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Federal Budget 2016/2017 - A Cap in the Knees for Retirees

A dramatic change to the amount  of pension assets retirees can use to fund retirement is one of the most significant announcements in the 2016/17 Federal Budget.

The Change

From 1 July 2017, the amount that individuals are able to transfer from their accumulation balance into the retirement phase in order to commence a pension will be capped at $1.6 million. 

Members that already have current pension account balances in excess of $1.6 million will be required to reduce their pension account balances to $1.6 million by 1 July 2017.  This may be achieved by transferring the excess amount back into the accumulation phase.

This measure limits the extent to which superannuation fund members are able to access tax-free earnings on assets supporting current pension liabilities.

Any amounts remaining in a pension account balance post 1 July 2017, exceeding the $1.6 million cap, as well as any earnings on the excess, will be taxed at the highest marginal rate.

This cap in conjunction with the proposed lifetime cap of $500,000 on non-concessional contributions (also announced in the Budget) will greatly curtail the current flexibility of superannuation funds.

Action Required

For members with current pension account balances currently exceeding $1.6 million, it will be necessary to start considering how the above changes may affect you. 

As the proposed measure will not apply until 1 July 2017, there is no immediate need to transfer amounts from current pension account balances into an accumulation account. 

However, the release of any further detail on this proposal should be monitored. The impact of not winding down pension account balances to the $1.6 million threshold or below may trigger significant tax liabilities.

Moving forward, adopting a segregated assets approach in the fund whereby high performing assets and assets with potentially large unrealised gains (with a total market value up to the $1.6 million cap) may be a desirable strategy to fund member pension liabilities.  Earnings on these assets are likely to maintain their tax-free status.

Of course, in each case it is necessary to consider the application of the Part IVA general anti-avoidance provisions.  That said, in our view Part IVA is unlikely to be an issue where the above strategy is adopted.

If you or your clients currently have a pension account balance of more than $1.6 million or are considering commencing a superannuation retirement income stream, contact Cowell Clarke for advice regarding these significant changes.

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