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Superannuation Spotlight - Part 2As discussed in Part 1 of this series, most of the proposed changes to superannuation based on the 2016 Federal Budget have been passed by Parliament.

The new financial year will bring even more changes for those receiving an income stream (or pension) from their superannuation fund.  While the rules vary depending on the type of pension you draw there are a number of changes to be aware of prior to 1 July 2017 such as:

  • The introduction of the ‘Transfer Balance Cap (TBC), limiting the amount that an individual can commence a pension with/have in pension phase. The TBC will be $1.6mil from 1 July 2017.
  • Changes to the way that some superannuation funds paying pensions are taxed.

We have outlined the impacts of these changes on some of the most common situations below.

 

Transition to Retirement Income Stream

From 1 July 2017, superannuation funds that are paying transition to retirement income streams (or TRIS) will have their earnings taxed at 15% (10% for some capital gains) – just like a fund in accumulation phase.   This will have no impact on how the TRIS recipient is taxed in their personal tax return, only on the earnings in the super fund.

Those over 60 will continue to receive their pension tax free.

If you are in receipt of a TRIS you can continue the pension, and will have the ability to apply CGT relief, which is available to mitigate the adverse tax consequences of these changes.  A TRIS is not subject to the same TBC of $1.6mil that applies to other pensions.

As we approach 30 June, it’s a good opportunity to review your circumstances to see if you meet the requirements to convert your TRIS to an account based pension.

 

Account-based pension (with $1.6m or less in pension phase)

Currently, a superannuation fund is entitled to tax free earnings on assets that support a pension regardless of the type, and this will remain the case until 30 June 2017. From 1 July 2017, if your total superannuation balance in pension phase is $1.6m or less, there will be no changes and your pension can continue as it is. Your fund will still be entitled to tax free earnings on the assets supporting the pension. If your pension balance becomes greater than $1.6m due to growth, there is no need to move your funds from that account.

 

Account-based pension (with more than $1.6m in pension phase)

If your total superannuation balance in pension phase is more than $1.6mil at 30 June 2017, you will be required to reduce the balance of your pension account below the $1.6mil limit.  This can be achieved by either converting part of your pension account back to ‘accumulation phase’ or removing funds from superannuation completely.  The earnings on the assets supporting the pension account will continue to be tax free to your superannuation fund.  Pension payments to those over 60 will also remain tax free.

Where you have had to convert part of your pension balance back to accumulation you will be entitled to apply CGT relief.  Due to its complex nature and the number of variables that need to be considered, keep an eye out for Part 3 of this series – dedicated to CGT relief.

When making changes to your superannuation is it also important to review your Estate Planning to ensure that it is still adequate in light of any changes you are making.  Superannuation is not automatically covered under your will, so it is important to review death benefit nominations and reversionary pension nominations to ensure their effectiveness.

For more information on understanding changes to your pension fund, and for advice on how to implement these considerations in your estate planning, please contact your usual Hanrick Curran advisor or, alternatively Clive Todd or Frances Hill on 07 3218 3900.

 

 

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.