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CASE STUDY: $1.6million pension asset cap looming

Written by HFP Adviser Michal Park

With the myriad of superannuation changes just around the corner, it is wise to begin formulating strategies to meet these new regulations. To ignore or delay could be very detrimental to your financial future.

Just yesterday I spoke with a Hudson member who will be tremendously impacted by these new rules – specifically, the $1.6 million cap on the total amount of retirement benefits within a tax free environment that will be introduced from 1 July 2017.

A few details of this member to set the scene:

She is 68. Her husband 71.

Both retired with no intention to EVER work again

Only income is 100% tax free pension income

100% of assets within their SMSF are in pension phase totalling approximately $3.700million (split 50/50)

94% of assets are invested in direct shares.

So, individually, each has a $1.850million allocated pension of which they are drawing the minimum annual income of 5% ($92,500 pa each).  If they continue these current arrangements past 1 July 2017, with a pension balance exceeding $1.6million, the amount in excess of this ($250,000 each) will need to be either:

Transferred back into the accumulation account (where the earnings will be taxed at 15%), OR

Withdrawn from the superannuation system altogether.

Breaching the cap will result in:

The requirement to remove the excess plus notional earnings


The payment of tax on the notional earnings attributable to the excess capital (this tax is 15% on the notional earnings for the first breach, and 30% tax for any subsequent breaches).

So, in summary, anyone with pension balances in excess of $1.6million will need to either transfer the excess back to accumulation phase OR remove the funds from the super system altogether.  Transferring back to the superannuation system is an easy fix – sure, you will pay tax on the earnings of 15%, but this is still concessional assuming you are still working and earning in excess of $18,200.

But what of my clients who will breach the cap but do not work?  Given the excess funds are already in the super system, they are eligible to move the funds back to accumulation phase – however, the tax on the earnings will arguably be more than any tax calculated in their personal names, given their current tax position.  Therefore, they are best to withdrawal the funds from the super system.

Ordinarily, this would involve selling down assets.  Not such a big deal in pension phase, given zero earnings tax and zero capital gains tax.  However, you are still forced to realise a gain/loss that you do not necessarily want to at that particular time.

Fortunately for this couple, their SMSF offers a unique opportunity to transfer funds “in specie” from their SMSF into their personal names.  This allows them to withdraw the funds from super without actually selling out of their current positions.  They will simply pay a nominal amount in admin fees, and potentially stamp duty (depending upon each State), to have $500,000 in direct shares change ownership from the SMSF to their individual names.  They then each have the $18,200 tax free threshold plus franking credits to ensure their personal income tax remains minimal if any.

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