Sladen Snippet – complicated draft laws for the $1.6 million super pension cap released

The Government has released the draft rules for the $1.6 million super pension cap in its second tranche of super measures. The measure to be known as the “transfer balance cap” is to commence from 1 July 2017.  

The draft rules for the measure are very complicated, and include:

  • The cap will be $1.6 million and will be indexed in line with CPI in $100K increments
  • Existing amounts exceeding the cap on 1 July 2017 must be commuted
  • Where a member does not use their cap in full, their remaining cap will be measured by a percentage so that for future increases in the cap they can only use their remaining percentage
  • The cap will move up and down through the concepts of credits and debits
  • Amounts that will be credited towards the cap (ie decreasing the amount left in the cap) include:
          - The value of super income streams (pensions)
          - The value of reversionary pensions and death benefit pensions
          - Notional earnings on excess transfer balance amounts
  • Amounts that will be debited towards the cap (ie increasing the amount left in the cap) include:
          - Lump sums (but not pension payments)
  • Certain benefits will not be subject to the cap (ie will be debits), including:
          - Personal injury settlement amounts rolled into super
          - Super balances lost through fraud
          - Super balances lost as a result of bankruptcy claw backs
          - Super balances reduced through family law splits
  • Amounts exceeding the cap will be subject to the notional earnings amount with the result that:
          - The excess plus the notional earnings amount must be commuted (into accumulation or a lump sum)
          - If the amount is not commuted the whole pension will not receive the pension phase exemption
          - The notional earnings will be taxed in the member’s name at 30%
  • Where SMSFs have a member who has reached their transfer balance cap the fund will no longer be able to use the segregated pension method
  • The ability to count partial commutations toward minimum pension payments will be removed
  • If members receive reversionary pensions that cause them to exceed their cap, they have 60 days to commute the excess
  • Special rules apply to death benefit pensions paid to minor children
  • Transitional capital gains tax (CGT) relief applies for pensions in place prior to 1 July 2017, including:
          - Super funds can elect to reset the cost base to market value for assets that support pensions
          - Where the proportionate (unsegregated) method is used, a notional capital gain will be triggered on the amount attributable to accumulation accounts, the super fund can elect to pay the capital gains tax on that notional gain or defer the tax to when the asset is sold (up to 10 years)

To discuss this article, or for further information please contact:

Phil Broderick
T: +61 3 9611 0163
M: +61 419 512 801

Melissa Brazzale
T: +61 3 9611 0161