Effective from July 1, 2017, the government intends to place a $1.6 million cap on the amount of superannuation that you can retain in, or transfer to, a super pension account. The government released an exposure draft of the proposed legislation for this measure on 27 September 2016. Final legislation is expected to be passed before the end of 2016. This proposed budget change capping pension balances (and therefore limiting the corresponding tax exemption available) to $1.6 million has caused major concern to impacted SMSF trustees – but it may not be all bad news!
The Changes Explained
There are 5 areas in which the new changes impact.
1. Cap on tax-free super accounts
Currently: No limit on the amount of money in superannuation that is tax-free in retirement mode.
Proposed: From July 1, 2017, a limit of $1.6 million can be transferred into a tax-free super account. Earnings on super accounts over this amount will be taxed at 15 per cent. Cap will be indexed in $100,000 amounts in line with the consumer price index.
2. Cut in transition-to-retirement arrangements
Currently: People aged between 56- 65 who are working can take money out of their super and that pension account then earns a tax free income. Some of the money can then be used for expenses or some or all of it to recontribute to a second account that is taxed at the normal super fund rate of 15 per cent.
Proposed: From July 1, 2017, the income in the pension account will be taxed at 15 per cent instead of zero.
3. Higher tax rate on concessional contributions
Currently: Compulsory and salary-sacrifice super contributions are taxed at 15 per cent. People earning more than $300,000 have their contributions taxed at 30 per cent.
Proposed: From July 1, 2017, the 30 per cent tax rate on super contributions will apply to people earning more than $250,000.
4. Cut in concessional super caps
Currently: People can contribute $30,000 a year on a concessional tax basis; people aged 50 and older can contribute $35,000 a year.
Proposed: From July 1, 2017, concessional contribution cap will be reduced to $25,000 a year for everyone.
5. Cut in post-tax contribution cap
Currently: People can put in $180,000 a year into their super from post-tax money or roll three years into one and contribute $540,000 post-tax every three years.
Proposed: From May 3, lifetime cap of $500,000 on all post-tax super contributions calculated from July 1, 2007.
Reducing the impact
It is possible to minimise the impact of this proposed change and create a very positive tax outcome, but it will take some planning.
Before diving into potential strategies to minimise (or eliminate) the impact of this proposed change, it is important to note that this information is of a general nature and does not take into account your individual financial situation or needs.
It is also important to recognise that only a licenced financial adviser can provide advice on these matters. Accountants can calculate the tax impact of strategies SMSF trustees may use, but they can’t influence your decision in any way unless they are licensed by ASIC. Superfund Partners has a number of licensed advisers as well as non-licenced specialist tax and SMSF accountants.
Now let’s look at an example of how trustees can work with the proposed $1.6m pension cap and still minimise the tax impact to their SMSF.
Bob and Martha are members of the Bob & Martha Superfund and each have a member balance of $2 million.
Before 1 July 2017, Bob and Martha, as trustees, will each need to determine how to achieve the $1.6 million pension accounts. Essentially, Bob and Martha have two options:
Transferring back $400,000 to accumulation, leaving $1.6 million exactly in pension phase.
Taking out the surplus of $400,000 each into their own names or other tax structure.
From a pure tax perspective, in an SMSF that has all of the members’ balances in pension, the SMSF is tax free – a wonderful place to be as the earnings of the superfund are no longer taxed. Plus, if you are over 60, the pension payments are tax free in your hands – happy days!!
However, once you return part of the pension account back to accumulation, like in this instance, the $400,000 will be in accumulation so the fund is no longer 100% tax free. Your pension that you withdraw from the superfund, provided you are over 60, remains tax free.
As a rough guide, if the fund had $100,000 taxable income, with the $400,000 being in accumulation, 20% would be taxable. That is, $20,000 at 15% = $3,000 in tax payable.
Another suggestion that has been put forward is withdrawing the $400,000 into your own personal names or a Family Trust as an investment vehicle. Be aware that a Family Trust needs the taxable income distributed to a person and that Financial Statements, and a tax return, will need to be prepared – which means additional costs will be incurred.
Based on an example of the low interest rates on offer, a term deposit for the $400,000 at 3% is earning the taxable income of $12,000. This means that if it is held either personally or via a Family Trust, no tax would be payable on this amount as a stand-alone investment (no other income taken into consideration).
Where to now?
Whilst there are significantly more considerations, the only question we are presenting here is, will it benefit you from a tax perspective? As individuals, each person has a personal tax-free threshold which could be taken advantage of, currently $18,200.
There is time to plan your actions before it commences on 1 July 2017. Above all, remember that the information contained above are simplistic in approach, designed to give you the opportunity to consider your tax options, ignoring return on investment.
For some, it will be a simple case of returning $400,000 to accumulation and paying 15% tax on some of the earnings of the SMSF. Others will want to do something completely different. The decision as trustees is completely yours, however, it would never hurt to discuss your options with specialists in this field.
This information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances.