The changes to superannuation announced in the 2016 Federal Budget have been passed by Parliament. Amongst those changes was the introduction of a $1.6 million transfer balance cap which limits the total amount that can be transferred into the tax-free retirement phase.
This new limit on superannuation will apply from 1 July 2017 and creates additional responsibilities for you as an SMSF trustee. The main issues you need to be aware of are:
- All super fund members who are receiving a pension on 1 July 2017 will have a transfer balance cap of $1.6 million created at that time.
A transfer balance cap is a limit imposed on the total amount you, as a member, are able to transfer into the tax-free retirement phase of superannuation.
- Those not receiving a superannuation pension on 1 July 2017, but will in the near future, their transfer balance cap will be created when they first receive a superannuation pension.
- The amount of tax-exempt assets available to fund a super pension under the cap is determined by a system of debits and credits which are recorded in a transfer balance account.
- Debits and credits in the transfer balance account are created by the following:
| Debits | Credits |
|---|---|
|
Commutations of superannuation pensions |
The value of super assets supporting income streams on 30 June 2017 |
|
Structured settle payments contributed to superannuation |
Starting new superannuation income streams from 1 July 2017 onwards |
|
Certain payments arising from family law splits, fraudulent or void transactions |
The value of reversionary income streams where an individual becomes entitled to them |
|
|
Notional earnings accruing to excess transfer balance amounts |
- Reversionary pensions will count towards the cap, but you will have a 12 month period to deal with the reversionary pension before a credit arises and counts towards the cap.
Going over the $1.6 million transfer balance cap will require the excess amounts to be removed from the retirement phase, which will likely require transferring some or all of the relevant pension which has exceeded the cap back to your accumulation account.
Defined benefit pensions and certain pre-2007 superannuation pensions have special rules for the transfer balance cap recognising their non-commutable nature.
Any amounts in excess of your personal transfer balance cap can continue to be maintained in your accumulation account in your fund. This means if you have more than $1.6 million in super you can maintain up to $1.6 million in pension phase and retain any additional balance in accumulation phase.
Approaching 1 July 2017, members may wish to structure their asset holdings to be in a position to maximise the $1.6 million transfer balance cap, especially between spouses.
It is also important to know that there is transitional capital gains tax relief for superannuation assets that are affected by any changes you might need to make by 1 July 2017 to comply with the new rules. This capital gains relief will ensure that any capital gain accumulated on affected superannuation assets will be deferred to a later time when the asset is sold.
Seek advice from an SMSF Specialist
It is important to seek the advice of an SMSF Specialist in order to assist you in understanding these rules and how they may relate to your specific circumstances. To find your nearest SMSF Specialist advisor, use our Find a Specialist function.
Disclaimer: The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.