New Superannuation Laws – New Transfer Balance Cap and Total Superannuation Balance
In the September/October 2016 edition of the Super Brief we we provided an outline of the Government’s new superannuation reforms that have now come into law. We have recently seen regulations that have come into force that have attempted to address some of the anomalies under the original legislation. One in particular relates to the necessary commutation of market linked and other non-commutable income streams in circumstances where a Member is in excess of their balance transfer cap.
There has been quite a bit of confusion and misunderstanding between Advisers and clients in particular relating to the rules concerning the new $1.6 million total superannuation balance cap and the $1.6 million general transfer balance cap. The purpose of this month’s Super Brief is to focus in on these issues in the issues that clients and Advisers have to address before 1 July next when the new rules come into operation.
$1.6M Total Superannuation Balance Cap
From 1 July next the Government will lower the annual non-concessional (post – tax) contribution cap from $180,000 to $100,000 and will introduce a new constraint that individuals with an account balance of $1.6 million or more will no longer be able to make non-concessional contributions. This effectively means that from 1 July next any Superannuation Fund Member will not be able to add non – concessional contribution amounts including any bring forward non – concessional contributions where they have a total member superannuation account balance of $1.6 million or more. This account balance is based on all Superannuation Fund interests and is not limited to the account balance for any one Fund.
The $1.6 million eligibility threshold is based on an individual’s balance as at 30th June the previous year. This means that if an individual’s balance as at the start of the financial year being the contribution year is $1.6 million or more they will not be able to make any further non-concessional contributions.
Individuals with balances close to the $1.6 million threshold will be able to use the bring forward annual cap amount for up to 3 years limited to the individual $1.6 million threshold. There are transitional rules which apply where clients have invoked the bring forward rules prior to 30 June 2017.
Based on recent guidelines the $1.6 million total superannuation balance threshold is calculated by adding the value of a Members:
- Accumulation phase superannuation interests (i.e. preretirement benefits);
- Transfer balance account (see further below); and
- The value of any rolled over superannuation benefits that are not reflected in an accumulation account value. (This would occur for example when a Member has rolled over a superannuation
benefit that is received after 30 June any financial year).
What is not counted towards the threshold is what is referred to as “structured settlement contributions”. These are effectively contributions referred to in the Income Tax Assessment Act as a compensation payment arising out of a personal injury settlement. These benefits have and currently remain exempt from the superannuation contribution rules and are also excluded for the purposes of the $1.6 million superannuation balance Cap.
What is also not counted towards the threshold are amounts or benefits that modify and create a credit to an individual’s transfer balance in respect of a Member receiving income stream benefits from their Fund. In essence these include:
- Amounts withdrawn out of superannuation income stream (i.e. commutations);
- Superannuation benefits reduced as a result of fraud, dishonesty or bankruptcy;
- Superannuation benefits transferred out as a result of a payment split arising on divorce or relationship breakdown;
It should also be remembered that the $1.6 million total superannuation balance does not prevent a Member making annual concessional (tax deductible) contributions which, from 1 July next,
regardless of age, will be $25,000 per person per annum.
Further, the total superannuation balance Cap does not take into account amounts received into a Fund as a result of the small business CGT concessions referred to as the “CGT exempt amount”. This is an amount of up to $1,415,000 per Member being the current lifetime CGT Amount for this financial year (i.e. $2,830,000 per couple).
As a result of the amounts that are not counted, a Member could have an account balance excess of the $1.6 million beyond 1 July next.
Please also note that these rules apply as from 1 July next. They do not prevent a Member from accumulating an account balance in excess of $1.6 million before this date and there is no provision in the rules for a Member to reduce their total superannuation account balance if they have already exceeded this threshold.
*Where possible increase your superannuation balance by either cash or in specie asset transfers (that are permitted under the super rules) if a Member is currently close to or has exceeded their $1.6 million balance threshold;
*Consider using your non – concessional bring forward amount for any other amounts. If you have not invoked your bring forward three-year contribution cap limit there is the opportunity to contribute $540,000 per Member up until 30 June next (i.e. 3 x $180,000 current non – concessional Cap) . After the 1st July this will reduced to the new 3 year bring forward cap of $300,000 per Member. Please note that there are transitional rules if you have already used up a part of three-year bring forward amount within the last three years.
*Calculate and value your Fund assets shortly prior to 30th of June 2017 where you intend to invoke the three you bring forward rule after that date. For SMSFs, this will require assets being valued in line with the ATO’s market valuation principles.
Outline of new $1.6 million Transfer Balance Account
When a person enters into the retirement phase of their life they usually commence a superannuation income stream (i.e. pension). Under the previous rules, all income and capital gains received from any amount of assets held in a superannuation pension account were not taxable (“exempt pension income”). The policy intent of the new legislation is to restrict the amount of assets held in
what is now referred to as “retirement phase” that are exempt from tax.
The new legislation imposes a transfer Cap from 1 July next that applies to all superannuation benefits within a Fund
that is producing an income stream-i.e. in retirement phase.
The legislation introduces concepts of a “transfer balance account”, the “general transfer balance” and an individual’s transfer balance. The rules around these accounts and how they are calculated and determined at different points in time are complex. For the benefit of our clients and our Adviser community we provide a comprehensive summary of the key features of these new rules as follows:-
- From 1 July 2017 the Government will introduce a new general transfer balance Cap being the limit of assets that can held in a pension account that will be tax – free. This limit applies to all Australian Superannuation Funds and currently for the 2017/2018 financial year the amount is $1.6 million per Member;
- The general transfer balance Cap will be indexed each year in $100,000 increments;
- At the time that an individual commences a superannuation income stream the individual’s personal transfer balance Cap will equal the general transfer balance Cap in that financial year;
- If an individual is in receipt of a superannuation pension income stream as at 1 July 2017 their personal transfer balance Cap will be the same as the general transfer balance Cap on that date, namely $1.6 million per Member.
- A Member who is receiving a superannuation pension income stream as at 1 July 2017 with an account balance of greater than $1.6 million will be required to commute (i.e. cash out) or rollback a portion of their pension into the accumulation account of their Super Fund which is subject to the current 15% tax rate.
- Once an individual starts a superannuation income stream they receive a transfer balance account that will operate during their lifetime, even if they subsequently cease the superannuation income stream. They will only cease having a transfer balance cap when they die (with some exceptions relating to child accounts based pensions);
- The new Act excludes a person who is receiving a transition to retirement pension from holding a transfer account balance as they are not regarded as being in retirement phase.
- Where an individual has started an income stream and has not used up their transfer balance account limit at the time they commence an income stream, their personal transfer balance Cap is subject to proportional indexation in line with the general transfer balance. Proportional indexation is calculated as a percentage and applied against the individual’s unused amount of their transfer balance Cap. This will practically mean that Members will be able to add assets to their pension account after rolling back and commencing a new pension income stream. (The rules currently do not permit assets to be added to an existing pension income);
- The rules create a series of debits and credits that is added and reduced from a Member’s personal transfer balance Cap. Credits are amounts that are added to the balance of a Members transfer balance Cap and debits reduce that balance.
- Amounts that are added or credited to a person’s transfer balance Cap include the value of all superannuation interests that support income streams, the commencement value of any new
superannuation income stream and the value of any reversionary superannuation income streams.
- Amounts that are debited which reduce a transfer balance Cap include commutations (i.e. cash withdrawals), family law payment splits and superannuation income streams that cease to be in the retirement phase and are transferred back into the accumulation phase of the account. Note, that amounts received from a structured settlement or personal injury claim create a debit in a person’s transfer balance.
- It should be noted that the earnings on assets in the retirement account as well as any losses sustained from any investment are not debited or credited to the transfer balance (i.e. not counted). Similarly, usual pension drawdowns will not reduce a transfer balance cap unless they are commuted.
- Where an individual has assets that are in excess of their personal transfer balance Cap at any time during the year they will be required to remove the excess amount from the retirement phase of their account (i.e. “excess transfer balance”). The ATO may also issue an Excess Balance Determination notifying the individual that there is an excess transfer balance.
- The ATO will accrue a general interest charge (currently 9.2% per annum) and this will apply on the excess transfer balance at a daily compound rate until the amount in excess of the Cap is rectified. The ATO will apply an excess transfer balance tax at the rate of 15% per annum as if the excess capital had been in the accumulation phase of the account.
- Note: A transitional arrangement exists for an excess transfer balance as at 30th June that is less than $100,000. It is disregarded if the amount is withdrawn within (6) six months.
- If the ATO issued an excess balance determination and the individual does not withdraw the amount in excess of their personal transfer balance Cap within the time periods stipulated the ATO can issue a Commutation Authority requiring the amount in excess to be cashed out of the Super Fund.
- There are special rules applying to defined benefit income streams which calculate an individual’s personal transfer balance of 16 times the annual pension amount.
- Consider valuing your existing pension income stream assets before 30 June and transferring any excess amounts out of the superannuation system or rolling back into accumulation phase;
- Consider rolling back any existing pension income streams before 30 June to attract a higher personal balance transfer from a future income stream;
- Consider transferring assets out and re-contributing to other family members in the Fund in order to rebalance any existing Member accounts and pension phase that are likely to be in excess of the pension transfer balance Cap;
The new transfer balance Rules have special provisions in relation to child recipients of income streams resulting from a deceased Member as well as reversionary pensions. This will be the subject of our next edition of the Super Brief when we discuss the topic:- “Reversionary Pensions and Death Benefit Nominations – Bear traps under the new Superannuation Rules”
Due to the complexity of these rules we would encourage clients holding SMSFs in particular to consider their individual circumstances and to seek advice from us before 30 June next.