With the election now decided it is likely the changes to superannuation put forward in the 2016 budget will be passed by Parliament. The volume and significance of the superannuation changes announced prompted questions from our clients, particularly with regards to the pension transfer cap and the lifetime non-concessional contributions limit. We discuss some of these questions below.
Transfer balance cap
The 2016-17 Federal Budget proposed that the maximum transfers to pension phase be capped to $1.6 million (indexed) from 1 July 2017. This is intended to limit the level of fund earnings that will be tax exempt.
Question 1 – I am 62 and drawing a pension, will pension payments be subject to tax from 1 July 2017?
No, the proposed changes do not alter how a lump sum or pension payment is taxed in your hands.
Question 2 – Will I still be permitted to draw down a lump sum if I have retired or reached age 65?
Yes, the Budget made no mention of altering conditions of release. Therefore, it is likely that the law will continue to permit lump sum draw downs upon meeting a full condition of release (e.g. if you have either retired or attained age 65).
Question 3 – If my spouse dies and their pension continues (i.e. ‘reverts’) to me – will this pension count towards my cap?
At this stage, it is too early to tell whether a pension that continues to be paid to you as the surviving spouse will count towards your transfer balance cap.
Question 4 – I am currently drawing down a pension with a balance over $1.6 million – will I be affected?
Yes, the Treasurer stated that existing members in pension phase with balances above $1.6 million at 1 July 2017 will need to reduce their pension balances to $1.6 million by this time (e.g. by transferring the excess back to accumulation phase). Over the years we have been mindful to even up account balances between members, but clients that still have a member balance of over $1.6m will need to consider other strategies such as segregating assets between accumulation and the pension phase.
Lifetime cap
The Budget proposed a lifetime non-concessional contributions cap of $500,000 (indexed) from 3 May 2016.
If legislated, this new cap will replace the existing non-concessional contributions cap (i.e. $180,000, or $540,000 under the three year bring-forward rule).
Under the proposal, non-concessional contributions made since 1 July 2007 will count towards the cap. If you had already exceeded the cap at 3 May 2016, the announcement states that you will not need to withdraw the excess. The Government has come under a lot of pressure on this measure as it appears retrospective in nature, as well as the low level of the cap when one looks at the assets required in order to generate a retirement income stream.
Question 1 – How is indexation of the cap expected to work?
The lifetime cap is expected to be indexed, and increase in $50,000 increments.
Question 2 – Can I make extra non-concessional contributions by 30 June 2017 even though I exceed my $500,000 cap at 3 May 2016?
Although the changes are not law yet, you run the risk of incurring additional taxes on non-concessional contributions made after 3 May 2016.
Question 3 – How do I find out what I have contributed since 2007?
The only way is to back to your own records or contact your funds directly. The ATO does not hold this information.
Without a doubt the changes to the superannuation rules will impact many more people than contemplated in the budget announcement. Until we see legislation in some instances it may be difficult to plan, but it is import to consider your situation well before these measure coming in to force on 1 July 2017.
Rob
Rob Gilmour is the Managing Principal of Wealth Simplicity. The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.