By Kimberlee Brown, SMSF Director, H&R Block SMSF Solutions

As you may be aware, radical changes to the superannuation law which were announced in the 2016 Federal Budget were passed by Parliament on 23 November 2016. Among the changes was legislation which will introduce a $1.6 million cap on the total amount of superannuation savings that can be transferred from a concessionally-taxed ‘accumulation account’ to a tax-free ‘retirement account’. Given that Superannuation tax concessions are intended to encourage people to save for their retirement, the government’s view is that they are not intended to provide people with the opportunity for tax minimization or for estate planning. As the earnings from retirement phase superannuation accounts are tax-free they are a very desirable investment choice for individuals. The rational for the change is that by limiting the amount that can be transferred into a tax-free retirement account, the superannuation system will be more fiscally sustainable and this will increase confidence that the settings are consistent with the objective of superannuation.

What is the $1.6 Million Transfer Balance Cap?

The $1.6 million transfer balance cap is a maximum threshold on the total amount of superannuation that can be transferred into a tax-free retirement account. This new limit on superannuation will apply from 1 July 2017 and creates additional responsibilities for SMSF trustees.

Mechanics & features

  • The transfer balance cap applies to the total amount of superannuation that has been transferred into the retirement phase. It does not matter how many accounts you hold these balances in.
  • You will be able to make multiple transfers into the retirement phase as long as you have available cap space.
  • Each individual with superannuation interests in the retirement phase has a personal transfer balance cap. The cap cannot be shared with any other person. To determine your position with respect to the transfer balance cap, you have a transfer balance account. This tracks the net amounts you have transferred to the retirement phase.
  • The transfer balance account works in a similar way to a bank account. Amounts you transfer to, or are otherwise entitled to receive, from the retirement phase give rise to a credit (increase) in your transfer balance account. Certain transfers out of the retirement phase give rise to a debit (decrease) in your transfer balance account.
  • The transfer balance cap will affect you if you are currently receiving a pension or annuity income stream that is close to or in excess of the cap, or start a retirement phase income stream after 1 July 2017.
  • The amount of the cap will start at $1.6 million, and will be indexed periodically in $100,000 increments in line with CPI. The amount of indexation you will be entitled to will be calculated proportionally based on the amount of your available cap space. For example, if an individual has previously used up 75 per cent of their cap they will have access to 25 per cent of the current (indexed) cap. If, at any time, you meet or exceed your cap, you will not be entitled to indexation.

Subsequent fluctuations in retirement accounts due to earnings growth or pension payments are not considered when calculating cap space. This means that

  • If you start a pension with $1.6 million and the value of that pension grows to $1.7 million, you will not exceed your cap
  • If you start a pension with $1.6 million and the value of that pension goes down over time as you use it to live on or you suffer losses, you can’t 'top up' your pension accounts. You will still be able to access other superannuation amounts you may hold in accumulation phase by taking these as a 'lump sum'.

The main issues you need to be aware of are:

  • All super fund members who are receiving an account based 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.
  • Transition to retirement income streams (TRIS) will not count towards your transfer balance cap as from 1 July 2017.
  • 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:
    • Commutations of superannuation pensions,
    • Structured settle payments contributed to superannuation, and
    • Certain payments arising from family law splits, fraudulent or void transactions.
  • 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.

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 recognizing their non-commutable nature. The transfer balance cap will also apply to future 'innovative' income stream products.

Although there is now a limit on the amount of assets you can transfer into a tax-free retirement phase account, this does not affect the amount of money that you can have in the accumulation phase of your fund. Any amounts in excess of your personal transfer balance cap can continue to be maintained in your SMSF’s accumulation. 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, where the earnings will be taxed at 15 per cent. Alternatively, the excess can be withdrawn from super altogether either as a pension payment or lump sum.

Consequences for breach?

Individuals who breach the cap will be required to remove the excess amount from the simple ABP and will be liable to pay penalty tax on the notional earnings attributable to the excess capital. Notional earnings compound daily (based on general interest charges) until the breach is rectified or an excess transfer balance determination is issued by the ATO.

Individuals who breach the cap will be required to remove the excess capital from their retirement phase account and will be liable to pay tax on the notional earnings attributable to the excess capital. The amount removed from the retirement phase can be transferred into an accumulation account, where the earnings will be concessionally taxed at 15 per cent, or withdrawn from superannuation.

Those individuals already in retirement as at 1 July 2017 with balances in excess of $1.6 million will need to either:

  • transfer the excess back into an accumulation superannuation account; or
  • withdraw the excess amount from their superannuation.

Transitional arrangements will apply for existing account holders.

Individuals can also apply to the Commissioner of Taxation to replenish their transfer balance cap space for anomalous situations that cause their retirement balance to be depleted, such as fraud, bankruptcy or family law splits.

Transitional arrangements for individuals with existing pensions at 1/7/2017

There will be no penalty tax applied if the individual is in breach of the pension cap by less than $100,000 (i.e. total pension balance is less than $1.7m) on 1/7/2017 and the breach is rectified within 6 months from 1/7/2017. If the individual fails to rectify the small breach within 6 months or is in breach of the pension by more than $100,000 on 1/7/2017, the individual will be subject to the normal penalty arrangements as follows: For a first breach, individuals will be subject to a 15%penalty tax on the notional earnings. After the first breach, a higher penalty tax rate of 30% will apply to any subsequent breaches.

CGT Relief

Temporary CGT relief will be provided for accumulated CGs on assets which would have been exempt but for the introduction of the $1.6m pension cap. 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. Where a fund moves an asset back to an accumulation account to comply with the introduction of the transfer balance cap before 1 July 2017, the fund will have the option of resetting that asset’s cost base to its current market value. The relief will ensure that CGT will not be applied to gains that accrued while the asset supported a retirement phase interest and will only be payable (on the sale of these assets after 1/7/2017) on the gains accrued from 1/7/2017. The relief only applies to assets acquired by the Fund prior to 9/11/2016 and continued to be held by the Fund until 30/6/2017. The choice needs to be made in the approved form before the 2016/17 fund tax return is lodged, and cannot be revoked.

Where an asset is already partially supporting an accumulation account, the fund will have a capital gains tax liability on the non-exempt proportion of the unrealized gains. The liability can be paid immediately or deferred until the asset is sold. This is a complex area of law that we encourage you to discuss with us in further detail.

How can H&R Block SMSF help?

If you are currently receiving a pension or annuity, you will need to speak to your superannuation providers about the likely value of your income stream as at 30 June 2017. Check how you can reduce the value of your income stream before 1 July 2017 to ensure you do not have an excess.

If you are concerned that the Government’s introduction of a Transfer Balance Cap will affect you from 1 July 2017, please feel free to give us a call so that we can review your circumstances and discuss your particular requirements in more detail. Specifically we can assist you with the following:

  • 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.
  • Assess the ongoing viability of account based pension or lump sum strategies currently utilised by your SMSF members. This may entail recommending new strategies.
  • Reviewing your SMSF asset structure to ascertain whether relief arrangements can be applied on capital gains tax assets supporting your existing account based pensions.

 

Important information

This content has been prepared by H&R Block Ltd ("H&R Block"), ABN 89064268 800.The information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, H&R Block, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

 

 

 

Talk to an H&R Block SMSF expert today

H&R Block is the expert on the full range of SMSF services including establishing a new self managed super fund, buying property with an SMSF and meeting annual compliance and tax obligations.

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Talk to an H&R Block SMSF expert today

H&R Block is the expert on the full range of SMSF services including establishing a new self managed super fund, buying property with an SMSF and meeting annual compliance and tax obligations.

Find out more