This week’s seminar hosted by The Australian in conjunction with BT has revealed deep-seated confusion among even financially savvy people on how the federal government’s new superannuation regime will apply when it comes into force on July 1.
For people with superannuation balances well under $1.6 million — and who are not likely to reach that level during their working lifetime — there are no major changes.
But the discussion revealed that for people with existing super balances of at least $1.6m or those who could well get there, particularly those with self-managed super funds, there is immense confusion about how and when the $1.6m “cap” will apply.
As one adviser said this week, there is a general misapprehension that there is a $1.6m limit on the amount anyone can have in a super fund.
The $1.6m is the total that a person can “tip into” or transfer into a pension fund bucket from a super fund, where earnings are tax free over their lifetime.
There were also questions raised during the seminar on exactly how existing money in a super fund that already has more than $1.6m in assets can be divided from July 1 onwards.
The changes will be a boon to financial advisers once people who are affected realise the complexity of the changes and try to work out their approach.
It helps to understand why the changes are being made in the first place. The net effect of the changes announced in the May 2016 budget, and introduced into federal parliament on November 9, is to claw back (some might say hack back) the benefits of the super regime made so generous under the Howard government by treasurer Peter Costello.
Despite the fact that it was a Coalition government that made changes to make super more generous — and the fact that the Tony Abbott-led Coalition successfully campaigned in the 2013 election on not making any unexpected changes to super — the current Coalition government believed that it was losing too much tax revenue from the system.
It also believed that some people were using the existing super regime as an estate-planning vehicle — to accumulate assets to pass on to their kids — in a tax-free environment.
Broadly, the government has done this by cutting back on two major aspects of the system — the amount of allowable contributions and the amount of money that can be moved into a tax-free regime when a person moves into their pension phase.
The lower caps on super contributions will be something that individuals will need to work out themselves as they will be penalised if they put in too much — either on a concessional or salary-sacrifice basis or on a post-tax basis.
People who have been salary sacrificing the maximum of $35,000 this year (including the compulsory 9.5 per cent superannuation guarantee) will need to cut back on their savings from July 1 to get them back to $25,000 (including the guarantee).
The post-tax annual limit has come down from $180,000 to $100,000 a year.
That sounds simple enough, but the figure of $1.6m keeps coming up in slightly different ways.
If someone already has $1.6m in their super, they won’t be able to put in any more at all on a post-tax basis.
Over time it appears that the government has decided that, for new people coming through the system, the maximum that people will be able to accumulate in super is about $1.6m.
But in the meantime, people with more than $1.6m in their super need to pay attention from July 1.
The $1.6m isn’t the amount of money they can have in super at any time, it is the total amount that can be transferred from the accumulation phase of super into the pension phase of super. Once the $1.6m has been tipped into this pot, its value may go up or down with the market.
From the outset, the ATO will be looking over your shoulder and keeping a tally of how much you have transferred from the super accumulation mode to the pension mode.
“From July 1, 2017, where a super fund is in pension mode, the money in that fund will be reported to the tax office and registered as their transfer balance,” says Jeff Scott, head of product at Clearview Wealth. If, say, someone is in pension mode and only has $1.4m, they can potentially put another $200,000 into their fund over their lifetime.
“If a member breaches the cap, they’ll need to withdraw any excess funds from their retirement income account (pension mode) or face penalties from the ATO,” says Scott.
“Where a member’s pension balance is over $1.6m as of July 1, 2017, they will face penalties from the ATO until the excess amount is removed.
“Members can either transfer the excess back into a super account or withdraw the excess amount from super altogether. They can move excess funds out of their retirement income account (pension mode) before June 30, 2017, to avoid excess tax.”
Or in other words, people with super funds in pension mode worth more than $1.6m should lodge a notification with the ATO that they have $1.6m in pension mode before June 30 to avoid being penalised.
As Scott points out, most superannuation funds have both accumulation and pension facilities.
“Normally, the member should not be forced to leave the super fund, but may be required to set up a new account within their existing super fund,” he says.
“Always discuss with your financial adviser or accountant before making any decision.”
For those affected, it is complicated and difficult. But the first thing for people is to realise they have a problem.
Scott says superannuation consultants are getting lots of inquiries from people who are worried or not sure what to do.
“Inside SMSFs it provides added complexity. Which assets should I transfer? Will the transfer trigger CGT? Is there any CGT relief? If I take money out of super, what is the impact on my age pension or my spouse’s age pension?” Scott says.
For those who may be affected by the changes, things are going to get rockier before they get better.
2 June 2017