Wealthy retirees face higher tax on pension transfers

Australian Financial Review

4 November 2016

Sally Patten

Wealthy retirees face higher annual tax bills because of a little understood methodology that will be used to adjust for inflation the proposed $1.6 million ceiling on tax-free superannuation pensions.

In addition to paying more tax, the methodology could require self-managed fund trustees to seek professional help to determine their individual pension transfer cap while its implementation will cost pooled super funds tens of millions of dollars.

The proposed methodology will affect people who have $1.6 million in the pension phase and people whose pension balance will grow beyond that level in the future.

The government said the decision to apply a proportional indexation of the pension transfer limit would prevent wealthy superannuants from gaining an unfair advantage, but super funds and financial planners said the planned system was overly complex and will be difficult to administer.

“The proportionate approach to indexing the transfer balance cap is complex and confusing,” said Jordan George, head of policy at the SMSF Association, which represents financial advisers and accountants who service self-managed super schemes.

“We believe that the small revenue benefit to government of restricting future transfers under a higher indexed cap is outweighed by the complex laws required.”

“It is likely most people will need assistance of an accountant or a financial adviser licensed to provide tax advice to assist them with maximising any future transfers under a higher indexed cap and to ensure they do not breach the transfer balance cap rules,” Mr George argued.

The Australian Institute of Superannuation Trustees is also concerned. “The transfer balance cap should be simple. A cap becomes a cap. Is the complexity worth it? The number of people who will be affected is tiny,” said David Haynes, executive manager of policy and research at the AIST.

“It just adds another level of complexity and makes it harder for self-managed fund members to track everything,” said Nerida Cole, head of financial advisory at Dixon Advisory. But Treasurer Scott Morrison insisted the proportional methodology was fair.

“Allowing individuals who have already transferred $1.6 million to transfer further $100,000 lump sums into a retirement account, well after they have retired, would not be consistent with the objective of superannuation,” a spokesperson for Mr Morrison said.

“Whilst superannuants and the superannuation industry would no doubt like to have additional sums in tax-free retirement accounts to improve rates of return, the government has no such plans to allow this,” the spokesperson added.

Under a fractional indexation system, for people who do not transfer the full $1.6 million into a super pension in the first instance, the percentage of the limit that they have not used will be indexed to CPI. The cap will rise in increments of $100,000.

If a retiree transfers $1.2 million into a pension account in July next year, when the rules are due to be enforced, they will retain the right to contribute another $400,000, or 25 per cent of $1.6 million, at some future date. If by the time they contribute a second tranche the limit has risen to $1.7 million, they will be able to contribute $400,000, plus 25 per cent of the $100,000 incremental rise. In other words, they will be able to inject another $425,000 into a tax free pension.

A retiree who injects $1.6 million into a super pension in the first instance will have used up 100 per cent of their pension transfer cap and will not be able to make any additional top up when the cap is raised to $1.7 million.

The SMSF Association estimates that retirees who are unable to contribute any more money to their super pension could end up paying more than $1000 a year in tax beyond what they otherwise would, depending on the level of investment returns.

It is expected that the Tax Office will be able to inform retirees the size of their personal transfer balance.

“Whether the available transfer balance cap space is calculated on a proportionate or absolute basis makes no difference to the administrative complexity, because the ATO, not superannuation providers, will still need to calculate the available cap space for an individual across all superannuation accounts,” Mr Morrison’s spokesperson said.

But Ms Cole anticipated that self-managed super fund members, who are responsible for their own retirement savings, would need to track all contributions in the first few years until the ATO had all the necessary data. “For the first few years, most people will get help [from a professional adviser] and the first time they want to access the higher index limit they might need help,” Ms Cole said.

The AIST estimates that the new system will cost super funds almost $90 million to implement. The government said the ATO had been allocated $4.4 million to implement the policy.