What are the implications when super exceeded $1.7M?

Just want to know from practical terms:
Super contributions - too much can mean extra tax

What are the negative implications?

 

Excess NCC seems to be the biggest issue.

 

Thanks. Should one stop at $1.7M and switch to cash option as an investment option? If one is no longer contributing anything to the super account except through investment returns?

 

Not at all. If you are no longer contributing, there is no excess NCC.

1.7m can be converted to a tax free pension and the remainder will continue to accrue 15% tax on investment returns (10% on long term capital gains).

The only time you would want to take some out of super is if your taxable income is below the tax free threshold (currently $18,200)

 

You can still have concessional contributions though (subject to age/work tests) though. And even excess CC!!
Generally though, if you have 1.7m in super you probably have assets outside of super as well.
So you then can do an estimate/guess of whether any future investment income is better earned inside or outside of super.

Assuming you have met condition of release, then you can start a tax free pension with the $1.7m (or whatever your personal limit may be at that time).

I think there's a bit more to it than this ...

 

Excess CC are counted as NCC, so yes your would want to avoid those, electing to release them otherwise be subject to 94% tax Super contributions - too much can mean extra tax

Definitely get proper tax advice, however the main point is to avoid paying 15% tax on returns inside super unnecessarily if you don't have other income outside of super.

 

But I am not making any contributions. Only investment returns. So should be safe?

 

Yes, mainly real estate.

 

You still need to stick to contribution limits for Super so no longer NCC allowed but CC may be allowed, depending if in accumulation phase?
I see no negative implications as excess is still taxed at 15%, capital gain tax around 10% (which would be lower tax environment than say outside depending as mentioned if you are generating other income at similar or higher tax bracket?). No need to change investment strategy why?
Both of us are in this situation but still in accumulation and running SMSF though. So cannot utilize certain Super strategies, like NCC, or commuting part pension and paying back in... but can for example still utilize Contribution Reserve strategy.
Although need to get rid of our funeral reserves, that's counted into CC though for the year.
Seek Super advise.

 

You can sell your PPOR (as long as held for 10 years or more) and you and spouse can then deposit $300K each into Super I think regardless of balance and this excess.
From 1 July 2018, individuals 65 years old or older may be eligible to make a downsizer contribution into their superannuation of up to $300,000 from the proceeds of selling their home.
Downsizing contributions into superannuation
You should investigate Super strategies that are available for your personal situations....there are many.

 

Yes. Confirmed

 

The other thing to keep in mind is your pension may be impacted.

"Downsizer contributions are not tax deductible and will be taken into account for determining eligibility for the age pension."

 

Agree, although I doubt spouse and I will be eligible, unless we blow it all?
And thinking about it if each of us has $1.7M so total for a couple of $3.4M even at 4% withdrawal rate that equates to $136,000.00 tax free, and I think that's a more preferable position to be in than government pension for a couple, what is it, I don't even know but last I heard was around $36K?

 

Many retirees I know benefit from gross-up of the super income too. That is often overlooked.

eg $3.4m in pension balances. All invested in VAS as an example. Lets assume a 5% yield. Income for the fund is $170,000pa. TAX FREE. But in addition all the franking credits are refundable. So lets assume its $50K. That is $220,000 of tax free income into the fund. They only draw the minimum so their pension value doesnt fall. It grows and the $1.6m (now $1.7m) cap doesnt count growth due to earnings. They could end up with $2m each of tax free pension earning balances !!!

 

So the strategy should be if you have already reached the cap of $1.7M and not making any NCC or CC to it, then work hard to grow it through choosing the right investment package and use it when the preservation age is reached? The income from the $1.7M is tax free. Is that the right understanding? That sounds good to me.

 

Thank you for this, I wasn't aware of this.
So if members had excess over $1.7M each then it would be taxed at 15% but is there a further benefit of franking credit where company would pay say 30% tax so would they also benefit of getting back that 15% tax (or not really?). Is this viable via VAS if invested in Super or VGS too in your opinion?

 

I think that's true if already all is in pension phase and limit reached but if the value falls then you cannot top up anymore, I would assume it works both ways?

 

I think if one has more than super as a way to sustain one's retirement, then there is no difference between super and other investment classes. You try to grow it to your best and like all investments, it cuts both ways. Of course for super, one would theoretically want to grow it "safely".

 

Not quite.

The TBC (transfer balance cap) becomes $1.7m after being $1.6m on 1 July. The memebr TBC is set wheen a pension is commenced and isnt based on presnet value. If Fred commenced apension on 1 April 2020 of $1.6 and after amrket changes the assets support it as worth $2m then his pension has $2m and all $2m earns tax free income. But he cantb strat a new pension with more than 41.6m. Its like a cap and a floor. The cap can rise with earnings but not with new moneyetc

My examle of VAS assumed a large % of the VAS income was franked at 30%. All of the franking may be refundable if all the fund income is "exempt pension income" is attributable to pensions under the transfer balance cap limits when the pension account was commenced

I just completed the 2020 work for a fund that started pensions of $1.6m that both members are over $2m. 100% of the franking is refundable. The cap relates to the limit on STARTING a pension. In theory with really great investment outcomes that increase earnings that pension has no upper limit. In theory its possible to continually compound so the pension is far higher than $1.6m even with minimum draw downs. In practice its harder. At 1 July of the year aftre earnings a higher pension must be drawn but its just 4% of the new income so it may compound if members dont take out large amounts

I used VAS merely as an example as a large % of its income is Australian source franked income