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Budget Update: Where are we now…. Nov 2016

The 2016 Federal Budget, combined with the July election, has placed superannuation changes at the forefront. As we are now slowly seeing these changes, some of which have already been altered, tabled in Parliament, and with the majority of these reforms scheduled to take place effective 1 July 2017, it is important as advisers to understand what the implications are for our clients.

We have focused briefly on a few key changes below:

Pensions

TRIS pensions will from 1 July 2017, no longer generate income taxed at 0% inside a superannuation fund. While there is no proposed changes to the way superannuation income streams are taxed at the personal level, the Budget proposes that effective 1 July 2017 all TRIS pensions will cease to enjoy the associated 0% tax rate on earnings derived in super, including capital gains.

Implications

What this means for us advisers is that we must be alert to triggers of a “condition of release”. Triggering such a condition will make the individual’s superannuation balance Unrestricted Non-Preserved and mean that the TRIS will automatically convert to an Account Based Pension (ABP).

This will enable your clients to continue to derive tax free earnings inside their super funds.

In addition, a TRIS will not count towards the transfer balance cap.

Transfer balance cap

This is the $1.6 million pension limit. This limit will apply per person. The limit is measured on a “percentage used” basis – for example:

Example:

Jamie has started an ABP on 1 July 2017 with $1.2million. He has used 75% of the transfer balance cap. When the cap increases to $1.7million, he will be able to commence another ABP with $425,000 (i.e. 25% of $1.7m).

While a member may start a TRIS, and do so using more than $1.6 million (and enable the individual to withdraw 10% as a pension), practitioners must be careful with the transition from TRIS to ABP and the transfer balance cap at this time.

Reversionary pension

Receipt of a reversionary pension will count towards the recipients transfer balance cap. Members will have 6 months to:

This will have a significant impact on the current day reversion (or via a BDBN) to the spouse and could cause significant difficulty with SMSF’s containing lumpy assets.

Example:

Bob and Kate are SMSF members. They each have $1.6m in their SMSF. When Bob passes away, Kate will need to either:

a. cease her pension. Then she could receive Bob’s death benefit as a pension and stay within the transfer cap, or
b. withdraw as a death benefit lump sum, the $1.6m of Bob’s balance.

Non concessional contribution changes

The current NCC rules remain for the 2016/17 financial year. Guidance from Treasury indicates that individuals retain the capacity to make a $540,000 NCC this financial year (provided they had not triggered the bring forward since 1 July 2014).

Individuals triggering the bring forward this year, and contributing between $180,001 – $380,000, will be prevented from making a NCC in the following 2 years.

All individuals will be prevented from making a NCC where their superannuation balances exceed $1.6million. For those close to this limit, individuals will only be able to contribute up to $1.6m.

Transitional rules

2015-16 2016-17 2017-18 2018-19 2019-20
More than $460,000 NIL New rules – $100k or bring fwd (subject to member balance)
Between $180,001 to $459,999 Can only bring contribution up to $460,000 New rules – $100k or bring fwd (subject to member balance)
No NCC made $540,000 Nil Nil New rules – $100k or bring fwd (subject to member balance)
No NCC made Between $180,001 – $379,999 Can only bring contribution up to $380,000 New rules – $100k or bring fwd (subject to member balance)

Practical Implementation – tips and traps

More Information

Please do not hesitate to contact either Brenda Hutchinson or Jason Roccasalvo to discuss your particular client’s circumstances.

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