The fat lady has finally sung with regard to the Coalition Government’s changes to superannuation but there is still a great deal of uncertainty among fund members. It will be important for professional advisers to assist clients in the lead-up to July 1, 2017, when the new system commences.
In recent weeks, I have received many questions that go to the heart of the confusion the new system is causing. Most of them relate to the $1.6 million pension transfer balance limit. Queries include:
• Will lump-sum withdrawal of $100,000 from a pension account in 2017–18 reduce the amount I can top it up with at a later date?
• If I move part of my $1.6 million in a pension account into an accumulation account in 2017–18 and then move it back to pension, does that use up part of my transfer balance?
• If I have a balance in a pension account of $1.6 million in 2017–18, can I still make concessional and non-concessional contributions?
The first thing clients need to be made aware of, with regard to how the new pension transfer balance limit will work, is that legislators have used a simple accounting model to keep track of where members are in relation to the transfer limit.
The transfer account balance will last for the lifetime of a member and ceases only upon their death. The way it functions is similar to a bank account. Amounts transferred to a pension account can give rise to a credit or increase in the transfer account balance, while transfers out of the pension account can give rise to a debit or decrease in the member’s balance.
The most common forms of credits or increases will be account-based pensions in existence at June 30, 2017, and transfers from an accumulation account to an account-based pension after that date.
Regular pension payments and investment losses are not counted as debits or decreases in a member’s transfer account balance. The most common debits from the balance include commutations from pension phase back to accumulation phase, losses due to fraud, and family law payment splits.
With regard to question one, this means if the member’s pension account balance at July 1, 2017, was $1.6 million, a lump-sum pension payment of $100,000 would have no effect on the transfer account balance. However, if the $100,000 was taken as a partial commutation, the member’s transfer account balance would decrease to $1.5 million.
For question two, because the member is rolling funds from the pension account back into an accumulation account, the transfer account balance will decrease by the amount rolled back.
One important aspect of the new legislation will be the transitional provisions applying to account-based pensions that exist at June 30, 2017. In this case, where the excess transfer balance is less than $100,000 and the member corrects the breach within six months, the excess will be disregarded.
In addition, as long as the excess is less than $100,000, the capital gains tax relief that applies to the assets of a fund at June 30, 2017, will also apply. Under the capital gains tax concessions, complying superannuation funds will be able to reset the cost base of assets reallocated or reapportioned from a pension account to an accumulation account.
It is, therefore, vitally important that advisers contact clients to ensure that pension account balances do not exceed the $1.6 million limit by more than $100,000.
Finally, for question three, where a member’s transfer account balance has reached the $1.6 million limit, no further non-concessional contributions can be made but concessional contributions can still be made if the relevant tests are passed.