Those with more than $1.6 million sitting in an SMSF will not be able to segregate their pension assets, according to the draft legislation.
“That takes away a few planning opportunities for SMSF investors who perhaps have more than $1.6 million in their pension, because we were hoping that one of the options would be to segregate your assets,” SuperConcepts’ Peter Burgess told SMSF Adviser.
“So it appears they’re doing that to prevent situations where SMSF investors may move assets between pools to try and minimise or avoid paying capital gains tax,” he said.
In more positive news, the concessional contributions cap is set to be indexed at smaller increments.
“Under the current law it only goes up in increments of $5,000, which means it doesn’t go up very often. So by changing that increment so that it goes up by $2,500, it will increase quicker or more often,” Mr Burgess said.
The draft legislation also clarified that reversionary pension amounts will be counted against a beneficiaries’ $1.6 million transfer balance cap.
SMSF Association head of policy Jordan George said beneficiaries will have a six-month period upon receiving a reversionary pension to decide how to deal with it.
“So they get six months to decide whether to commute part of it or commute an existing part of it to come under their existing $1.6 million cap,” he told SMSF Adviser.
Mr George said this will become an important consideration for SMSF practitioners when assisting clients with their estate planning.
“It was surprising, in a positive way, that the government said that any amount that is over the $1.6 million cap, up to $100,000, won’t be subject to the excess tax in the first six months of the new rules applying,” he said.
The taxation of the excess amount will be similar to the treatment of non-concessional contributions tax.
“So there’s a notional earnings amount, the excess has to be refunded, then there’s a 15 per cent tax paid on the notional earnings amount to make sure that taxpayers don’t get any advantages by making contributions over the limit,” Mr George said.
“The thing that may catch people out is that the notional earnings amount is in line with the general interest charge, which is a reasonably high amount, especially when you look at people who are in retirement phase, and they tend to have more conservative investment allocations.”