Super Changes – 1.6 Million Pension Transfer Cap

Super Changes – 1.6 Million Pension Transfer Cap

13:19 23 November in Australian Superannuation, Government & ATO, Industry News, Latest News, SMSF

On the 9th of November 2016, the Government introduced legislation into Parliament that covers many area’s of Superannuation under the auspices of fairness.

The legislation is the result of amended 2016-17 budget reforms previously announced.

Once passed by the Parliament, these measures will take affect for the 1st of July 2017.

This article focuses on one aspect of the changes that people are concerned about.

1.6 Million Pension Transfer Balance Cap

From the 1st of July 2017 the maximum amount of tax free pension balance will be $1.6 Million per member.

For members that have over $1.6 Million in pension phase on that date, they will be able to transfer the balance back into accumulation.

Any income earned on that accumulation account will be taxed @ 15%.

Example: If my current pension account is valued at $2 Million (value of my % of the funds’ assets) on the 30 June 2017, then on the 1st of July I will be required to transfer $400,000 to an accumulation account. So I would have two members account; Pension worth $1.6 Million and Accumulation worth $400,000 (2 Million Total).

Impact of Changes

To see the impact of these changes we will do a simple example over two financial years, this current financial year and next financial year.

2016-17$2017-18
$
1st of July 2016- 30 June 2017 (Current Rules)1st of July 2017 - 30 June 2018 (New Rules)
Pension Account Balance$2,000,000Pension Account Balance$1,600,000
Accumulation Account Balance
$400,000
Income made on Pension Account @ 5% PA Return*
$100,000Income made on Pension Account @ 5% PA Return*
$80,000
Income from Accumulation @ 5% PA Return
$20,000
Tax On Pension Income X 0% ($100,000 X 0%)$0Tax on Pension Income X 0% ($80,000 X 0%)
$0
Tax on Accumulation Account ($20,000 X 15%)
$3,000
Total Tax Payable$0Total Tax Payable
$3,000
Please note: Expenses are not available to reduce tax as no tax is payable in 100% pension phase.*The rate of return is an indicative number only.Please note: Expenses are available to reduce taxable income as income is now taxable.
This table is to compare the affect of Tax only under the new rules

This simple example shows a $3,000 increase in tax payable however, the total tax effect is over dramatised as expenses in the 2017-18 year are now able to be used to offset income and tax credits will be added as a refund on the reduced tax payable figure. Of course tax credits used to eliminate tax will reduce your refund.

Effective tax rates on the example above of $100,000 income will go from 0% to 3% overall minus expenses and credits.

The 2017-18 Limit of $1.6 Million will be indexed to deal with the rising cost of living. Once your pension is locked in on the 1st of July 2017 with $1.6 million, then that pension will be able to grow in value due natural growth, but new money from outside of that pension will not be allowed to be added to this pension. If you start on the 1st of July 2017 will less than 100% of $1.6 Million, then you will be able to add the remaining percentage multiplied by the future pension limits.