February 2017 – The hidden traps in the Superannuation changes

Every SMSF member needs to understand the changes to the superannuation law so that they can consider their options and take action to ensure their superannuation savings will continue to grow in the most tax effective way.

The change most people are familiar with is the $1.6 million transfer balance cap. For the sake of convenience I will simply refer to this as the “cap”. What you may not know is that the cap will apply in two instances. First, it is the limit on the amount of net capital that can be placed on an SMSF member’s pension account where the earnings are tax exempt.  Amounts above the cap need to be moved to the accumulation phase or taken out as a lump sum. The second instance is where the cap will apply to a member’s total superannuation balance. If a member exceeds $1.6 million in their superannuation balance, they will be prevented from making further non-concessional contributions into their SMSF.  Now I should point out that there are some contributions which do not count towards the $1.6 million pension cap or superannuation balance cap.

Compensation payments for personal injury, received by SMSF members and contributed into their SMSFs are not counted towards the $1.6 million superannuation balance cap or the $1.6 million pension cap.   This means members can have a pension account in excess of $1.6 million.

On the other hand, if a small business taxpayer transfers the proceeds from the sale of active assets up to the value of $1,415,000, or capital gains from the sale of an active asset of up to $500,000 into their SMSF (under the Small Business CGT concessions) the contribution will count towards their superannuation balance.  If the amount exceeds $1.6 million, then the member will be restricted from putting any more non-concessional contributions into their SMSF.

SMSF members turning 65 during the 2016/2017 financial year need to understand the changes to the bring-forward non-concessional contributions cap. There will be a transitional non-concessional bring forward cap of $460,000 or $380,000 depending on when the bring-forward cap was triggered.  If you want to take advantage of the full $540,000 cap you need to make the whole bring-forward, non-concessional contribution of $540,000 before 30 June 2017.

There will also be a $500,000 limit that stops you from being eligible for the catch-up concessional contributions, where you can use any of your unused concessional contributions cap, from 1 July 2018, on a rolling basis for up to five years.

Where an SMSF member exceeds their $1.6 million pension cap by less than $100,000 at 30 June 2017, the new law allows the member six months to remove the excess from the member’s pension account.  However, the member will still be recorded as having exceeded their $1.6 transfer balance cap and will not be eligible for any indexed increases of the cap in the future, even if they reduce their pension account balance below $1.6 million.

Members need to be aware that withdrawals from their pension are recorded differently depending on the type of withdrawal.  While a partial commutation reduces a member’s $1.6 million pension cap, an ordinary pension payment does not. This is an important distinction for members who want to put more money into their pension account.

Reversionary pensions and death benefit pensions are also treated slightly differently under the $1.6 million pension cap. Although both pensions count towards a dependant recipient’s pension cap, reversionary pensions are not counted towards the cap until 12 months after the deceased member’s death.  The amount counted towards the cap also differs. For a reversionary pension it is the amount in the deceased’s account at death of death whereas, with a death benefit pension, it is the accumulated amount when it is paid to the dependant.

Estate planning also needs to be considered more carefully where the deceased member’s children receive their superannuation entitlements.  The children may not be able to take a pension of up to $1.6 million, or may be able to take a pension in excess of $1.6 million, depending on whether the deceased was in receipt of a pension at the time of their death.

While the changes may cause concern, in my opinion knowledge is your best defence. Understanding how the changes will apply to you, and taking early action will help you to navigate these changes with more certainty.

Disclaimer

Monica Rule is an SMSF specialist and author.  Her advice is general in nature and you should seek advice that relates to your specific circumstances before making any decisions. www.monicarule.com.au