Donegal Update

Super reforms draft - update Nov 2016

Following on from last week's announcement, the Government has released the second tranche of draft legislation for consultation (closing 10 October 2016) covering more of the super reform measures that were announced in the 2016-17 Budget.

New announcements

- $1.6 million pension transfer balance cap
- $25,000 cap for concessional contributions
- Catch up concessional contributions for balances under $500,000
- Removal of tax-exempt earnings within transition to retirement (TTR) Pensions
- Reduction of the Division 293 tax (30% tax on concessional contributions) threshold to $250,000
- Removal of anti-detriment provisions
- Removing the ability to treat a pension payment as a lump sum payment.

$1.6 million pension transfer balance cap

We now have guidelines around the most complex measure from the 2016-17 Budget. Up to $1.6 million can be transferred in to pension phase from 1 July 2017. If you have a pension balance at 1 July 2017, then this amount will be deemed to have 'transferred in'.

There are some important things to note regarding transfer balance cap:

- The cap is only measured when moving funds from accumulation to pension and vice versa
- If your $1.6 million pension grows in value, you will not be required to withdraw the balance above $1.6 million
- You pension payments do not reduce your pension transfer cap. The minimum pension requirements will remain unchanged.
- If your balance is above $1.6 million come 1 July 2017, there is a 60 day window to rectify this provided your balance is less than $100,000 over the limit (this accounts for market fluctuation)
- Cases where pensions vastly exceed $1.6 million after 1 July 2017 with no action taken may be subject to 15% tax personally on a 'notionally earned' rate plus a general interest charge
- There are special rules regarding reversionary pensions and how this affects your personal $1.6 million transfer balance cap.

Further updates

Mr. Morrison has stated that the third tranche of consultation covering the outstanding proposals will be released in the coming weeks. We anticipate further details regarding the new non-concessional cap of $100,000 as well as clearer guidance around contributions for those with a balances over $1.6 million.

Planning impacts

The most recent round of updates has made it imperative for a number of clients to take action in preparation for these changes. Any clients that fall in to the below categories will need to take action within the coming months to ensure we make plans to adjust for the proposed changes:

- Pension balance over (or on track to be over) $1.6 million
- Have a large disparity with their partner's superannuation balance
- Contributing or salary sacrificing up to the concessional cap
- Invested in a TTR Pension
- Earning in excess of $250,000.Over the coming months, we will need to discuss how your retirement savings are structured entering in to this new superannuation environment.

If you have a balance over $1.6 million in pension after 1 July 2016, you will be subject to penalties.

You may need to realise particular assets within your superannuation/pension, crystallise losses or hold off on transactions until after 1 July 2017.

It is imperative to decide on a concise, structured plan to navigate how these changes will affect you.