Direct Adviser, Ursula Boorman

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New Superannuation Changes Take Effect July 2017. Are you prepared? The world of superannuation will be reimagined from July 1, 2017. What does this mean for you? We chat to Ursula Boorman of Direct Advisers to find out more.

What changes are taking place?

From July 1, 2017, we will see the most comprehensive changes since 2007. There will be new limits on tax-free pensions and limits on how much we can save each year in the low tax environment.

Why are the changes coming in?

The changes are designed to make the system fairer and more sustainable. The system is still generous, with individuals able to invest up to $1.6 million in a totally tax-free environment. However, the changes are complex, so we encourage you to seek advice if you think you may be affected. Steps need to be taken prior to the change date of July 1, 2017.

What does it mean for people who hold a Transition to Retirement Income Stream (TRIS)?

If you have not met a condition of release, your pension is no longer tax free. This is a big change. The income stream will be taxed as if it is still in accumulation.

If you have met a condition of release, your pension is tax free. You will need to ensure that your pension provider has this recorded, as it is possible that tax will apply; even if you have turned 65, the account may still be defined as a TRIS.

For information on conditions of release, visit directadvisers.com.au.

What is the $1.6 million Transfer Balance Cap?

It’s the amount an individual can transfer to, or hold at 1 July 2017 in a tax-free pension. Over your lifetime, withdrawals, commencements and closing of allocated pensions and any future tax-free pensions will all affect your cap. This is a lifetime limit that the tax office will track. We will also track this for clients, and I recommend you do the same.

What issues will arise for Self Managed Super Fund Trustees (SMSF)?

Many of the issues will revolve around managing this new cap and optimising their position. If they hold a pension in excess of the $1.6 million on 1st July 2017, they will have to make several decisions around rolling the excess back to super or making a withdrawal. It may be an option to contribute to a spouse’s account, if the spouse is eligible.

What if you have more than $1.6 million in super?

For individuals, it will no longer all be tax-free in retirement, and you should seek advice immediately. If your super is over $1.6 million from a combined pension and accumulation account, the segregation of your assets may need to be addressed. If you don’t know what this means but it sounds like you, talk to your adviser.

Trustees who expect to be in breach of the cap at 1 July 2017 will need to decide how they are going to reduce the pension balance, and this may result in the opportunity to lock in capital gains for certain assets – referred to as “CGT Relief Arrangements”. It is very important that your SMSF submits its tax return on time if you wish to apply for CGT Relief. No extensions this year! It could be expensive.

What does this mean for Defined Benefit Pensions and Life Expectancy Pensions?

These are both included in your Transfer Balance Cap. For the purpose of valuing these income streams for the cap, we need to use these methods:
A) Lifetime pensions and annuities: Annual entitlement x 16.
B) Life expectancy annuities: Annual entitlement x remaining term.

So if John is receiving a Defined Benefits Pension from CSS of $35,000 pa, this will add $560,000 to his Transfer Balance Cap.

What about putting money into super?

The only reason you would put off a contribution to super until after 1st July would be to make a tax deductible contribution in the next financial year. In a welcome change, all working individuals under age 75 will be able to claim a tax deduction if they wish for money placed into superannuation up to a maximum of $25,000. You must include any employer or salary sacrifice contributions in this $25,000.

If you are under 65 and not working, you can also use this new rule.

Keep this in mind if you sell a large asset such as an investment property and you are looking to reduce any Capital Gains Tax. Look out for future news around rolling forward unused tax deductible contributions for future years.

The 2017 Financial Year is the last chance to make contributions of $180,000 or up to $540,000 if you are under 65 years. These are called non-concessional contributions. There is no immediate tax benefit from making the contributions, but in future years the income on the money is taxed at the lower super tax rates. This is also an excellent opportunity to equalise superannuation for couples if you are able.

Case Study

Ron is 62 and Joanne is 65. Joanne’s super balance is $1.8 million and Ron’s super balance is $500,000. By withdrawing $540,000 from Joanne’s super and contributing to Ron’s super, they have dealt with Joanne’s breach of the Transfer Balance Cap and made the most of the last year of the higher contribution limits. Next year the contribution limits change to $100,000 pa or a maximum of $300,000 using the “bring forward” rule. (Three years limit in one year.)

Do you have any further advice?

As a SMSF Specialist AdvisorTM, I encourage you to read more about the changes, just in case you need to take action. The changes to TRIS pensions, and the inclusion of Defined Benefit Pensions as part of the Transfer Balance Cap are significant.

If you’re confused about whether you need to take action, visit directadvisers.com.au for white papers on this topic or send a question to Ursula@directadvisers.com.au

Thanks Ursula.

Ursula Boorman is an authorised representative of Direct Advisers Pty Ltd, AFSL Licence No 236855. The information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice.

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