Since the 90s, a constant element of the super regime has been the unlimited access to tax exempt pension earnings. With the passing of amended super laws in late 2016, this is now coming to an end.

A key benefit of the superannuation regime has been the concept that all assets that fund pensions have their earnings exempt from tax. This has applied to any pension, up to any amount. However, from 1 July this is changing, and the following reforms will take effect.

Transfer balance cap

Under this new rule, retirees are limited as to how much of their super can be used to establish pensions. The effect of this change will be to restrict access to the tax exemption that retirement pensions receive. Initially, the limit will be set at $1.6 million, with the amount indexing over time. Anyone with more than this, can either keep funds in super accumulation accounts (where the tax rate is 15%) or withdraw the money from super.

Existing retirees with more than this in pensions will be forced to roll any excess back into an accumulation account as at 30 June 2017. Those with defined benefit pensions (such as those provided to public servants) will also be impacted by the new rules.

While this only affects the wealthiest of superannuants, over time the impact will be felt more widely. Controversially, these rules will also apply where someone receives a super pension following the death of their spouse. For example, imagine a couple with $1 million each in pensions. The new legislation will not affect them. However, should one of them die and leave the other their pension, then the survivor will have the second $1 million counted against their cap. This would force them to withdraw $400,000 from one of the pensions.

Transition to Retirement Pensions

Currently, it is possible for those people who have reached their super preservation age to start a pension while they work. Known as Transition to Retirement (TTR), these pensions receive the same tax exemption on earnings as other income streams. However, from 1 July 2017, this will no longer apply. Instead, these earnings will be taxed at a rate of 15% – the same as accumulation accounts. This applies to existing pensions, as well as new ones. While TTR pensions may still be beneficial in some circumstances, one of their great attractions will be gone.

Capital Gains Tax relief

The outcome of the above changes will be more tax. However, the government has offered some relief from capital gains. Put simply, where the above changes affect the tax being paid in super, the government will allow people to reset the cost of their pension assets. This rule is far too complex to go into here. Suffice to say, the outcome will be one where gains accrued tax-free before 30 June 2017, will not attract tax in the future.

Like all of the changes to super announced last year, the devil is in the detail. If you think you may be impacted by these changes, we recommend seeking personal advice well before the new rules take affect on 1 July 2017.

If you would like more information please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.