Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 280

When the $1.6m cap is no longer relevant

The year is rapidly drawing to a close, which means it’s highly likely that you will now hold completed financial statements for your SMSF. If your balance is over $1.6 million, the first thing you may notice is that your imputation credits refund is down from last year.

This is due to the change in rules made by the Turnbull Government, which restricted the amount that could be held in tax-free pension mode to $1.6 million, leaving the rest of the fund’s earnings to be taxed at 15%.

When trustees no longer need to worry about the cap

The next thing you might discover is that the $1.6 million that was your Transfer Balance Cap (TBC) at 30 June 2017 has now grown. It could easily be worth as much as $1.7 million if your fund earned, say, 7%, while you drew the mandatory pension of 4%.

This situation has triggered a few emails asking what the trustees of the fund should do. Will the TBC now stay at $1.7 million or will it go back to $1.6 million if the amount in pension mode drops as a result of bad performance or increased pension drawings in the current year?

Superannuation guru Monica Rule has good news for you. She tells me that your TBC is no longer relevant, provided the documentation was done properly as at 30 June 2017. As long as your fund did the paperwork correctly on that date, the fund trustees no longer have to concern themselves with the $1.6 million TBC.

Thus, there is no limit to what your super in pension mode could grow to if you had excellent returns, way in excess of the compulsory drawdowns. And there is no penalty if, for any number of reasons, the amount you hold in pension mode drops below $1.6 million.

Continue to draw minimum

But one factor is critical. If all or part of your fund is in pension mode, you are required to draw a set percentage of the balance of the fund that was in pension mode at 30 June. The factor is 4% for anybody under 65 and rises progressively to 14% at age 95 and above.

AgeMinimum pension drawdown factors
55–644%
65–745%
75–796%
80–847%
85–899%
90–9411%
95 or older14%

For example, if you are aged between 65 and 74 you should be withdrawing at least 5% of the previous June balance each year. Therefore, if your balance was $1.6 million at 30 June 2017, you should have drawn $80,000 in pension for the year ended 30 June 2018. However, if your financial statements now show that your TBC has become $1.7 million, you will need to increase your drawdowns in the present year to $85,000.

This is a further example of the complexity of our superannuation system, and the dangers for people running SMSFs who don’t get it right. Despite the penalties, which can be heavy, I am still amazed by the number of questions I receive from people who obviously don’t know what they’re doing. Often, they simply don’t know what they don’t know. This is an area where expert advice is critical.

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. Contact him on noel@noelwhittaker.com.au

RELATED ARTICLES

Moving your SMSF into pension phase

Tips when taking large withdrawals from super

Tax-free super drives the politics of envy

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Australia’s bounty: is it just diversified luck?

Increases in commodity prices have fuelled global inflation while benefiting commodities exporters like Australia. Oftentimes, booms lead to busts and investors need to get the timing right on pricing cycles to be successful.

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Investment strategies

Five features of a fair performance fee, including a holiday

Most investors pay little attention to the performance fee on their fund but it can have a material impact on returns, especially if the structure is unfair. Check for these features and a coming fee holiday.

Interviews

Ned Bell on why there’s a generational step change underway

During market dislocation events, investors react irrationally and it should be a great environment for active management. The last few years have been an easy ride on tech stocks but it's now all about quality.  

SMSF strategies

Meg on SMSFs: Powers of attorney for your fund

Granting an enduring power of attorney is an important decision for the trustees of an SMSF. There are alternatives and protections to consider including who should perform this vital role and when.

Property

The great divergence: the evolution of the 'magnetic' workplace

The pandemic profoundly impacted the way we use real estate but in a post-pandemic environment, tenant preferences and behaviours are now providing more certainty to the outlook of our major real estate sectors.

Shares

Bank reporting season scorecard May 2022

A key feature of the May results for the banking sector was profits trending back to pre-Covid-19 levels, thanks to lower than expected unemployment and the growth in house prices.

Why gender diversity matters for investors

Companies with a boys’ club approach to leadership are a red flag for investors. On the other hand, companies that walk the talk on women in leadership roles perform better, potentially making them better investments. 

Economy

Is it all falling apart for central banks?

Central banks are unable to ignore the inflation in front of them, but underlying macro-economic conditions indicate that inflation may be transitory and the consequences of monetary tightening dangerous.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.