Ask Colley: SMSFs below the $1.6m cap
In this edition of Ask Colley, Graeme Colley, Executive Manager at SuperConcepts, answers "I don’t have $1.6 million in superannuation or in retirement phase. How do the new rules from 1 July 2017 capping super at $1.6 million affect me?"
I don’t have $1.6 million in superannuation or in retirement phase. How do the new rules from 1 July 2017 capping super at $1.6 million affect me?
Whenever I’m at a gathering where someone asks me what I do and I tell them I’m a technical advisor for SMSFs, I get one of two responses: either their eyes glaze over and I know it’s time to quickly pivot to talking about the cricket or the weather; more often than not, though, I get a question pitched straight back at me about a personal situation.
This question came up just last week from a neighbour Mark (names changed to protect the innocent) who is 63 years old and about to retire with $1.3 million in super. For the purposes of this illustration I’ll hypothesize Mark’s partner, Rebecca, has about $600,000 in super and they are both below the new caps.
Mark tells me he phoned his accountant when the new $1.6 million rules asking if it affected him and the accountant told him to think about contributions and any death benefits if one of them dies.
This is good advice because the new rules will allow him to make tax deductible super contributions up to $25,000 enabling him to top up his super to the cap. However, Mark is only getting half the story here because these contributions will depend on any deductible contributions his employer makes for Super Guarantee purposes or whatever he salary sacrifices to super from pre-tax salary. It will also depend on his taxable income and personal tax rate.
Perhaps this is where things could get a little technical because the maximum contribution could be up to $25,000 and depend on any deductible contributions his employer makes for Super Guarantee purposes or whatever he salary sacrifices to super from pre-tax salary. I told him he should understand that if the amount of tax deductible contributions exceeds $25,000 penalties will apply. Once he reaches 65 a work test applies if he is going to contribute.
There are other types of contributions that could apply depending on Mark’s superannuation balance and age. These could include non-tax deductible contributions, the co-contribution, the low income superannuation tax offset or the spouse contribution tax offset.
Mark could make non-tax deductible contributions of up to $100,000 each year or he could use the bring forward rules which allows him to contribute up to $300,000 over a fixed three year period. The amount of non-tax deductible contribution also depends on Mark’s total superannuation balance on 30 June in the previous financial year. If the balance is between $1.4 and $1.6 million there are restrictions on the bring forward rule and if it is more than $1.6 million it is not possible to make non-tax deductible contributions to super.
Mark tells me his accountant mentioned the potential impact of the caps on death benefits should he or Rebecca pass away. This probably has the biggest impact for anyone with a balance of less than $1.6 million in super because any death benefit that is payable on a partner’s death may also require the reorganisation of the survivor’s superannuation. For example, if Mark and Rebecca had commenced a pension from their SMSF and Mark passed away, Rebecca would need to review it.
I told Mark to suggest to his accountant the potential for him to start a pension with the whole amount he has in super which will provide a tax free minimum of $52,000 p.a.
If either Mark or Rebecca dies (not the prettiest of scenarios to broach I admit) and they are taking a pension from super, the value of the death benefit pension is counted against Mark’s cap. So it’s unlikely that the cap will impact on Mark or his partner should one of them pass away.
“What if I drop off the perch?” Mark asks me. “Will there be any impact?” he says.
A bit of a morbid conversation for a Saturday afternoon I thought so I went back to talking about cricket and the weather.
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