The changes, first brought into effect in July 2017 to the transfer balance cap, impact individuals who might have considerable assets in superannuation. Under the change, there is a limit of $1.6 million on the assets that can be transferred in superannuation from an accumulation account to tax-free retirement-phase accounts.
Amounts above that cap can remain in accumulation phase during an individual’s lifetime. After the death of the member, it will normally need to be taken out of superannuation and may be treated as taxable benefit payments. In this instance, capital gains tax or stamp duty may apply.
People want to maximise their retirement savings. For couples, there is often the need to equalise superannuation balances to compensate for differences — such as if one member of a couple was highly salaried and the other was on home duties. These differences also matter when it comes to estate planning: it is important to consider what might happen in the distribution of assets if one member of the partnership passes away.
About 80 per cent of Pitcher Partners’ clients think that their last will and testament will take care of how their superannuation benefits are distributed. The reality, however, is that it cannot. People should no longer expect their superannuation to simply track along without strategic thinking about how to work with the new limits.
Failing to take the transfer balance cap into account could be very expensive. As an example, consider a couple where the husband passes away, leaving a SMSF worth $1.2 million — including an $800,000 property. While the husband might have intended in his will that all these assets pass directly to his wife as a death benefit pension, unless she has a sufficient transfer balance cap, she will need to receive some of those assets as a death benefit lump sum instead. If the lump sum includes the property, the wife must either pay the stamp duty to transfer the property entirely to her name — about $30,000 in this example — or sell it and pay whatever capital gains tax liability is incurred. The tax liability would be even greater if the assets had passed to the man’s adult children instead. In this case, the children could expect to have to pay tax on any taxable component of the bequest, which might be a tax bill in the hundreds of thousands.
Estate planning requires consideration of many legal and strategic issues. For example: how to direct the trustee; who the beneficiary is; and how to understand the potential tax outcomes for the recipient beneficiary. Another factor that complicates estate planning is timing. There may be as little as six months to liquidate assets and pay out any liability. When people are grieving, these matters can be overwhelming, and certainly not a priority. It is therefore important to go through the process now, to buy time when it is most needed.
When considering estate planning, a considered strategy to maximise superannuation is crucial to the overall outcome. Even if a person’s will dictates their wishes for bequeathing their super, the transfer balance cap rule changes mean this might not be straightforward. Have a discussion with loved ones now, and consider all options, in order to get the desired outcome while minimising tax.