Australia’s 2016-17 Federal Budget proposed a number of significant superannuation reforms intended to affect SMSF professionals and trustees.
It was encouraging to see so many questions and comments submitted during the session, highlighting that SMSF practitioners are dedicated to providing clients with the right advice in regards to the proposed changes.
Of course, it is important to remember that at this stage the Federal Budget reforms are just proposals. There is an election to be held and the proposals must pass through parliament and become law before we know for sure what we will be dealing with.
With over 100 questions submitted during the webinar we can determine the key areas of interest and where possible, provide you with further clarification.
The $1.6 million transfer limit was by far the biggest talking point, followed by the changes to the taxation of earnings on transition to retirement (TTR) pensions and the introduction of the $500,000 lifetime non-concessional cap. Some of the common questions we received are addressed below.
A: Unfortunately not. Our understanding is that once a person has used up their transfer limit they can move no further monies into pension phase. This will be monitored through an apportionment method as the transfer limit is indexed.
For example, if a client was to commence a pension on 1 July 2017 with $1 million, they would have used up $1 million out of the $1.6 million transfer limit or 62.5%. They would have 37.5% remaining.
If, three years down the track, the transfer limit is, say, $1.8 million then the client is eligible to transfer 37.5% of the $1.8 million (i.e. $675,000) into pension phase.
A: It is important to recognise that the proposal is for a lifetime transfer limit. This applies per person not per fund or period of time.
The most someone can transfer into pension phase over their lifetime is $1.6 million (indexed in line with CPI).
It is our understanding that once a pension has been established, the changes in the account balance due to market movements (for example) have no effect on the transfer limit.
Therefore a person cannot access two lots of $1.6 million by establishing pensions in two SMSFs. They only have one $1.6 million lifetime transfer limit. Also, if a pension balance falls under $1.6 million this does not mean you can roll the pension back and recommence with a full $1.6 million again. The limit is not on how much you can have in pension phase, but on how much you can transfer to pension phase.
A: In short, we don’t know. There is no mention of how TTR pensions will be treated under the lifetime limit in the Federal Budget papers.
However, due to the TTR pension not receiving a tax exemption on earnings from 1 July 2017, our expectation is that it will not be considered a tax-free retirement account and therefore will not count towards the $1.6 million lifetime transfer limit.
If a TTR pension is not counted towards the lifetime limit, then we would expect that when a member meets a condition of release and decides to commence a full account-based pension post 1 July 2017, which is a tax-free retirement account, then assets will be revalued and the amount transferred to the account-based pension will count towards the person’s lifetime transfer limit.
Of course, there is a chance a TTR pension will count towards the $1.6 million lifetime transfer limit… we’ll just have to wait and see.
A: The proposed lifetime non-concessional cap applies from 3 May 2016. If this does become law then the Federal Budget suggests that this client would not be able to make any further non-concessional contributions. Non-concessional contributions made post 3 May in excess of the new lifetime limit will need to be withdrawn from superannuation or be subject to the existing penalty arrangements.
Our understanding is that spouse contributions will count as non-concessional contributions and will count towards the lifetime cap. Government co-contributions are classed as non-concessional contributions but if they remain in line with current treatment they will not count towards the lifetime cap.
A: The ATO has provided the following guidance in respect to obtaining further detail about the non-concessional contributions individuals have made since 2007:
Accurium is dedicated to help you understand the impact of the Federal Budget proposals on your retirement planning and pension strategies. If you have any further questions or if there is something we can help you with please don’t hesitate to call on 1800 203 123 or email us at email@example.com
To read Accurium’s full 2016-17 Federal Budget report please click here.
The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.