|Summary: The proposed $1.6m transfer-to-pension cap means that anyone with more than that in superannuation is going to have to make some choices.|
Key take-out: There are some key dos and do-nots to reposition yourself ahead of the government's still-to-be-legislated change.
Key beneficiaries: Retirees, superannuants. Category: Superannuation.
So, you're going to bust the cap. You've got more than $1.6 million in super. And you're wondering what the proposed transfer-to-pension cap is going to mean.
You're going to have some decisions to make. Which of your precious assets stay in, and which stay out?
The new (it's still technically a proposal) $1.6m transfer-to-pension (TTP) cap means that anyone with more than that in superannuation is going to have to make some choices.
We don't know exactly yet what those choices will need to be yet. We'll need to wait to see the draft legislation, hopefully soon, to know those with any great certainty.
But coming from the experts, there are a few things that, even now, SMSF trustees/members should start to consider.
Refreshing your cost base
If you have a pension fund that currently has more than $1.6m in it, you may wish to consider, very carefully, refreshing the cost base of the assets in the pension fund.
Why? To protect yourself from a nasty capital gains tax bill later.
If you are going to be in the position where you have to transfer a substantial amount back to superannuation (from your current pension account, if it's more than $1.6m), then you might also be transferring back from pension to super a big tax problem.
Here's an example:
Let's say you previous transferred $4m of assets into a pension fund in 2010. The assets you had transferred into the pension fund at that time had a cost base of $2m. They are, by virtue of being great assets that have done well with capital growth, as of today's date, worth $6m.
You are only allowed to keep $1.6m in pension, so you are going to have transfer $4.4m back from pension to super.
With that $4.4m that goes back to pension will be a cost base of $1.467m (I'm just using a proportional amount of the original $2m cost base). If you then had to sell this $4.4m while back in superannuation, you would face a tax bill of $293,333 (assuming 10 per cent tax on the capital gain).
However, if you turned over the $6m in assets currently in the pension fund before June 30 next year, to give yourself a new cost base of approximately $6m, it would dramatically increase the cost base and lower future potential capital gains.
You will incur some trading fees obviously, which will hopefully be far less than the tax you might have to eventually pay. It's something worth considering.
Wash sale rules – a big, important note
Please be aware of the wash sale rules. The Australian Taxation Office is alert to those who are simply trying to "wash" their cost bases to minimise tax. And they don't like it.
In order to avoid unnecessary attention from the ATO, you will need to be very careful about how you implement a program to refresh your cost base, and preferably seek specific advice for your situation from your financial adviser or accountant, or bone up heavily on what you need to do.
Avoiding a wash sale includes: not selling a similar amount of assets, then simply repurchasing the same amount of assets, such as selling 1000 Commonwealth Bank shares, then repurchasing 1000 CBA shares.
Use it as a time to make some asset allocation changes, or sector changes, or changes to a competitor that you believe is likely to perform better in the future, such as moving from one bank to another bank you think has better prospects. If you're selling 1000 BHP Billiton, then perhaps you'll buy a smaller amount of BHP, but diversify into Woodside Petroleum and/or Rio Tinto or others (please note, they're just examples. I am giving strategic, not share advice in this column).
Even-up your super
I'm seeing example after example where people should start acting immediately to try to even up their super balances between spouses.
A situation you want to avoid is where one member of a couple has a pension fund balance of $2.5m, and the other has a balance of $400,000. After July 1 next year, the spouse with the $2.5m balance will have to transfer back $900,000 from pension to super to fit under the TTP cap and start paying tax (at 10-15 per cent) on income and gains on that $900,000.
You need to do what you can to even-up super funds. That can include some of the strategies I covered here. Moving concessional contributions from a high balance spouse to a low-balance spouse, on a yearly basis, will be very important. Sure, it might only be $35,000 (less 15 per cent) and $25,000 (less 15 per cent) but each and every year, it will make a huge difference.
Which assets should stay in pension and which should go to super?
This is going to be a huge question that many will need to answer in the next nine months … but we can't begin to answer it yet.
If you have to transfer a bunch of assets back from pension to super, what assets are you going to leave in pension and which will you push back to super?
The reason it can't be answered is because we haven't seen the draft legislation. And so much is going to depend on what you will and will not be allowed to do, in regards to your $1.6m pension fund.
No one has answers yet. And there are plenty of theories. Max Newnham and I had a good debate on it – both of us were polar opposites on what we though the Tax Office would do – immediately after getting off air from last week's Advisor Q&A.
For some, from a risk perspective, it might make sense to transfer higher income assets into super. For others, it will be growth assets. It will be a unique decision to make for yourself.
But first … we need to see the legislation.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is a licensed financial advisor, a mortgage broker and an expert on self-managed super funds. He is a regular contributor to Eureka Report. To contact Bruce, please click here.