This year saw major changes that affect the way member’s benefit from many of the major tax concessions of superannuation following the implementation of the federal government’s new superannuation regime. The starting point for many is that if your superannuation balances is well under $1.6 million and is unlikely to exceed this lev­el during your working lifetime, then the changes don’t affect you (apart from chang­es in ongoing annual contribution limits).

The next point is that you can have more than $1.6 million in super, the new $1.6 million cap is a cap on the amount that can be transferred across to a tax-free pension account on your retirement. The changes that came into effect from 1 July, were implemented on the basis that the sweeping reforms that made up the Simpler Super legislation changes to super­annuation in 2007 were too generous and required diluting. Over the last 18 months, there had been growing political and bud­get pressures to reduce the tax concessions, as many felt the concessions were not benefiting all Australians. Many viewed that superannuation was being used as a generous estate planning vehicle where assets were being accumulated to pass onto the kids in a tax-free environment.

The government has estimated the changes will provide an extra $540 million in tax over four years. The main crux of the changes re­volves around cutting back the annual limits on contributions (getting money into super­annuation) and placing a cap on the amount of funds that can be transferred into a tax-free pension account on retirement. The biggest issue for members who have been salary sacrificing up to the old limit of $35k (over age 50) is that you’ll need to review the level of your pre-tax contribu­tions ASAP. If you are still contributing at the same level you did in 2016/17 and you got close to $35k, if you don’t make adjust­ments, you’ll most likely exceed your cap and face penalties. Avoid the penalties at all cost. Remember these contributions cov­er all your 9.5% super guarantee contribu­tions and all salary sacrifice contributions.

If you have $1.6 million in your super ac­count already, you’ll be unable to make any further concessional (after-tax) con­tributions to super, the good news is that you can still continue to make annual non-concessional contributions at the cur­rent rate of $25k pa. This will help build up your super balance going forward along with investment returns on the capital. For those still receiving a transition to retire­ment pension, you should sit down and go through the maths as to whether the strate­gy remains a correct strategy. For those with large balances the tax rate of 15% on the fund’s earnings will mean for most the ben­efits of the strategy no longer are favourable and for some, they may end up with a worse superannuation balance at retirement.

For those entering retirement from 1 July, you can now only transfer a maximum of $1.6 million to a tax-free pension ac­count, any excess in your superannuation account must be retained in your accu­mulation account. For many, this won’t be a major problem as marginal tax rates of holding the excess outside of superan­nuation could be much higher than 15%.

How does the $1.6 million transfer balance cap work?

First off, the cap of $1.6 million will be in­dexed in $100k increments, based around the increases in the CPI (inflation rate). This will mean with a 2% CPI rate; the cap will increase to $1.7 million in just over three years (2020). If you had already commenced a pen­sion prior to 1 July 2017 and the bal­ance at this date was under $1.6 million, you can commence further pensions up to the current transfer balance cap. Once you have fully utilised your trans­fer balance cap, you will be unable to take advantage of the periodic indexed increases in the transfer balance cap. Movements in the balance of your pen­sion account due to market returns and pension withdrawals are not countered towards your transfer balance cap, this means should we have another GFC type fall in markets, members will be unable to use this as an opportunity to add further funds to their tax-free pension account. If you take lump sum payments or roll your pension back to accumulation (commute all or part of your pension), your transfer balance cap will be reduced accordingly.

 I receive my pension via a defined pension scheme:

If you receive your pension via a defined benefit fund, you will also be caught up with the transfer balance cap. To calcu­late this, you simply multiply your an­nual defined benefit pension income by 16 to work out the capital value as­signed against your transfer balance cap. The tax rates that apply are determined by whether the defined benefit fund is an un­funded (untaxed) or a funded (taxed) ben­efit scheme. In all cases, if you are close to your transfer balance cap and nearing re­tirement, you will need professional assis­tance in modelling the different outcomes and determining what actions are needed. The ATO in October came out and advised they have seen an increase in a strategy of using reserve accounts in SMSF’s as a way to circumvent the $1.6 million transfer bal­ance cap. They have advised they will mon­itor the use of reserves in SMSFs going for­ward. If your accountant comes to you with a strategy to use such a reserve, you should be cautious and seek a second opinion. Members should at all costs, avoid being put in a position of please explain to the ATO.

One advantage of the rule changes for those with high balances.

There is one advantage of the new rules, particularly to members who held pension account balances as at 1 July 2017 above $1.6 million. The minimum pension drawdown is calculated based on your pension bal­ance each year. For those who had balanc­es well above this figure, they would have been required to move any excess above $1.6 million back to accumulation. This transfer would also see a reduction in their annual minimum pension drawdown. Let’s look use an example of a member who was over 65, held $3,500,000 in super as at 1 Jul 2017. Based on the above, the member has been able to retain $95,000 annually in superan­nuation, whilst still retaining the ability to make withdrawals from the accumulation account if needed.