By Bryan Ashenden
Published in Australian Financial Review 30 January 2017.
There has been a lot of discussion about how the 1 July 2017 changes to super will impact you if you are looking to contribute to super or have a large pension balance.
And with the reduction in contribution caps and the new $1.6 million pension limitation, it’s not a surprise the focus these items have had.
However, you also need to understand this impact if you are one of many Australians who at some staged commenced a transition to retirement income stream. And this applies even if you don’t have $1.6 million in super. Often referred to as a TTR or a TRIS, this is a new form of superannuation income stream that became available from July 2005 and is designed to allow you to access your super in the form of an income stream, and to help you to adjust out of the workforce.
There were, and still remain, a number of requirements around TTRs, such as a minimum age to commence one, a minimum and maximum amount that can be drawn each year and the inability to access lump sum payments.
But the impacts from 1 July 2017 are perhaps not well understood. And if you are running a TTR out of a self-managed super fund (SMSF), you need to be doubly aware of these changes both as the member, but also as a trustee.
The first impact to be conscious of is the reduction in concessional contributions allowed from 1 July 2017. One of the advantages of a TTR has been to salary sacrifice wages to super and have it taxed at only 15% and replace this lost income with payments from the TTR itself. If you are over 60 at the time of receiving the TTR payment, it would be tax free. Currently, you could have up to $35,000 of concessional contributions made each year. From 1 July 2017, this will fall to $25,000, so some of this benefit may be lost to you.
The next issue to be aware of is that from 1 July 2017, the earnings on the assets inside your fund that support your TTR will be taxed at that standard 15% rate that applies within super. Currently, those earnings are not subject to tax. An extra 15% tax on the underlying earnings can have an impact on the overall effectiveness of a TTR strategy, but in many situations it may not be sufficient reason on its own to stop your TTR.
Third, and like a normal superannuation pension that exceeds $1.6 million in value today, there is the possibility of capital gains tax relief being available provided you take steps to ensure your pension complies with the new rules before 1 July 2017. This relief includes a resetting of the cost base of the supporting TTR assets, and the elimination or reduction of any unrealised capital gains to that point in time.
The good news on this CGT relief is that arguably there is not a lot that has to be done to comply with the new rules as the only change at your fund level is that from 1 July 2017 the tax on earnings starts to apply. However, it will be important that where you have an SMSF, the election for this CGT relief is made by the time the SMSF’s 2017 tax return is due to be lodged.
Whilst all the above are important to be aware of, it’s perhaps the following two points that are most significant.
First, if you have started a TTR but have not yet satisfied a condition to gain unfettered access to your super (such as retiring or turning age 65), then you need to decide if it is worth continuing with the TTR at all from 1 July 2017.
If you look purely at the tax and financial side of the argument, the benefits from 1 July 2017 will be less than they are today. But where you should be focussing is why did you start the TTR in the first place? If it was because you need the additional income, for example as a result of reduced working hours, or to pay down some debt, then if those reasons remain valid, the extra tax payable from 1 July 2017 may not outweigh the need for that extra income.
The second is if you have been in a TTR for a while, you should check to see if you have actually met a condition of release that means a TTR is no longer required and you could convert it to a normal pension.
In the past, if you didn’t need a lump sum payment or didn’t require more than 10% of your account in a year, there was no incentive to change from a TTR as for all intents you would have the same outcome. But from 1 July 2017, if your TTR could be a normal pension, and you don’t exceed the new $1.6 million limitation for retirement pensions (which importantly does not include TTR amounts), then by converting to a retirement pension, the underlying earnings on assets in the income stream will be tax free. If it remains a TTR, they will be taxed at 15%.
As with all changes to super, it’s important to understand what those changes are and how they will impact you personally and, in an SMSF context, what actions you are required to take as a trustee.
The best way to ensure you stay on top of all these issues is to use your professional adviser network, from a financial adviser, to the administrator and auditor of your fund. Working together you should be able to plan towards the best outcome.
This information is current as at 08/05/2017.
The information provided in this article is general in nature and does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.
This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. Any tax considerations outlined in this article are general statements, based on an interpretation of current tax laws. Any such tax considerations do not consider your specific circumstances and do not constitute tax advice. As such, you should not place reliance on any such taxation considerations as a basis for making your decision. As tax implications of the can impact individual situations differently, you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser about any liabilities, obligations or claim entitlements that arise, or could arise, under a taxation law.
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Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investment held in superannuation. The Government has set caps on the amount of money that you can add to superannuation each year on both a concessional and non-concessional tax basis. There will be tax consequences if you breach these caps. For more detail, speak with a financial adviser or visit the ATO website.