SMSF changes on 1st July 2017

Okay - trying to get my head around the new changes that come into effect on 1st July 2017. My SMSF expert accountant tried to explain them to me, but my eyes tend to glaze over after 30 seconds.

The reason I'm asking is our SMSF, plus PAYE super, is fast approaching the $1.6mil "cut off" balance - and - once retired in 3-ish years will be around $2mil throw off around $100,000+ in income.

From what I can understand:

- maximum pre-tax contributions will reduce to $25,000 for everyone
- maximum post-tax contributions will reduce to $100,000 for everyone
- can make a maximum lump sum post-tax contribution up to three years worth of contributions (i, $300,000) in one hit.

Now, this is where I get confused and please tell me if I've got this right or wrong

If your total super (incl SMSF) has a balance of $1.6mil (which is not a lot in this day and age) you cannot transfer more than $1.6mil anywhere - even to another super fund or take it as an income stream or withdraw it to pay out debt - which is kinda fair enough as it prevents people from drawing million out to gift to family, or pay out a big mortgage, and going on the pension.

Once your total super reaches a balance of $1.6mil, you get no tax concession for any contributions made thereafter ... I am assuming this means "external" (ie, PAYE salary) contributions, not earnings on assets held within the super funds and SMSF, and reinvested in the SMSF.

Income from assets held within the SMSF will be taxed at 15% if you are undertaking a transition to retirement, but remain at nil tax after full retirement (at the government approved age).

I gather, if you pass away and your SMSF passes to your beneficiaries (ie spouse) then the tax-free benefits on the income stream are lost, even after you retire.

Is there anything else I need to understand?

 

If you have more than $1,600,000 and are retired, the income on the balance over $1,600,000 is taxed at 15%

 

Lizzie

We have a 4 page infographic on this I can send to you if you would like

Ross

 

so - if the super fund is at $2mil ... you'd have to calculate how much of the income is from the $400k over the limit and pay 15% on that $400k's worth of income?

ie - say - $2mil balance - income $150,000 - so $120,000 would be tax free - and you'd have to pay 15% on $30,000 regardless of whether it's being used as an income stream or reinvested?

So confusing if you're older and not financially savvy. Are they trying to discourage people from being self funded?

 

Hit the nail on the head but paying 15% on anything above the $1.6m - still a hefty discount unless returns are really poor. If you only achieve 2% on a $2m balance ie $40k you have a $32k threshold, if you have a 10% return how get $160k tax free if you choose to draw it.

Also note that it is a per member limit not total for the fund.

 

Oh - so not quite as savage as first appears ... the wording of the documentation that came out from the ATO was so confusing.

And ... as there are the two of us in the SMSF, out limit would be $3.2mil? I will confirm that with my SMSF accountant but do not doubt you. Our immediate thought was to split the SMSF into two - one each - so that makes sense

 

My tip is that if your eyes glaze over the advice is not understood. PC isnt a substitute for financial advice as its mostly unqualified and NONE is personal advice. Thus errors will occur if you use or believe it.

Get additional advice that IS understood. Splitting the SMSF into two ?NO ....Wrong Wrong Wrong. It wont change a thing. Likely will trigger tax and additional problems.

Depending on your age and other issues $1.6m is NOT a maximum limit. It may be for now. For each member as a tax free amount. BUTonce you hit $1.6m you cant increase the tax free amounts but you can leave the excess where it is. That isnt a bad thing.

One of the most critical matters for funds that do exceed limits is strategy. There is a CGT option to choose which can protect some capital gains that wont affect the $1.6m limit. All these issues are member by member specific advice. We are currently working through each members issues and finding opportunities that may change after the budget.

 

I do hope your expert accountant is a licensed financial adviser or the guidance is a unqualified and unlicensed advice. Does your Doctor do eye tests too...Not greatly different.

 

I don't understand - which is why I put it here, and will then go back to the accountant and try and marry it all up.

What do you mean, depending on age, $1.6mil isn't the limit ... all the paperwork I've read say that is the limit (full stop).

And I don't understand the CGT aspect. If the funds are within the super fund then how is it possible to move them around to "protect" some of the value without decreasing the value? What is the point of moving anything outside the SMSF as the tax rate on income is even higher then ... and the purpose is to make an income ... unless you convert it within the SMSF to something like gold where there is no income or tax until the asset is sold?

However, if it's $1.6mil per member - and there are two of us - we'll be right for a goodly few years yet and the rules will have been changed again by then.

 

Why are you asking financial information of an accountant ?

I just gave advice to two people that they could do far more than $1.6m in super. Each. There are exceptions. However it may be the tax free pension cap. Their current assets exceed the cap so they have away to "bank" the CGT profits at 30 June 2017 tax fee even if they exceed caps. They can add more than $1.6m each to super but it wont be tax free. Just concessionally taxed. That may be a great benefit anyway.

There are threo basic rules
1. Max tax free is $1.6m per member at 30 June 2017 and
2. However members at 30 JUne 2017 can each have accounts with more than $1.6m each BUT must split these between tax free and taxable earnings
3. Aftre 30 June 2017 members cant create a member balance of more than $1.6m in most cases. Exceeding $1.6m is only a pre 30 June issue in some cases. The small business concessions can be an exception !!

Taxable accumulation accounts can still be a generous concession v's taking the money out of super

 

Because he's a SMSF expert - and that's all he does. Really knows his stuff - but like most experts - doesn't necessarily explain it in plain layman english, in words of one syllable or less.

Super thanks for you help. It explained a few things that I can now go back and clarify with him

 

You are paying for the information. If you don't understand, ask for the information to be given again, and again ... in plain English.

Don't leave until you fully understand.

My understanding is that it is $1.6 mil per person. Surely a SMSF with two members will have to allocate money correctly to each contributing member? Not just lump it all together and divide by 2?

At the end of the day, you are the one signing the returns so any repercussions come back to you.
Marg

 

@Kat - you should have the infographic. Let me know if it did not come through.

 

Hi Ross, thanks for that. I haven't received it in my end, but I'll keep a look out.

 

pls send to me too

 

Done!

 

@hobo - you should have it now.

 

I would like one please

On a related note:
I need to know more about this $540 000 last chance maximum contribution, very curious what it can mean in tax benefits!!

 

@Ross Forrester, I would appreciate it if you could forward a copy of the infographic.

Thanks

 

We are in the process of getting our heads around these changes.

@Ross Forrester, could you also send me your 4 page infographic. Thanking you in anticipation.