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Five urban myths about super changes

Much of the conversation about the superannuation reforms relates to reducing pension balances to a person’s transfer balance cap, resetting the Capital Gains Tax (CGT) cost base for investments and making last minute contributions before the caps drop on 1 July 2017. This article covers a few urban myths that have developed among some trustees and their advisers concerning these new regulations.

As a general rule, from 1 July, a person’s transfer balance cap of $1.6 million is the maximum value of pensions that can be transferred to retirement phase after that date including the value of pensions in place as at 1 July 2017. It is possible for a person to have a higher transfer balance cap if they receive a defined benefit pension because of the restrictions placed on receiving lump sum withdrawals. Transition to retirement income streams (TRIS) are excluded from measurement against the transfer balance cap as the income earned by the fund on investments that support a TRIS will be taxed at 15% from 1 July 2017.

Urban myth no. 1

Amounts transferred from retirement phase to accumulation phase cannot be withdrawn from superannuation.

Incorrect. Any amount used to provide an account-based pension must have met a condition of release of retirement after reaching the person’s preservation age or age 65, whichever is the earlier. Meeting either of these conditions of release means that the benefits are totally non-preserved and can be withdrawn from superannuation at any time.

Urban myth no. 2

A minimum amount equal to a percentage of a person’s accumulation account is required to be withdrawn from the fund each year.

Incorrect. Only account-based pensions and transition to retirement pensions require a minimum set percentage of the account balance on commencement or as at 1 July each year to be paid to the pensioner. Where defined benefit pensions are paid from the fund, the amount required to be paid annually is determined through an actuarial valuation.

Urban myth no. 3

Only one pension is able to be paid from retirement phase under the rules from 1 July 2017.

Incorrect. There is no limit to the number of pensions that can be paid from superannuation for an individual. A person may have a number of valid reasons for commencing more than one pension, which may be due to the manner in which contributions were made to the fund, changes in the pension rules or use of pensions to gain the greatest taxation advantage.

Urban myth no. 4

Any pension balance in retirement phase must be reduced to $1.6 million each year.

Incorrect. The value of the relevant pension measured against a person’s transfer balance cap occurs at the time an account-based pension commences from 1 July 2017 or on the amount supporting account-based pensions on 30 June 2017. The withdrawal of regular pension payments or changes to the pension account balance due to investment gains or losses do not impact on the amount measured against the person’s transfer balance cap.

Different rules apply to the valuation of defined benefit pensions, which are based on the pension payable and a special valuation factor.

Urban myth no. 5

The amount a person is permitted to have in superannuation is limited to $1.6 million.

Incorrect. There is no limit to the amount a person is permitted to accumulate in superannuation. However, the value of pensions measured against a person’s transfer balance cap for amounts in retirement phase is not permitted to exceed $1.6 million (which is subject to indexation). Also, if a person’s total balances in all superannuation funds exceeds $1.6 million, it is not possible to make more non-concessional contributions.

The new superannuation rules will impact on the amount of tax paid in the superannuation fund for members with a pension value of more than $1.6 million or receiving a TRIS pension. Any excess over $1.6 million will be required to be transferred to a taxed environment in accumulation phase or taken from the fund as a lump sum. Investments supporting a TRIS will be transferred from a tax exempt to taxed environment in the fund. While there are a number of decisions to be made, members should understand the facts and ignore the myths that confuse and complicate some relatively straightforward changes.

 

Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a leading innovator in SMSF services. The material in this article is for general information and does not consider any person’s investment objectives.

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