You can have too much super

One of the key changes to super from 1 July 2017 was the introduction of the total superannuation balance (TSB) measure.

Accordingly, amounts held in accumulation and retirement income assets are used to restrict many concessions and benefits link to superannuation including the amount of non-concessional contribution caps and bring-forward period, catch-up concessional contributions, spouse contribution tax offset, co-contribution, SMSF pension segregation, SMSF reporting and others.

A sound understanding of the TSB measure allows advisers to provide accurate advice to clients about their super and maximise their retirement benefits.

Furthermore, a failure to consider a client’s TSB may lead to breaches of the non-concessional contributions cap or an inability to use the catch-up concessional contributions measure. A Government proposal would allow recently retired clients age 65 and over an extra year to contribute to super from 1 July 2019 if their TSB is less than $300,000 (at 30 June prior), even if the work test is not satisfied.

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Therefore, advisers should consider the possibility of future changes to super and a potentially wider scope of the TSB measure.

Defining TSB

The TSB is the sum of accumulation and pension interests, with some adjustments. More technically, TSB is the sum of:

• Value of accumulation interests;
• Transfer balance account, modified for structured settlements and/or account-based income streams, including term allocated pensions (or TAPs), to reflect the account balance payable at 30 June. Excess transfer balance earnings also count; and
• Rollover benefits ‘in transit’ that is, paid before 30 June and received after 30 June, not reflected in the client’s accumulation interests or transfer balance account.

Structured settlement or personal injury contributions do not count.

Example

Marina, age 58, is keen to make non-concessional contributions (NCC) to super. She has not made NCCs in recent financial years, including the current year. You discover she has the following interests in super with current market values as outlined in table one.

Table 1: Maria’s interests in super at current market value

On the surface, her total super interests appear to be $1.35 million and therefore she is potentially eligible to make a $300,000 NCC to super in 2018/19. Upon closer investigation, you discover her TSB at 30 June 2018 is as in table two.

Table 2: Maria’s TSB at 30 June, 2018

Source: ANZ

As her TSB exceeds $1.4million at 30 June 2018, she cannot use the three year NCC period and contribute $300,000. Marina is limited to a $200,000 NCC, without breaching the NCC cap.

You must ensure you capture the value of interests at 30 June of the prior financial year for TSB, rather than use current market values. Include the special value of defined benefit pensions when calculating TSB. Failure to include defined benefit pension may lead to underestimating TSB and exceeding NCC caps.

How to check a client’s TSB

Super funds (including SMSFs) report TSB amounts to the ATO. Clients can view their TSB using ATO online services through myGov. It is generally wise to check the amount on myGov with the client’s known super funds as errors, duplicate reporting or delays can occur.

Strategies to reduce TSB

Although an adviser’s role is generally to help clients grow super benefits over time, the TSB measure suggests we may need to momentarily limit this growth or build super in the name of a spouse, where possible. Table three summarises the various TSB amounts and the benefits associated reducing super balances.

Table 3: Benefits of reducing super balances at various TSB amounts

Source: ANZ

Let’s outline various strategies you may wish to consider when managing TSBs.

Contribution splitting

Contribution splitting allows a member to transfer their concessional contributions to their spouse’s super account, subject to certain limits. Generally, an individual can split 85 per cent of concessional contributions, but the amount cannot exceed their concessional contributions cap for that financial year. The receiving spouse must be below preservation age or if between preservation age and under age 65, have not permanently retired from the workforce.

Contribution splitting becomes particularly relevant when considering the TSB measures. The strategy may help a member of a couple to keep their super below the various limits above, particularly as part of a long term strategy. You can consider a splitting strategy for couples in respect of last financial year’s (2017/18) contributions. Contributions made in 2018/19 would generally be split in the next financial year.

Example

Abdul, age 55 and Aliya, age 54, have an SMSF. Their TSBs are $1.3m and $700,000 respectively (at 30 June 2018). Abdul will continue to work full time for another five years and expects to maximise his concessional contributions cap. Aliya will have limited concessional contributions in her name.

A contribution splitting strategy could be advantageous for the couple if utilised over the next five years. If Abdul can keep his TSB below $1.4m, he can utilise the 3 year bring forward period and make a $300,000 NCC. Furthermore, if his TSB remains below $1.6m, he can make some amount of NCCs. At some point, the SMSF may also be eligible to use the segregated pension method if Abdul’s TSB remains below $1.6m.

Transition to retirement pension

Where a client has reached preservation age but is still working, a possible option is to commence a transition to retirement (TTR) pension. From 1 July 2017, the tax exemption for investment returns on assets supporting the TTR pension was removed. However, TTR pension income is received tax free from age 60 and tax concessionally if under age 60. Advisers may wish to explore the option of commencing a TTR pension and using pension payments to reduce TSB. The additional income could be used to make a spouse contribution or retained as a non-super investment.

Example

Holly, age 62, has $510,000 of super in the accumulation phase and is still working full time. She expects to incur a large capital gain in 2019/20 and will use $5,000 of her concessional contributions cap for 2018/19 and 2019/20. She wants to qualify for catch up concessional contributions and make a personal deductible contribution of $40,000 (unused amount of $20,000 for 2018/19 plus $25,000 for 2019/20 less $5,000).

To ensure Holly has a TSB below $500,000 at 30 June 2019, we can consider the commencement of a TTR pension. The minimum payment of four per cent is pro-rated based on the number of days remaining in the financial year. The maximum payment of 10 per cent is not pro-rated, although some income stream providers may pro-rata the payment.

Accordingly, Holly could elect to receive a TTR pension payment between $20,400 (assuming 1 July 2018 commencement date) and $51,000. The receipt of TTR pension payments may assist to keep Holly’s TSB below $500,000 at 30 June 2019.

Withdrawal and recontribution to spouse

Advisers should also consider the option of withdrawing super from one spouse’s account and making a contribution into the other spouse’s account (where eligible). In addition to a potential spouse contribution tax offset, a withdrawal and recontribution to the spouse can be useful to help equalise super benefits and thereby reduce TSB for one member of the couple.

To make the withdrawal, the client must satisfy a condition of release, for example, permanent retirement, ceasing employment from age 60 or turning age 65. Alternatively, unrestricted non-preserved components can be accessed at any time. If the client has reached age 60, there is no tax payable on a lump sum withdrawal. Where aged between preservation and less than age 60, the low rate cap ($205,000 for 2018/19) may be available on the taxable component to reduce tax on a withdrawal.

To make the NCC, the recipient spouse must be eligible to contribute to super and the amount should be within the relevant NCC cap, after considering TSB (at 30 June prior).

Example

Pranav, age 65, has $1.9 million of super in the accumulation phase. He is considering retirement and plans to commence an account based pension with his accumulation balance. He is married to Geeta, age 62, who is already retired. She has $200,000 in an existing account based pension.

Pranav can withdraw $300,000 and contribute Geeta’s super account (assuming she is not in a bring-forward period and has no other super interests). Pranav then commences an account based pension with his remaining $1.6 million accumulation balance and Geeta commences an account based pension with the $300,000 contributed to her super account.

The withdrawal from Pranav and contribution to Geeta’s super account has ensured that an additional $300,000 could be maintained in a tax-free income stream structure. The transfer balance cap is explained in more below.

Delay NCCs

In some cases, you may wish to consider delaying NCCs to ensure a client’s TSB remains below a relevant threshold. This strategy is particularly relevant if considering the catch-up concessional contribution measure. If a client is approaching a $500,000 TSB, a deferral of NCCs may ensure a client can use the catch-up concessional contribution measure.

Example

Rory, age 52, plans to dispose of a property with a significant capital gain in the 2019/2020 financial year. He expects to receive super guarantee contributions of $5,000 in the 2018/19 and 2019/2020 financial years. His TSB at 30 June 2019 is estimated to be $300,000.

Rory can use the $25,000 concessional contributions cap in 2019/2020 (assuming no indexation) and a $20,000 catch-up concessional contribution from 2018/19. He can utilise the catch-up concessional contribution provision if his TSB is below $500,000 at 30 June 2019. Accordingly, Rory’s concessional contribution cap is $45,000. If we allow $5,000 of super guarantee contributions, Rory can make a personal deductible contribution of $40,000 in 2019/2020 to reduce the capital gain. He may wish to delay making NCCs in 2018/19 to ensure his TSB remains under $500,000 at 30 June 2019.

TSB and transfer balance cap

It is important to understand the difference between the transfer balance cap and TSB measures. The transfer balance cap is effectively a limit on the amount a client can have in super pensions (in the retirement phase). Amounts transferred in and out of retirement phase income streams are reported by super funds and tracked by the ATO in a transfer balance account.

If the client exceeds this cap, generally tax is payable for the period the client was above the cap. Furthermore, the excess plus a notional earnings amount must be rolled back to accumulation phase or cashed out.

In contrast, the TSB is the sum of accumulation and pension interests, with some adjustments. A higher TSB can impact a range of super benefits and concessions, as outlined in this article.

Example

Arjun, age 62, has recently terminated employment and is considering his retirement options with $1.9m in accumulated super. His TSB at 30 June 2018 is $1.8m.

If Arjun commences an account based pension with $1.9million, he will exceed his personal transfer balance cap of $1.6m and have an excess transfer balance of $300,000. In this case, the excess transfer balance and a notional earnings amount must be removed from the account based pension to bring Arjun’s transfer balance account back within his transfer balance cap.

Arjun commences an account based pension with $1.6m. The remaining amount ($300,000) can remain in the accumulation phase. Alternatively, Arjun may wish to consider a tax-free withdrawal and investing in the non-super environment, depending on his tax position. He cannot make NCCs in 2018/19 as his TSB (at 30 June 2018) is not below $1.6m.

Conclusion

Financial planning principles suggest that we should build sufficient retirement assets for clients and super is generally a tax effective environment to build savings. However, the TSB measures require a re-think of conventional financial planning strategies. Clients can have too much in super.

Strategies to manage TSB include contribution splitting, transition to retirement pensions, withdrawal and recontribution to spouse and delaying NCCs. If we overlook a client’s TSB, there may be significant implications including a NCC cap breach or the catch-up concessional contributions measure may be unavailable. As future Governments may widen the scope of TSB, advisers should be ready for further changes.

Mark Gleeson is ANZ’s technical services manager.