From 1 July 2017, there will be a limit to the amount a superannuation member can have in a tax-free pension account. The limit is $1.6 million from 1 July 2017.
If the member has a balance of more than $1.6 million in super, only $1.6 million of this balance can be held in a tax-free account-based pension account. The balance over $1.6 million will need to remain in accumulation (or be commuted back to accumulation for existing pensions) – the earnings on which will be taxed at 15%.
If the pension account has a balance of more than $1.6 million as at 1 July 2017, the ATO will direct the trustee of the fund to commute the excess over $1.6 million back to accumulation, together with any deemed earnings on the excess. The individual will also be liable for excess transfer balance tax on these earnings.
Once the tax-exempt pension account has been established, subsequent earnings on this balance will not be required to be withdrawn to take the balance back to $1.6 million (similarly, if the account drops below $1.6 million, a top-up contribution cannot be made to bring the account back to $1.6 million).
The cap will apply to:
All existing pensions at 1 July 2017
All new pensions started on or after 1 July 2017
Transition-to-retirement income streams converted to an account-based pension
For reversionary pensions, 6 months after the date of death
The $1.6 million cap will be indexed in $100,000 increments in line with the Consumer Price Index (CPI). However, if a member utilises the full $1.6 million transfer cap, they cannot take advantage of future $100,000 CPI increases. If the $1.6 million cap is not fully utilised, the member can take advantage of the future $100,000 cap increases.
Who does this affect?
This measure will have a direct impact on members who have a current pension balance over $1.6 million. These members will need to take immediate action to comply with the new provisions from 1 July 2017.
This measure will also have a future impact on members that have an accumulation balance of over $1.6 million that may be looking to convert this balance to an account based pension at a later date.
Call us today on 56656469 if you would like to discuss how these changes may apply to you.
DISCLAIMER: The information in this article is general in nature and is not a substitute for professional advice. Accordingly, neither TJN Accountants nor any member or employee of TJN Accountants accepts any responsibility for any loss, however caused, as a result of reliance on this general information. We recommend that our formal advice be sought before acting in any of the areas. The article is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our consent,
Jeanette has over 20 years experience as an accountant in public practice. She is a Chartered Accountant, registered tax agent and accredited SMSF Association advisor. When she is not helping business owners grow their empires, you will likely find her out running on the trails or lifting weights in her local CrossFit gym. Book in to see Jeanette today.