The raft of changes to the new superannuation system to commence from July 1 have just made the thorny issue of inheritance even more difficult for high value balances of $1.6 million or more. And they bring out some tricky issues relating to capital gains tax as well.
Even if you are planning on spending the kids inheritance, you probably need to think about the issue if you will have more than $1.6 million on retiring. After all, maybe you’ll fall off the perch earlier than planned.
Complexities resulting from the new system arise from the $1.6 million cap which will apply to inheritances in various ways. Rebecca James, special counsel with DBA lawyers, told The New Daily that super balances left to dependent children would be treated in two ways depending on the fund status.
Where a person dies with their fund in pension mode and with a balance over $1.6 million and left it to, say, two dependent children, the pension cap would not be an issue. “If the fund was $2 million and there were two children under 18 or under 25 and still dependent then each could be paid $1 million as a pension.”
In this case the money would be looked after by a trustee for children under the age of 18.
However, if the fund was in accumulation mode with the member still working, the situation would be different. Then only the cap of $1.6 million could be paid out as pensions to the two children. The rest would have to be paid as a lump sum outside super.
The new system will also deal differently where the balance is left to a spouse. Under previous law super balances could be left to a spouse who could deposit them in their own super account without them having to leave the super system.
Ms James said “new regulations still in draft form will change these payments from member benefits to death benefits.” The implication of that is that the $1.6 million cap will apply and inheriting spouses will not be able to take in more than that into a fund
“One good thing is that people will have a window of 12 months from the death of a member to decide on what course of action to take,” said Shane Ellis, principal of Shane Ellis Lawyers.
Capital gains tax will also be an issue for those with big balances above $1.6 million. Till now funds in pension mode have been free of both income and capital gains tax. But once the new system comes into place things will change.
Capital gains changes
As those with balances above $1.6 million enter pension mode, they will have to split off any excess into an accumulation fund where earnings, including capital gains, will be taxed.
In retail and industry funds, the mechanisms for doing this are expected to be looked after by the fund itself. But for self-managed funds, the onus will be on the trustee who will probably use advisors to help.
As a concession to the effects of the new system, those with balances above $1.6 million will be allowed by the Australian Taxation Office to revalue assets in pension mode. That will give them a higher cost base meaning when assets are sold down the track the amount of the taxable gain will be lower than if the actual acquisition costs were used.
“The resetting of the CGT cost base for an SMSF asset will not occur automatically. The SMSF Trustee must make an irrevocable election to reset the cost base for each asset that it wants to reset the CGT cost base for,” said Mr Ellis.
The concession is a one-off measure that will only apply to funds caught by the $1.6 million cap and deal with assets that are moved from pension funds into accumulation funds between November 9 2016 and June 30 2017. If you retire after those dates you miss out.