In response to our recent survey it has become apparent that almost 70% of our Members have an SMSF and we have been asked by many Members to provide "Tell it as it is" information and advice in that area. So each Friday we are going to provide some superannuation and SMSF focused content which you will hopefully find of interest. We do after all own a financial planning business (MTIS Pty Ltd) and have 16 people operating under the Marcus Today brand of telling it as it is to clients, rather than them what the industry want them to hear.
THE $1.6m SMSF CAP IS COMING
We have been fielding questions about the $1.6m SMSF cap that is being introduced from 1st July this year. This legislation has now been passed and will introduce what’s called a $1.6 million “transfer balance cap” which limits the amount of assets that can take advantage of the tax exemption of assets used to fund superannuation pensions.
The calculation of what constitutes tax-exempt assets is determined by a somewhat complicated system of debits and credits which are recorded in what is called a transfer balance account. You probably don’t need to know the details of how that is calculated, even the professionals get lost in the rather unhelpful legal language used to explain it. Suffice it to say, the $1.6m is a statement of what is in your superannuation fund give or take a few complications.
Assuming you have calculated the transfer balance account, going over the $1.6 million transfer balance cap will require the amount over $1.6m to be moved from the fund which will likely mean a reduction of any pension as well. Defined benefit pensions and certain pre-2007 superannuation pensions have special rules for the transfer balance cap recognising their non-commutable nature but the rest will get caught.
Any amounts in excess of the personal transfer balance cap of $1.6m can continue to be maintained in the accumulation account in your fund. This means if you have more than $1.6 million in super you can maintain up to $1.6 million in pension phase and retain any additional balance in accumulation phase (which is taxed less favourably).
Approaching 1 July 2017 clients may wish to structure their asset holdings to be in a position to optimise the $1.6 million transfer balance cap, especially between spouses.
It is also important to know that there is transitional capital gains tax relief for superannuation assets that are affected by any changes you might need to make by 1 July 2017 to comply with the new rules. This capital gains relief will ensure that any capital gain accumulated on affected superannuation assets will be deferred to a later time when the asset is sold.
In addition to the $1.6m cap the legislation is also introducing:
- Lower contribution caps from 1 July 2017. The new caps will be:
- Concessional contributions (pre-tax contributions) — $25,000 per year.
- Taxpayers who were aged 49 or over on 30 June 2016 can make up to $35,000 in pre-tax contributions in 2016/17.
- Non-concessional contributions (after-tax contributions) — $100,000 per year. The mooted $500,000 lifetime limit has been dropped in favour of this $100,000 annual cap. The rules allow the opportunity to bring forward three years of contributions – making it possible to contribute $300,000 in one year.
- A reduction in the income threshold at which individuals are required to pay an additional 15 per cent contributions tax, from $300,000 per year to $250,000.
- Providing greater flexibility for those with broken work patterns by allowing individuals with balances of less than $500,000 to ‘carry forward’ unused concessional cap space for up to five years.
- Removing the tax-free treatment of assets that support a transition to retirement income stream.
- For the 2016/17 year, it is still possible to make a contribution of up to $180,000 for one year, or to bring forward three years’ contributions – so you are able to make a contribution of up to $540,000. If you do not use this full limit of $180,000 or $540,000 in the 2016/17 year, then you will be limited to the $100,000 annual and $300,000 bring forward caps for future years.
- If you already have a balance of $1.6m or more in your SMSF at 1/7/2017 then you will not be able to make further after-tax contributions.
- When approaching the $1.6m cap care will need to be taken with the bring forward rules as these are restricted by the new $1.6 million balance restriction.
Some of these changes may require you to adjust your investment, contribution, pension and estate planning strategies going forward. This will most likely be the case if you have a superannuation balance of over or close to $1.6 million, were planning on making significant contributions to superannuation in the next few years, are a high income earner or have a transition to retirement pension in place now.
How can we help?
Marcus Today also has a financial planning business. We are already having discussions with clients in preparation for July 1st. If you are concerned that the Government’s changes to the transfer balance cap will affect you from 1 July 2017, you should be talking to your financial planner/accountant. If you don't have one please feel free to email us to arrange a time to meet so that we can discuss your particular requirements in more detail. We have less than four months until it all happens.