While several of the proposed superannuation changes put forward in Budget 2016 are not proceeding, the much discussed change in the superannuation transfer cap is scheduled to take effect from 1 July 2017.
While the legislation is still in the exposure draft phase it would be wise to start considering how the change may impact plans for your superannuation and estate planning strategies.
Professional advisers should also prepare for the changes their clients may require implemented.
What is the transfer cap?
The transfer cap is a limit on the capital you can have supporting a pension through your superannuation fund. The amount is to be set at $1.6 million (subject to CPI increases).
Income generated by assets in a superannuation fund in pension phase is tax free whereas income generated by assets while the fund is in accumulation phase is taxed at 15%.
By limiting the amount of assets that generate an income in a fund in pension phase the government hopes to have people with larger fund balances generating taxable income.
The cap amount can be reduced by the value of payments as a result of a family law settlement or court order, commutations back to accumulation phase and payments as a result of bankruptcy or fraud but NOT by payments out of the fund. Further, if the fund has the full cap amount of $1.6 million and it then loses value the member is not permitted to make up that amount again.
What does this mean for members with balances in excess of the cap?
It seems that members with a balance in excess of the cap will be required to commute the excess back into an accumulation phase. If this does not occur there will be tax imposed on the notional earnings of the amount retained in pension phase in excess of the cap. There also appears to be a capacity for the tax rate on that excess to be increased with the number of breaches.
The excess will be calculated to include reversionary pensions received from a spouse, leaving limited options to people who receive reversionary pensions other than to commute that pension or some of their member funds back to accumulation phase within six months of the date of death or withdrawing the amount to their own name provided they are of the age to do so.
What does this mean for an estate plan?
In the circumstances where a reversionary pension has been utilised for a spouse but will cause the cap limit to be exceeded it should be reviewed to see whether it remains the most appropriate mechanism.
If there are no circumstances that require the security of locking the surviving spouse into a reversionary pension, such as blended families or potential family disputes, then it may be appropriate that other mechanisms are used for the payment of death benefits.
While there is no urgency yet, if it is likely that a superannuation fund member will be in excess of the new cap after 1 July 2017 they should start a review of their existing pensions and balances. This review should include those who will only exceed the cap upon the death of a spouse.
Such a review should consider the cost base of assets that might need to be commuted back to accumulation phase (including a consideration of the capital gains tax provisions), whether the superannuation fund deed needs to be updated to take into account the new laws and what options are likely to be available.
As with any review it should involve all of your professional advisers to ensure that all implications are fully considered including potential tax liabilities, asset protection and impact on Centrelink benefits.
If you would like further information or assistance, please contact one of our estate planning team.