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.

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.

  • 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
    a) Commutations of superannuation pensions,
    b) Structured settled payments contributed to superannuation, and
    c) Certain payments arising from family law splits, fraudulent or void transactions
  • Reversionary pensions will count towards the cap ($1.6 million) but members will have a 12 month period from the date of death to deal with reversionary pension before a credit arises and counts towards their cap.

Going over the $1.6 million transfer balance cap will require the excess amounts to be removed from the retirement phase which will likely require the commutation of the relevant pension which has exceeded the cap.
Defined benefit pensions and certain pre-2007 superannuation pensions have special rules for the transfer balance cap recognising their non-commutable nature.

 

What if I have more than $1.6 million in super?

Any amounts in excess of a member’s personal transfer balance cap can continue to be maintained in their “accumulation” account in their 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.

Approaching 1 July 2017, you may wish to structure your asset holdings to be in a position to optimise the $1.6 million transfer balance cap, especially between spouses.

 

Capital Gains Tax Implications

Where an asset supporting an income stream is moved the accumulation phase between 9 November 2016 (when legislation was introduced) and 30 June 2017 to comply with the new transfer balance cap, a complying super fund may make an “irrevocable election” to reset the cost base of this asset (reset to its market value at that time).

The choice is made on an asset by asset basis. To be eligible for this CGT relief, the asset must be held by the fund throughout the above period.

Upon future disposal tax may be payable on accrued capital gains after this date. The election must be made before the fund’s 2016-17 Income Tax Return is required to be lodged. If the cost base is reset, the 12 month eligibility period for the CGT discount is also reset and the indexed cost base method is no longer available.

 

Segregated Current Pension Assets

Where a segregated current pension asset ceases to be segregated (become subject to the proportionate method or is re-allocated to the segregated non-current asset pool) between 9/11/16 and 01/07/17 the super fund may reset the cost base of this asset to its current market value at that time. To be eligible for this CGT relief, the asset must be segregated current pension asset as at 9 November 2016.

 

Unsegregated Pension Assets

Where a fund holds an asset and uses the unsegregated method for that asset throughout 9/11/16 to 01/07/17, the fund may choose to reset the cost base of this asset as at 30/06/2017.

 

How can we help?

If you are concerned that the Government’s changes to the transfer balance cap will affect you from 1 July 2017, please feel free to give us a call to arrange a time to meet so that we can discuss your particular requirements in more detail.

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David Watkins, has been providing advice to clients since 1987. He is a Certified Financial Planner, a member of the Financial Planning Association (FPA), and Superannuation Professionals Association of Australia (SPAA).Google Plus

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