Is 2016/17 a golden year for transition to retirement income streams in SMSFs?

In a word – yes.

That might seem like an odd position given the significantly detrimental changes due from 1 July 2017. (From then on, these pensions will lose one of the key benefits of being in “pension phase” – the ability to pay no tax within the SMSF on any investment earnings including capital gains on the assets on which it is relying to pay the pension.)

However, there’s nothing like the imminent demise of a tax concession to focus the mind on its value!

Clients eligible to start one (anyone born before 1 July 1960) have just one last year to make the most of three important opportunities.

Firstly, this year, they still have the traditional tax concession on fund earnings. Consider a member whose fund holds $1m, all of which is in transition to retirement phase. If the fund is generating (say) $50k in dividends it will not only pay zero tax on the dividends but will receive a full refund of any franking credits. Even more amazingly, if an asset the fund has owned for many years (including well before the pension started) is sold, it pays no capital gains tax on that sale.

(This is the concession which is disappearing next year.)

Secondly, this is the final year in which any person taking any type of account-based pension (including a transition to retirement pension) can ask the trustee of their fund to make sure it is taxed as if it was a lump sum rather than an income stream payment. The difference is important as most people under 60 still pay tax on income stream (pension) benefits but pay little or no tax on amounts they take as lump sums. This won’t be available next year but is still possible in 2016/17. This means that an individual with a pension (including a transition to retirement pension) this year has all the upside of tax exempt investment earnings in their fund without the downside of any personal income tax. This is a hugely underutilised opportunity as people often assume they cannot ask for payments made from a transition to retirement pension to be classified as lump sums. They can – as long as their fund allows it – which would generally be the case with SMSFs but perhaps not with retail or industry funds.

Finally, there is no doubting that two big changes from 1 July 2017 will reduce the extent to which funds can benefit from tax free income. The first is the removal of that concession entirely for transition to retirement pensions as discussed above. The second is that “full” pensions (for people who have retired etc) will be capped at a starting balance of $1.6m in future and any super over and above this amount will effectively have to remain in accumulation phase (where the earnings are fully taxable).

The Government has specifically recognised that many people will be significantly affected by the change by including some special grandfathering rules for capital gains. In essence, there are opportunities to enshrine some protection for capital gains built up before 1 July 2017.

But you’ve got to be in it to win it – anyone who doesn’t get around to starting their pensions (including a transition to retirement pension) in 2016/17 will miss out on this grandfathering. There are even more incentives to start pensions as soon as possible for those who won’t be completely in pension phase during 2016/17. This is because the protection will be based on the actuarial percentage they receive for the year. The earlier their pensions start the higher the percentage.

And then – just to add some more complexity – there will be some people for whom it makes sense to actively avoid taking advantage of the CGT relief because they could get a better result without it.

We’ll be exploring these opportunities in some detail in our seminars on the new rules in early December. Click here to register right now for the best strategic SMSF training in your capital city.