Superannuation – Maximum pension account balances $1.6 million
From 1 July 2017, the Government will introduce a ‘transfer balance cap’ of $1.6 million. This will mean that all individuals will have a maximum amount of benefits which can be held in a pension account and receive concessional income tax treatment. Any increases in the pension account due to net investment earnings exceeding pension withdrawals will not be restricted, but can remain in the pension account.
The effect of this ‘maximum pension account balance’ is twofold:
- Only those assets supporting these pension accounts will be eligible for ‘zero tax’ on the investment earnings of those assets (or be considered tax free)
- This will limit the amount that can ultimately be withdrawn as tax free pensions for individual tax payers.
The transfer balance cap will be indexed in accordance with the Consumer Price Index (CPI) but the amount will only be increased in $100,000 increments, on the same basis as the Age Pension assets test.
If an amount is transferred to a pension account that exceeds $1.6 million, the excess amount will be treated in a similar way to excess non-concessional contributions, with a tax charge applying.
For those individuals with existing pension account balances that exceed $1.6 million, they have two choices. As at 1 July 2017, the individual can:
- Transfer the excess amount (above $1.6 million) to an accumulation account balance, or
- Withdraw the excess amount from super (providing they are eligible to withdraw benefits in full).
The proposed ‘cap’ on maximum pension account balances appears to achieve the Government’s aim of reducing the tax advantages for the high income earners. Those that have been able to accumulate significant balances within super can now only have a maximum amount that pays zero tax.
SMSF Trustees need to be mindful of the requirement to value all super fund assets at market value. Assets cannot be simply artificially devalued to ‘get under’ the $1.6 million cap.