Key Superannuation Changes for July 2017: Pension Limits

Here is Part 4 of our series on key superannuation changes to come into effect on 1 July 2017.

The legislation introduces an extraordinarily complex set of rules designed in summary to limit the amount in the fund that can be held in the tax-free pension stage to an amount of no more than $1.6 million.

In brief, this is accomplished by pension balances, being subject to a “transfer balance cap”, which is established when the pension commences, or on 1 July 2017 for pensions which are already being paid.

If too much is held in the pension account, then tax has to be paid on the “notional earnings” on the excess.

The first time this happens the tax rate is 15%, but if it happens again then the tax rate becomes a penalty 30%.

Accordingly, and as a result of the paperwork needed to be done, all pensions should ensure that their pension accounts do not exceed $1.6 million.

Nothing has been released yet on how to value assets, which under the current legislation is required each year, but without specifying any particular formality to be adopted.

At this point, therefore assets need to be valued to market, with flexibility as to how that is able to be demonstrated by the fund trustees.

Introduced (to some surprise) is the ability to reset the cost base of pension assets to the asset’s market value at 30 June 2017.

The implications will differ, depending on whether the asset is “segregated” to meet pension liabilities, or if the fund uses the “proportional” approach.  With the former any gain will be exempt, and the latter it will be partially exempt and able to be deferred.

Resetting the cost base is only available if the pension was in place prior to the bills being introduced into Parliament in September 2016.

The cost base reset is achieved by making an irrevocable election made and lodged by the time the fund’s tax return is due, and is to be made on an asset-by-asset basis.

It appears that the reset is only available where action has to be taken due to the new rules i.e. either because:

  • the pension balance is over $1.6 million; or
  • the pension is a transition to retirement pension (which under the new rules will no longer qualify for the tax exemption).

The ATO have foreshadowed that taxpayers taking action to access the cost base reset where it is not within the above circumstances will be scrutinised under the anti-avoidance rules in Part IVA.

Transition to Retirement Pensions

Part of the legislation provides for the removal of the tax exemption within the fund where the pension being paid is a “transition to retirement” income stream.

Accordingly, one of the tax-attractive features of a transition to retirement strategy will be removed.

Such pensions are payable from age 65, where the person has not met the definition of “retirement” as set out in the SIS Regulations.

Consideration will need to be given as to whether the person:

  • keeps the pension going, but no longer has the benefit of the tax exemption;
  • ceases the pension and rolls back into the accumulation phase; or
  • takes action so he or she meets the definition of “retirement”.

That definition is far easier to meet from age 60, and simply requires a cessation of an arrangement under which the person was gainfully employed on or after that age.

Note, however, there is copious case law in relation to what is really needed for a termination of employment and precisely what will need to be done to allow the “transition to retirement” income stream convert to a normal pension.

Consideration will also need to be given to the possible advantages of using a cessation of a transition to retirement income stream to trigger a cost base reset.


In discussing pensions with clients, the licensing requirements need to be met.

In this regard ASIC has recently issued some guidance on accountants giving advice, in a release entitled “AFS Licensing Requirements for Accountants who provide SMSF Services”.

If you require any assistance, please contact us.