Tax with Max: Getting it right before July 1

Q. My husband is 65 and I am considerably younger. He has $1 million in pension phase in our SMSF, and I have $300,000 in accumulation phase. In the 2016 financial year he made a non-concessional contribution of $180,000 into his pension account. We wish to transfer funds from his pension account to my accumulation account so he can qualify for the Centrelink age pension.

Could we amend the 2016 tax return and have the accounts re-audited to have the $180,000 NCC shown as my contribution? Could we also for the current financial year have him withdraw $540,000 and have me make an NCC using the three-year bring forward rule?

ANSWER: The first point I need to clarify is that your husband could not have made an $180,000 non-concessional contribution (NCC) directly into his pension account. Super contributions, whether they are concessional or non-concessional, must first be made to an accumulation account and then rolled into a pension account.

This means in your husband's situation the $180,000 NCC would have first gone into an accumulation account and then rolled into a pension account. This would have resulted in him having two pension accounts.

His other option would have been to make the NCC, commute his $820,000 in pension back into accumulation phase, and then commence a new pension account of $1 million.

For him to have made the NCC of $180,000 he must have passed the work test if the contribution was made after he turned 65. If he did not pass that work test, and there has in fact been an error made by the contribution being classed as his when he could not have made it, you could have an arguable case for the 2016 accounts being altered to show the contribution coming from you.

If your husband was entitled to make the NCC you could face problems in having the 2016 accounts changed and re-audited unless another mistake of fact has been made. You could not change the 2016 accounts just to gain a Centrelink or tax advantage.

To change the 2016 accounts you would need to have some form of documentation – such as a letter from you as the member stating that you made the $180,000 contribution and that it had been mistakenly allocated to your husband – that could be shown to the super fund's accountant and auditor.

There is nothing stopping your husband withdrawing $540,000 from his superannuation pension account, and then you making an NCC of $540,000 before June 30, 2017. As a result of the superannuation changes that commence on July 1 this year will be the last time that an NCC of $540,000 can be made.

The NCC limits from July 1, 2017 will be $100,000 a year, or up to $300,000 if a person qualifies for the bring-forward rule. When someone triggers the bring-forward rule in the 2017 financial year, but does not contribute the full $540,000, they will be limited to only making an NCC of $380,000.

This strategy of the $540,000 being withdrawn from your husband's pension account, and you making an NCC of the same amount, will only work if the assets counted by Centrelink excluding the value of your family home and your superannuation are worth less than $816,000.

Q. I have a number of questions relating to the new superannuation and pension rules that commence on July 1, 2017.

1. If I contributed $100,000 to a super pension account now and take it out before June 30, 2017, is it still going to count as part of my transfer balance on June 30, 2017?
2. Do lump sum withdrawals from a pension account in 2018 – for example, $100,000 from a $1.6 million superannuation pension balance – reduce my transfer balance and can I then top up to $1.6m at a later date? Does this apply to regular pension payments?
3. Can I move part of my $1.6m in pension to an accumulation account in 2018 and then move it back to pension, or have I used 100 per cent of my transfer balance?
4. If I have $1.6m in a pension account in 2018 can I still contribute to an accumulation account, provided I meet the non-concessional and concessional rules?

ANSWER: Taking your questions in the order that you have asked them:

1. If you make a non-concessional super contribution of $100,000 which is rolled into a pension account during the 2017 financial year, and that is either paid out as a lump sum pension payment or a lump sum commutation, your transfer balance at July 1, 2017 would not be affected. In other words, any activity during the 2017 year in superannuation accumulation and pension accounts only has an effect in determining what the balance of a person's accumulation and pension accounts are at the date the new rules apply, on July 1, 2017.

2. If a $100,000 amount is withdrawn from a pension count as a lump sum pension payment this does not have an effect on reducing a member's transfer balance account. For the $100,000 withdrawal to affect the transfer balance account it must be done as a commutation payment. If it is done as a commutation you can top up your pension account back to the $1.6 million limit at a later date.

3. To transfer a sum of money from a pension account into an accumulation account, this must be done as a commutation. In other words, a portion or the entire pension must be finished or commuted and then rolled back into accumulation phase. This is treated as a credit and the amount will decrease the transfer account balance.

4. Under the new rules once a person has $1.6m in superannuation they are unable to make any further NCCs. They will still be able to make concessional contributions if the relevant rules are met. The only tax-free contributions, or NCCs, that the $1.6m limit does not apply to are those that can be made by qualifying small business owners under either the 15-year or the retirement capital gains tax (CGT) exemptions.

Q. My wife and I are aged 81 and 82 years. We have an SMSF with equal amounts of approximately $2 million each in pension accounts. Can we leave these funds in the SMSF and simply pay the 15 per cent tax on the surplus?

ANSWER: You are the perfect example of a couple that must take action with regard to the amount you have in superannuation before June 30, 2017. This is because, if you both did nothing between now and the deadline, the excess over the new $1.6 million transfer limit will be greater than $100,000 each.

Where a member's superannuation pension balance exceeds the $1.6m limit by less than $100,000, and they correct the breach within six months, the excess will be disregarded and no penalties will be payable.

In addition, you will have access to the capital gains tax relief that effectively means any unrealised capital gains made on investments transferred back into an accumulation account will be protected, thus avoiding paying CGT of 15 per cent on the unrealised gain.

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

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