Australian Financial Review
16 February 2017
One of the high-profile changes to super rules from July 1 is transition to retirement (TTR) income streams or pensions no longer being entitled to tax- free earnings on the investment accounts from which they are paid.
Although the change will see the loss of an attractive tax concession that can enhance the yields of super income returns by 15 per cent and capital gains by 10 per cent for the period of time a TTR is in place – a major reason why they have been popular – it’s a modification that needs to be put into perspective, given it can be managed by those who are adversely affected.
There are certainly many who will be disappointed by the change, says superannuation strategist Darren Kingdon, of Kingdon Financial Group. And it won’t just be high income earners who will be affected.
The TTR strategy has been embraced by many everyday mum and dad super savers who have them as part of a pre-retirement strategy, especially those who have sought advice from financial planners. It’s estimated there are about 600,000 superannuants with a TTR pension.
As the accompanying table shows, the change will mean a difference of anywhere between 0.45 per cent and 1.8 per cent where investment returns range between 3 per cent and 12 per cent.
While the investment side of the TTR change is one consideration, there is more to it than that. Based on questions from readers with an existing TTR arrangement or those wondering whether they still have appeal (before and after the July 1 change), there is plenty to think about.
An important thought is what can be involved in converting a TTR to an account-based pension before July 1. One scenario is illustrated by a reader’s situation.
With not one but three TTRs – two of them in industry super funds and one in a self-managed fund – what interests him is that his total super is $50,000 in excess of the $1.6 million pension limit that will apply from July 1. What must he do to reduce this below the limit, he asks, and by when?
His priority, says Daniel Butler of DBA Lawyers, should be to convert his transition pensions into account-based pensions before July as they will be entitled to tax-exempt investment earnings beyond July 1 whereas his TTR income streams won’t be.
From July 1 the investment earnings of any TTR account will become taxable. What will still be tax-free is the pension payments he receives.
The fact that he will be turning 65 next month, says Butler, means he will have satisfied what is described as a “full” condition of release. It’s a condition that will entitle him to convert the TTRs to account-based pensions, so long as the relevant fund trust deeds and pension documents allow this. There is no reason why they shouldn’t.
Since he has three pensions, says Butler, he will need to be mindful of the tax-free and taxable components of each to determine the one he will reduce to bring him below the $1.6 million limit. It is generally beneficial, says Butler, if the pensions have the growth assets.
These are technical considerations he will need to be aware of and if he doesn’t understand them, he should seek some advice.
CGT relief entitlements
As far as the three pensions are concerned, one option is whether he should combine some of these super interests from an investment and cost-saving viewpoint. He could do so by rolling over the pensions from one or more funds into one fund.
When transferring any excess over $1.6 million back into an accumulation account, he will need to be aware of any possible capital gains tax (CGT) relief entitlements that may be linked to each fund.
This might include asking the trustees of each industry fund if they can provide him with any information on possible future CGT relief entitlements and how any election to reset the cost base of assets should be exercised.
A point to note about CGT relief and TTR income streams is that there is still some uncertainty about how it will apply in the situation where the member does not need to change his TTR but would like the CGT relief even though he plans to continue thesame TTR balance.
The Australian Taxation Office is considering this question, says Butler, and is likely to finalise its draft Law Companion Guideline LCG 2016/D8 covering this and other issues with respect to CGT relief in the near future.
With regard to staying below the $1.6 million transfer balance cap, Butler says, anyone in receipt of an account-based pension (or combination of pensions) on July 1 will have a personal transfer balance cap of $1.6 million.
Where pension balances are above $1.6 million, they will generally be required to reduce their pension assets to $1.6 million by July 1.
However, there will be no extra tax payable if the person’s transfer balance account does not exceed
$1.7 million for a pension that was payable prior to July 1, provided the transfer balance account is reduced to below $1.6 million by December 31, 2017.
Dixon Advisory financial planner Nerida Cole says if a member is up to $100,000 in excess during the six months from July 1, this will not result in penalties.
This is a period of grace designed to cover exactly the scenario the reader describes where he wants to comply but because of market fluctuations may end up over the limit. If the excess is more than
$100,000 or the member stays in excess for longer than six months, the no-penalty clause will cease to apply.
Butler says the reader could therefore reduce his pension to just below the $1.6 million cap or rely on the extra $100,000 cap “leeway” for that six-month period.
Please send any questions or comments to John.Wasiliev@fairfaxmedia.com.au.