Key Superannuation Changes for July 2017
The main bills have passed, although enshrining of the purpose of superannuation in law has been left for another day.
This is the first major overhaul of the superannuation landscape since the changes introduced in 2007, which were, in the intervening years, extremely generous.
The changes are designed to reduce the tax concessions available through superannuation, targeted at those who are at the “well-off” end of the spectrum.
Broadly it is still a very tax advantaged structure and many things have not changed, for example, if your benefits are paid to you (whether as pension or lump sum) once you have attained age 60, there is no tax you are personally required to pay.
There is to be, however, a limit on what the fund can hold in the tax free pension phase.
Government statements suggested that very few people would be affected, but it looks like more people are going to be caught than may have been anticipated.
This series of notes is designed to highlight the most important aspects that need to be worked through, and draw attention to action to take, starting with the most important first.
Depending on demand, we will also hold one or more seminars to go over the changes and strategies in a face-to-face situation.
Timing
For the major changes, decisions will need to be made over the next 6 months or so, allowing decisions and as required, action, by 30 June 2017.
Changes to Contribution Rules: 30 June 2017
If assets in super per person are already over $1.6 million, then non-concessional contributions will not be possible from 1 July.
Until then the current rules apply. Those rules allow up to $540,000 per person (subject to the usual limitations applicable now) to be contributed.
For those with less than $1.6 million the amounts able to be contributed will significantly reduce.
If contributions are to be made by the transfer of assets, then early consideration is needed, particularly where those assets are land and buildings etc. so documents can be prepared and the requirements for a contribution to be effective are met.
If the Fund has borrowings which were going to be cleared by non-concessional contributions early thought needs to be given, including by virtue of the 31 January 2017 start date for the ATO guidance on related party loans.
Contribution or income reserving may be useful to consider.
Pension Changes: from 1 July 2017
Pension accounts need to be within a $1.6 million “transfer balance cap” as from 1 July 2017.
There is, however, a $100,000 buffer (for amounts in pension mode at 1 July 2017) which applies before a tax cost arises, but only if rectified within a 6 month period.
If the requirements are not met there is a 15% tax cost on the deemed earnings on the excess, plus paperwork. In future years that tax cost could be 30%.
The likely balance of all pension accounts needs to be determined (and if needed assets valued) to make sure they are within the $1.6 million limit, or if not are no more than $1.7 million, and then the excess rectified by 31 December 2017.
This will possibly be achieved by rolling part back into the accumulation phase, thus returning to the 15% and 10% rates.
Alternatively a lump sum (or larger pension amount) could be withdrawn to reduce the balance as needed, noting however doing so may not be allowable if the pension is a transition to retirement income stream.
Cost Base of Assets: Election by Due Date for Fund’s 2016 Return
Where the new rules are going to effectively require a pension to cease then an election can be made to reset asset cost bases, by way of a deemed disposal and re-acquisition at market value.
If the asset is currently segregated to pay a pension then no gain arises, and if it is proportionally exempt then the gain can be deferred.
Reviewing funds in the pension mode, and cost base and value of assets will need to be undertaken in time to take action and make any elections (which are to be made asset by asset).
If a cost base is reset as it is a deemed disposal and re-acquisition, the one-third discount period of 12 months recommences. Elections are irrevocable.
Death of a Person: Within 12 Months (Maybe)
On the death of a person, decisions have to be made within 12 months of a pension becoming payable, as the pension resulting is then counted for the recipients transfer balance cap, and so may trigger an excess.
It may be appropriate to move from having an automatically-reverting pension (in which case, the 12 months runs from the date of death) to a pension that reverts upon the trustee’s decision (in which case, the 12 months runs from the date of that decision).
Regard should be had to the loss of the tax exemption in the fund between the date of death and the commencement of a new pension in the latter scenario.
Advice
In discussing superannuation interests, including contributions and 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.
