SMSF: Do you meet conditions of release to transfer from preserved to unrestricted non-preserved benefits?

The changes to superannuation that come into effect on July 1, 2017 pose a range of issues for self-managed super fund (SMSF) members.

The strategies required to address specific changes depend on personal circumstances.

For example, to be able to use some strategies you will need to have met a condition of release that allows your preserved benefits to be re-classified as unrestricted non-preserved benefits (URNP).

A simple distinction between the two is that preserved benefits must stay within the superannuation environment, with the exception of Transition to Retirement Income Streams (TRIS), whereas URNPs may be withdrawn at any time.

That doesn’t mean URNPs should be withdrawn from super – it just increases the options available.

Two examples where conditions of release may influence strategies for responding to the latest super changes are TRIS and the $1.6 million transfer balance cap.

Transition to Retirement Income Streams (TRIS)

From July 1, 2017 the earnings from investments that support a TRIS will be taxed at up to 15% within the super fund.

However, if a condition of release has been met, the TRIS can be converted to a standard account-based pension, restoring the tax-free status of investment earnings. While receiving a TRIS have you temporarily stopped work, changed jobs, or have you been working two jobs and ceased working at one of them?

Tax on pension payments from either type of income stream won’t change. They are taxable (less a rebate) for under 60s, but tax free for those over 60.

It’s therefore worthwhile, prior to June 30, for holders of a TRIS to review their cash flow needs, compare their personal tax rate to the tax rate applicable within their super funds, and to adjust their strategy accordingly.

The $1.7 million transfer balance cap

From July 1, 2021 a cap of $1.7 million applies to the total amount that an individual can have in the pension phase of superannuation. This includes existing pensions, and applies regardless of the number, type and sources of pensions.

It may be worth reviewing your employment history and consider any super balances that may be lost, or if you hold multiple accounts consider consolidating them into one super fund.

As defined benefit pensions don’t have an account balance, they are valued at 16 times the annual pension amount. Likewise, market linked pensions are valued at the lifetime expectancy factor times the annual pension amount.

Individuals with more than $1.7 million in the pension phase can roll the excess amount back into the accumulation phase where earnings are taxed up to 15 per cent.

Alternatively, if a condition of release has been met, the funds can be withdrawn from super. However, depending on personal tax rates, a higher rate of tax may apply to investment earnings outside of super than within a super fund.

Also, rolling excess amounts back into the accumulation phase may lead to the fund becoming unsegregated, which means specific assets are not allocated specifically to the accumulation and pension accounts. This can complicate tax calculations and incur actuarial costs.

Need help?

The changes to superannuation may seem complicated for many SMSF trustees but LDB can help you navigate the changes while looking at the big picture.

To find your way to the best mix of super and non-super strategies, call us on (03) 9875 2900 or contact us via the form below.