The proposed $1.6m cap on tax free superannuation pension account accounts will see excess assets moved back into 15% taxed accumulation balances on 1 July 2017.

For funds that segregate individual assets between exempt and taxable that will be straight forward. They can step up the cost base of reclassified assets to lock-in the pre-1 July 2017 exemptions.

Many large funds however apply a ‘proportional’ approach to pension exemptions. If 25% of the fund’s assets support pensions, 25% of each capital gain is exempt and 75% is taxable. Simple! No tracking of individual assets.

But if a handful of fund members have pension balances over $1.6m things could get complicated. It will be only ‘a handful’ because less than 1% of the population have these balances, and many of them will have self-managed funds.

So a fund’s taxable proportion dial should move only a fraction; say 0.001% from 75% to 75.001%.

To lock in the exemption until 1 July 2017 for these members the fund will need to reset the cost base of all its assets to market value at 1 July 2017. 75% of accrued gains to that point will remain taxable, normally on sale of the individual assets. A slightly higher 75.001% of post-1 July 2017 gains will then become taxable, also on sale of individual assets. All mathematically possible of course but in practice perhaps quite some fun for a proportional fund’s systems, and all for the sake of a few and some fairly small beer.

Funds won’t be obliged to reset their asset costs. They can instead forgo the exemption on the affected pre-1 July 2017 gains i.e., 0.001% in our example. But that cost won’t have been booked, and if the fund is to raise a liability to whom should it be charged? If to the members with pension balances over $1.6m they will be retrospectively taxed (at the choice of the trustee), and if to members as a whole those with less than $1.6m balances will be funding the cost of other members.

Taxable proportions change each year anyway with fund profile changes: new members increase the taxable proportion and the drift of members to retirement reduces it. A further question for these funds, therefore, is whether 1 July 2017 is a good time to lock in the prevailing tax free proportion – it may not be, particularly for funds growing their pension divisions.

Not surprising, the Government has called for feedback on this proposal.