Tax with Max: Planning for super limits

Who will the super changes actually affect?

When Scott Morrison announced the changes to superannuation in this year's federal budget, the proposed $1.6 million pension transfer limit was predicted to only affect one per cent of superannuation members.

The administration burden of this limit on superannuation pension accounts will be borne most by SMSF members. In a report issued by Class Limited, a provider of cloud-based SMSF software, the true impact on SMSF members has been revealed.

After reviewing the data held by Class on the more than 100,000 super funds serviced by them, an estimated 13.5 per cent of SMSFs have at least one member that will be affected by the $1.6m limit, 7.3 per cent of members already have pension balances of greater than $1.6m, and two per cent of members in accumulation already have balances of greater than $1.6m.

$1.6 million limit – do earnings count? 

With respect to the budget it says you can transfer $1.6M into a superannuation pension account. If say you have a balance of $1.5M at 1/7/16 but you have only transferred $1.3M into super and the balance is accumulated earnings, what is the amount that would be considered to be the transferred amount? If after the 1/7/17 your balance grows to exceed $1.6M, through accumulated earnings, are you obliged to remove the excess amount, transfer it to an accumulation account, or can you exceed this balance because accumulated earnings are not considered to be transfers?

Answer: The proposed $1.6m limit on amounts transferred into a superannuation pension account is in effect a Reasonable Benefit Limit that has been relabelled. RBLs were introduced by the Hawke Labor government in 1988 and then removed by the Howard coalition government in 2007.

It is surprising therefore that the coalition is re-introducing what is effectively a pension RBL. As the old saying goes “if you put lipstick on a pig, it is still a pig”. The coalition may try and deny that the $1.6m transfer limit is not an RBL, but the way it will apply from July 1, 2017 is a clear indication of what its true nature is.

If the limit was in fact meant to apply only to amounts transferred from an accumulation account into a pension account, the method of calculating whether people had exceeded the limit at July 1, 2017 would be very different from what will actually be happening.

All superannuation members in pension phase will have the balance of their accounts assessed at July 1, 2017, and anyone with a balance in excess of $1.6m will either be required to roll the excess back into an accumulation account or withdraw the excess.

If the limit truly applied to amounts transferred into pension accounts the system would require a person's pension accounts at July 1, 2017 be reviewed and an assessment done of the amounts previously transferred into pension phase. If the transfer amounts did not exceed $1.6 million, but the balance of the pension account was greater than $1.6m due to accumulated earnings, the member should not be required to withdraw the excess.

The proposed legislation by imposing the limit on a person's pension account balances at July 1, 2017, which will be a combination of both transfers and accumulated income, is clearly establishing a new form of RBL for those members.

Where a person's pension account balance is less than the $1.6m at July 1, 2017 they can transfer more money into the pension account, based on what the percentage their pension account balance is of the $1.6m limit.

For example Paul Costello has a balance in his pension account of $1.28m at July 1, 2017 and will have used 80 per cent of the new pension RBL balance. If in five years, his pension balance has increased to $1.5m, due to accumulated income exceeding pension payments and costs, and the pension RBL has increased by $100,000 due to increases in the consumer price index to $1.7m, Costello can roll a further $340,000 into his pension account.

For anyone who starts a pension after July 1, 2017 the RBL acts more like a transfer limit. Where a person does not transfer up to the limit set they will be able to roll in additional amounts using the same percentage method as detailed in Costello's example.

How should we select assets?

Our SMSF has two members that are brothers that are both over 75 with balances far in excess of the $1.6m cap. Do you see that in selecting assets in the fund to earn and pay the pension can be done to either provide a tax free pension at the minimum rate of the $1.6m or put a property with high future growth and moderate earnings towards the $1.6m limit?

Also will the $1.6m cap be indexed and increase with earnings above the minimum pension or CPI using the cap as a starting amount only? Maybe the services of an actuary will be required to split assets into pension and accumulation phase.

Answer: The transfer limit will increase in $100,000 increments based on increases in the consumer price index. Superannuation fund members, when faced with the choice of either withdrawing any excess in a pension account or rolling it back into accumulation, should definitely opt for the latter.

This is because by keeping the excess funds still in superannuation the member will still only be paying 15 per cent on the earnings, and the strategy of segregating assets between members in accumulation phase and members in pension phase could offer greater benefits than strategy does now.

The strategy will involve allocating high income earning assets to members in pension phase. Investments that are held for growth with lower income returns, and those taxed advantaged investments such as unlisted property trusts that have a high level of tax-deferred income, would be allocated to the accumulation members.

Before undertaking this strategy a comparison should be done between the income tax saved by the accumulation account members and the extra accounting costs that will be incurred by using the strategy. Where segregation of assets are used there is at least a saving of not requiring an actuarial report to work out the difference between income related to pension accounts and income related to accumulation accounts.

When does the lifetime limit begin?

In your last column you stated, “If in the PAST one has triggered the lifetime limit of $500,000” – does the comment with regard to withdrawal or penalty refer to the future, or past non-concessional contributions?

Answer: Thankfully, despite this $500,000 limit on non-concessional contributions being retrospective, at least any excess non-concessional contributions made prior to May 3, 2016 can remain in superannuation.

For the coalition to argue that the $500,000 limit is not a retrospective superannuation measure is ludicrous. If the new limit was to apply to non-concessional contributions from budget night it would not be retrospective. As it will apply to all contributions made since July 1, 2007, that were made under the existing contribution rules, to penalise anyone that has exceeded this new limit by not allowing further non-concessional contribution is clearly retrospective.

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