De Gori, saying the abolition represented a "net negative to low and middle income earners".




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There are some technical errors here:

1. "capital gain is crystallised from 1 July 2017, it will be taxed at 10 per cent"

Correction - capital gains in superannuation is not taxed at 10% - actually it is taxed at 15%, but only 2/3 is taxed at that rate - and only after the asset has been held for 12 months qualifying it for that discount. There is only one tax rate inside superannuation (accumulation) and that is 15%. This is a common error for many advisers.

2. "The analysis pointed out that clients below age 60 with room under their Low Rate Cap who maintained a TTR income stream beyond 1 July 2017 would be worse off because they would be taxed on their pension income at their prevailing marginal rate less a 15 per cent tax offset, compared to their former position where they received this income tax-free."

Correction - For under 60's the income from a pension account was never tax free (except for the tax-free deductible amount). I think the author is referring to the fund earnings which were tax-free, but now will not be?

Perhaps a little technical knowledge needs to be sourced before sending technical articles to advisers.

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