No room for error with your self-managed superannuation fund
THE year is rapidly drawing to a close, which means it’s highly likely that you will now hold completed financial statements for your self-managed superannuation fund.
If your balance is over $1.6 million, the first thing you may notice is that your imputation credits refund is down from last year.
This is due to the change in rules made by the Turnbull government, which restricted the amount that could be held in tax-free pension mode to $1.6 million, leaving the rest of the fund’s earnings to be taxed at 15 per cent.
Let’s hope it is a warning to the Labor Party that their proposal to abolish the refund of franking credits will not raise as much money as they have claimed.
The next thing you might discover is that the $1.6 million that was your Transfer Balance Cap (TBC) at June 30, 2017, has now grown. It could easily be worth as much as $1.7 million if your fund earned, say, 7 per cent, while you drew the mandatory pension of 4 per cent.
This situation has triggered quite a few emails asking what the trustees of the fund should do now. Will the TBC now stay at $1.7 million – or will it go back to $1.6 million if the amount in pension mode drops as a result of bad performance and/or increased pension drawings in the current year?
Superannuation guru Monica Rule has good news for you. She tells me that your TBC is no longer relevant, provided the documentation was done properly as at June 30, 2017.
As long as your fund got it all correct on that date, the fund trustees no longer have to concern themselves with the $1.6 million TBC. Thus, there is no limit to what your super in pension mode could grow to if you had excellent returns, way in excess of the compulsory drawdowns. And there is no penalty if, for any number of reasons, the amount you hold in pension mode drops below $1.6 million.
But there is one factor that is critical. If all or part of your fund is in pension mode, you are required to draw a set percentage of the balance of the fund that was in pension mode at June 30. The factor is 4 per cent for anybody under 65 and rises progressively to 14 per cent at age 95 and above.
For example, if you are aged between 65 and 74 you should be withdrawing at least 5 per cent of the previous June balance each year. Therefore, if your balance was $1.6 million at June 30, 2017, you should have drawn $80,000 in pension for the year ended June 30, 2018. However, if your financial statements now show that your TBC has become $1.7 million you will need to increase your drawdowns in the present year to $85,000.
This is another example of the complexity of our superannuation system, and the dangers for people running selfmanaged super funds who don’t get it right. Despite the penalties, which can be heavy, I am still amazed by the number of questions I receive from people who obviously don’t know what they’re doing. Often, they simply don’t know what they don’t know. Expert advice is critical.