Pension tax strategies impact TBC

pension tax TBC

Pension commutation strategies used to minimise tax within the accumulation phase may limit the level of indexation that applies to a personal transfer balance cap.

SMSF members who have used pension commutation strategies to minimise tax have been warned this may impact the transfer balance cap (TBC) indexation level that will apply to them from 1 July 2017, according to an SMSF specialist.

SMSF Alliance principal David Busoli said the increase in a superannuation pensioner’s personal TBC from 1 July will be based on their highest-ever transfer balance account (TBA) figure and tax minimisation strategies in the past may have pushed the TBA higher than expected.

“The strategy typically involves a member with an accumulation account, containing a sizable taxable component, wishing to make a large non-concessional contribution,” Busoli said.

“To prevent the permanent mixing of tax components, a strategy is to commence a pension with the accumulation account before making the non-concessional contribution, start a pension with the tax-exempt non-concessional contribution balance and, subsequently, commute the first pension back to accumulation.

“The highest-ever TBA will be the sum of the commencement value of the two pensions, which will adversely affect the member’s pension indexation position into the future.”

He noted the tax minimisation strategy had been popular in the past prior to the introduction of the TBC as there was no downside, but its automatic use since then was no longer sensible without consideration of its impact on the TBA.

Maximising the tax-exempt component did not generally benefit the member, but rather created a potential future benefit for non-tax dependant beneficiaries and those using the strategy had to decide whether the member or their beneficiary received the benefit, he added.

“These issues only matter if the member receiving the pension also wants to use their personal TBC and it is unlikely to be a problem for those with around $500,000, but for those with more than $1.2 million, the tax strategy could create issues with their TBC. Of course, for those who have a TBA of $1.7 million it is a non-issue,” he said.

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