Pension – Transfer Balance Cap (New in 2018)
$1.6 million transfer balance cap
A transfer balance cap was introduced as part of the 2016 Budget to limit the maximum tax-free pension balance for each superfund member. The amount of the cap will start at $1.6 million[1] effective from 1 July 2017. Changes in account balance, due to changes in valuations or investment return, have no effect on calculating the cap.
Any excess amount over the cap as at 1 July 2017 will need to be withdrawn or revert to accumulation mode, which would then be subject to 15% tax on earnings.
It is necessary for the SMSF to report the value of all existing superannuation interests that support tax-free pension account at 30 June 2017 to the ATO on the 2017 SMSF annual return. If your member balance in pension phase is over or close to $1.6 million, we strongly suggest you to make an appointment with us to discuss your situation.
Removal of Tax Exemption for Transition-to-Retirement Pensions
Effectively from 1 July 2017, transition-to-retirement pension will lose its tax exempt status and all earnings will be taxed at 15%. Discuss with us if you have a transition-to-retirement account to assess the benefits of keeping the transition-to-retirement, to be reverted back to accumulation, or to satisfy a condition of release with a nil cashing restriction.
Transitional CGT Relief
As a result of the transfer balance cap commencing on 1 July 2017, a temporary relief from certain capital gains that might arise, on an asset by asset basis, will be available for superfunds to comply with the transfer balance cap by –
1) withdrawing amounts from superannuation environment, and/or
2) transferring value from the retirement phase to the accumulation phase.
This relief is inherently complex and only applies to certain CGT assets acquired by the superfund prior to 9 November 2016. It is not automatic and must be elected irrevocably by the trustees when lodging the SMSF Annual Return 2017.
Be careful – If you choose to reset the cost base of an asset to its market value at 30 June 2017, and then you sell the asset before 1 July 2018, no CGT discount will be available as the 12 month holding period has also been reset – counting from 30 June 2017.
Asset Segregation
Effectively from 1 July 2017, SMSFs with member balance more than $1.6 million in retirement phase can no longer apply the segregated method.
[1] Indexed in in line with CPI and increased in increments of $100,000.
