Legislation to implement the Government's superannuation reforms passed the Parliament in November 2016. The changes improve the fairness, sustainability, flexibility and integrity of the superannuation system.
This package of reforms introduces significant changes to the Pension Rules. Generally, the new legislation will reduce the member's capacity to claim a tax exemption on the earnings associated with an income stream product (e.g. Transition
to Retirement Pensions / Simple Account Based Pensions etc).
Simple Account Based Pension (SABP) Strategies
Introduction of the Transfer Balance Cap
Currently, there is no limit on the amount of money you can have in your SABP. Moreover, all the SMSF earnings associated with your SABP are tax exempt in your SMSF Annual Return.
From 01 July 2017, the Government will introduce a $1.6 million cap on the total amount of superannuation benefits that you can transfer into a tax-free retirement account. This limit is known as the Transfer Balance Cap (TBC).
Superannuation benefits accumulated in excess of the cap can remain in the accumulation account, where the earnings will be taxed at up to 15%.
What Counts towards Your Transfer Balance Cap?
Only pension accounts in the retirement phase count towards the Transfer Balance Cap. The following types of income streams are counted for TBC purposes:
- Simple Account Based Pensions, including Death Benefit Pensions;
- Transition to Retirement Pensions that were converted to Simple Account Based Pensions after turning age 65 years old or on retirement;
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Capped Defined Benefit Income Streams (see the ATO website here for more information).
The following types of superannuation interests do not count towards the TBC:
- Transition to Retirement Pensions (under 65 and not retired);
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The accumulation phase value of your super interests.
Importantly, the Transfer Balance Cap works on a per-member basis. If you have more than one super pension account in the retirement phase with different Superfunds, the Transfer Balance Cap applies to the combined amount in all of those pension accounts.
Further details on the Transfer Balance Cap can be found here.
Strategy: Share the Transfer Balance Cap with Other Members via a Re-balancing Strategy
The Transfer Balance Cap works on a per-member basis. Each member has his/her own personal transfer balance cap. If one member's total Pension Balance is greater than the $1.6 million cap while the other member still has an available
cap space, a Rebalancing Strategy would allow the member with larger balances to transfer some or all of the excess pension balance to the other member prior to 30 June 2017. On a Fund basis, more super benefits can be retained in the tax-free
retirement accounts, thereby increasing the tax-exempt proportion of the SMSF earnings.
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Eligibility Criteria
In order to undertake a Rebalancing Strategy, you must firstly satisfy a nil condition of release to withdraw your Super Benefits from the SMSF (e.g. aged over 65 or between preservation age ~ 64 AND retired). More details
on accessing your Super benefit can be found here. We also caution that if the withdrawal occurs before the member turns age 60, some withdrawals tax might be incurred in the member’s
personal tax return.
The other member (i.e. the receiving member) must be eligible to contribute to the SMSF. The applicable contributions rules and caps can be found here. For more information on the Contribution Strategies prior to 01 July 2017,
please click here.
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Implementing the Strategy:
If you satisfy the above criteria, the Rebalancing Strategy can be implemented as follows:
(1) Your Super Benefit must be physically transferred from the SMSF's bank account to a Personal Bank Account.
(2) The amount must in turn be transferred back to the SMSF's bank account as a Contributions for the other member on the same day or later.
(3) If you wish to convert the "re-contribution" to pension phase, an additional pension needs to be established. You can commence an additional pension by contacting ESUPERFUND after the contribution has
been made.
It is important to understand that the member's benefit must be physically transferred to a Personal Bank Account and in turn transferred back to the SMSF's bank account to implement the strategy. An accounting entry is not sufficient.
We also advise that you can achieve the re-balancing strategies by withdrawing and re-contributing smaller amounts repetitively (if there is insufficient cash to complete the re-balancing in one single transaction). For administration ease,
please apply for a single additional pension after you have completed all the transactions instead of applying for an additional pension every time you make a re-deposit.
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Results:
By implementing the Rebalancing Strategy, your member benefit will be reduced and the other Member's benefit increased, i.e. your proportional entitlements in the SMSF will be affected.
Lump Sums Do Not Count towards the Minimum Pension Requirements from 01 July 2017
When you have a Simple Account Based Pension, you are allowed to make both pension withdrawals and lump sum withdrawals.
"Lump sum" and "pension" are superannuation terminologies used to describe different withdrawal types, they have no direct reference to the frequency or size of your withdrawals.
If you are aged between preservation age and 60, the "Taxable" Component of the withdrawal is taxed differently in your personal tax return, depending on whether it is a Lump Sum or a Pension:
- Pension: the "Taxable" Component of the Pension withdrawal is taxed at the Member's marginal tax rate less a 15% Pension Rebate.
- Lump Sum: The "Taxable" amount up to the low rate cap ($195,000 for 2016/2017 FY) of a Lump Sum withdrawal is tax free and the balance is taxed at 17%.
Please visit our website here for more information.
Until 30 June 2017
Until 30 June 2017, both withdrawal types can count towards the minimum payment requirement. If you still have a remaining cap space in the low rate cap, you may treat all of your withdrawals as lump sums and none as pensions in order to minimise
tax in your personal tax return. By doing so, you can still meet the minimum pension requirement in the 2016/2017 FY.
From 01 July 2017
From 01 July 2017, only pension withdrawals count towards the minimum payment requirement while lump sum withdrawals cannot be used to meet the minimum pension requirement. This implies that at least the minimum pension amount must be pension withdrawals
and only the amount in excess of the minimum pension amount can be either lump sum withdrawals or pension withdrawals at the Trustee's discretion.
Strategy: Last Oppotunity to Use Lump Sums to Meet Minimum Pension Requirements
In simple terms, the 2016/2017 Financial Year is the last financial year during which an individual aged under 60 & retired may choose to treat all withdrawals as lump sums and none as pensions in order to minimise tax in the personal
tax return.
We caution that if you are aged under 65 and not retied, you are generally not allowed to make lump sums withdrawals from your SMSF.
Transition to Retirement Pension (TRAP) Strategies
Removal of Tax Exemption benefits
From 1 July 2017, the Government will remove the tax exempt status of income from assets supporting Transition to Retirement Pensions regardless of the date the TRAP commenced. The earnings on the amount supporting TRAPs will be taxed
at up to 15% (i.e. same tax rate applying to accumulation earnings).
Further details on how the superannuation reforms affect TRAPs can be found here.
However, if you attain age 65 or declare retirement prior to 30 June 2017, you will not be affected by the above TRAP Earnings Taxation Measure. Instead, you will be affected by the Transfer Balance Cap discussed in the SABP Strategies Section.
Stratregy: Avoid the TRAP Earnings Taxation Measure through Early Retirement
In this case, you must meet the definition of "Retirement" and sign a "Retirement Declaration". The definition will vary depending on when you cease work.
If you cease employment between Preservation Age and 59, "Retirement" means that at the time you ceased employment you never intended to work again either on a full-time or part-time basis (defined as more than 10 hours per week). A "Retirement" Declaration
must be signed if you cease employment between Preservation Age and 59 and can be found here.
If you cease employment after age 60, "Retirement" means you cease your employment. In this case the intention to return to the workforce is irrelevant. The definition of retirement in this case is less stringent than for those under 60. A "Retirement"
Declaration must be signed if you cease employment after age 60 and can be found here.
Importantly your retirement must be “real” in order to avoid the TRAP Earnings Taxation Measure (e.g. reducing your working hours with the same employer without actually ceasing your employment would not meet the definition
of "Retirement" discussed above).
As soon as you retire from the workforce and you are satisfied that the definition of "Retirement" can be met, please complete, sign and forward a copy of your “Retirement Declaration” to ESUPERFUND.
Seek Professional Advice from a Financial Adviser
This package of Superannuation Reforms involves complex changes which may affect your retirement plans. The situation is even more complex if you have superannuation benefits in multiple Superfunds. This is because all the thresholds and caps apply to
your total superannuation balance, not your balance in each individual Superfund.
ESUPERFUND is a no advice model and does not provide financial advice to clients. We recommend that you seek professional advice from a financial adviser. A licensed financial adviser will consider your personal situation and make a recommendation
suitable to your financial needs.
It should always be remembered that Trustees are legally responsible for all the decisions made even if you obtain advice from a Financial Planner. Whilst a Financial Professional can provide advice and assistance you are ultimately responsible for the
Fund.