How do the changes affect me?

  • The most significant change is the imposition of a transfer balance cap (TBC), which will impose a $1.6 million limit on the total amount that can be transferred into the tax-free retirement phase account. Whilst at present, all earnings on retirement phase accounts are tax-free, from 1 July 2017, super funds will be liable to pay excess transfer balance tax if the TBC is exceeded. The TBC will be indexed periodically in $100,000 increments in line with CPI increases however anyone that exceeds or equals their TBC will lose the benefit of indexation.
  • A member's available cap space is determined based on the amount of credits in the individual's transfer balance account (TBA). The TBA acts as a ledger keeping track of credits and debits to pension phase accounts.
  • The solution for any member in excess of their TBC is to roll-back the excess amount into the member's accumulation account (this is known as commuting). Amounts in the accumulation account will remain within the superannuation system and continue to receive favourable tax treatment with income taxed at 15% and capital gains at 10%. Further, transfers of any amount from the fund to members continues to be tax free upon receipt.
  • Beneficiaries of a death benefit pension will be at risk of exceeding their TBC as its receipt will cause a credit in the beneficiaries' transfer balance account. The timing and value of the credit will depend on whether the pension is considered to be "reversionary". If so, the credit will not arise until 12 months after the date of death of the original member and the amount of the credit will be equal to its value on the day it first became payable (i.e. the date of death). This means that reversionary beneficiaries will have a 12-month period to ensure compliance with the TBC, during which time any growth on the underlying assets of the death benefit will not be counted towards the TBC. This favourable treatment does not extend to non-reversionary pensions. To this end, it should be noted that a pension will only be considered to be “reversionary” where it reverts to the beneficiary automatically upon the original member's death.
  • The concessional contributions cap will reduce to a blanket $25,000 per annum (down from its current level of $35,000 for those over 50 and $30,000 for all others).
  • The non-concessional cap is reduced to $100,000 per annum (down from its current $180,000).
  • The higher 30% contributions tax will be levied on those with a personal income exceeding $250,000 per annum (down from the current $300,000).
  • There will no longer be a tax exemption on the earnings used to pay a Transition to Retirement Income Stream (TRIS). Earnings will instead be taxed within the super fund at the concessional rate of 15% per annum, thereby still providing a tax benefit however not at the level members may have become accustomed to.
  • Temporary CGT rollover relief is available until 30 June 2017 for SMSFs. The relief may allow the cost base of certain assets to be reset if they are transferred from pension to accumulation phase in order to comply with the TBC and TRIS reforms.
  • It should also be noted that from 1 July 2018, the TBC reforms allow a ‘carry forward’ of any unused concessional cap space (for up to 5 years) where a member’s superannuation balance is less than $500,000.

What should I do?

  1. Where a member is at risk of exceeding their TBC, the following actions should be taken before 1 July 2017:
    1. the member must request in writing their trustee to commute the excess amount so that it is either retained in the accumulation account or paid as a lump sum pension payment; and
    2. the trustee must resolve by a written resolution to do so.
  2. Importantly, the ATO has advised that the excess amount need not be specified in the request or resolution, thereby allowing further time to attend to the necessary accounting adjustments. The ATO has stressed that the above documents must be completed in order to effect the roll-back.
  3. Trustees will need to act quickly to determine whether CGT rollover relief is available and appropriate and should seek professional advice in this respect as the window of opportunity closes on 30 June 2017.
  4. Superannuation trust deeds should be amended prior to 30 June 2017 in order to:
    1. ensure that the Trustee has adequate power to commute funds from the pension phase account to the accumulation account;
    2. reflect the legislative changes outlined above and ensure that the rules adequately cover the TBC and empower the Trustee to act accordingly; and
    3. provide for reversionary and non-reversionary death benefit pensions.
  5. Individuals in or approaching retirement phase and who, together with their spouse, have more than $1.6 million in superannuation should review their binding death benefit nominations and SMSF trust deeds to determine whether a reversionary pension would be payable and the implications if not.