The changes to superannuation announced in the 2016 Federal Budget have been passed by Parliament. Amongst those changes was the introduction of a $1.6 million transfer balance cap which limits the tax exemption for assets funding superannuation pensions.
What are the key points?
This new limit on superannuation will apply from 1 July 2017 and creates additional responsibilities for SMSF trustees. The main issues you need to be aware of are:
- All super fund members who are receiving a pension on 1 July 2017 will have a transfer balance cap of $1.6 million created at that time.
- Those not receiving a superannuation pension on 1 July 2017, but will in the near future, their transfer balance cap will be created when they first receive a superannuation pension.
- The amount of tax-exempt assets available to fund a super pension under the cap is determined by a system of debits and credits which are recorded in a transfer balance account.
How the ‘Debits’ and ‘Credits’ system will work:
Credits are created by:
- The value of super assets supporting income streams on 30 June 2017,
- Starting new superannuation income streams from 1 July 2017 onwards,
- The value of reversionary income streams where an individual becomes entitled to them, and
- Notional earnings accruing to excess transfer balance amounts.
Debits are created by:
- Commutations of superannuation pensions,
- Structured settle payments contributed to superannuation, and
- Certain payments arising from family law splits, fraudulent or void transactions.
How are ‘Reversionary Pensions’ treated?
Reversionary pensions will count towards the cap, but members will have a 12 month period from the date of death to deal with the reversionary pension before a credit arises and counts towards their cap.
What if I exceed the $1.6m cap?
Going over the $1.6 million transfer balance cap will require the excess amounts to be removed from the retirement phase. You effectively have two options:
- Commute the excess pension balance back into an accumulation account (investment earnings will be subject to 15 per cent tax), or
- Withdraw the amount that is above $1.6 million from the super fund.
Any amounts in excess of a member’s personal transfer balance cap can continue to be maintained in their accumulation account in their super fund. This means if you have more than $1.6 million in super you can maintain up to $1.6 million in pension phase and retain any additional balance in accumulation phase.
Defined benefit pensions and certain pre-2007 superannuation pensions have special rules for the transfer balance cap recognising their non-commutable nature.
Approaching 1 July 2017 people may wish to structure their asset holdings to be in a position to optimise the $1.6 million transfer balance cap, especially between spouses.
Capital gains tax exemptions may apply
It is also important to know that there is transitional capital gains tax relief for superannuation assets that are affected by any changes you might need to make by 1 July 2017 to comply with the new rules. This relief may allow you to reset the cost base of your super fund assets to the market value as at 1 July 2017.
This capital gains relief will ensure that any capital gain accumulated on affected superannuation assets will be deferred to a later time when the asset is sold. However, this is an irrevocable election with complex and far reaching consequences that requires proper consideration.
How can we help?
If you are concerned that the Government’s changes to the Aged Pension are going to affect you, please feel free to give Jason McLaren a call on 0418 800 363. Jason is able to provide you with personalised financial advice through his Australian Financial Services License with Three Chairs Financial Services.
You can keep up to-date on all things Super by following us on Facebook.
The information contained in this article is general in nature and does not take into account your personal situation or objectives. You should not act on this information in any way before seeking professional advice.
