New superannuation legislation will take effect from 1 July 2017. It has received Royal Assent so will apply in its present form.
The information contained in this paper is of a general nature and does not take into account personal circumstances. Before making any decisions based on the factual information contained in this document, please consult with your financial adviser.
Below is a summary of the impact of the new legislation of retirement income streams and the tax free status of assets inside the superannuation environment.
Introducing a $1.6 Million Transfer Balance Cap
From 1 July 2017, the Government will introduce a $1.6 million cap on the total amount of superannuation that can be transferred into a tax-free retirement account.
- The cap will index in $100,000 increments in line with the consumer price index, just as the Age Pension assets threshold does
- Superannuation savings accumulated in excess of the cap can remain in an accumulation superannuation account, where the earnings will be taxed at 15%
- A proportionate method which measures the percentage of the cap previously utilised will determine how much cap space an individual has available at any one time. For example, if an individual has previously used up 75% of their cap, they will have access to 25% of the current (indexed) cap
- Subsequent fluctuations in retirement accounts due to earnings growth or pension payments are not considered when calculating cap space
Unlike the current unlimited superannuation balance which may be treated as in the tax-free pension / retirement phase upon an individuals’ retirement, from 1 July 2017, the maximum amount per person which may be transferred into tax-free retirement / pension phase will be $1.6 million (indexed in future $100,000 increments). Any excess amounts should be commuted to a 15% tax rate accumulation phase super account and / or withdrawn from super.
An income stream is fully or partially "commuted" when a super fund acts on a member’s instructions to reallocate some or all assets supporting their tax-free income stream to instead support a lump sum (accumulation phase) entitlement. Commutation is generally the only way an individual’s transfer balance can be reduced where it would otherwise exceed $1.6 million from 1 July 2017.
Commutation / reallocation of tax-free pension phase assets to 15% taxed accumulation phase will reduce the super fund’s ongoing proportion of tax-free income.
Commutation / reallocation of an income stream asset is deemed to be a disposal and re-acquisition of the asset for CGT purposes (if the election is made to reset cost base to market value). This deemed treatment will not, however, apply for GST purposes (ie. commutation will not result in a taxable supply of a super fund’s commuted / reallocated commercial building).
Those individuals already in retirement as at 1 July 2017 with balances in excess of $1.6 million will need to either:
- Transfer the excess back into an accumulation superannuation account; or
- Withdraw the excess amount from their superannuation
Example – Jason
Jason is 60 and plans to retire during the 2017-18 financial year. Jason expects he will have an accumulated superannuation balance of less than $1.6 million. This measure does not affect Jason.
Example – Agnes
Agnes, 62, retires on 1 November 2017. Her accumulated superannuation balance is $2 million. Agnes can transfer $1.6 million into a retirement income account. The remaining $400,000 can remain in an accumulation account where earnings will be taxed at 15%. Alternatively, Agnes may choose to remove this excess amount from superannuation.
While Agnes will not have the ability to make additional contributions into her retirement account, her balance will be allowed to fluctuate due to earnings growth or drawdown of pension payments.
Tax-free income streams
Earnings in retirement phase accounts will remain tax-free.
From 1 July 2017, there will be the removal of a self-managed super fund’s (SMSF’s) ability to hold assets as segregated current pension assets (e.g. assets allocated only to supporting an individual’s tax-free income stream) if any SMSF member has a total super balance which is >$1.6 million at the most recent 30 June (ie. such SMSF’s will need to use the proportionate method only from 1 July 2017).
From 1 July 2017, the legislation will remove the tax exempt status of income from assets supporting transition to retirement income streams (TRIS). Concessional treatment of the maximum 10% Transition to Retirement Income Streams (TRIS) available to individuals at or above preservation age such that supporting assets will be taxed at 15% rather than 0% and concessional lump sum treatment will no longer be available for TRIS drawdowns from 1 July 2017.
For more information on the superannuation reform and how the changes will affect you, your business and family, please contact Ian Walker on 07 3002 2699 or email@example.com.