Taking it to the pensions limit and beyond

Q. I have an SMSF in pension mode with a balance of approximately $1.7 million. I had planned on withdrawing $100,000 prior to June 30, 2017 to ensure I am under the $1.6m cap. Do market fluctuations allow a target of $1.7m rather than $1.6m?

ANSWER: Under the new system the $1.6m pension transfer limit applies to the value of a member's pension account at June 30, 2017. Where a member's pension balance has increased due to market fluctuations, and exceeds the $1.6m limit at June 30, 2017, the excess will either need to be withdrawn or rolled back into an accumulation account.

After June 30, 2017, if the value of the pension account increases due to income earned, including increases in the market value of investments, this does not affect the $1.6m transfer limit.

Q. I am under 65. Can I still make a tax deductible concessional contribution of $35,000 to super this 2017 financial year, and $25,000 next financial year? Will I be allowed to segregate which assets go into the accumulation account from the pension account to ensure that the pension account does not exceed $1.6 million?

ANSWER: As you are under 65 you can contribute the $35,000 concessional contribution for the 2017 year but will be limited to $25,000 for the 2018 year. If your current pension account in your SMSF does not exceed the $1.6m limit you can use the segregation method to allocate assets between your accumulation account and your pension account.

Once the combined value of your accumulation accounts and pension accounts exceed $1.6m, you will not be able to use the segregation method and must use the proportional method.

It is interesting to note that nearly all of the limits that will apply from July 1, 2017 under the new superannuation system will increase in $100,000 increments in line with increases in the consumer price index. The $1.6m limit relating to SMSFs not being able to use the segregation method however is set in concrete and will not increase.

Q. If you anticipate a significant capital appreciation for a particular asset after June 30, 2017, are you able to keep that asset in the pension account and not use the proportional method but allocate this asset to the pension accounts? Has the segregation method for tax purposes been scrapped for all SMSFs?

ANSWER: If the total value of your accumulation and pension accounts does not exceed the $1.6 million limit you can continue to use the segregation method and allocate the investment to the pension account. This will result in the value of the pension account increasing without it affecting the amount of the new pension transfer balance cap.

For example, if your pension account balance at June 30, 2017 was $1.2m you would have used three-quarters of the new pension transfer limit of $1.6m. If the asset generates the significant capital gain, while you are still able to use the segregation method, all of that gain would increase the value of your pension account without it affecting the pension transfer limit. This means you could transfer a further $400,000 into a pension account.

The segregation method of allocating assets between accumulation accounts and pension accounts within an SMSF can still be used until the combined value of a member's pension and accumulation accounts in the SMSF exceeds $1.6m; from then on the proportional method must be used.

Q. I turned 65 on August 16, 2016, during the time when a $500,000 non-concessional lifetime limit was proposed. I have been retired for over four years with no prospect of returning to the workforce.

I previously used the withdraw/re-contribute strategy with a $540,000 non-concessional contribution in the previous three years and became eligible to do so again on July 1, 2016, which was to be the final piece of my long-term super strategy.

As you would realise, I could not execute the withdraw/re-contribute strategy between July 1, 2016 and August 16 because the proposed $500,000 non-concessional lifetime limit prevented me from doing so.

If I had gone ahead with a three-year bring forward of $540,000 and the legislation was passed, then I would have needed to reverse the contribution and be stuck with $540,000 outside of super. Are there any options available to me with regard to the re-contribution strategy?

ANSWER: Unfortunately as you will not be able to pass the work test you cannot withdraw a further $540,000 and re-contribute it as a non-concessional contribution to increase the tax-free percentage of your super fund.

As you have probably found out trying to take up the matter with the ATO and other authorities and politicians, because you are effectively being stopped from using the re-contribution strategy before your 65th birthday, it more than likely falls on deaf ears.

Your only option will be, if you want to use the re-contribution strategy, to try and find some form of work between now and June 30, 2017 that will result in you meeting the 40 hours in 30 continuous days work test.

Q. I have recently turned 56 and due to emerging health issues may need to consider early retirement over the next 12 to 18 months. I currently have approximately $1.75 million in an SMSF and maximised the non-concessional contribution for the 2017 year. After retirement, the only income I will receive personally is from 'managing' my personal investments that are valued at approximately $1m.

Can I make a $25,000 personal contribution into my SMSF after July 1, 2017 to reduce my personal tax payable on investments? Also, just prior to the SMSF moving into pension phase, can I take the excess over $1.6m and invest that in my personal name to give a better overall tax outcome?

ANSWER: If you recently turned 56 that should mean you were born between July 1, 1960 and June 30, 1961. This means that your preservation age is 56 and you could commence a pension from your SMSF once you have met a condition of release, such as retiring.

One of the other changes made to superannuation tax policy has been the broadening of individuals being able to claim a tax deduction for personal concessional super contributions. Currently a person who receives the benefit of employer super contributions can only make a tax-deductible super contribution if their employment income is less than 10 per cent of their total income.

From July 1, 2017, as long as there have been no other concessional contributions made by you or on your behalf, you can make a $25,000 tax deductible concessional contribution to reduce the tax payable on your investment income. Under current legislation you will be able to do this until you turn 65, after which time you would need to pass a work test.

You should seek professional advice to determine whether you will be better off tax wise to pay out the excess superannuation over the $1.6m pension transfer limit and invest it in your personal name.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

Got a question for the Tax with Max column? Email: askmax@eurekareport.com.au

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