The much publicised superannuation reforms are set to commence from 1 July 2017. While these may not have a significant impact for some, they will require careful planning by others to ensure compliance.
Outlined below is a summary of some of the more significant changes that will commence on 1 July 2017.
The 3 year bring forward rule remains for persons under 65, allowing individuals to contribute up to $300,000 non-concessional contributions in one year, provided they do not make any further non-concessional contributions in the following 2 years.
If a person triggers the 3 year bring forward rule during the 2016/2017 financial year, they will still be able to contribute up to $540,000 on or before 30 June 2017. Any balance of the bring forward amount not used as at 1 July 2017 will be adjusted to reflect the reduced non-concessional contribution cap.
In addition to amounts able to be contributed under the non-concessional cap, the Government has announced in the 2017-18 Budget that from 1 July 2018 individuals over 65 can contribute up to $300,000 of the proceeds of sale of their principal residence as a non-concessional contribution. To be eligible, the residence must have been owned for at least 10 years and the contribution is able to be made by both members of a couple in respect of the same home. Contributions can be made even if the individual’s account balance exceeds $1.6M.
Each individual will have a transfer balance account from the first time that they commence a retirement phase superannuation income stream. Transition to retirement income streams do not count towards the cap.
Amounts are credited to the account when they are transferred from accumulation phase into a retirement phase income stream and are debited when they are commuted and either paid out as a lump sum or transferred back into accumulation phase. Pension draw downs do not count as a debit to the account balance.
Increases and decreases in the account balance after the pension has commenced which are attributable to earnings, capital growth or capital losses referrable to the capital supporting the pension do not count as credits or debits. As a result, the value of the pension can grow to exceed $1.6M without breaching the transfer balance cap.
The Government has announced in the 2017-18 Budget, however, that the outstanding balance of a Limited Recourse Borrowing Arrangement (LRBA) will be included in a member’s annual total superannuation balance and the transfer balance cap, with repayments of the principal and interest of an LRBA from a member’s accumulation account being credited to the member’s transfer balance account.
For individuals who have existing pensions as at 1 July 2017 the transfer balance account is the value of the superannuation interest on 30 June 2017. Where individuals have more than one superannuation income stream either in the one fund or across different funds, the balance is the sum of the value of all of these superannuation income streams.
Individuals who have current superannuation income streams the value of which exceeds the transfer balance cap will need to commute part of their income streams and either draw down the excess or transfer it back into accumulation phase by 30 June 2017.
Individuals who have a transfer balance cap on 1 July 2017 of more than $1.6M, but less than $1.7M, will have a 6 month transition period to bring their account balance down to $1.6M without penalty.
Individuals who exceed their transfer balance cap at any time will have an excess transfer balance and will have to commute part of their income stream to remove the excess plus the notional earnings derived on the excess during the period of the breach.
If the excess continues for more than 1 day, then the individual is subject to excess transfer balance tax for the period of the excess. The tax is payable on the notional earnings (calculated daily) derived from the excess during the excess period and is payable at 15% for breaches occurring during the 2017-18 income year. In later years, the tax rate is 15% for the first breach and 30% for any subsequent breaches.
The current tax exemptions continue to apply up to 30 June 2017. Accordingly, any income (including capital gains) derived from segregated current pension assets up until this time are still tax exempt.
Transitional CGT relief is available so that assets with current capital growth do not need to be disposed of by funds to get the benefit of current tax exemptions on increases in value to date.
Where an asset that is currently a segregated current pension asset ceases to be a segregated current pension asset as a result of the commutation of benefits back to accumulation phase to comply with the new legislation, provided certain criteria are met, the fund can elect to trigger a capital gain as at the date that the asset ceased to be a segregated current pension asset via a notional disposal and re-acquisition of the asset. Any capital gain resulting from the election will be tax free and the cost base of the asset will be reset to its market value as at the date of the notional re-acquisition so that any future capital gain or capital loss made in respect of the asset is calculated based on any increase or decrease in value from that date only. In addition, the 12 month qualification period for the general CGT discount will be reset.
Where a fund is currently using the proportionate method it can also elect to trigger a capital gain based on the value of the assets as at that date. As above, this will reset the cost base of the asset and the 12 month qualification period. The capital gain made as a result of the election will be partly taxable and partly tax free and the fund can choose to defer the tax payable on the taxable portion of the capital gain until a subsequent realisation event occurs in respect of the asset, e.g. a subsequent disposal of the asset.
The anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 can apply to the election.
This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.