By Domenic Festa (Accredited Tax Specialist and Chartered Tax Adviser)
Effective Date: 30/07/2017
The superannuation reforms announced in the 2016 Federal Budget have largely been implemented.
Many of the changes simply adopt the government announcement.
However, there are some changes that are not so obvious which require strategic planning action, and provide opportunities to add value. Our take on these less obvious changes are set out below.
Excess Transfer Balances
- There is a general misconception that where a member’s balance exceeds the transfer balance cap ($1.6 million), there is a requirement to reduce the balance prior to 1 July 2017. The legislation provides no such requirement.
- A reduction is only required if the Commissioner gives a determination (Section 136-10).
- If a failure to reduce causes an excess transfer balance on an after 1 July 2017, the consequence is excess transfer balance tax is payable at the rate of 15% (the same rate that is payable for assets that are not in pension mode). A higher rate of 30% is only payable after 1 July 2019 if the member has previously been liable for excess transfer balance tax for a year that commenced on or after 1 July 2018.
- Two elements that may make it beneficial to do a reduction prior to 1 July 2017 are to access the cost base upgrade and the transitional excess transfer balance of $1.7 million.
- Planning Point: failure to reduce by 1 July 2017 simply triggers 15% tax on the excess (the same rate is payable if the reduction had occurred). If the member’s circumstances warrant (for example, lumpy assets), may consider deferring reduction until prior to 1 July 2019 or receipt of an ATO determination.
Excess Transfer Balance Cap
- There is a maximum cap of $1.6 million per taxpayer that is eligible for the pension exemption. It is not possible to avoid the cap by splitting the superannuation balance over several superannuation funds.
- A child receiving a pension as a result of the death of a person, has a separate transfer balance cap (and generally does not have a personal transfer balance cap) where the child is in receipt of a reversionary pension, the deceased did not have a transfer balance account, or the child was in receipt of the pension prior to 1 July 2017.
- The general thrust of the rules relating to child pensions established after 1 July 2017 is that if the deceased was never in receipt of a pension on or after 1 July 2017 the child receives a share of the deceased’s transfer balance cap, otherwise the child pension must be attributable to a superannuation pension being received by the deceased at the date of death.
- Planning Points:
- For pensions commenced on or after 1 July 2017, if the deceased does not have a pension, the child’s cap will be limited to a share of the deceased’s transfer balance cap, but where the deceased established a pension prior to death, the cap will be equal to the share of the deceased’s superannuation pension which may be significantly higher (since income and growth in assets do not affect the cap).
- Child pensions exceeding these limits may be permitted if the child has an unused cap for child pensions just before 1 July 2017, an unused cap from another deceased person who did not have a transfer balance account, or establishes a non-death benefit income stream which establishes a personal transfer cap for the child.
- Planning Points:
- The higher transitional cap of $1.7 million only applies if the excess balance is reduced before 1 January 2018. Planning Point: members with balances between $1.6 million and $1.7 million, must reduce the excess by 1 January 2018.
- Lifetime pensions and pre-2017 life expectancy and market linked pensions (capped defined benefit income streams) with a value in excess of the transfer balance cap will not be liable for excess transfer balance tax and the whole amount is eligible for the pension exemption. However, the whole amount of any other pension may be liable for excess transfer balance tax.
- Capped defined benefit income streams that exceed the transfer balance cap can be maintained and the full amount eligible for the pension exemption, but the recipient will be liable for additional tax if entitled to the over age 60 exemption or the death benefit dependent exemption. Additional tax arises by including in assessable income 50% of an excess amount. The excess amount is the amount of benefits from capped defined benefit income streams that exceed 1/16 of the general transfer cap.
Cost Base Upgrade:
- Election is required to obtain the upgrade.
- For assets that were held as segregated pension assets on 9 November 2016, the upgrade may apply to assets that cease to be a segregated current pension asset before 1 July 2017 and is not sold before 1 July 2017. The asset may subsequently satisfy the pension exemption under the proportionate method.
- For assets using the proportionate method, there is a deemed sale and repurchase which will trigger a notional gain to the extent of the nonexempt portion. The notional gain is calculated without regard to capital losses. Tax on the notional gain is deferred until a subsequent realisation event.
- Planning Point: Consider whether to make the election to obtain the upgrade.
- The reduction in the transitional bring forward caps to $460,000 and $380,000 only applies if the total amount of contribution for the three-year bring forward is not made prior to 1 July 2017. Planning Point: make full contributions for three-year bring forward prior to 1 July 2017.
- Bring forward rule – If you do not make the full contribution for the bring forward rule in the first year, earnings may disqualify you from making additional contributions in the second or third years.
- Non-concessional contributions are not permitted if your total superannuation balance equals or exceeds your transfer cap (commencing at $1.6 million). Planning Point: With proper planning this will allow an actual cap of $1.7 million.
- Pension Exemption:
- SMSF’s: Segregation method is not available if any member in the retirement phase has a total superannuation balance exceeding $1.6 million. This $1.6 million threshold is not subject to indexation.
- Planning Points:
- Separate members with balances less than $1.6 million into a separate superannuation fund from members with balances exceeding $1.6 million.
- For members with balances exceeding $1.6 million, separate assets for which you wish to claim the pension exemption into a separate superannuation fund (from which a pension will be paid, providing a full exemption up to the $1.6 million). This achieves the same result as the segregation method (which is not available).
- CGT and stamp duty must be considered on the separation.
- CGT on separation prior to 1 July 2017 may qualify for the pension exemption.
- A stamp duty exemption exists in Queensland for the splitting of a super fund into two or more super funds, but it requires an application to OSR.The application must include an explanation of the background and the entitlements to be extinguished or created, and the arrangement must not be for the sole or dominant purpose to avoid duty. It is not possible to obtain a private ruling prior to execution of documents.
- As an alternative, a special form of restructure which we have processed through OSR allows the separation into separate superannuation funds without stamp duty.
More information – Superannuation Reform 2016 – A Roadmap to guide you through the maze
NOTE: This article is for general information only and should not be relied upon without first seeking advice from one of our specialist solicitors.