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SMSFs and the pension cap: a case study

Our recent article set the scene for how SMSFs will need to re-assess their pensions under the $1.6 million pension cap. The comments and questions received highlight the complexity of this reform for SMSF trustees. To further decode the changes, we found there are four key questions regarding these reforms:

  • how will member accounts be tracked from 1 July 2017?
  • can the fund employ a segregated assets strategy?
  • is the fund eligible to preserve capital gains on some or all fund assets?
  • how is the capital gains tax relief applied?

To demonstrate the key points, we have developed the following case study:

Case study – Fred and Wilma’s SMSF

Fred, aged 68, and Wilma, aged 69, are both fully retired and, as at 7 December 2016, have:

  • an account-based pension in the SMSF in Fred’s name valued at $1.2 million
  • an account-based pension in the SMSF in Wilma’s name valued at $700,000
  • a defined benefit lifetime pension from his years of work at Slate Pty Ltd which pays him $50,000 per year.

Outside super, they also have a share portfolio valued at $130,000, a cash bank account valued at $20,000 and an investment property valued at $550,000, all in joint names.

These non-super investments produce $32,500 per year from dividends, interest and rent. Minimum payments from the SMSF provide $95,000 on top of the $50,000 from the Slate lifetime pension.

Fred and Wilma are living within their means and will spend only $100,000 this year. The excess is invested in their share portfolio.

1. How will member accounts be tracked from 1 July 2017?

The first step is to determine whether either member is affected by the $1.6 million pension cap at 1 July 2017.

Wilma has a total retirement phase balance today of $700,000. This is not likely to exceed $1.6 million by 1 July 2017 so no change to her account is required.

Fred has $1.2 million in the SMSF in pension phase and the $50,000 a year lifetime pension. To value the defined pension under the new reforms we take the annual payment and multiply it by 16 (this is independent of the age of the retiree). The defined pension is valued at 50,000 x 16 = $800,000. So Fred’s total retirement phase balance of $2 million is $400,000 in excess of the cap.

Fred must either commute the excess out of retirement phase back to accumulation, or withdraw it altogether from superannuation. By 1 July 2017, he can only have a maximum of $1.6 million in retirement phase. Since the lifetime pension is non-commutable, he will have to commute the excess from his SMSF.

Wilma and Fred currently have $16,250 each in taxable income each year from their non-super income. Their pension payments are tax free. They currently pay no income tax.

If Fred were to withdraw $400,000 from super and invest it outside super (in joint names) then earnings from those investments would increase the household’s taxable income.

Say these produced 5% earnings then this would increase Wilma and Fred’s taxable income to $26,250 each. Due to SAPTO and LITO offsets they would also pay no tax outside of super this year. They can receive up to about $58,000 in combined household taxable income before they would need to pay tax.

If Fred transfers $400,000 back to accumulation inside super then a proportion of earnings on all fund assets would be assessable income and taxed at 15%. The tax-exempt percentage would be around 80% for 2017-18 and so if the SMSF also received 5% income on investments then this would produce taxable income around $19,000 and subject to imputation credits the SMSF would pay some tax.

Taking money out of super is irrevocable for Fred and Wilma as neither is able to re-contribute to super. After a few years, as their non-super investments increase due to not spending all of their income, Fred and Wilma expect their taxable earnings to increase and they might start paying more tax than if the assets remained in super.

Fred and Wilma decide to manage their future tax position and leave the excess in superannuation. This will create a new accumulation account for Fred. They decide that this new accumulation account will be created on 30 June 2017 to ensure that Fred’s pension balance at 1 July 2017 is no more than $800,000.

2. Can the fund employ a segregated asset strategy?

There is no requirement to segregate assets to this new accumulation account. Indeed, the SMSF will not be allowed to employ a segregated strategy from 1 July 2017 due to Fred having a total retirement phase balance of $1.6 million.

All assets will be unsegregated and from 2017-18 onwards the fund will need to determine the tax-exempt percentage to claim Exempt Current Pension Income (ECPI).

3. Is the fund eligible to preserve capital gains on some or all fund assets?

The fund will have some balances moving out of the pension phase to the accumulation phase as a direct result of the changes. The fund is therefore eligible to apply the CGT relief to reset the cost base of assets to ‘lock in’ gains earned under the current rules.

Since all fund assets will be affected by the requirement to comply with the $1.6 million cap due to now being unsegregated from 30 June 2017, the fund is eligible to apply the CGT relief on all assets. However, the SMSF does not have to apply this relief.

Segregated pension assets with losses might not apply the relief as losses will be disregarded but can be carried forward if incurred when unsegregated. For segregated pension assets in a gain position this relief will lock in the tax-free gain, with only future gains taxable. Fred and Wilma decide to apply the CGT relief to all assets that are in a gain position when re-valued at 30 June 2017.

As the CGT relief is not automatic, the fund will apply for the relief for each chosen asset in the approved form (regulations forthcoming) at 30 June.

4. How do they apply the capital gains tax relief?

All of Fred and Wilma’s SMSFs assets are segregated pension assets from 9 November to 30 June 2017 and are therefore eligible for the relief.

For each asset in a gain position the relief is applied at 30 June. The gain is locked in as tax free and disregarded in the 2016-17 annual return. The cost base of each asset is reset to be the current market value and this is irrevocable. Fred and Wilma decide not to apply the relief to assets in a loss position; the cost base of these assets will not be reset.

If Fred and Wilma had decided to complete the transfer to accumulation prior to 30 June 2017 then an actuarial certificate for the financial year might be required to claim ECPI.


At 1 July 2017, Fred will comply with the transfer balance cap by having a maximum pension balance in his ABP of $800,000 with the rest of his balance in a new accumulation account. The SMSF will use the proportionate method to claim ECPI from 2017-18 onwards.

Fred and Wilma will record the new cost base of fund assets which applied the CGT relief. When these are realised in the future the capital gain will be based on this new cost base, and the CGT discount will only apply if the asset is realised post 30 June 2018.

If you want to better understand how these key decisions apply to your situation, Accurium has developed a series of flow charts that show you how to apply each decision to your SMSF.


Melanie Dunn is the SMSF Technical Services Manager at Accurium. This is general information only and is not intended to be financial product advice. It is based on Accurium’s understanding of the current superannuation and taxation laws. No warranty is given on the information provided and Accurium is not liable for any loss arising from the use of this information.


January 25, 2017

Hi Melanie
Thanks for your helpful explanation regarding the $1.6m pension cap. If I currently have $2.6m in super does this mean that after July 2017 I cannot transfer funds into my pension account to maintain a balance of $1.6m. This treatment is different to Public Servants receiving defined benefits who are guaranteed no reduction in their pension accounts.

Does it also mean that by 30 June 2017 my current pension fund balance can be divided into a pension account and a new accumulation account. If this is the case we can then consider different investment strategies for our pension account and our accumulation account.

I do not think the comment by SMSF Trustee to be particularly helpful. In the event of my death, my spouse who is 48 years old would have to support our two teenage children and live on the income for the next 40 years. Perhaps one of Cufflinks investment advisers can suggest a fund (other than the old age pension) that will provide a revenue stream that retains its purchasing power for the next 40 years.

Something the Government has not publicised is the loss in revenue by allowing public servants on defined benefit pensions to receive their pension tax free (up to $100k/year) This concession will also reduce their marginal rate of tax on any other income they receive. Their pension is indexed for life.


R Calvert
January 22, 2017

Hello Melanie

Thank you for your very helpful article,flow chart and the answers provided above.

I have 2 questions please.

1. If a person with a pension account balance in excess of $1.6m completes the necessary reallocation to reduce the excess by 30 June 2017 how will the ATO know this has been done? The SMSF tax return isn't due until May 2018 at the latest and yet penalties apply for non-compliance.

2. Commutation. Prior to 1 July 2017 a person with a pension balance in excess of $1.6m is able to reallocate the excess to an accumulation fund and/or utilise a lump sum withdrawal.

If an excess transfer account balance arises in subsequent years, for example the need to accommodate a non-commutable reversionary pension, is there still a choice to reallocate the excess to an accumulation fund or does it have to be a lump sum withdrawal? By way of background, reading ATO LCG guidelines the only specific reference to reducing a future excess is via commutation which means only lump sum withdrawal is an option.

Many thanks


Melanie Dunn
January 20, 2017

Hi Craig,

If Wilma were aged 59 then she would be eligible to make a non-concessional contribution to super.

Prior to 1 July 2017 current contribution rules are in place. An individual can make a non-concessional contribution of up to $180,000 in 2016-17 (or up to 3x this under the bring forward rule depending on whether it has been triggered previously).

It is also important to be aware that from 1 July 2017 contribution rules are changing:

Kind Regards,


Melanie Dunn
January 19, 2017

Hi Craig,

Thanks for your question. Fred and Wilma are both over age 65 and fully retired. Under contribution rules personal contributions can only be made after age 65 if the individual meets a work test.

As such if Fred or Wilma withdraw money from the SMSF this decision will be irrevocable because neither will be eligible to make any further contributions to superannuation to get the money back in. This is not a new rule.

Money can be withdrawn from the SMSF and invested in assets outside the superannuation system in own or joint names.



January 19, 2017

Thanks Melanie for your prompt reply. I had overlooked the over 65 rule. But if say Wilma were only 59, could my last scenario apply?
ie. could Fred withdraw 400K from the fund and invest it in joint names, and then Wilma make a 400K (or at least 300K) non-concessional contribution into the fund uner her name, all before 1 July 2017?

January 19, 2017

Hi Melanie

I too appreciated your article, but am still confused about one element contained in the second last para of item 1, where you say "Taking money out of super is irrevocable for Fred and Wilma as neither is able to re-contribute to super". What does this mean? Why? If so, from when does it apply?

Specifically, does it mean that, prior to 1 July 2017, Wilma can no longer make any non-concessional contributions into the fund under her name?

Further more, specifically, does it mean Fred cannot withdraw 400K from the fund and invest it in joint names, and then Wilma make a 400K non-concessional contribution into the fund uner her name, all before 1 July 2017?

January 18, 2017

Hi Melanie
Please confirm Phil's comment that amounts in the pension fund cannot be replenished from the accumulation fund when the pension fund falls below $1.6m due to either poor investment returns or withdrawals.

Melanie Dunn
January 19, 2017

Hi Bruce,

Once an individual reaches their transfer balance cap - effectively once $1.6m has been moved into pension phase - then no further money can be moved into pension phase (other than if commutations occur e.g. to allow pension phase assets to be moved out of an SMSF if the SMSF was being wound up and into a retail pension fund).

Money that is in pension phase can move up and down in value with investment markets and withdrawals, however the pension cannot simply be replenished as if its value goes down. The cap is a 'transfer cap', a restriction on how much you can move into pension phase, not an ongoing upper limit on the value of your pension assets once they are in pension phase.



SMSF Trustee
January 19, 2017

Yes, this is part of the strategy to get estate planning out of the low/zero tax pension world. We are meant to run our pension accounts down over time, spending in retirement the capital we put aside during our working years. This is also why the Government doesn't care if the income that the fund earns doesn't cover the minimum pension payment from time to time - we aren't supposed to grow the real value of a pension account, so it's a case of 'so what?' if we have to dip into capital.

Leaving an inheritance is meant to be undertaken from other assets, on which I've paid tax, not something supported and enabled by the fact that other tax payers are giving me a tax break. So limiting the size of the funds on which I pay no tax makes perfect sense.

At least that's how I believe the Government and bureaucrats see it. Personally I don't have any objections to this line of thinking. I've always looked at the super/pension system as a mechanism to help me save for my retirement, not to help me build a portfolio larger than I need to support my retired life.

Melanie Dunn
January 18, 2017

The minimum pension requirements are only required to be paid on assets in the pension phase. No minimum pension is required to be paid on amounts in accumulation phase.

Therefore the minimum pension payment at 1 July 2017 will be 5% of your account-based pension only (assuming you are aged between 65 and 74 at 1 July 2017) . This must be paid form the pension account, not the accumulation account. Any further payments you might wish to take in excess of the minimum pension requirement can be taken from the accumulation account or the pension account. If payments are taken from accumulation phase there may be tax payable on the payment if you are under age 60.

The minimum required payment for financial year 2016-17 will be based on the pension phase balance at 1 July 2016 and will not be affected by any partial commutation of your pension to accumulation in order to comply with the incoming $1.6m transfer cap. The full minimum pension payment as determined at 1 July 2016 must be paid prior to 30 June 2017. This assumes that the pension will not be fully commuted and a partial commutation will be used to transfer amounts to accumulation phase prior to 1 July 2017.

January 18, 2017

I have assets in my SMSF in excess of the $1.6M -- so I will be transferring the excess to an accumulation fund whilst retaining $1.6M in my pension fund. I am retired and am required to pay myself a minimum annual pension of 5% -- say $150k pa. Can that 5% be paid from the accumulation fund -- or must it come from the pension fund (which I am unable to replenish) thus rapidly depleting my tax-free component?

December 23, 2016

Peter O, I thought you were an accountant, Jenny

Peter O
December 23, 2016

Jenny, can you read and summarise this so I can understand it. I read the first paragraph and got a headache.

December 16, 2016

Thanks Melanie for your stimulating case study which I suspect covers many situations. I know it is almost year end but now you just need to extend the case study just a little further to cover the extra planning we have to do now when one of the partners die. So if Wilma just cannot take the strain of the extra super planning and dies say on 2 July 2017 what must happen? Under the old rules we could have reversionary pensions that carry on to the remaining partner until his death. But her Fred is up to his tax free pension limit with $400k in accumulation. So my question is can Wilma's $700k pass over to Fred and because he is over the $1.6m limit then he must move her money into accumulation to give him $1.1m there? Or must her money leave super altogether? Important to know this now since I believe Fred would be well advised to be leaving as much as possible in accumulation from the outset since if he took it out then he would be in at least the 19c tax range given his non super investments.

Stephen H
December 16, 2016

Hi Melanie, thanks for a great article and the link to the Accurium flow charts.

Could you please clarify one timing detail on page 3 of those flow charts (preserving capital gains), which states that the election for CGT relief must be made prior to 1 July 2017.

This apparent requirement is at variance with the legislation at s.294-115 which states that the "choice is to be made in the approved form and can only be made on or before the day by which the [fund is required to lodge its 2017 tax return]". Lodgement date is typically many months after 30 June.

Could you please clarify where you are getting your 30 June 2017 deadline from?

My belief is that Trustees and their advisors will have time to take a measured decision (and in full knowledge of 30/6/17 valuations), and needn't be panicked into a hasty one by 30 June, as your flowchart implies.

John De Ravin
December 16, 2016

Hi Melanie,

I just wanted to thank you for your article and in particular for the link to the Accurium flow charts. This isn't simple, is it? Now I see why another recent article in Cuffelinks viewed the recent superannuation legislative changes as a Christmas present from Santa Claus, alias the Treasurer, to the financial advice profession!

The flow charts have saved me from having to wade through hundreds of pages of "explanatory information" and for that, I am deeply grateful.

Thanks again Melanie.

December 15, 2016

Hi Melanie,
I enjoyed the article but am a little confused by your answer to Rod re income test for pension.
I have a NSW Govt SSS defined benefit pension which was a complying pension. I have been told that the full amount of it is counted as part of the income test so I didn't qualify for a part pension or the Health Card. My own contributions were calculated at 40% by fund which I was told was previously not counted but this was changed 1st January 2016

Melanie Dunn
December 15, 2016

Hi Ann,

In my response above I discuss the taxation of a payment from a defined benefit income stream (taxable income) which should not be confused with the Income Test Centrelink assesment of an income stream (assessable income).

In case you are interested, a short summary of the Income Test changes implemented 1 Jan 2016 can be found here:


Rod Shogren
December 15, 2016

I don't understand why Fred's defined benefit pension has been ignored in his taxable income. Seems to me his taxable income is not $16,250 but $66,250. It follows that Fred and Wilma have more than $58,000 combined household taxable income.
Or is the defined benefit pension now to become untaxed except through the "deemed" higher SMSF balance?

Melanie Dunn
December 15, 2016

Hi Rod,

Thanks for your question.
For simplicity I have assumed Fred's defined pension is a funded pension fund. This means payments are from a taxed source and are tax free after age 60.
You are correct that many defined pension funds are unfunded and payments will be from an untaxed source, such as most government funds. Payments from these funds count towards taxable income even after age 60. However pensioners may still be eligible for a tax offset on the payment, generally 10% for payments from an untaxed source after age 60.


John Griffin
December 15, 2016

The Commonwealth Superannuation Scheme, the CSS defined pension is taxed in the hands of pension recipients. However, it appears that CSS defined pension along with all other tax free defined pensions is being included in the 1.6m tax free pension cap as at 1/7/17.

Why is a pension on which tax is currently being paid by recipients being included in the 1.6m tax free cap? Is this not a case of double counting?

December 15, 2016

I have been told by an advisor that since I am over 65 and not working I cannot transfer money into an accumulation account? I am confused

Melanie Dunn
December 15, 2016

Hi Doug,

I expect your adviser was talking about making contributions, which is adding new money to your accumulation account. There are generally restrictions on your super fund receiving contributions after age 65 which involves you meeting a work test. More info can be found here:

What we are talking about in this article is transferring money that is already in superannuation in a pension account from pension phase back to accumulation phase in order to comply with the new $1.6m pension cap. For some SMSF members currently in full pension phase this may create a new accumulation account.



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