by Gemma Kovaloff, Rosenfeld Kant SMSF Division, ASIC Authorised Rep No: 0001250846

In this article, I provide a snapshot of changes that apply to members with a balance of more than $1.6m in an  Account Based Pension (Retirement Income Stream) and/or a Defined Benefit Pension, or any amount in a Transition to Retirement Income Stream (TRIS). I also outline the option of CGT relief available to funds that are affected by these changes.

If the changes apply to you, you will need advice on implementation as requirements vary from fund to fund and from member to member, depending on your current circumstances and priorities. Read on for summaries, tips and traps, including what you may need to do before 30 June 2017.

Superannuation & Self-Managed Superannuation Funds (SMSF)

Part 3 of 3 – Pensions

$1.6M Transfer Balance Cap (TBC)

Probably the most significant change to come into effect on 1 July 2017 is the introduction of the Transfer Balance Cap (TBC). This is the cap on the amount of capital an individual can transfer to an account based pension account. It places a limit on the amount of super earnings that are exempt from tax. The initial cap will be $1.6m for 2017/18 and will be subject to increments of $100K based on CPI.

Any excess above the $1.6m must either be transferred to an accumulation account or withdrawn from super. Otherwise an excess transfer balance tax will apply, except where the excess is due to a non-commutable defined benefit pension. This tax will be calculated on excess transfer earnings at the rate of 15% for the first breach, then 30% for subsequent breaches.

Each member will have a Transfer Balance Account which will keep track of the transactions that have an effect on the cap. These will include the value of pensions at 30 June 2017, new pension commencements, reversionary pensions, earnings on excess, commutation of pensions, family law splits, structured settlements and losses due to fraud and bankruptcy. Pension payments, investment gains and losses don’t affect a member’s cap.

Tips

    • If you have more than $1.6m in your account based pensions (retirement income streams) you can leave the excess in an accumulation account in your existing or another superannuation fund. If your existing fund doesn’t allow an accumulation account, the excess can rolled over.If you have an SMSF, the excess can be transferred into an accumulation account in the same SMSF provided the fund’s trust deed allows this. If not, the trust deed can be varied.

    • The ATO is allowing a 6-month, $100K grace period for compliance with the cap.

    • Once capital has been transferred to retirement phase, the value of the member’s account due to pension payments and earnings doesn’t affect the cap. That is, the account can exceed $1.6m and no penalties will apply.

    • There are no limits on the amounts that can be withdrawn from the accumulation account.

    • If you have multiple pension accounts you can elect which account to transfer from to your accumulation account.

    • It is important that all pension commutations and/or establishments are properly documented.

    • Reversionary pensions are still possible and provide the beneficiary extended time to sort out their affairs if an excess results.

    • An actuarial certificate will be used to calculate the value of exempt current pension assets. For an SMSF this is an automated process within all popular SMSF software.

Traps

    • Care needs to be taken when withdrawing funds from your fund to comply with the regulations as you may not be able to make re-contributions due to the contribution caps. If your existing fund doesn’t allow accumulation accounts, make sure the excess is rolled over to a new fund.

    • A fund is unable to use the segregated method to calculate exempt current pension income if a member has more than $1.6m in pension assets. The segregated method can still be used for investment purposes.

    • The cap is based on proportional indexation which means that when you commence a pension the % of cap used is assessed. This is taken into account as the cap is indexed so if you commence a pension with $1.6m you have used 100% of the cap. Therefore, when the cap increases to $1.7m you cannot access the additional $100K as you have already used 100% of your cap.

What to do before 30 June 2017:

  • Review your existing pensions and decide in which order any pensions will be rolled back.

  • Check your documentation for existing pensions;

  • Minute your intentions regarding any pension rollbacks and/or pension establishments.

  • Contact me if you have any questions. Phone (07) 9375 1200. Email gemma@roskant.com.au

Defined Benefit Income Cap

Defined benefit pensions, like account based pensions (retirement income streams) will count towards a member’s transfer balance cap. The amount included in the cap will be equal to the annual pension payment x 16.

Where a non-commutable defined benefit pension results in an excess, that is when annual payment is greater than $100K, there is no penalty on the excess. However, the excess amount will be taxed at the member’s marginal rates, depending on the taxed and tax-free elements.

Please contact me if you require more information. Phone (02) 9375 1200. Email gemma@roskant.com.au

Transition to Retirement Income Streams (TRIS)

From 1 July 2017, the tax exemption on earnings of assets supporting a Transition to Retirement Income Stream will be removed. Accordingly, the income will be taxed at 15%.

If you have an existing TRIS , you may be able to convert this to an account based pension if you have met a condition of release:

  1. Turning 65 years;

  2. Retiring from gainful employment; or

  3. Ceasing a form of gainful employment after turning 60 years.

Please contact me if you require more information. Phone (02) 9375 1200. Email gemma@roskant.com.au

Capital Gains Tax (CGT) Relief

The ATO recognises that complying with the new rule will decrease assets in the tax free retirement phase and will allow Capital Gain Tax relief to lock in capital gains/losses that have already accrued under the current rule.

The relief will be available if an SMSF has a TRIS or will commute an account based pension to comply with the $1.6m cap.

If a fund is eligible for relief they can elect to do so on a per asset basis. There are different methods – segregated or non-segregated – depending on the status of an asset in a pre-commencement period. Relief works by resetting the cost base of an asset and therefore realising gains/losses on the asset according to the 2016-2017 tax position.

Funds have until the day they lodge their 2016-2017 annual return (generally 15 May 2018) to make the election. Once an election is made it is irrevocable.

Whether to apply the CGT relief or not will depend on many factors such type of asset, current vs future % of exempt current pension income and growth potential. A downside to resetting the cost base is that a discount cannot be claimed on any gain for 12 months.

In light of these comprehensive changes, now is a very good time to review your overall super and SMSF situation and strategies. Further, please contact me to find out more about changes to the taxing of defined benefit pensions and implications for child pensions. It would be my pleasure to answer your questions and/or to arrange an appointment. Phone (02) 9375 1200. Email gemma@roskant.com.au

Superannuation & SMSF Series
1: Summary of key super changes | 2: Contributions caps, thresholds & Rules | 3: Pensions

Gemma Kovaloff is Senior Manager with Rosenfeld Kant SMSF Division, ASIC Authorised Rep No: 0001250846

The information (including taxation) contained within this article is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Rosenfeld Kant strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.