The New $1.6m Superannuation Pension Transfer Cap

OK its law now and after digesting the information AND the 70+ page Explanatory memorandum attached to the law Here is a breakdown of what the $1.6 limit means. Important : This is general information about a future tax change. SEEK PERSONAL FINANCIAL / TAX ADVICE BEFORE ACTING.

Lets start by correcting a misconception. The new law is NOT a limit on member balances held in super. A person can continue to hold more than $1.6m in super. However the full tax concessions which give "tax free" income to a pension member are limited by the $1.6m rule. Beyond the $1.6m the balance can be held in an accumulation account and subject to tax (15% on earnings, 10% on capital gains and possible tax on lump sums beyond the member tax free cap)
This is important. DO NOT WITHDRAW SUPER IF YOU THINK YOU EXCEED THE $1.6m WITHOUT FINANCIAL ADVICE. Taxed super in accumulation is still concessional. ie Earnings taxed between 10-15%.

Start date 1 July 2017

The tax refers to ""transfer balance caps"" and this counts a members existing PENSION account balances held in all super fund at 01 July 2017 and new pension commencements thereafter if they are eligible to create new pensions.

Q : My planner / we do this recontribution thing annually. We rollback from pension to accumulation and add new amounts so just one larger pension exists. How am I affected ?
A : Dont do this after 30 June 2017 without new FINANCIAL advice. (Accountants cannot give this advice unless they hold a AFSL AND give personal financial advice. An accountant with a limited licence cannot also give advice on this issue as it relates to a NEW pension which is a new product) On or after 01 July 2017 that is still permitted BUT its a bad idea to do it. It will consume your transfer balance cap and could lead to loss of tax free pension income. ie Joe has a $1.1m pension balance at 01 July 2017 and also has a $500K accumulation balance in another fund. He thinks he will consolidate these into one account by rolling back (commuting) the pension and starting one new pension of $1.6m. Joe CANNOT do this. The $1.1m counts to his cap. A new second pension of $500K is permitted. However once he ends the pension on the $1.1m it cannot be restarted.

Pension resets, commutations, reboots, restarts and refreshes (or any other name) will no longer work effectively and may do more harm than good under this new law.

Q : Can Joe add the $500K to the existing pension to circumvent this ?
A : No. Pension rules already do not permit increases. In Joe's case he should maintain two separate pension accounts. For compliance it is recommended Joe draw two pension payments regularly - One for each account that exceeds the minimum.

The $1.6m transfer cap will be indexed in 100,000 increments. However a word of warning. If a person utilises the $1.6m transfer cap either on 01 July 2017 or at any time thereafter they cannot access the indexation amounts. ie Joe in the example above would be unable to use the $100,000 increment if it occurred in say 2019.

Q : How does the cap work. Is it based on the fund or the member ? Perhaps I will split my super up ?
A : The cap is a personal member cap and applies to all of that members PENSION accounts with all funds. Significant complexity can be expected if a member has multiple funds. Errors will be avoided by consolidating to one fund in some cases IF able.

Q : What happens if my super balances exceed $1.6m prior to 30 June 2016. What should I do ?
Consider financial advice on the impact. Consider consolidating well in advance also. If the expected value of balances at 30 June 2016 exceeds $1.6m you may need to do one of two things.

A.Withdraw some super (not sensible IMO) or
B. Transfer some pension balances to accumulation prior to 30 June 2016
​

Q : If my excessive balance above $1.6m is then in accumulation, what impacts will occur ?
Your accumulation interest would be subject to 15% tax on earnings other than 12mth+ CGT events taxed at 10%. This is still concessional. Withdrawals from the accumulation account need review to determine the taxation impacts on lump sum withdrawals. If you have a SMSF or SAF, your fund will also lose the ability to use the segregated pension method and must use an certificate to finalise the fund tax return. This will likely add several hundred dollars to compliance costs as the data required for an actuarial certificate is detailed and complex and time consuming. The certificates range in price from $150 up to many hundreds of dollars.

Q : If I'm affected is it all bad news ?
A : No. A special CGT rule has been added to cater for affected funds. For an asset that supports a pension that is excessive a new CGT rule permits the fund to choose to deem a CGT event on 01 July 2017 which resets the costbase of the asset to its market value. This will reduce the potential impact of future CGT. However if the election is used the 12month CGT discount period restarts and only becomes available on or after 02 July 2018.

Q : Any other catches ?
A : I'm sure there will be more. A further issue that has been forgotten by many funds that use the pension strategy is that CGT income is proportional when a segregated asset method is unavailable. Prior to selling large value CGT assets advice should be obtained so CGT is minimised.
A : A range of strategies will no longer work. Transferring super from an industry fund pension to a SMSF or vice versa or even changing superfunds may pose a major concern for ALL taxpayers who receive pensions. Since pensions cant be transferred from one fund to another a pension account must be commuted to accumulation to be rolled over. Then a new pension commenced in the new fund. This will affect the $1.6m transfer caps. For example Dawn has $850K of pension balances in her industry fund on 01 Jly 2017. She decides to transfer her super to a SMSF. Dawn would be unable to commence a new $850K pension in her SMSF. Dawn had used $850K of her cap with the former fund and would have just $750K remaining cap. IMO this new law forces pension members to leave their super where it was on 30 June 2017 which is a daft position when the Govt seeks to encourage improved financial choices. The choice has been removed for many. For pension members thinking of SMSFs or changing funds they need to act well before 30 June

Q : I have a defined benefit scheme. I dont have an account balance and just have a right to a pension. I'm not affected am I ?
A : Yes. A different scheme operates for defined benefit members. Your pension receives a 10% tax offset. From 01 July 2017 that offset will be limited to $10,000pa representing a "cap"on the tax concessional treatment for up to $100K a year. For members of funded defined benefit schemes 50% of pension s will now be taxed at your marginal tax rate. Again a daft move now requiring many retirees to prepare tax returns.All defined benefit members should seek advice from their fund/s as early as possible.

Q : If I use the $1.6m transfer cap how will earnings impact on this ? Could I go over if I earn a decent return or make good capital gains ?
A: No. The "transfer cap"method is based on the amount that is in the pension account at 01 July 2017 and new pensions commenced thereafter. Earnings do not change the transfer cap.

Q : My pension balance at 01 July 2017 is $1.6m and through poor returns, pension drawings etc in 2019 my balance is just $1m. Does this help me ?
A : No. Your cap remains at $1.6m. You would be unable to commence any further pension. You also cannot utilise the indexation of the cap when it occurs.

Q : My wife and myself have reversionary pension. I'm concerned that if one of us dies it will change the account balance for the survivor and affect the cap. Am I right ?
A : Yes. There is a special rule for deceased PENSION balances which are reversionary. On death the reversionary pension will transfer to the spouse as a separate pension. They cannot be combined. You will have 12months to reduce the surviving pensioners account balances within the cap. Alternatives include transfer of some to accumulation OR withdrawal from the fund. This issue will open some limited estate planning opportunities and financial / tax advice would be strongly recommended. In some cases withdrawal may be sensible as it may assist to avoid future taxation of superannuation if death benefits for the surviving spouse's adult children.

Q : Can I transfer the tax free elements to accumulation if my balances are excessive. I think doing this will assist with paying future death benefits tax free to my kids.
A : I havent seen a answer to this yet. However like all super payments / transfers etc proportioning of elements is typically required.

Q : I have a SMSF . What other changes are required ?
A : The trust deed may need to be updated especially for those paying any pensions. Most SMSF deeds contain a repetition of the super rules. Therefore they will be incorrect and MUST be amended to change to the new rules. Shortform "permissive deeds" that avoid repetition of rules may not need to be updated but will require review. The respective deed provider may offer guidance on this. If the deed does mirror the pension and balance rules a pension commenced without changing the deed would NOT comply with the SIS Regulations and pose a serious tax concern.
A : The SMSF Deed and Product Disclosure Statement (PDS) must be updated and new pension documents that comply with the new rules acquired if a new member is added to the fund on or after 01 July 2017 or a new pension commences for any member.
A : Investment strategies may need to reflect issues around segregated assets for affected funds
A : A record of caps is going to become essential

 

Hi Paul,

Thanks very much for that. I have seem most of the above covered by various specialists in their articles but I still can't see where your post addresses my issue from the other thread:

What I was getting at is that the $1.6m transfer cap applies to the tax free "pension" so of course once that limit is reached no more can be transferred into the pension. Looking back I was not clear in that I was referring to "pension" balance. Unfortunately in my case this is also impacted by a small Gov't defined benefit pension which the 16 times multiplier gets applied to and the SMSF pension cap reduced accordingly.

But where does it state that one can NO longer make "concessional" contributions into the members "accumulation" account (provided they're under 65 and to 75 based on work test) once the accumulation balance reaches $1.6m or the member has a tax free pension operating which has reached the full cap? I fully understand that "non-concessional" contributions are no longer permitted once the member's "accumulation" or "pension" transfer balance reaches $1.6m but thought "concessional" contributions were still permitted? Of course any excess can never be transferred from accumulation to the pension account once the cap is reached but 15% (10% discounted CGT) tax with full access once preservation age is reached and retired this is still a great deal.

Hope I'm making sense.

It's highly likely I've missed something and of course I'm just an amateur. Have just set aside the 70 page explanatory memorandum for bedtime reading. The likes of Dunn and Butler are helpful as well.

Look forward to your reply.

I know you're a busy professional so your sharing of technical information is greatly appreciated.

Cheers
PS: This will be the first time ever I will be consulting a SMSF specialist to confirm strategies and seek advice prior to 1 July 2017. I expect this financial year to be a very profitable one for planners and SMSF specialists. These changes have created an absolute mess. Typical sledge-hammer approach.

 

Easy. Your above reply is way off track and riddled with errors.

1. The $1.6m cap doesnt apply to contributions at all...read on
2. The cap applies to a members pension balances so that UP TO $1.6m in pension is permitted across all that persons funds. You choose which.
3. Under this the CC and NCC caps will limit how much $ gets into the fund to commence pension/s OR accumulation. ie If you have blown CC and NCC then the ONLY other ways to get more super in your name is a reversionary death benefit (a challenge to plan for!!) OR rollover from another fund. (see my prior post for that problem too)

example : You have a total of $1.7m of super from all sources of rollover, CC and NCC at 30 May 2017. Your wife has $1.6m also. The required outcomes for maximum tax benefits would mean:
1. You have a pension of $1.6m at 30 June 2017
2. You have a $100K accum balance at 30 June (or whatever balance exceeds $1.6m)
3. Wife has a pension account of $1.6m
Your fund cannot segregate assets and must use an actuarial certificate at 30 June 2018 to determine how much taxable income relates to the $100k balance (rest is exempt). Assuming you are both aged under 75 then NCCand CC can be accepted provided you each meet work tests and have available NCC and CC caps. These new monies must be held in accumulation.

Once the pension limit is done you can (subject to caps and work test if applicable) continue to make NCC and CC to super, if your caps permit but it must be held in accumulation.

For some SMSFs members there may be advantages of using more than one fund ie leave accumulation in industry fund and hold pension in SMSF. Range of strategies to explore to suit individual and fund needs.

 

There is a further issue that this $1.6m transfer cap will impact. Many people sell a small business and have a significant eligible small business capital gain that may be eligible for rollover to super. relevant caps PER MEMBER are :

Key superannuation rates and thresholds

Now this CGT cap will still exist after 1 July 2017 but it will limit how much can be set aside after contribution to fund a tax free pension. The same $1.6m pension cap remains. The CGT cap doesnt increase it further etc.

Important to remember that the $1.6m limit should not limit how much you contribute to super. It just limits the tax benefits of taxfree earnings etc. Even with full taxation in the super environment taxes on super remains low and the importance of asset protection and estate planning remain.

Another example of large non-concessional contributions can include a inspecie real property (commercial property) transfer to super. The new lower NCC cap and altered bring forward rules will affect how much can be contributed for each member and may affect this strategy for the future for some taxpayer so considering it before June 30 is wise. And then consideration of the $1.6m pension cap further affects that strategy too. It doesnt end the strategy it just may reduce its lifetime tax benefit. Still a substantial benefit - Just reduced.

 

NOTE GENERAL COMMENTARY ONLY. NOT FINANCIAL ADVICE OR TAX ADVICE JUST COMMENTS

it would appear that appreciation in the market value of assets is ignored for the purposes of the $1.6m pension cap. So one strategy would be to segregrate assets and allocate the better performing shares to the pension account.

 

Thanks @Paul@PFI,

Sorry, I must be getting dumber with age. Too much home brew no doubt.

As per your comment:

A simple scenario:

1. Come 1 July 2017 assume member already receiving an account based pension of say $2m.
2. On 1 July 2017 $1.6m stays in account based pension and $400k is rolled back into "accumulation" account.
3. Can the member make a "concessional" contribution of $25k into his / her Accumulation account (which could be to increase the members accumulation balance or spouse split) in that year?

Thanks for your patience.
PS: I noted that you have added to your earlier post. So it would suggest my question In point three above is in the affirmative?

 

I really need to start catching up on my reading. I thought segregation was disallowed under the new rules?

 

austing

SMSFs will not be able to use the segregated method to determine their earnings tax exemption for an income year if:

• at a time during the income year, there is at least one superannuation interest in the fund that is in retirement phase; AND
• just before the start of the income year:
  • a person has a total superannuation balance that exceeds $1.6 million; and
  • the person is the retirement phase recipient of a superannuation income stream (whether or not the fund is the superannuation income stream provider for the superannuation income stream).

 

Thank you. Sorry I should have been more specific in that it was SMSFs I was referring to. Retail and Industry funds in general can still do this of course. And I interpreted your previous post as segregation being allowed for all regardless of cap.

Bad habit of mine in that I tend to only read stuff mostly in how it affects us. Hence I come under the rules you quoted.

Thanks

 

@Paul@PFI - Could you give a little more information about this.

So it would appear that it takes the balance of a pension as of 1 July each year. Then if you commute, its a case of too bad, you lost that now.

So if you're going to commute a pension, do it before 30 June, then commence after 1 July?

Could you confirm my understanding of what you said above - this is my example.

John has a pension of $500,000 as of 1 July 2017
For giggles, he decides to commute it back to super.
If he were to commence a new pension, his limit for his pension is $1.1m
He decides to rollover the entire amount of $500,000 this into a new pension
Now his pension limit is $600,000
For giggles again, he decides to commute it back to super
Then rolls it back to a new pension.
Now his pension limit is $100,000

 

Sorry, I know I'm being difficult here but I'm still not convinced that further NCCs are allowed once a members Total Super balance (accumulation plus pension transfer balance at its simpliest) reaches the cap ($1.6m):

From Trish Powers:

 

And to think , I had it all worked out before the last tranch of changes ....

Sigh

Cliff

 

He he, same here. I really need to see a psychologist. You'd think I'd have better things to do in retirement than to try to figure this stuff out. And I do it for pleasure.

 

As a thirty something year old these constant rule changes just further reconfirm my decision to continue to invest outside of super (except for the minimum requirement).
Who know how much, when or how I would be able to use, access or otherwise control MY money next year, let alone in 5,10 or 20+ years.

Blacky

 

Agreed!
Super is going to be my play money.
It is not reliable as a source of retirement income.
At the rate things go, super won't be accessible until 80... i don't want to work to that age!
(though it is one way to solve longevity risk )

 

Further to NCCs, an article from DBA Lawyer's seminar last Friday that just popped into my inbox thankfully which I found extremely helpful in clarifying a few things:

Will be fun for professionals trying to explain all this to their clients!

 

Crickey, and the article quoted below just also arrived in my inbox from Cuffelinks. Excellent bedtime reading, I'm sure everyone's excited. Take note of the Flowcharts which are also quite useful:
https://www.accurium.com.au/-/media...chnical-updates/accurium-decision-charts.ashx

 

I wish there was a blanket disclaimer over all posts and at least this topic. This is a nightmare - I spent 3 hours in training over the last 2 days on this topic, by great strategists in DBA & Topdocs. Glad my base of clients are not pensioners. Like I said - advice is needed here BEFORE you pull the trigger, its complex, don't make rash decisions without considering the rules as a whole.....

Great money grab in any case

Cheers Ivan

 

Yes! Try being Joe Public trying to understand how best to make use of our super.

 

There are some really bad aspects to this law. It discourages people changing funds is my biggest gripe. Thats just stupid law that should be changed. If a person has a bad financial adviser they will get smashd by this as they may be unable to change.

Question : A old couple with a SMSF. How does that work ?... SAF is the sole option IMO.

Im sure Dan Butler mentioned the pension rule problem. Changing pension rules may need a new pension.....A commutation? Oh crap. How did he propose that one be fixed ?

There needs to be a rule that bypasses pension resets and a pension commuted to start a new pension from a new fund.
.