Superannuation draft legislation released in relation to $1.6m pension cap

On 27th September Treasury released draft legislation to implement a number of superannuation reform measures announced in the 2016 Federal Budget.

From 1 July 2017 a transfer balance cap of $1.6 million limit will be introduced, limiting the tax exempt income that can be claimed by the trustees of a SMSF to a maximum of $1.6m.

For members with pension account balances that exceed the transfer cap, only the portion of the assets up to $1.6m will be exempt. The balance exceeding $1.6m will be treated as if it is in accumulation phase taxed at 15% or 10% on capital gains for assets held longer than 12 months.

Good news – The cost base of the assets are reset to market value at 30 June 2017.

Transitional provisions provide Capital Gains Tax (CGT) relief, where superannuation funds are able to reset the cost base of assets reallocated from pension phase to accumulation phase prior to 1 July 2017.

It is proposed that the transitional arrangements will be effective for those in pension phase at 30 June 2017. A transitional period of 10 years from 1 July 2017, requires assets to be disposed of in order to benefit from the uplift in the CGT cost base. Assets disposed of post the 10 year transitional period will be subject to a CGT event calculated on their original cost base.

Segregation of assets, not an option!

For those with assets in excess of $1.6m the trustees will not be able specifically allocate (segregate) assets to the member’s pension account. Subsequently any disposal of an asset will create a CGT event that will be apportioned over all the assets of the fund.

No benefit for reversionary pensioners

For pensions established with a revisionary beneficiary, generally the deceased’s spouse is still subject to the $1.6m pension cap if their spouse passes away. If the reversionary beneficiary has already used their $1.6m pension cap they have six months after the death of their spouse to revert the pension back to accumulation.

There is still a long way to go before the legislation is passed so we will keep you up to date as further announcements are made.

If you have any questions please don’t hesitate to call 03 8602 4100