Changes to the Superannuation system as part of the Australian government’s 2016-2017 Budget, are set to commence July 1 this year. The changes are designed to improve the integrity, sustainability and flexibility of the Australian superannuation system, according to the government. However, they do pose a risk of negatively affecting Australians close to or at retirement, who have not given the upcoming changes due diligence investigating how it may potentially affect them.
So what are some of the changes on the horizon, and who will be most affected? Importantly, what can we do to make sure we stay on top of them so they don’t negatively affect our pension fund? Rajeev Dixit, CPA for over 25 years and founder of DBS Accountants, explains:
Is your SMSF prepared for the upcoming changes?Question 1: What are the upcoming changes?
Currently, superannuation pensions are tax exempt. The most critical change to SMSFs, says Mr Dixit, is that from July 1, any person who has a combined $1.6 million or more in a pension fund, will no longer be subject to the concessional tax treatments they’ve enjoyed so far.
“This cap is on the purchase amount of the pension, not the super balance as such,” says Mr Dixit. “The way the rules are drafted, you actually get penalised if your pension balances are above $1.6 million as of July 1. The cap applies to a person, not to a fund account, so the purchase price of all pensions held by a person combined together can no longer exceed $1.6 million without paying additional tax.”
“This combined limit is determined by the entry or purchase price of the pension fund at the time it was created, or balance as of 30 th June 2016 whichever is later,” continues Mr Dixit. “It’s the combined limit on the purchase price or the entry amounts, not on the balance.”
Question 2: Who will be most affected by the entry cap?
“If you are starting a pension fund from scratch, it’s very clear cut. The people affected by this rule change are those who have existing pensions.”
People who are close to retirement, or who are already drawing from a pension fund close to or above the $1.6 million limit will be the ones who must follow the upcoming changes closely, explains Mr Dixit.
“If you are starting a pension fund from scratch, it’s very clear cut. The people affected by this rule change are those who have existing pensions, rather than people starting a new ones,” says Mr Dixit.
For those with a pension fund over the limit, or those who are unsure of which side they might fall on, it’s imperative that trustees review balances and adjust pension and accumulation balances in order to avoid being stung by the impending changes.
“Given that what was tax-free yesterday will be taxable tomorrow, it’s essential for people to sort out ways to recalibrate assets to fall within the new limits. In some situations, there may be a need for physical movement, but in most cases there is no need for physical transaction of assets, but the corresponding documentation has to be made before June 30.”
Question 3: Why do I need to take action now?
Finding a fully-qualified, experienced financial planner to assist you with reevaluating and reshuffling your super is a time-expensive process, and with the changes just around the corner – the window of opportunity is rapidly closing, says Mr Dixit.
“In most cases, there is no need for physical transaction of assets, but the corresponding documentation has to be made before June 30.”
“This is something that requires a comprehensive review,” says Mr Dixit. “For example, people needing to value a diverse portfolio which includes real estate, the process can take several weeks. If the restructuring includes buying or selling of assets, this alone can take fair bit of time. On top of this, financial planner and valuers are getting very busy so to find an advisor to assist you with this complicated matter in time may become a challenge in itself.”
Because of the complicated nature of SMSF changes, Mr Dixit strongly recommends people seek financial advice on the matter.
“People may think they understand the changes, but because there are so many hidden complexities, good comprehensive financial advice is a must. The consequences of getting it wrong can be fairly expensive.”
To find out more about the upcoming changes and how they might affect your SMSF, get in touch with the team at DBS Accountants today.
DISCLAIMER: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information consider its appropriateness having regard to your objectives, financial situation or needs. DBS can help you identify potential issues, but you may need a fully licenced financial planner to advise you.