By Mark Ellem
For SMSF trustees, 2016/17 will be a watershed compliance year.
As we approach 1 July 2017 and the start of the biggest superannuation shakeup in 10 years, SMSF trustees need to be prepared for the changes. There are some key decisions to be made that can have a long-lasting effect your retirement nest egg.
So, let’s break down the new rules. They can be categorised into two areas: contributions and pensions. In essence, they restrict how much a person can contribute to super and limit the amount a person can have in a tax-free retirement account.
Concessional contributions, for example, employer contributions and personal contributions claimed as an income tax deduction, will have their cap reduced from $30,000 to $25,000, from 1 July 2017. Further, the higher $35,000 transitional cap for older members (aged at least 49 as at 30 June 2016 for 2016/17 contributions) will be removed; that is, everyone, regardless of age will have a cap of $25,000 from 1 July 2017 (the cap will be subject to indexation).
The non-concessional contribution (NCC) cap will also reduce from 1 July 2017. It will be four times the concessional cap – $100,000 for 2017/18. Importantly, there will be an additional overriding eligibility test for NCCs. When a member has total superannuation balance of more than $1.6m at 30 June of the prior income year, the NCC cap will be zero. There will also be trigger points for ‘total superannuation balance’, starting at $1.4m, that will be impact a member’s ability to utilise the new bring forward rule, where eligible.
In short, lots!
First, there is the introduction of a Transfer Balance Cap (TBC) that will limit the amount that can be held in a tax-free retirement phase pension account. The TBC starts on 1 July 2017 at $1.6m and will be indexed to CPI in $100,000 increments.
Amounts in excess of the TBC will be required to be commuted to an accumulation account or withdrawn from superannuation. When considering these options, think about the personal tax-free threshold. Each individual taxpayer has a tax-free threshold of $18,200 (excluding minors and certain other taxpayers). If this threshold is not being used, consider whether any excess TBC amount should remain inside of superannuation as part of an accumulation account and taxed at a flat rate of 15%, or if it’s removed, invested in the individual’s name where the first $18,200 is received tax-free (this can be effectively higher, depending on applicable tax offsets). Whether this option is taken will depend on the individual’s other assessable income, the type of investments and whether there is potential for capital gains on future disposals.
The TBC will also affect pensions paid to a member as a result of the death of a spouse, for example, a reversionary pension. The amount and timing of the deceased member’s benefit that counts against the surviving spouse’s TBC will depend on whether the pension was reversionary, non-reversionary or commenced from the deceased’s accumulation account. This will not just affect those members with more than $1.6m in pension, but also where the surviving spouse will have a combined pension amount of more than $1.6m. There are also special TBC rules for child pensions, old legacy defined benefit and market linked pensions.
From 1 July 2017, TTR pensions will not be treated as a tax-free retirement phase account. Consequently, the portion of the fund’s assessable income which is allocated to them will no longer be tax-exempt.
The introduction of the TBC and TTR pension integrity measures will have an effect on the amount of tax an SMSF pays. However, there is no change to the taxation of superannuation benefits received by an individual. For members of an SMSF, provided they are at least age 60 at the time of receiving the payment, there is no tax on the benefit payment they receive, regardless of whether the payment is a pension or lump sum.
Further, where the excess pension above the TBC is retained in an accumulation account, the member will still be able to access those benefits. Payments from an accumulation account will be lump sum benefits, but again, if the member is at least age 60 at the time of receiving the payment, it will be tax-free.
A common strategy will be to limit payments from a pension account to the minimum required. The requirement to draw a minimum pension only applies to a member’s pension account and not to any accumulation account that they have. Any monies required above the minimum pension can be taken from the accumulation account. Whilst this does not have any tax advantages specifically to the member, it will mean a higher portion of the member’s overall benefits are in pension accounts, which will result in a higher portion of the SMSF’s income being exempt from fund 15% income tax.
As part of the introduction of the TBC and TTR pension integrity measures, there will be the option to reset the cost base of eligible fund assets to market value. For more information, refer to our previous articles CGT Relief Explained and CGT Relief and TTR Pensions.
If you wish to utilise the higher contribution caps in 2016/17, then your deadline is 30 June 2017. With the new $1.6m ‘total superannuation balance’ eligibility test not applying for 2016/17, members with more than $1.6m in super have 2016/17 as possibly the last year they can make an NCC and quarantine tax on income at 15%.
Although 30 June 2017 is a Friday, don’t leave it until the last moment to make the contribution. Many have been caught by the delay in EFT and internet banking rules. A contribution made via EFT or internet on 30 June 2017 will most likely not be credited to the SMSF’s bank account until early in the 2017/18 income year. For the contribution to be included in the 2016/17 income year, it should show as a credit into the SMSF’s bank account no later than 30 June 2017.
For those utilising the current bring forward rule, make sure you have checked whether you have triggered it in the current 2016/17 or previous 2015/16 income year and know how much of the maximum cap you have left. For those triggering it now, make sure you are eligible.
For the TBC, TTR pension and CGT relief rules, most of it can be sorted as part of the finalisation of the SMSF’s 2016/17 annual financial statements. The 2016/17 SMSF annual return and accompanying schedules will be used to notify the ATO of the application of the CGT relief rules and report member pension balances. Most SMSFs that use a tax agent will have until 15 May 2018 to lodge their 2016/17 annual return, however, some may have any earlier date.
Yes, the 2016/17 compliance year is one of the bigger years and there’s much for SMSF trustees to think about. However, with the assistance of your SMSF administrator, accountant and adviser, you’ll be able to navigate the reforms and make the appropriate decisions.
