SUPER CHANGES

29 May 2017

$1.6 MILLION TRANSFER BALANCE CAP EXPLAINED

By Bree Hallett

From 1 July 2017 a new transfer balance cap will apply to limit the amount of superannuation benefits that can be transferred from the accumulation phase to support tax free retirement phase income streams. All individuals will have their own transfer balance cap.

Key points of this reform:

• Applies to existing superannuation pensions as well as superannuation pensions established from 1 July 2017.
• Initially up to $1.6 million can be held tax-free in a superannuation pension account.
• From 1 July 2017, amounts above $1.6 million can be moved back into the superannuation accumulation phase or removed from the superannuation system subject to meeting a condition of release.
• The transfer balance cap for financial year 2017/18 will be set at $1.6 million and will be indexed annually in line with increases in the Consumer Price Index (CPI) in increments of $100,000.

Importantly, if you hold more than $1.6 million in tax-free pensions, you must act before 30 June to comply with the new rules.

What is a transfer balance cap?

Each individual with superannuation interests in the retirement phase has a personal transfer balance cap initially commencing with a limit of $1.6 million on 1 July 2017. The cap cannot be shared with any other person. To determine your position with respect to the transfer balance cap, you have a transfer balance account. This tracks the net amounts you have transferred to the retirement phase.

What counts towards your transfer balance cap?

The transfer balance cap applies to all income streams – both those commenced before and after 1 July 2017. Income streams commenced prior to 1 July 2017 will be assessed on 1 July 2017. Those commencing after that date are assessed at the time the income stream commences.

Superannuation income streams include; account based pensions, lifetime and term annuities, defined benefit pensions and death benefit superannuation income streams (with modifications for child death benefit pensions).

Income streams that do not ordinarily have an account balance, such as defined benefit pensions and annuities, have a value determined based on a formula contained in the legislation. The calculation is: annual Income x 16. This means that a defined benefit pension that pays $100,000 per annum will fully exhaust the transfer balance cap and there is no scope to start or maintain any account based retirement phase income streams after 1 July 2017 without breaching the transfer balance cap.

As the transfer balance cap applies to the individual, the cap is therefore cumulative of all income streams that are owned by that individual.

What if you are above the $1.6 million transfer balance cap?

On 1 July, any amount above $1.6 million held in a superannuation pension needs to be moved back into the accumulation phase or withdrawn subject to meeting a condition of release.

Although investing in the accumulation phase is not tax-free, it is still very attractive. Income generated in the accumulation phase (such as dividends and bank interest) are taxed at 15% and capital gains are taxed at 10% (if the investment is held for at least 12 months).

If you are considering holding money in your own name, your personal marginal tax rates will apply. If you have reached age 65, it is possible to receive income up to $32,279 for singles, or $28,974 for couples, and not pay tax in your personal name due the Seniors Australian Tax Pensioners Offset. However, it is important to consider the long term – if your income grows, or you receive a capital gain, or if offsets are wound back into the future you could easily end up in a different tax bracket.

More importantly, if you are considering withdrawing money out of superannuation, you should be very cautious about the restrictions on contributions applying from 1 July as it may not be possible to return the money to superannuation if your situation changes.

Another benefit of the accumulation phase is that money held in these accounts does not need to pay a minimum pension throughout the year. In fact, the capital can be retained in the account until you need it or on your passing, allowing you to preserve funds for future healthcare costs or to provide family support.

Accumulation accounts can also help preserve your eligibility for other benefits. Balances held in accumulation accounts are not assessed under the Commonwealth Seniors Health Card (CSHC) income test, preserving your eligibility for a CSHC. However, capital held outside superannuation or within pensions established after 1 January 2015 will have a deemed level of income included under this test, so depending how close you are to the threshold, your eligibility could be impacted.

Action required

There are a number of strategies which can be undertaken to assist with making the most of the new transfer balance cap rules including those which aim to equalise superannuation balances. If you need assistance in understanding how you are impacted by the $1.6 million balance transfer cap and the strategies available to you to optimise your position, please contact us.

It is important to be aware that there is transitional capital gains tax relief available for those who are impacted by this reform. The transitional capital gains tax concession allows the cost base of assets to be reset so that only gains accrued from that date will be taxable. This is a choice and not compulsory and decisions can be made regarding each asset. We will be focusing specifically and comprehensively on the transitional capital gains tax relief in our email correspondence next Monday.

Bree Hallett
Financial Planner
SMSF Specialist Advisor™
Authorised Representative No. 452911

If you have any questions or comments, please email me at bree@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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