Budget 2016 | Retirement
A $1.6 million superannuation transfer balance cap
A transfer balance cap will be introduced from 1 July 2017. This will restrict the total amount of superannuation that can be transferred from accumulation to pension phase to $1.6 million.
Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain the excess in accumulation phase, where earnings will be taxed at the concessional rate of 15%.
The $1.6m cap will be indexed in $100,000 increments in line with the consumer price index. A proportionate method which measures the percentage of the cap previously utilised will determine how much cap an individual has available at any point in time.
Existing pension balances
Members already in pension phase as at 1 July 2017 with balances in excess of $1.6 million will need to either:
- Transfer the excess back into an accumulation; or
- Withdraw the excess amount from their superannuation.
Individuals who breach the cap will be subject to a tax on both the amount in excess of the cap and the earnings on the excess amount similar to the tax treatment that applies to excess non-concessional contributions.
The Government has also confirmed commensurate treatment for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000 from 1 July 2017.
What this means
- This proposal will allow couples to have a combined pension balance of up to $3.2 million. However, where most of a couple’s superannuation savings are in one spouses name the $500,000 lifetime non-concessional cap will restrict a couple’s ability to equalise their benefits to take full advantage of the transfer balance cap.
- The requirement for member’s with balances already in excess of $1.6 million to either withdraw or transfer the amount in excess of the cap back to superannuation means that people with pension account balances in excess of $1.6 million have not been grandfathered from these changes.
- In this case, this may also result in impacted members with SMSFs or super wrap accounts disposing of assets prior to transferring back to accumulation so as to ensure any capital gains are crystallised while the assets are still in pension phase and exempt.
Transition to retirement pensions: removal of earnings tax exemption
The tax exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed from 1 July 2017. Earnings will then be taxed at 15%. This change applies irrespective of when the TTR income stream commenced. This means that grandfathering applies.
The Government states that reducing the tax concessional nature of transition to retirement income streams will ensure they are fit for purpose and not primarily accessed for tax minimisation purposes.
Further, individuals will no longer be able to treat certain superannuation income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap of $195,000.
What this means
- Taxing earnings on TTR income streams significantly reduces the tax effectiveness of strategies such as TTR and salary sacrifice. For clients aged 60 or over, TTR strategies may still be worthwhile as pension payments are tax free and allow tax effective salary sacrifice contributions. However for clients under age 60, the tax benefits are minimal.
