Superannuation restructure tips to stay under $1.6m pension cap

Australian Financial Review

16 November 2016

by Sam HendersonMake the most of opportunities before June 30 to balance out super sums between partners, writes Sam Henderson who answers your questions on super.

Q: To comply with the proposed $1.6 million tax-free pension limit, our SMSF will require restructuring. What I am contemplating is withdrawing a significant amount as a pension from my member pension account and making a non-concessional contribution into my wife’s pension member account – which happens to be well below the $1.6 million limit. As the trustee, I need to choose the withdrawal type – ie, lump sum or pension. Both withdrawal types count towards the minimum withdrawal requirement of our pension and are not taxed in my personal tax return. Will such a withdrawal, dependent on whether it is nominated as a pension or a lump sum, compromise the grandfathered status of the pension account when considering eligibility of the Commonwealth Seniors Health Card? I retain a right to exclude the non-assessable pension under the grandfathered rules at January 1, 2015. Are there other ramifications dependent on the type of withdrawal that is made? What are the differences between a lump sum and a pension withdrawal? David

A: Put simply, a commutation means that your pension account will need to stop and restart, therefore affecting the grandfathered Commonwealth Seniors Card (or, more widely than your case, those on the grandfathered age pension deeming rates with lower balances). Since there are no upper limits (there is a minimum only) of pension payments, it’s best to make your withdrawal in the form of pension payment to ensure existing grandfathered scenarios remain unaffected.

As a general rule, I typically make lump sum withdrawals for clients as pension payments for the sake of simplicity and to maintain any grandfathered provisions.

With respect to making a non-concessional contribution in your wife’s name, you may be able to contribute up to $540,000 into her super fund by June 30 if she hasn’t triggered the bring-forward rule. If she’s over 65, though, she will be limited to $180,000 a year and only if she meets the work test of working 40 hours in 30 consecutive days in the financial year in which the contribution occurs. Next year, of course, all these amounts will be markedly reduced so the next half of this financial year will be a big one for super funds to maximise their opportunities.

Q: Sam, if I have more than $1.6 million in my self-managed superannuation fund (SMSF), can I still make non-concessional (after-tax) contributions in 2017-18? Peter

A: Peter, my understanding is that after July 1, 2017, if your balance exceeds $1.6 million then you will not be permitted to make further non-concessional contributions. People with less than $1.6 million in their fund will be able to make non-concessional contributions up to their $1.6 million cap of $100,000 per annum or up to $300,000 using the bring-forward rule. If you do make further non-concessional contributions, you will be issued with a direction from the ATO to remove the money from your superannuation fund.

For this reason, it may make sense to make arrangements to contribute up to $540,000 for each member in this financial year using the existing bring-forward rules to potentially max out a contribution between a couple of up to $1,080,000

Q: I am 67 and fully retired, therefore I cannot open a superannuation account as I would fail the work test. If my pension exceeds $1.6 million (say $2 million), where could I put the extra $400,000? Frank

A: Frank, the government plans to make this one easy for you by compelling you to comply with the apportionment rule. If you have an existing retirement pension (account-based pension), then you will not be given any other alternative other than using an apportionment process to calculate your $400,000 over and above the proposed $1.6 million cap.

That said, you will be able to cash the funds out of the superannuation environment and for some people, this may be a viable alternative. Just remember, though, outside of the super entity, you will need to pay the regular individual marginal tax rates and potentially capital gains tax. It’s the latter that concerns me.

I mentioned last week that I am curious as to how the government will be able to apply the rules to those with multiple superannuation funds and if the apportionment rule can practically be applied given potentially two different trustees (such as when a person has an SMSF and an industry fund). For example, if we rolled your $400,000 excess amount into an industry fund and invested it into direct shares with franking credits, we could potentially eliminate the income tax by segregating the accounts which won’t be possible if all the funds are in one account. So too, we may see an emergence for higher-net-worth clients having two SMSFs for this reason, ignoring any potential impact on the Commonwealth Senior Health Card or any other grandfathered provisions under Centrelink.

You see, you don’t need to meet a work test to do a rollover into another fund and you can do partial rollovers (potentially in-specie) depending on where you’re rolling your fund to or from although, as mentioned, you’d want to check the grandfathering if you have a health card. Advice is definitely recommended to those in this situation.