2016 Federal Budget Retirement Account Balance Cap
The budget handed down on 3 May 2016 included a number of unexpected changes in relation to the superannuation regime. The most prominent was the introduction, with effect from 1 July 2017, of a cap of $1.6 million for an individual to hold in a tax-free retirement phase.
The above change impacts not only those who are approaching retirement or looking to commence a pension, but also those who have already commenced a pension. As such, the change represents a significant departure from prior practices of ring fencing existing positions or treatments.
The guidance currently available refers to yet another Superannuation term being “Cap Space”. “Cap Space” in essence represents the amount between a member’s pension balance and the balance cap. Importantly, subsequent increases and decreases in the pension account balance, based on earnings and pension payments will not be considered to impact Cap Space. For example, if pension balance starts at $1.6 million and the stock market experiences a surge moving it to $2.0 million the fund will not breach the cap. Conversely, if a pension payment is made to reduce the balance to say $1.2 million this does not result in the creation of a further $400,000 of Cap Space.
The retirement account balance cap will be indexed in line with CPI in $100,000 increments, which in real terms mean it, should be increased every 2-3 years. The amount of cap space remaining for a member will be determined by apportionment e.g. if a member has previously used up 60% of their cap they will have access to 40% of the current indexed cap.
By way of illustration, assuming an individual has utilised 60% of the cap (i.e. $1.6 million x 60% being $960,000), then they will have access to Cap Space of $640,000. If the cap is subsequently indexed to $1.7 million then they would have a revised Cap Space of $680,000 (i.e. the increased Cap Space is 40% of the increase in the cap).
For individuals that already have a pension account balance in excess of the Retirement Account Balance Cap, the excess will either need to be withdrawn from Superannuation or transferred back to accumulation phase by 1 July 2017. For monies transferred back to accumulation phase, earnings will be taxed at the ordinary 15% rate. There currently is no guidance as to how it is intended for individuals to access monies that are in accumulation phase.
As a result of the announcement, taxpayers will need to give significant consideration to adjusting and re-evaluating investment and retirement planning strategies. As such, increasing pension payments prior to 1 July 2017 may be something that should be considered as well as the ongoing effective rate of tax within superannuation in conjunction with other relevant factors and income profiles.
Please contact your ESV Advisor on 02 9283 1666 to discuss this further.