From 1 July, 2017 some of the most significant changes to superannuation for many years will come into effect.
If you have superannuation, particularly in Self Managed Superannuation Funds (SMSF), you need to make sure you understand how the changes will affect you. You may need to make plans now before 1 July, to make sure your superannuation complies.
Firstly let me make it clear that superannuation is still a major tool to be used in retirement, succession and taxation planning.
The taxation benefits of superannuation are so great that the changes in law have been made to slow down the movement of funds into superannuation.
Despite the changes, superannuation is still an incredibly attractive taxation structure to be using as part of your holistic planning.
If you are not, you should be asking your advisor if it is suitable for you.
Transfer balance cap
If you are over 60 and have been accessing your superannuation in the form of a pension, the income earned on the investments held inside super has been tax free to date. This includes any realised capital gains.
You can’t get any better than tax free income. Many superannuation ‘pensioners’ have managed to build up significant superannuation benefits to take advantage of this tax free income, often in the millions.
As such, the government has decided to put in place a cap on the amount a pensioner can transfer into a Retirement Phase Pension.
This amount is initially set at $1.6 million per person. A retired couple could together have $3.2 million.
You can still have more than the $1.6 million in super. However, any excess over this will need to stay in “accumulation phase” where it’s earnings will be taxed at 15 per cent. Subsequent earnings on the Retirement Phase Pension account are not restricted and the balance could grow beyond the $1.6 million cap without affecting it.
Transition to Retirement income Streams (TRIS’s)
It has been common place for those who are over 60, but not yet retired to access their super benefits in the form of a TRIS.
This resulted in income earned on the super benefits being tax free. Contributions could still be made to super tax as a tax deduction.
There was a lot of speculation these pensions would be abolished. Instead, the income generated by the TRIS capital will be taxed at 15% instead of being tax free.
The balance of the TRIS account will not count towards the Transfer Balance Cap (TBC). Any readers receiving TRISs need to seek advice to determine if they are still relevant for them.
What do you need to do?
Individuals in receipt of Account Based Pensions at June 30, 2017 with balances greater than $1.6 million will need to “roll back” the excess to accumulation or withdraw that amount by 30 June.
Each individual’s circumstances will determine which is the best strategy. If your individual marginal tax rate is over 15 per cent leaving your excess benefits in super in accumulation where the income earned will be taxed at 15 per cent may be the most appropriate outcome. Such a “roll back” must happen no later than June 30, 2017.
In the case of a SMSF no monies will actually change hands. However, appropriate documentation will be required. With non SMSF’s a physical movement of money will be required.
If you are lucky enough to have more than the TBC of $1.6 million in a retirement pension and therefore have moved excess funds to accumulation phase, going forward you may consider only drawing the minimum pension from your retirement pension and top this up with lump sum withdrawals from accumulation.
Transitional CGT Relief
Allows for a resetting of the capital gains tax cost base to the market value of assets used to pay pensions.
The decision to do so needs to be made by the date of lodgement of the 2017 tax return for the superfund.
Indexation
The TBC is initially $1.6 million. It will be indexed over time in line with CPI in $100,000 increments.
As such, the younger you are the higher your TBC may be once you are eligible to start a retirement pension.
What if you do nothing?
If you are receiving a retirement pension and your benefits are greater than $1.6 million at June 30 and you do nothing, Excess Transfer Balance Tax of 15 per cent (first breach) or 30 per cent (subsequent breaches) will apply.
Concessional Contributions Cap to reduce
Currently tax deductible contributions of $30,000 or $35,000 (if over 49) can be made into superannuation per taxpayer prior to June 30, 2017. After that date the cap will reduce to $25,000 for all individuals.
Non-Concessional Contributions Cap (NCC) reducing
It follows then that the NCC cap is also reducing from $180,000 per annum to $100,000. Strategies to consider before 30 June, 2017 are:
- Maximise your concessional contributions;
- Maximise your Non-Concessional Contributions and , if able, take advantage of the bring forward rule to maximise what you can get into super before the new rules commence;
- Consider if there is an ability to withdraw super from an individual who will be over the cap and recontribute the funds on behalf of a spouse who is under the cap;
- Consider impact on estate planning. Both members of a couple may be under the cap however on the death of one, the survivor may exceed the cap if they receive the deceased’s benefits.
Disclaimer:
- Information provided in this column is of a general nature. It does not take into account your personal financial circumstances. Tailored professional advice must be sought before acting on any information contained. Flor-Hanly is a Corporate Authorised Representative No. 124 3967 of SMSF Advisers Network Pty Ltd (ABN 64 155 907 681) AFSL No. 430062. SMSF Advisers Network Pty Ltd is a fully owned subsidiary of the NTAA.
