The good news is that most people are not affected, however, If you are one of the 4% of Australians fortunate enough to have $1.6 million or more in your individual superannuation, the new rules may affect you.
The legislation announced in the May 2016 Budget has now passed, meaning that persons drawing a pension from their fund are limited to holding $1.6 million in their tax free account based pension. This doesn’t mean that tax will apply to you as an individual person. It means that the earnings on the assets in your fund in excess of $1.6 million will be taxed a flat rate of 15% (10% capital gains tax for assets held for greater than 12 months).
To assist self-managed super fund trustees plan for the new measures, the Government has announced that members with an individual entitlement greater than $1.6 Million and receiving an account based pension will be able to reset the asset cost base on assets held as at 30 June 2017. This means that assets of your choice can have their cost base altered to market value as at 30 June 2017. In effect the fund is deemed to dispose of the asset and reacquire it on the same day for the higher price. There is no brokerage on this and no deemed capital gain for tax purposes. The intention is to allow trustees to potentially select a higher cost base for chosen assets, so that once the asset is disposed, the capital gain is reduced and a unfair tax burden is not imposed by the changes.
An example of this is below:
The Test superannuation fund has two members who hold $2 Million in superannuation entitlements each. At 30 June 2017 the fund holds the following stocks:
Stock Average Share Cost Price Market Share Price
30 June 2017
Ramsay Health Care $40 $60
BHP $36 $26
In the above case, it may be beneficial for the fund to elect to reset the cost base of Ramsay Health Care, since the market value is higher than the cost price. In respect of BHP, the fund would be well advised to retain the original cost price, since it is higher than the market value as at 30 June.
This legislation is new and untested. Many accountants and financial planners are still grappling with the legislation and how best to approach it. It also largely depends on the state of the market as at 30 June 2017, which nobody knows. Thankfully the decision to reset cost bases does not need to be made until the 2017 annual tax return is lodged with the ATO. This gives ample time to decide which assets to consider a cost base reset.
At Lister Mason we are following the developments closely and those funds we expect will be affected by this legislation will be contacted in May or June as to the best way to navigate the pending changes. We will also continue to provide updates in our newsletters.
Naturally if you are concerned about the pending changes, we encourage you to contact one of our professionals to discuss your personal financial situation.
This article appeared in our February 2016 newsletter