“From 1 July 2023, existing superannuation pensioners will be subjected to a personal transfer balance cap based on their highest ever transfer balance account balance. Some will not receive the indexation they might have expected because of a common tax component strategy,” said SMSF Alliance principal David Busoli.
Mr Busoli said the recontribution strategy was a way for members to allow tax-free money to pass to their children.
The strategy typically involves a member with an accumulation account, containing a sizable taxable component, wishing to make a large non-concessional contribution. To prevent the permanent mixing of tax components a strategy is to commence a pension with the accumulation account before making the non-concessional contribution, start a pension with the tax exempt non concessional contribution balance and, subsequently, commute the first pension back to accumulation.
The highest ever transfer balance account will be the sum of the commencement value of the two pensions which will adversely affect the member’s pension indexation position into the future.
“Members would take money out of their fund and put it back in as a non-concessional contribution. They could then start a pension with an accumulation account, then put in non-concessional contributions,” he said.
“The TBAR had to be notified and that increased the amount of TBC you have used. Now the indexation will be based on highest ever balance used and even if you stop what you started it is counted as TBC and it will have an effect when TBC is counted.”
Mr Busoli said with the new regulations, the recontribution strategy will not benefit the member, but will rather impose a penalty on them.
“They will no longer have the full indexation they used to have,” he said.
“They have to determine what is worth more – having a greater indexation increase or my kids pay less tax when I die? And by that time they may have used up most of their account anyway.”
Mr Busoli said he said many fund members may not be aware of the change and its implications.
“I don’t think people have even considered it and may think it is still like the old days where they could start and stop a pension,” he said.
“Prior to the introduction of transfer balance caps there was no downside to the strategy, but its advisability is no longer automatic.
“This is now something they do have to consider. People who have low balances who think they will never get to the cap probably don’t care and people with high balances already over the cap don’t care as they already have no indexation.
“It is those in the middle who will have to consider it.”
In regards to the thought, “the strategy typically involves a member with an accumulation account, containing a sizable taxable component, wishing to make a large non-concessional contribution. To prevent the permanent mixing of tax components a strategy is to commence a pension with the accumulation account before making the non-concessional contribution, start a pension with the tax exempt non concessional contribution balance and, subsequently, commute the first pension back to accumulation”, I was just wondering whether there are any Part IVA concerns around such a scheme of transactions? The ATO is seemingly increasingly hawkish with their Part IVA stance and not sure whether this type of series of transactions is subject to Part IVA scrutiny?