Five things to do if you’re caught by the $1.6 million super cap.
1. Draft Dodging
First thing to remember is that under the proposed legislation, the $1.6 million cap will only apply once a super fund is in the pension phase. While you are accumulating super, the fund’s earnings will all be taxed at the concessional 15 per cent tax rate – regardless of your age or the balance.
Come July 1, 2017, any money transferred into a superannuation pension will be capped at $1.6 million. However, that cap will be indexed in proportion each year, so if you aren’t going into pension phase for five years, you can expect a bigger cap. If you are lucky enough to have a defined benefit pension, the cap will most likely be determined by multiplying your annual pension payment by 16.
Existing super pensioners with a balance greater than $1.6 million will need to transfer the proportion over that $1.6 million out of super or into a separate fund, where earnings will initially be taxed at 15 per cent – the same as if they were in an accumulation fund. There are other concession over capital gains tax in the transition phase which are worth exploring with a financial advisor if that applies to your fund.
4. Withdrawal is Final
When you are weighing up whether to withdraw funds from super or put them in an accumulation fund, you have to remember that when you decide to withdraw assets from super to get back under the cap it’s likely to be very hard to get them back in. Given that changes in super legislation have been frequent, that may help decide your position.
5. Don’t Forget the Offset
The generous tax offsets available to pensioners should also be taken into account when deciding whether it’s better to have a greater balance outside of superannuation. These offsets can often make your effective tax rate lower than your marginal rate. If those offsets are withdrawn that can result in significantly inflating marginal tax rates on certain income ranges. This is something you will have to explore with an adviser.