When an SMSF has accumulation interest because of the Transfer Balance Cap

Melanie Dunn, SMSF Technical Services Manager and Actuary at Accurium, discusses what you should know if an SMSF has accumulation interest because of the Transfer Balance Cap regime which started on 1 July, 2017. We now have a $1.6m limit, per person, on the amount of savings which can be moved into the tax-free retirement phase of superannuation, she writes.

Melanie will present on the topic, Superannuation in Estate Planning, at the Wills and Estates Update Seminar on Friday, 1 March. 

Melanie Dunn

From 1 July 2017 we have a $1.6million limit per person on the amount of savings that can be moved into the tax-free retirement phase of superannuation.

This means retirees who have balances in excess of $1.6million will likely now have both a retirement phase pension and a non-retirement phase accumulation account in superannuation unless they withdrew the excess from the superannuation system altogether.

For SMSF retirees this may be the first time since first moving into retirement that their fund has had an accumulation interest. It may also be the first time the fund has had a mix of pension and accumulation balances.

Here are 6 things you need to think about when running an SMSF that is not solely in retirement phase due to the transfer balance cap.

1. Separate accounts need to be maintained for pension and accumulation

Where a member has both pension and accumulation accounts in the SMSF the trustee must not only allocate fund income on a fair and reasonable basis between them and other members in the fund, but they now need to keep track of an accumulation account and a pension account for the member and allocate income and expenses in a fair and reasonable manner between those accounts. This does not mean the trustee needs to allocate specific assets to belong to each member or/and account, indeed from a tax perspective the trustee is not allowed to segregate assets.

2. Income earned on fund assets will not be 100% exempt from tax

The SMSF is likely to have disregarded small fund assets and as such be required to use the proportionate method to claim ECPI. This means that an actuarial certificate is required prior to completing the SMSF annual return. The actuarial exempt income proportion will identify what proportion of the fund’s assessable income will be exempt from income tax.

3. The fund may be eligible to claim a tax deduction on some fund expenses

General fund expenses that must be apportioned can only be claimed as a deduction in the annual return to the extent they were incurred in producing assessable income. Now the SMSF has an accumulation interest it is likely to have assessable income and so the trustee may be eligible to claim part of those expenses as a deduction to offset taxable income in the annual return.

4. Strategic thinking is required when taking benefit payments from the fund

When a payment is taken from the SMSF the trustee will need to identify what interest the withdrawal was taken from for the member, pension or accumulation. There are pros and cons to each option:

    • A minimum payment must be made from each pension as a pension payment in order to meet the legal requirements of having an income stream eligible for an exemption from income tax. So at least one payment in the year needs to be a pension payment and it must be enough to meet the minimum payment standards.
    • Where a member wishes to draw above their minimum requirement in a year then they should consider taking that additional amount as a lump sum from their accumulation interest. This means a larger balance stays in the tax-free retirement phase, reducing the SMSFs future tax bills. For members under age 60 lump sums paid up to the lifetime low rate cap ($205,000 for 2018-19) are tax free.
    • Payments can also be taken as a lump sum payment from a retirement phase pension. This payment does not count towards minimum pension requirement and is treated as a lump sum for tax purposes. Lump sums paid from pension accounts will be debited form the individual’s transfer balance account, meaning more room under the $1.6m cap if needed in the future (e.g. receiving a death benefit income stream). Lump sums paid from retirement phase pension must be reported under the transfer balance account reporting requirements.

5. Consider opportunities to even up retirement phase balances to reduce taxable accumulation interests in the fund

Each member in the SMSF has the lifetime transfer balance cap of $1.6million. Where one member has a large balance which exceeded the $1.6million cap resulting in an accumulation interest in the SMSF, but the other member has a balance in retirement phase under $1.6million consider whether there is an opportunity to move some of those accumulation assets into retirement phase for the other member. The member would need to be eligible to make/receive contributions and consideration needs to be given to whether it is appropriate for the first member to give up their entitlement to those assets e.g. as part of the other member’s interest those monies would be payable to their beneficiaries on death not those of the original member. But for some couples looking to maximize exempt income in their SMSF this may be a strategy to help maximize the value of superannuation in retirement phase. Care is needed to ensure you don’t fall foul of the complicated contributions and transfer balance cap rules.

6. Accumulation accounts will still form part of your superannuation death benefit but cannot be taken as a reversionary income stream

An accumulation account is a separate interest to any retirement phase pension in the SMSF. As such, a separate superannuation death benefit will be payable when a member passes away and can be documented as such so that the accumulation interest is to be paid to a different beneficiary to the retirement phase pension if so desired upon death.  However, an accumulation interest can only be taken by your beneficiaries as a death benefit income stream or lump sum. It will not form part of a reversionary income stream, even if the pension from which the accumulation balance was commuted was a reversionary pension. The beneficiary will also not have the 12 month grace period under the transfer balance cap rules like that received from reversionary income streams. The beneficiary will need to decide as soon as practicable whether to take the death benefit as a lump sum and withdraw it from super, or as a death benefit income stream subject to their own transfer balance cap.

Melanie Dunn, SMSF Technical Services Manager, is a Fellow of the Institute of Actuaries of Australia specialising in Global Retirement Income Systems. She has over ten years’ experience at Accurium in our superannuation team. Melanie has extensive knowledge in superannuation and SMSFs, and is a regular presenter at a number of industry leading SMSF conferences. She also provides training for Accurium clients and staff. Melanie specialises in complex issues such as retirement modelling, pensions and segregation strategies. Contact Melanie at mdunn@accurium.com.au or connect via Twitter or LinkedIn

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