Tax with Max: Clarifying the 2017 super landscape

Q. From one of your recent articles I think the answer indicates that the asset limit to receive an age pension under the rules commencing January 1, 2017 is $816,000. Anyone losing their pension under the rules and getting it back later would be subject to an asset limit of $2.35 million. Does this mean that a couple would be better off losing their pension now and getting it back later, rather than not losing it when the new rules come into force on January 1, 2017?

Answer: Before I answer your question I need first to clarify the answer I gave in relation to couples who lose their age pension due to the change in the assets test that commences on January 1, 2017. The assets test that will apply is $816,000, and the $2.35m I referred to does not relate to any assets test. It is the value that a couple can have in their superannuation under the deeming rules that relate to the income test for the age pension.

The current income test means the age pension ceases once a couple's combined annual income exceeds $75,357. This means if a couple only has superannuation as their investment asset, and don't earn any other income, they can have up to $2.35m in a super fund under the income test deeming rules. Of course, because their assets will exceed the $816,000 assets test limit, they would not qualify for the age pension anyway.

When couples lose the age pension as a result of the change in the assets test they will effectively be given a Commonwealth Seniors Health Card that is not subject to an income test. Under the current income test applying to a CSHC couples lose the card if their total income exceeds $84,472.

For a couple that does not earn any other income from employment or investments outside of superannuation, under the current deeming income rates that apply to superannuation pension funds, the income limit for a CSHC will be exceeded when the total value of the superannuation accounts exceeds $2.637m.

The major benefit of receiving a CSHC without an income test will be for those people with extremely high superannuation balances, effectively those that that will be affected by the $1.6m pension transfer limit, and those that earn high amounts of income other than from a superannuation pension.

The answer to your question is that a couple will be better off if they lose their age pension as a direct change of the assets test that commences on January 1, 2017. If they lost their age pension before this date it is my understanding that they would not qualify for the non-income tested CSHC.

Q. In your article entitled Tax with Max: A super property dilemma (September 28) you made the suggestion that before July 1, 2017 it would be possible to make roll forward NCCs (non-concessional contributions) of up to $380,000, being $180,000 for 2016-17 and $100,000 for the two subsequent years.

In all other advice/commentary I have read this figure has been quoted as $540,000, being $180,000 for each of the three years as per the current NCC limits, presumably because they would be the ones in force at this point in time. Can you clarify/confirm which limit would apply?

Answer: What you have read in other publications could be regarded as being technically correct due to the fact that the legislation, to give effect to the changes in the non-concessional contribution limits, has not been passed by both houses of Federal Parliament.

If someone were to follow the advice in the other articles and contribute $540,000 in non-concessional contributions, if they meet the other relevant requirements, they will not be breaching the current limits.

In the announcements related to the scrapping of the $500,000 lifetime non-concessional contribution limit Treasury clearly stated that the measures will take effect once legislated from July 1, 2017. Under the revised limits no further NCCs can be made once a person's superannuation balance exceeds $1.6m. For those people with superannuation balances of less than this limit the maximum annual NCC will be $100,000.

The ability to bring forward two years of future NCCs will be retained. Having being taught to be cautious I believe it is prudent to advise Eureka Report subscribers that they should limit their NCCs for the 2017 financial year, if they qualify for the bring forward rule, to $380,000.

This $380,000 is made up of the $180,000 NCC limit for the 2017 year and the $100,000 limits that will apply from July 1, 2017, if the legislation is passed. If the legislation is never passed the current limit of $540,000 would then apply, which means a NCC of $160,000 could then be made.

For someone who has or is turning 65 during the 2017 financial year, and would not pass the work test in the 2018 year, it makes sense to make a $540,000 NCC under the current rules. If the legislation is passed they would be required to withdraw $160,000 as it would be regarded as an excess contribution and penalties could apply.

Q. What are the implications of the Government's proposal to add income from our defined benefits to our income from SMSFs in determining our tax position? This will very adversely affect those of us who worked hard to save within an SMSF as a supplement to our defined benefits.

Answer: If the $1.6m superannuation pension transfer limit becomes legislation there has been provision made for it to not only affect account-based pension holders but also those who receive pension income from defined benefit funds.

Defined benefit funds in most cases relate to people who have worked for government institutions and often the pension received is classed as untaxed. Under the current rules someone who is 60 or older and receives an untaxed super pension pays tax at their marginal rate, but receives a 10 per cent tax offset.

To ensure that the limit being placed on superannuation pension accounts is fair and equitable, effectively the $1.6m limit will apply to defined benefit pensions. This is being done by applying a multiple of 16 times to the amount received as an annual pension under a defined benefit scheme.

This means if someone is receiving a defined benefit pension of up to $100,000 there will be no change to their tax treatment. However, untaxed defined benefit pensions over $100,000 per annum will not receive the 10 per cent tax offset.

It would appear that if someone receives a defined benefit pension, and also has an account-based pension, they could be forced to roll back their account-based pension into accumulation phase if they receive more than $100,000 a year as a defined benefit pension.

Where the multiplied value of the defined benefit pension is less than $1.6m people can have account-based pensions that take them up to the $1.6m limit. For example, a person who receives a defined benefit annual pension of $60,000 a year, which has a value using the 16 times multiple of $960,000, will be able to have an account-based pension of up to $640,000.

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

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