Date of article: 9 January 2017
Last updated: 9 January 2017
From 1 July 2017, a new cap will be introduced to limit the amount of superannuation capital that can be transferred to the retirement phase (the transfer balance cap). This cap will limit the amount of the earnings that are exempt from taxation.
The transfer balance cap is $1.6 million for the 2017-18 year. The cap is indexed to CPI in $100,000 increments.Once a proportion of cap is utilised, it is not subject to indexation. The unused balance of the cap is proportionally indexed. Where the transfer balance cap is exhausted, the cap is not indexed.
Transitional arrangements will apply for individuals already retired with balances below $1.7 million on 30 June 2017, who will have until 31 December 2017 to bring their retirement phase balances under $1.6 million.
The transfer balance cap is determined on a 'net' basis of amount transferred to the retirement phase and does not value earnings, losses or pension drawn-downs (the transfer balance account). Subsequent earnings on balances in the retirement phase will not be capped or restricted.
The following amount adds to (credit) the individual’s transfer balance:
The following amounts are subtracted from (debit) the individual’s transfer balance:
Because the retirement phase balance may increase due to earnings, full or partial commutations may exceed the balance of the individual’s transfer balance account (or even their transfer balance cap). Where this occurs, the individual’s transfer balance account will have a negative balance.
For example: On 1 July 2017, Taylor purchases a pension worth $1.6 million. On 1 June 2018, the superannuation interest that supports the pension is valued at $1.7 million because of investment earnings. Taylor fully commutes the pension on this day and receives a $1.7 million superannuation lump sum. Taylor debits his transfer balance account by $1.7 million to reach a transfer balance account of –$100,000. Taylor is entitled to start a new pension worth up to $1.7 million without breaching his transfer balance cap.
Changes will be made so that partial commutations to a lump sum paid to the individual cannot be counted towards the minimum annual payment requirement for superannuation income streams.
If an individual exceeds their transfer balance cap, the ATO will direct the excess amount to be commuted. The individual will be liable for excess transfer balance tax on their excess transfer balance earnings.
Earnings on capital in retirement phase account (up to transfer balance cap of $1.6 million for the 2017-18 year) is tax-free.
An individual's remaining balance will remain in an accumulated account. There is no limit on the amount that can remain in an accumulation account.
| Up to 30 June 2017 | From 1 July 2017 | |
| Earnings tax on retirement phase accounts | Tax-free: no limit on the size of the retirement phase accounts. | Tax-free: $1.6m transfer balance limit. Taxable: Excess balances (amounts exceeding $1.6m) to be held in an accumulation account and taxed at 15%. |
| Earnings tax on transition to retirement phase accounts | Tax-free: no limit on the size of the retirement phase accounts. | Tax-free: Nil. Earnings on transition to retirement phase accounts will be taxed at 15%. Transition to retirement income streams will become taxable from 1 July 2017 as these income streams will not be categorised as 'retirement phase' assets. |
Capital gains tax relief arrangements
The capital gains tax relief arrangements ensures that tax does not apply to unrealised capital gains that have accrued on assets that were used to support superannuation income streams up until the effective commencement date of the $1.6m cap on exempt pension income.
The temporary relief arrangements are required to provide temporary relief from tax consequences for capital gains accumulated before 1 July 2017, where these gains would have been exempt income if realised prior to the following circumstances:
The CGT relief arrangements provided will allow the super fund to reset the cost base on CGT assets that are moved from the retirement phase to the accumulation phase between the introduction of these Superannuation Taxation Bills, being 9 November 2016 and 1 July 2017, including assets supporting transition to retirement income stream.
Note that the CGT relief applies to assets held as at 9 November 2016, and not new assets acquired after that date.
How it will work
The superannuation fund is deemed to have sold and reacquired the relevant asset (assets that are moved from retirement phase to the accumulation phase) for market value,resulting in the reacquired asset having its cost base set at its current market value.
As the superannuation fund is taken to have sold and then reacquired the asset, applying CGT relief would reset the 12-month eligibility period for the CGT discount.
CGT relief is not automatic. A superannuation fund is not required to apply this CGT relief, but if the fund chooses to apply the CGT relief, the election must be made on or before the 2016-17 tax return is due, and cannot be revoked. The ATO has not indicated whether the choice is made on a prescribed form or the tax return.
The CGT assets eligible for relief depends on whether the fund, during the pre-commencement period: uses the segregated method, starts using the proportionate method, or continues using the proportionate method.
A precursor to a trustee choosing CGT relief is that a member will have to transfer value back to the accumulation phase to comply with the transfer balance cap or TRIS reforms commencing. This sets the context for accessing relief.
Funds can segregate the assets they hold that support superannuation income stream benefit liabilities, with earnings on segregated assets exempt from tax. Alternatively, where assets are not held solely to fund pension liabilities, funds are required to use the proportionate method, where a proportion of earnings on all of a fund's assets are exempt.
Segregated fund
Superannuation funds with segregated current pension assets on 9 November 2016 may elect the CGT relief on an asset-by-asset basis for those segregated current pension assets.
Where a superannuation fund chooses to apply the CGT relief because it has reallocated assets from the segregated pension assets pool to the segregated non-current pension assets pool, the cost base of the segregated non-current pension assets is reset at that time at its market value.The remaining segregated pension assets cost base is not reset.There is no immediate tax for the fund as the earnings on segregated current pension assets are tax-exempt.
Note that the superannuation fund cannot continue to use the segregated fund method from 1 July 2017. See below: Excluding funds with member that have large balances from using the segregated assets method.
It may be detrimental to apply the relief to assets that are in a capital loss position, as the election will reduce the cost base (the loss is disregarded and not carried forward). Another situation is if the sale of the asset is to occur within 12 months of the reset of the cost base, to consider whether the benefit of the reset cost base exceeds the discount, as the CGT relief also resets the 12-month eligibility period for the CGT discount.
Unsegregated fund
Superannuation funds that are not segregated on 9 November 2016 will qualify for CGT relief for all assets under the proportionate method. The fund may choose to reset the cost base of any or all of its assets to their market value as at 30 June 2017.
Under the proportionate method, the cost base of the assets would be reset by assuming the assets have sold and reacquired for market value just before 1 July 2017,resulting in the reacquired asset having its cost base set at its current market value. The 12-month eligibility period for the CGT discount is also reset.
Because the proportionate method covers both current pension assets and accumulation assets, the proportion of any net capital gain relating to the accumulation assets is taxable in the 2016-17 income year. This proportion is the actuarial percentage.The superannuation fund would need to pay that tax, or elects to defer the tax payment until the asset is actually sold.
Anti-avoidance
The Explanatory Memorandum provides a reminder and states that the CGT relief arrangements are only intended to support movements or re-proportioning of assets and balances necessary to support compliance with the transfer balance cap and changes to the TRIS.It would be otherwise inappropriate for a fund to wash assets to obtain CGT relief or to use the relief to reduce the income tax payable on existing assets supporting the accumulation phase. Schemes designed to maximise an entity’s CGT relief or to minimise the capital gains of existing assets in accumulation phase - by creating the circumstances in which the choice may be made — may be subject to the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936.
SMSFs will not be able to use the segregated method to determine their earnings tax exemption for an income year from 2017-18 year if:
It will not be necessary for a person with an interest in a SMSF to be receiving an income stream from the SMSF to be excluded from using the segregated assets method. A SMSF will be excluded from using the segregated assets method where a member of a SMSF has a total superannuation balance exceeding $1.6m (includes all interest that person has in any superannuation fund) and is a retirement phase recipient of an income stream from another superannuation income stream provider.
Similarly, a SMSF could have a member with a transfer balance account balance under the $1.6m cap, but who also has a total superannuation balance exceeding $1.6m. If so, the fund could not be segregated from the 2017-18 year while this situation continued.
However, such SMSFs can still choose CGT relief using the segregated method for the whole of the 2016-17 year.
The provision prevents member that have large balances and a SMSF from splitting their superannuation balances across more than one superannuation fund to utilise segregated method. However, having 2 SMSF may be a solution, one SMSF with assets wholly in retirement phase within the $1.6m cap, and another SMSF with assets that are in accumulation phase.
The set of rules surrounding these reforms are the most complex yet, and may be subject to further interpretation and changes.
Terminology
Transfer balance cap means $1.6 million in 2017-18 year. The cap is indexed to CPI in $100,000 increments.
Transfer balance account means the net amount of capital an individual has transferred to their superannuation retirement phase.
Additional ATO resources
ATO LCG 2016/D8 - Superannuation reform: transfer balance cap and transition-to-retirement reforms: transitional CGT relief for superannuation funds
ATO LCG 2016/D9 - Superannuation reform: transfer balance cap
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