Before the sun sets on this financial year and the new dawn rises, there are a number of things to consider before the superannuation landscape changes forever on 1 July. This guide and checklist provide an overview of things to take into account by 30 June this year and what needs to be done from 1 July, even if your superannuation balance may be less than $1.6 million.
Things to do before 30 June 2017
Contributions
There are no changes to the concessional and non-concessional contribution limits and rules for this financial year. However, from 1 July, the caps on these contributions will be reduced and for anyone with more than $1.6 million in super on 30 June 2017, non-concessional contributions cannot be made to super.
Therefore, review your superannuation contributions if you wish to maximise the opportunity you have available until 30 June 2017. Concessional contributions include salary sacrifice, personal deductible contributions and superannuation guarantee contributions. If you are at least 49 at the beginning of the financial year, the concessional contribution maximum is $35,000 and for everyone else it is $30,000.
Pension balance reduction
If you have more than $1.6 million providing your superannuation pensions it will be necessary to reduce your pension balances to no more than $1.6 million by 30 June 2017 otherwise a tax penalty may apply. As you don’t know the exact value of your pension balance prior to that time any adjustment to the fund’s accounts that is required can be made at the time the fund’s accounts are written up sometime after 1 July 2017.
However, you need to take action now to tell the trustee of the fund that you expect the pension balance to be greater than $1.6 million but don’t exactly know how much that will be on 30 June 2017. Once you know the exact amount the accounts can be adjusted to reduce the pension balances to the required amount(s). SuperConcepts has a member request on its website www.superconcepts.com.au [1] which you can use free of charge for the purpose of notifying the fund about the required adjustment.
Things to do from 1 July 2017
Contributions
Reduced concessional cap to $25,000 per annum
From 1 July 2017, if you want to make extra concessional contributions, ensure that the combined total of your employer SG superannuation contributions and any salary-sacrifice payments made to superannuation, and any contributions claimed as an income tax deduction do not exceed $25,000 for the financial year.
Reduced non-concessional cap to $100,000 per annum, with the three-year bring forward figure to $300,000
Generally, non-concessional contributions are contributions made to an SMSF that are not included in its assessable income; most commonly, personal contributions for which no income tax deduction is claimed.
As the contribution cap will be reduced from 1 July 2017, there will be less scope in future income years to make non-concessional contributions. If you have a total superannuation balance in excess of $1.6 million as at 30 June, you will not be able to make a non-concessional contribution in the next income year.
Where you have triggered their three-year bring forward entitlement in either 2015/16 or 2016/17, and you don’t fully utilise the bring forward entitlement by 30 June 2017, from 1 July 2017 you may find your entitlement to the remaining unused amount will be reduced in line with the reduction in the non-concessional contributions cap.
The $1.6m Transfer Balance Cap
From 1 July 2017, a lifetime cap will apply to the value that can be transferred to the pension phase of super. This cap is known as the ‘Transfer Balance Cap’ and will start at $1.6 million. This cap will be indexed periodically in $100,000 increments in line with the consumer price index.
The cap applies to:
- your combined pension balance so that if you have multiple pension accounts, either within the same fund or in multiple funds, it’s the total combined value of these pensions that is counted against the cap
- pensions commenced both before and from 1 July 2017.
Any amounts in excess of the cap must be transferred to an accumulation account or withdrawn from the fund. For pensions commenced prior to 1 July 2017, this must occur on or before 30 June 2017. Some exceptions apply to pensions, which under the legislation are not permitted to be commuted (converted to lump sums).
These new rules limit the amount that can be held in the tax-free pension environment. Earnings on pension balances are tax free while earnings on accumulation balances are taxed at 15%.
Capital Gains Tax (CGT) Relief
As a result of the introduction of the $1.6 million Transfer Balance Cap and the new requirements applying to Transition to Retirement (TTR) Pensions, some funds that sell assets after 1 July 2017 may incur capital gains tax (CGT), which would not have otherwise been payable if the Transfer Balance Cap had not been introduced. To compensate members, CGT relief measures have been introduced.
This treats certain assets as being sold and re-acquired on the date of the roll-back to accumulation and reset the cost base of the asset. The CGT reset date must be 30 June 2017 unless the fund has segregated assets, in which case the CGT reset date can be between 9 November 2016 and 30 June 2017.
Resetting the cost base is optional:
Provided the eligibility criteria are met, resetting the cost base is optional and is applied on an asset-by-asset basis.
Elections to claim CGT relief are irrevocable. This means the deemed sale and repurchase of an asset cannot be reversed. This is especially relevant for funds where an asset’s future performance turns out to be unexpectedly unfavourable or where the fund’s proportion of exempt pension income in the income year of disposal is greater than the percentage in 2016/17. It is worthwhile to seek professional tax advice to determine whether your fund is eligible for this relief and its pros and cons.
Trustees can choose when to pay
The SMSF has the choice of either recognising any notional capital gain or loss in the 2016/17 income year, or deferring it until the asset is sold.
Tax changes to Transition to Retirement (TTR) pensions
TTR pension no longer exempt from fund tax exemption
From 1 July, investment earnings within a TTR pension will no longer be tax exempt and will instead be taxed at the concessional rate of 15%.
Members transitioning to retirement will still able to commence a TTR pension upon reaching preservation age and access their preserved superannuation balances prior to retirement. The earnings of the pension account won’t be exempt from tax until a full condition of release has been satisfied.
The value of the TTR pension will not count towards the Transfer Balance Cap until such time that a full condition of release has been satisfied.
Checklist
Here’s our checklist to help you stay on top of the super changes coming into effect from 1 July 2017.
1. $1.6m Transfer Balance Cap
- Members with pension balances in excess of $1.6 million – If you have more than $1.6 million in the pension phase of super, any pension balance in excess of $1.6 will need to be removed from super or transferred to accumulation phase on or before 30 June 2017. Some exceptions apply to pensions, which under the legislation are not permitted to be commuted. The ATO has released guidelines which explain how an SMSF member can request a pension commutation prior to 1 July 2017 to comply with the Transfer Balance Cap, even though the amount of the member’s excess pension balance may not be known at the time of the request.
- Members with multiple pensions – If you have multiple pensions you will need to choose which pension to commute, if the total of value of the pensions exceeds $1.6 million
- Strategies for spouses – Spouses with uneven super balances may consider implementing contribution-splitting strategies in 2016/17 and beyond. This may not apply in all cases subject to the contribution rules.
2. Capital Gains Tax (CGT) relief
- Which assets to reset to market value – If there are members in the fund affected by the introduction of the $1.6 million Transfer Balance Cap or the changes to TTR pensions, trustees will need to decide which assets, if any, to claim CGT relief for.
- Make a valid choice – Trustees must choose for CGT relief to apply for a CGT asset in the approved form. The choice is irrevocable, and must be made on or before the day a trustee is required to lodge their fund’s 2016/17 income tax return. This decision should also be documented through a trustee resolution.
- Defer or not to defer – Where there is a notional capital gain, trustees will need to decide whether to treat the proportion of notional capital gain as assessable in the 2016/17 year or defer until the asset is actually sold.
- Keep records – Trustees need to keep appropriate records for the assets subject to CGT relief, and the exempt portion of any deferred capital gain. Records need to be maintained to ensure that capital gains or losses on the subsequent realisation of these assets can be accurately determined.
- You may need an actuary certificate – Where applicable an actuary certificate would need to be obtained to determine the portion of the fund’s assets in pension phase for the 2016/17 financial year. This will be needed in order to determine the portion of the notional capital gain that will be taxable on assets for which the CGT cost base has been reset.
3. Tax Changes to transition to retirement (TTR) Pensions
- You may be need to make adjustments to remain within the cap – Once a full condition of release is met, such as retirement, the value of a TTR pension will count towards the Transfer Balance Cap at that point. Members may be required to make adjustments to remain within the cap once the pension converts to an account-based pension.
4. Limits to non-concessional contributions
- Consider maximising contributions during 2016/17 – Remember to consider maximising your non-concessional contributions during the 2016/17 financial year.
- Close out any unused bring-forward entitlements – If your client has triggered the bring-forward rule in either 2015/16 or 2016/17, ensure they have fully utilised their bring-forward entitlement by 30 June 2017.
- Strategies for spouses – Spouses with uneven super balances may consider implementing contribution-splitting strategies in 2016/17 and beyond.
- Remain within the applicable cap – Ensure that your client’s non-concessional contributions are not higher than the applicable cap post 1 July 2017.
5. Limits to concessional contributions
- Consider maximising contributions during 2017 – Remember to consider maximising concessional contributions during the 2016/17 financial year.
- Remain within the applicable cap – Ensure that your concessional contributions are not higher than the applicable cap for post 1 July 2017.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.