By Tim Miller
(Miller Super Solutions)
Having reviewed the 2016 Budget to see what impact it may have within the SMSF Industry, there are the obvious challenges ahead with regards to lowering the concessional contribution cap and restricting the amount of money that can be maintained in the pension environment, however, there are a number of other announcements that when considered alongside these issues have a positive outcome for SMSFs. It’s therefore important to consider the announcements collectively.
Firstly, it should be noted that with the exception of the lifetime limit applicable to non-concessional contributions, all other announcements are effective from 1 July 2017, so expect some consultation (hopefully) and no doubt Industry lobbying before accepting that the announcements are inevitable, even if you consider that they are. However, it may be necessary to act prior to that time to avoid any unnecessary circumstances.
Strategic hurdles – account balance restrictions
The Government announced a $1.6m transfer balance cap, which in effect is the maximum starting balance allowable for a pension from 1 July 2017. How this will affect multiple pension strategies post 1 July will be of interest, the concept of identifying what proportion of the cap is used at commencement and then applying the remaining proportion as a percentage of the indexed cap is fundamentally RBL indexation, so let’s just pretend that the ATO has used the last 10 years to iron out all the bugs in the RBL reporting system before it gets relaunched as a transfer balance cap (TBC) system. Although I think TBC is appropriate when determining whether it will work.
Existing pensioners will have to review their current circumstances to ensure that their pension balance does not exceed $1.6m as at 1 July 2017, a straight transfer to an accumulation interest at 30 June 2017 for the excess seems logical, but nothing ever is so don’t be too hasty to make changes before there is certainty, and if ever there was a reason to review an investment strategy and asset allocation, this is it. There are of course Market Linked and Lifetime/Fixed Term pensions to consider, perhaps the chance to commute the non-commutable will be presented.
Transition to retirement
Transition-to-retirement pensions (TTR) have for a long time come under Budget speculation and that speculation has come to fruition, although not with their complete demise as forecast by some. From 1 July 2017 TTRs will no longer be entitled to the Exempt Current Pension Income (ECPI) deduction. This begs the question “will TTRs count towards the $1.6m transfer balance cap?” It would seem inappropriate but so would jumping to the conclusion that they don’t. If they do count, clients will need to consider the purpose of their TTR and the impact it might have on future contributions being allocated to another pension.
I think that sometimes when you ask for trouble you get it and when you heavily promote legislative loopholes to obtain unintended taxation benefits you run the risk of those benefits being closed. I personally disliked the strategy of drawing an “income” from a TTR and then making a taxation election to treat the benefit as a lump sum not an income stream. The ATO said this may have ECPI consequences and how right they were, but in a far broader approach.
Administratively there will no longer be a requirement for funds with accumulation and TTRs to obtain an Actuarial Certificate so this is one announcement that lessens the administrative burden.
The Administration burden – lifetime Non-concessional cap & concessional rollovers
Trustees, Fund Administrators, Planners and the ATO are all on notice effective immediately. The $500,000 lifetime non-concessional contribution limit is effective 7:30pm AEST Tuesday 3rd May 2016. Any clients of significant wealth contemplating making a non-concessional contribution of any size in the period from now to 30 June 2016, and then beyond, needs to be aware that all non-concessional contributions made from 1 July 2007 up to and including 3rd May 2016 will count against this cap. What this means is that someone who has used their bring-forward provision to contribute up to $540,000 has already exhausted their cap. These prior amounts will not be deemed excessive but will restrict future contribution capacity. Watch this space, especially if you intend on transferring benefits from a Foreign Super Fund although you may be better off leaving overseas retirement benefits outside of the Australian Superannuation system.
Beyond the introduction of this cap, there is will be additional administrative issues associated with providing for a 5-year rolling concessional contribution carry forward allowance as this will be linked to an individual’s superannuation balance. Whilst introducing the ability to carry forward unused contribution limits is in itself a benefit, identifying an individual’s balance at a given time may be problematic. When previously contemplated, a prior year 30 June consolidated balance seemed a probable outcome. Of course the use of reserves and their incorporation into member balances will no doubt become part of the discussion.
A final note about contributions that will be a benefit is the removal of the work test and substantially self-employed 10% test for concessional contributions prior to a member’s 75th birthday. This is a welcome announcement, however, it comes with a warning that nothing changes this current year or next. Don’t forget to get those declarations done now for 2015/16 because the existing contribution acceptance rules haven’t changed.
A detriment no more
The abolition of the anti-detriment lump sum benefit and subsequent tax deduction will for the large majority of SMSFs be totally irrelevant, however this may create some unwanted reserving considerations for those that had planned to use the strategy on the death of a member. What this announcement does is provide a consistent approach to the payment of death benefits across the entire industry, which may in fact benefit the more flexible estate planning opportunities available to SMSFs.
Budgeting for change
What this Budget has delivered is an absolute that the Superannuation system is about to change. With a number of the policies characteristically similar to existing Opposition policy, it is clear that unlimited pension balances will be a thing of the past. Time will tell what the final settling point will be, but be prepared to act in a relatively short time frame, but whatever you do, don’t jump the gun or assume changes won’t occur.
General advice warning:
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
Miller Super Solutions is the SMSF education & training creation of Tim Miller, assisting SMSF professionals and trustees with the practices associated with establishing, running and ultimately closing down SMSF’s.