A raft of new regulations comes into force on July 1 that make the super system less attractive from a tax perspective for some self-managed super funds. This is especially the case for funds in pension phase with assets valued at more than $1.6 million.There was a sharp increase in the contribution level to SMSFs by trustees in the December 2016 quarter. The average contribution went to $8550, compared with $3040 in in the September quarter, according to SuperConcepts SMSF Investment Patterns Survey.
Executive manager technical & strategic solutions at SuperConcepts Philip La Greca says the lift in contributions would probably continue for the next two quarters."The current non-concessional amounts apply for the remainder of this financial year and investors are taking advantage of the limited time available to them," say La Greca.
As for the looming July 1 changes, they have the potential to affect the way some self-managed super funds are structured. Now is the time, with your advisers, to assess whether and how your fund might be affected to ensure it remains compliant beyond the start of the new financial year.
The first step is to understand what the changes are. Broadly, super funds in the pension phase will now be able to hold assets to the value of only $1.6 million tax-free. This is known as the transfer balance cap.
Members in pension phase with super balances exceeding $1.6 million will need to commute part of their pensions by June 30. That is, they will need to convert them back to the accumulation stage. Investment income on funds in the SMSF above $1.6 million will be taxed at 15 per cent, rather than be tax free.
Members with balances over $1.6 million will also be restricted from making non-concessional contributions after June 30. There are a number of paths for people who have more than $1.6 million in a pension-stage fund. One option is to take assets out of the super environment altogether.
But Andrew Simpson, a partner with chartered accountants Gunderson Briggs, says in many cases it is better to commute assets back to the accumulation phase rather than house them in another structure.
"A lot of people assumed assets above $1.6 million would be transferred to a trust. But it's quite difficult to get the 15 per cent tax rate anywhere but super," he says. Assets in the accumulation stage are taxed at 15 per cent in the super environment.
As a concession to the introduction of these rules, the government has announced it will allow super fund members in pension phase to reset asset values for capital gains tax purposes for investments acquired before November 9, 2016, which is when the amendments to super laws were passed.
SMSF members who wish to claim CGT relief for their assets need to ensure it makes sense from them to reset their asset values at the moment. This is also a one-off, irrevocable strategy. So ensure it does make sense to reset asset values held in your SMSF. If resetting the value results in more CGT payable down the track it may not make sense to reset the asset's value now.
You can choose to receive CGT relief on an asset-by-asset basis. But to do that trustees need to be able to accurately value to asset, either by using market figures or through a proper arms-length valuation. It is also important to keep proper records of this work.
Another change is to the transition to retirement rules. Previously, investors over a certain age who were still working were able to contribute additional funds to their super account before tax and then draw down a small pension tax-free from this. This strategy is no longer as effective as it once was.
There has also been a reduction to contribution caps. Concessional contributions (including superannuation guarantee, salary sacrifice and personal concessional contributions) will be limited to $25,000 each year, a reduction of $5000 or $10,000 depending on age. Non-concessional contributions will be capped at $100,000 a year, down from $180,000.
Peter Burgess, general manager technical services and education at SuperConcepts, says : "If you're under 65 you can bring forward up to three years of non-concessional contributions now. That's a total of $540,000 per individual. If you have a spouse, then the spouse can do the same. But it's important to use up the whole $540,000 entitlement by 1 July."
Mollifying the SMSF member community, Peter Hogan, the SMSF Association's head of technical, says much of the work to manage the changes will be done as part of SMSF's normal end-of-year account preparation processes. "CGT relief is the area of most concern, as is moving funds in excess of $1.6 million back into the accumulation phase," he says. "The important thing from our perspective is that trustees meet before 30 June with their advisers and minute any decisions they make in relation to their fund and its assets," says Hogan.
He stresses that trustees of SMSFs in pension phase with less than $1.6 million do not really need to do anything.
In terms of consequences for people who have breached the transfer balance cap, Greg Einfeld, principal of specialist SMSF advice practice Lime Super, says fund members are likely to end up paying more tax than they have in the past.
Einfeld says the least-understood change is the removal of the tax exemption on transition to retirement pensions. "Currently, investment income on these pensions is tax exempt. But the tax rate will increase to 15 per cent from 1 July. Many SMSF trustees are unaware of this change."
It is also worth noting the new rules have consequences for estate-planning purposes. For example, consider Peter and Mary, who each have about $1.5 million in account-based pensions. Under the current rules, Mary could keep Peter's death benefit in the SMSF and start a new death benefit pension.
"But that won't be allowed in future because it would result in Mary exceeding her transfer balance cap. One solution is for Mary to commute her existing pension back to the accumulation stage and create space for the new pension within her transfer balance cap of $1.6 million," Einfeld says.
In light of all the changes, Christopher Page, managing director of financial research business Rainmaker Group, says SMSF trustees and members should regularly review their investment strategy.
"Monitoring your investments and keeping on top of underperforming funds is key," he says.
There are also legal ramifications as a result of the new super laws. Donal Griffin, an SMSF specialist with Legacy Law, suggests the new laws mean SMSF investors should consider taking advice to ensure their fund remains legally compliant.
"The extremely benign super fund environment is changing quite substantially. In particular it's an idea for SMSFs to review the succession planning of their fund because death nominations may not flow with the money into any new structure that's created as a result of the rules," he says.
For instance, says Griffin, it cannot be assumed pensions will automatically revert to a spouse on the death of an SMSF member. It is also an idea to check whether it is appropriate to have binding or non-binding death nominations attached to the fund.
"The new rules are a good wake-up call for SMSF trustees to check they are on the right path and everything is set up the way they expect it to be," he says. In particular, it's essential to check the SMSF's trust deeds to ensure any actions taken as a result of the new laws are allowed under the deed.
Says Griffin: "Trustees might be surprised or even horrified to find a strategy they researched well two years ago may not be as tax effective as they would like now. Now's the time to ensure your fund is set up exactly the way you want it to be before the new rules come in on 1 July."