The release of the second tranche of draft legislation to give effect to the superannuation changes outlined in this year’s federal budget has clarified how the $1.6 million pension transfer limit will work. Although it is not a foregone conclusion that the changes will be passed, professional advisers that ignore the implications of the limit will do so at their own and their clients’ peril.
One of the measures in the draft legislation will remove the ability of SMSFs with large balances to use the segregated asset method. This means SMSFs with members that have a balance of more than $1.6 million must use the actuarial method for calculating tax-free income relating to pension accounts.
The Turnbull government is putting on notice any superannuation fund members that already have pension accounts in excess of the $1.6 million limit. If the legislation is passed unamended, any superannuation members with a pension balance of more than $1.7 million must make sure that by July 1, 2017 their pension balance is reduced to $1.6 million.
Members with balances in excess of $1.6 million, but less than $1.7 million, have 60 days to either roll over the excess amount back into an accumulation account or withdraw it as a lump sum. If this deadline is not met, excess transfer balance tax will be payable.
This new tax is 15 per cent tax of the notional earnings on the excess for the financial year the excess occurred. If that member exceeds the transfer balance limit again, tax is paid at 30 per cent on the notional income earned.
The way that excess transfer balances are accounted for is a simple debit and credit system. Transfer account credits will be made up of super pension balances of account based pensions, life time pensions and defined benefit income stream balances at July 1, 2017, plus all new pensions commenced from that date. In addition, notional earnings on excess pension balances will also be a credit.
Transfer limits
Where an excess credit arises as a result of a reversionary death benefit pension, the member receiving the pension will have six months to transfer the excess to accumulation or take it as a lump sum.
The debits or reductions in pension balance credits include excess transfer balances stated in an ATO determination notice and from the following commutations:
- rolling benefits back into an accumulation account or taken as a lump sum,
- resulting from fraud, dishonesty and payments to bankruptcy trustees, and
- resulting from a marriage breakdown.
Where a full commutation of a pension results in a debit or negative transfer balance, this amount can be used to start a new superannuation pension without breaching the pension transfer limit. A pension balance that increases due to earnings exceeding pensions paid after July 1, 2017 does not result in a breach of the pension account limit.
SMSFs that have members with pension balances in excess of the $1.6 million limit will be provided with temporary CGT relief from accumulated capital gains on assets that have been previously exempt. The cost base for assets transferred from pension accounts to accumulation accounts, due to the pension account balance limit being exceeded, will be reset to their value as at July 1, 2017 by an approved form being submitted before the SMSFs 2017 financial year lodgement deadline.
This capital gains tax relief will be more beneficial for super funds that currently use the superannuation method. SMSFs that use the actuarial method will pay tax on that portion of an asset that relates to the accumulation phase. Tax payable on this unrealised capital gain can be deferred until the asset is sold or for a maximum of 10 years.
