One of the proposed measures of the federal budget handed down by the coalition government in May was the introduction of a $1.6 million superannuation transfer balance cap on the total amount of super an individual can transfer into retirement accounts. As stated by Treasurer Scott Morrison: “This amount could support an income stream of around four times the level of a single aged pension.”
Morrison went on to say “that the transfer balance will affect less than 1 per cent of superannuation fund members and will be applied to both current retirees and to individuals yet to enter their retirement phase”.
Along with other proposed measures, there has and will continue to be a lot of debate, backlash and confusion on the basis of this proposed measure, its interpretation and potential application. This will continue up to the election and potentially for many more months as it goes through the passage of legislation.
At face value, this measure is to be effective from 1 July 2017 and as previously stated will limit the amount that can be used to support tax-free retirement account(s). Subsequent earnings on these accounts will not form part of the cap and the cap will be indexed in $100,000 increments in line with the consumer price index. Amounts in excess of this cap amount can be maintained in the accumulation account where earnings will be taxed at 15 per cent. There will be a tax on amounts transferred above the cap similar to the tax treatment of excess non-concessional contributions. Fund members with retirement accounts as at 1 July 2017 that exceed the cap will be required to reduce their retirement balances back to the cap amount. The excess may also be converted to an accumulation account.
This is a simplistic summary of the proposed measure, however, when delving into the finer details and potential application, many questions remain unanswered. Some of these are as follows:
- The application to death benefit payments. Does a reversionary pension go to the lifetime cap of the recipient? If the reversionary beneficiary has already used the full cap amount, what is the status of this reversionary pension? Is it forced to be taken out as a lump sum?
- Is a beneficiary entitled to a death benefit pension from the deceased accumulation account if the beneficiary has already used the full cap amount? If the answer is no, then many accumulated funds will be forced out of the super system and there will additional tax implications.
- How will market-linked pensions be treated? These pensions are non-commutable, so what will happen to the excess over $1.6 million with these types of pensions as at 30 June 2017? Will the rules for a defined benefit pension apply even though this type of pension is not classified as a defined benefit pension?
- What about the old pre-1 July 2007 defined benefit pensions? If and when these get restructured to a market-linked pension, how will the lifetime cap apply to the excess?
- Will transition-to-retirement income streams (TRIS) count towards the cap? The proposed measures look to tax the earnings on these income streams, so if they are not included, what happens when the benefits held under a TRIS become unrestricted non-preserved benefits?
- Rollback and restart of pensions. How will this administratively work? If a pension after 1 July 2017 is to be rolled back so as to restart with additional funds, what amounts will count towards the transfer balance? How will fluctuations in account balances be dealt with?
- Can the accumulation account be used to fund pension payments or will the lifetime balance cap not only restrict the level of exempt current pension income, but also the funding mechanism? If this is the case, we will see an increase in the use of pension reserves.
These are only a few questions and issues that come to mind and I am sure there will be plenty more that arise. Morrison plans to raise $2.9 billion over four years through the proposed super changes. However, without proper industry consultation and thorough due diligence, not only may this cost the coalition the election, but the administrative nightmare on application may quickly absorb any revenue gains. Past experience has clearly shown this could occur.