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Silver Lining identified in the Balance Transfer Cap trap

Up until 30th June 2017 retirees could have as many assets in super they could manage to contribute and enjoy tax free income on those assets in pension phase. This tax haven status was quashed in 2016 budget when it was announced that from 1st July 17, only up to $1.6 Million (known as balance transfer cap - BTC) of assets could can be in retirement phase and any income on assets above BTC would pay tax in super.

Any amounts in pension phase on 30th June 2017 greater than BTC amount can be either withdrawn from the superannuation system or moved to accumulation account of the retiree, where income is taxed at concessional tax rate of 15%.

What followed was Superannuation Bill Treasury Laws Amendment (fair & Sustainable superannuation) Bill 2016 (TLA) which became law on 9th November 2016 legislating balance transfer cap amount of $1.6M. In the explanatory memorandum which was issued with the bill, the treasury explained their reasoning behind changes in law...

Para 1.3: As Australia’s population ages and fiscal pressures increase it is important that our superannuation system is used for its core purpose of providing income in retirement to substitute or supplement the age pension and not for tax minimisation and estate planning purposes.

Para 1.4:The Government’s changes will make the superannuation system fairer and more sustainable by ensuring superannuation tax concessions are well‑targeted and affordable.  The measures in the TLA Bill reduce access to tax concessions for the wealthiest individuals and better target tax concessions to encourage all Australians to be more self‑sufficient in retirement.

In essence, the treasury found that the law which existed from July 2007 was only benefiting wealthy individuals in reducing their tax and for estate planning purposes whilst not being fair to those who needed it, the most. The objective of superannuation was re-defined with improved integrity in the superannuation system, it further clarified ...

Para 1.21  Australians should have confidence that the superannuation system is being used for its core purpose of providing income in retirement.  A number of the changes in the TLA Bill will build this confidence.


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The Government has enshrined this objective of superannuation system in the legislation in response to the Financial System Inquiry. Changes in TLA pretty much sums up the framework for all future changes to the superannuation system. The bill suggests that Age Pension and voluntary savings are the other two alternatives available to Australians for retirement income.

Some of the calculations available in the media is closing into a figure of around $600,000 in superannuation savings as the ideal figure which a couple should target to get the best return from government age pension in retirement years.

This figure was arrived after income and asset tests which the treasury applies before paying any age pension to retirees.

Wealthy Australians will most likely opt for building wealth outside of super in structures like a family discretionary trust and / or companies.

To build wealth in super from 1st July 2017 for retirees, is not such a bad idea as amounts above the $1.6M will be in an accumulation account, with income being taxed at 15%.

Another way of looking at the new law is that from 1st July 2017, there is tax free income threshold on $1.6M of assets with remainder assets income being taxed @ 15%.

Individuals with income up to $45,020 outside of super generally pay tax @ 15% tax ($6178.50 plus medicare levy less $324.70 low income tax offset) for 2017 - 18 financial year. This means if your investments are returning say 6%, there is no difference, if you invest the excess amount of $750,000, above the BTC amount, inside or outside super ($750,000 = 45,000 / 6%).

Conversely, based on 6% investment return, if your super balance is less than $2.35M and you have no other income outside of super, you should be thinking of withdrawing from super and investing outside of super as you will pay less tax.

This statement has its own limitation, as once your total superannuation interest is greater than the BTC, you cannot contribute any more non-concessional contributions (after tax contributions) to super.

In other words, once the money is out of super, you will not be able to put it back in super, only deductible or concessional contributions are allowed once your total superannuation balance reaches the BTC amount.


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Is investing "In Super" better than "outside super"

There are arguments for and against various investments vehicles, such as discretionary trusts and companies and tax is only one consideration. If your retirement pool is less than $1.6 Million ($3.2M for a couple - $1.6M each), then you are still living in a tax haven and will not pay any tax on investments inside super.

There are many reasons given by planners and estate lawyers when recommending retirees with over $1.6M to invest outside super rather than investing inside super. Some of these arguments are relating to payment of death benefit to adult children.

We suggest readers with large retirement pools to take further estate planning advice on this issue as this is a very complex area of law.

For couples, as per new balance transfer rules, there is a danger of breaching the cap amount, if one dies. Superannuation balance of the deceased will generally be added to the survivor superannuation balance, in case the deceased pension is a reversionary pension and the amount of reversionary pension of the deceased will be credited to their balance transfer account of the survivor. This credit can possibly push the survivor's superannuation balance to breach the BTC amount of $1.6 M.

The other option is get the deceased super balance paid out as a lump sum death benefit payment and withdraw the pension amount of the deceased from the superannuation system. Or the survivor can partly or fully commute their own pension to accumulation account to accept the reversionary pension of the deceased to avoid breaching the BTC amount.

Our understanding of superannuation law has revealed some interesting findings of two new strategies that have emerged based on the new law.

Before you consider using these strategies, please consult your advisors as it is possible that these strategies may be misunderstood by the ATO as a plan to avoid tax and scrutinize your action under the penalty provisions of Part IVA of ITAA.


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Reasons, why pension account grows, after commencement

Before we go into details of our findings, let's look at the various issues relating to growth in pension account after its commencement.

Firstly, it is to be remembered that the balance transfer cap amount is tested against the value of assets of the fund when we commence a new pension for the first time or on 1st July 2017 for an existing pension.

This means if a member has a balance of $2.4M in pension phase on 30th June 2017, the member must partially commute his pension on 1st July 2017, as on this date only $1.6M can only remain in retirement phase. The commuted amount of $800,000 can either be taken out of the superannuation system and invested outside super or moved to accumulation account of the member.

Pension account can grow due to higher investment earnings credited to the account as compared to pension withdrawals by the member. What one needs to remember is that any future growth in the pension account is not credited to the balance transfer account of the member and will not breach the cap amount. The explanatory memorandum attached to the TLA bill explains this situation

Para 3.57 After a superannuation income stream has commenced, changes in the value of its supporting interest are not counted as credits or debits.  That means a superannuation interest that supports a superannuation income stream that increases in value because of investment earnings does not have its growth counted towards the cap. Similarly, a superannuation interest that supports a superannuation income stream that loses value because of investment losses or the drawdown of superannuation income stream benefits does not have that reduction reflected in the individual’s transfer balance account


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Secondly, Not every asset has the same investment return, there are some assets within an SMSF which will always have higher returns than other assets of the fund.

If higher returning assets are allocated (segregated) to a pension account, then it is possible to credit the pension account, with a higher income amount instead of the average return of the fund.

This means that a pension account of a member can grow quicker if certain high income assets are allocated specifically to them, provided such segregated investment is allowed by the trust deed and offered to the member by the trustee of the fund.

In our example above, the fund has $2.4 Million of assets and for sake of simplicity, let's assume the fund has two assets of equal values, $1.2Million each and one asset returns 10% and the other asset returns 2% making the average return of the fund 6%.

In dollar value the total income of the fund is $144,000 with asset A returning $120,000 and Asset B returning $24,000.

Up to 30th June 2017, allocation of income for a 100% pension fund was an un-interesting topic for an Self managed super fund, as there were no limits on how much money you could have in retirement phase.

In the past, accountants usually never paid much attention to how the accounting software allocated income to various members and member accounts and left these calculations to their accounting software. SMSF auditor rarely look at these calculations, although required to do so as per SIS Act and form an opinion on it, in their audit report.

However, from 1st July 2017 pension funds with member balances greater than $1.6 M with accumulation accounts will be concerned on how the two accounts are credited with income as it will determine how the two will grow or reduce over a period of time.

Exempt income of the fund is based on a percentage which is average balance of the fund in comparison to average pension balance of the fund. Any future growth in the pension accounts as compared to accumulation accounts, will increase exempt income percentage and the fund will pay less tax.

We must warn our readers here as any un-warranted higher allocation of income to the pension account can alert the tax office and they may take this trustee activity as a tax avoidance measure and consider taking action under part IVA of ITAA.

However, segregation of certain assets to a pension account for investment purposes should not be misunderstood as a tax avoidance scheme or a tax induced measure as genuinely the pensioner may want to ensure that the pension will last his life time - his retirement years to warrant this segregation.

SIS Regulations SISR 5.3 (2) provides guidance on how income should be allocated:-

SISR 5.3(2): the trustee of a regulated superannuation fund or an approved deposit fund must determine the investment return to be credited or debited to a member's benefits (or benefits of a particular kind) in a way that is fair and reasonable as between:

(a) all the members of the fund; and

(b) the various kinds of benefits of each member of the fund.


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Since trustees may want pension member accounts to last, whilst the member is alive in retirement years, trustees may consider "fair and reasonable" to offer investment choice to its pension members and in our example segregation of Asset A to a pension account may be justified.

Lastly, SMSF's from 1st July 2017 are not allowed to segregate pension assets for calculation of exempt pension income.

If a fund has one member with pension account and an accumulation account (super balance more than BTC amount) or if there are accumulating members in the fund along with pension members, all assets of the fund, must be un-segregated and an actuary employed to calculate exempt pension income of the fund and issue the fund with an actuarial certificate determining the exempt pension income of the fund, before lodgement of the income tax return of the fund.

A fund will be 100% in pension fund if all pension members have less than $1.6M each and there are no accumulating members in the fund. Such a fund will always remain a segregated pension fund and not actuarial certificate will be required.

Investment segregation of assets between member accounts should not be confused with segregation of assets for tax purposes under Section 295 - 390 of ITAA for calculation of exempt pension income of the fund.

In our example, out of $2.4M, the amount commuted to accumulation account is $800,000 which is about 1/3rd of the total fund balance. Which means that about 1/3rd of income will be taxable to the fund, irrespective of any asset being segregated to the pension account.


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Assuming the member needs to withdraw $100,000 each financial year at the end of the financial year as a pension, exempt income percentage will be close to 66% as about 2/3 of assets are in retirement phase ($1.6M / $2.4M).

In our example, from income of 144,000, about 66.67% will be exempt current pension income and 15% tax will be payable on the remaining $48,000 income. $7,200 tax will be payable and it will reduce the accumulation account of the member and should be allocated accordingly.

The fund's accounts at the end of the year will look something like this


Accumulation Account

Pension Account


Opening Balance

1st July 2017





Pension withdrawal




Income Tax




Closing Balance




Accounting Allocation of Income 1/3rd To "A" and 2/3 to "P"




Closing Balance

30th June 2018




ECPI % for following Yr





Lump Sum strategy with investment choice strategy

Implementing our two strategies of lump sum payments, instead of only pension payments and allocation of certain investments to pension account can change the closing balance of the two accounts. Our intention here is to reduce accumulation account and increase pension account over the years to increase exempt income percentage and reduce the ultimate tax the fund has to pay each year.

Step 1: Lump Sums

Let's assume that our pension member is 62 years old and needs to withdraw only 4% of the pension balance as on 1st July, any excess required for life style purposes, can be withdrawn as a lump sum from the accumulation account.

Step 2 Allocation of Asset A to pension account

Secondly, if investment choice is offered to the member, irrespective of the tax calculations, investment return of a segregated pension asset can be credited solely to the pension account.

Remember, this strategy does not change the tax situation of the fund in the first year, however favours the pension balance for exempt pension calculations for the following and each subsequent year.

In our example above, first year calculations are as below:


Accumulation Account

Pension Account


Opening Balance





Pension / Lump Sum withdrawal




Income Tax




Closing Balance




Accounting Allocation of Income 1/3rd To "A" and 2/3 to "P"




(Asset A is of $1.2M - more income can be allocated to pension account of $1.6 Million)


Closing Balance




ECPI % in following Yr





You will notice that closing balance of the pension account is greater if these two strategies are implemented. If similar income is earned in following year - 2nd year - ($144,000) - the 3% increase in ECPI will result in tax saving of only $531 - however cumulative effect of this strategy over the first five years will give you a tax savings of  $4163 and tax saving in the 6th year alone is $1915 and keeps growing each year.

In our calculations exempt current pension percentage in the 6th year was 69.4% as compared to 60.54% if these two strategies were not implemented or in other words further 9% of income can be sheltered from tax if these two strategies are implemented.

Please note that in our calculations, returns were kept constant at 6% and the pension withdrawal was kept constant at $100,000 for each of the next 6 financial years.

Larger funds with higher amounts of accumulation account will show an inverse benefit as there is no cap to an accumulation account, however BTC or pension accounts are capped in the first year to $1.6 Million.

For example member balance of $16M will have only 10% or $1.6M in pension phase rest being in accumulation account. However, you will get a different result if there are two members in pension fund instead of one as two members provide $3.2M tax shelter (pension assets) to a fund.

Further, tax savings can be greater or lower depending on investment returns of the fund and how much is withdrawn as pension and lump sum, each year, by the member.

For actuarial certificate calculations, timing of lump sums as compared to pension withdrawals can also make a difference in exempt pension income percentage, that is, if early withdrawals are shown as accumulation account lump sum payments it will improve exempt pension income percentage.

Two simple strategies worth considering - a silver lining and a small consolation to pensioners in the new BTC regime.


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New Template added in Admin Documents - FREE

A new document has been added on in admin documents on "how to commute a pension on 30th June 2017" if your member balance is more than the balance transfer cap amount of $1.6 million, then any amount must be rolled back to accumulaiton phase.

This is a free document, we have been advised that this document is being sold for $330 by our competitions (cleardocs etc..).


Step 1. To access this document, from document manager, click on green SMSF Trust and then click on "Admin Docs"






















Step 2 Once you are in the Admin Docs - click on Rollback of Pension  - to download the document.





How to commute a pension on 30th June 2017 to comply with Balance Transfer Cap


Any member of an Self Managed Super Fund (SMSF) who is in pension phase with balance above $1.6 million (transfer balance cap amount) on 30th June 2017, must either withdraw the amount above this amount from the SMSF or commute one or all pensions and move the amount from retirement phase to accumulation phase before or on 30th June 2017.


A member of an SMSF who is pension phase on 30th June 2017, may or may not have an accumulation account in that SMSF.


The actual commutation of the pension account to accumulation account is a mere journal entry to credit an existing or newly created accumulation account of the member in the fund and debit to one or more pension accounts of the member to ensure that the remaining pension account is not more than $1.6 million.


Income, tax calculations and asset valuation are generally not available on 30th June 2017, the trustees may need some time to quantify the amount above the $1.6 million as on 30th June 2017 in the pension account. Since trustees may not know the exact member pension balance on 30th June 2017, the exact amount of commutation from pension account to accumulation account may not be known for some time.


 Click here to learn how to commence a pension in an SMSF


Commutation of pension

s before 30th June 2017


On 1st July 2017 not more than $1.6 million can be in retirement phase or else you will breach the transfer balance cap amount, commutation of pension of all amounts in excess of the transfer balance cap must happen on or before 30th June 2017.


For some SMSFs it is not possible to work out the pension balance on 30th June 2017, as valuation of some assets will not be known till much later. For example, units in unlisted or listed trusts are only known when the final accounts of the trust are completed sometime in September 2017.


ATO has put together a guidance to assist SMSF trustees with valuation of the pension where an SMSF member is unable to determine what their balance is at June 30 2017. 


ATO in practical compliance guideline 2017/5 has suggested how these commutation requests from members should be recorded.


Trustees are not required to quantify the excess amount in the minutes they prepare for the pension commutation on 30th June 2017 but they need to be clear about how they intend to calculate the excess amount in the minutes, even though the amount of pension in excess is not determined much later than 1st July 2017.


This irrevocable request by the member and trustee accepting the request minutes must be in writing and must happen before 1st July 2017. These minutes must identify which income stream has to be commuted.


Click here to download a template of such a request by the member & minutes of the SMSF accepting such request.


Click here to download PCG 2017/5




Breakthrough for unlicensed Accountants

If you are an accountant and do not hold an AFSL, you cannot advice clients to set up SMSF's as the exemption for this advice is no longer available to you from 1st July 2016.

However, if a client instructs you, the legislation allows you to set up an SMSF as without advice, it is a simple administrative task. If these instruction come to you from your website, it is even better, as you can substantiate that no financial advice was provided by your firm.

We have launched a new website, which integrates with your website and anyo

ne browsing your website can place an order / instruction with your firm to set up a new SMSF. When details are entered by the browser / new client on your website on an online form, they are actually filing our form which is integrated with your website . This way, you are not only able to establish an Audit trail that no financial advice was provided, but also when you log in to your account on our website, clients entered information is already waiting for you in the un-finished stage.

Our smart form can also create a new trustee company, if not already in existence and you can also apply for an ABN via our website for free, instead of re-keying the data on the government website.

This integration saves you time and effort to re-enter client information, all you have to do is edit the un-finished application, pay us and take delivery of a new SMSF deed and constitution of the trustee company. The cost of this service is $125 Incl. GST for individual or existing corporate trustee and $165 plus ASIC fees when a new corporate trustee has to be created as well.

For a demonstration on how this integration works, please visit Integration requires your IT team to modify a few things on your website and then our IT team completes this integration.

The fee to integrate with our website is $660 Incl. Gst. For further information on how integration works,

Contact :  Agni Chowdhry CPA (SMSF Specialist)

phone 0 2 9684 4199.



Free Demo on how to Integrate your website
Are you an accountant who wants to only do Accounting work for SMSF cleints?
Do you want to allow your clients to instruct you to set up an SMSF on your wesbsite?
Deed + Trustee Company + ABN = all in one form on your website in 2 days.
Contact our office on 02 9684 4199 for a free demo 
or look at

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Segregation of Assets after 1st July 2017


Properties have varied investment returns, generally residential properties returns are lower as compared to commercial properties.


Members may want to retain properties with higher rental return in pension phase so that they can be exempted from tax. Any income and capital gain in accumulation phase is subject to 15% tax.


From 1st July 2017, you can no longer segregate pension assets from accumulation assets, all assets of the fund must remain un-segregated as that will be the members superannuation balance in the fund. An actuarial certificate will be required to determine exempt current pension income of the fund.


 Click here to learn how to apply for an Actuarial Certificate for $55


A person can be a member of multiple super funds. For example, if a member has two SMSF's, they may be able to achieve segregation between pension and accumulation assets. One fund up to $1.6 million could be in pension phase and the other fund can hold all the other assets in excess of $1.6 million and be in accumulation phase.

Fund with high return / income could then remain in pension phase and the pensions of the fund which has lower returns, such as residential properties, could be commuted to accumulation phase.


A second fund can be set up before 30th June 2017, however, SIS legislation does not allow rollouts of assets from one fund to another fund, unless where two funds are merging or in case of a marriage split. Rollovers of assets should not be confused with in-specie contributions where assets can be contributed to the fund, rollovers between two funds must always be in cash.


ATO has stated that they will be looking at applying provisions of Part IV A at situations where trustees are attempting to pull out or pull in assets from un-segregated pools to segregated pools . However, a genuine case where the trustee wants to set up one or two more funds for estate planning purposes should not be caught by these provisions.



SMSF as a Estate Planning Vehicle


If a member has more than one child, for estate planning purposes it can be beneficial to have one SMSF for each child, where the assets of the fund can pass on to the next generation without paying any capital gain tax.


These type of SMSFs typically will have three members, two parents and one child and once the child gets married, their spouse becomes the 4th member.


On death of one parent, the number of members will reduce and increase when a grandchild is admitted in the fund when he or she turns 18 years.


To implement this strategy parents should be gradually drawing down on pensions and gifting it to the child who will then contribute to the fund as non-concessional contribution, so that one day parents are phased out of the fund and kids (plus spouse) member balance represent the assets of the fund.


This strategy works to eliminate or limit capital gain tax when the asset is ultimately sold, presumably when the child or grandchild is in pension phase.


Investments making a gain and held outside of super will always pay capital gain tax, however this strategy can be used by multiple generations, as an SMSF can go on till perpetuity.


This similar capital gain tax shelter is only currently available on sale of principal place of residence i.e. on death of a parent, any capital gain on the sale of principal place of residence passes to the next generation without any capital gain tax liability. The cost base of the deceased for each investment property passes to the beneficiary at the time of death and capital gain tax paid on its ultimate sale.



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Multiple Superannuation Interests


Having one SMSF for each child  strategy ensures that assets move from one generation to the next without paying any or minimal capital gain tax on the assets ultimate sale with the advent of transfer balance caps which restricts the amount which can be in pension phase.


If you or your clients have only one fund and want to set up another fund (or funds) for estate planning purposes before 30th June 2017 and divide the assets of the current fund by moving some properties to the new fund, there is a further restriction imposed by exemptions contained in Section 66 of SIS Act.


Only business real property (BRP) can be acquired from a related party, the two funds would be considered to be related to each other and transfer of any residential property will be prohibited.


If BRP of one fund has to be moved to another fund, you will first have to rollover cash from one fund to the second fund so that trustees of the second fund are able to purchase BRP from the trustees of the first fund. Since the first fund is in pension phase, this sale will trigger a CGT event, however no tax will be payable as there is no capital gain tax on sale of assets which are 100% supporting a pension before 1st July 2017.


When BRP is sold to another SMSF, the beneficial interest in the property will remain the same as the property will move into the new fund for the same members, albeit in another fund, no stamp duty should be payable. Enquiries should be made with the office of state revenue before implementing this strategy.




Many investors are withdrawing the excess over the balance transfer cap amount and investing outside of super in structures like family trusts.




 Click here to learn more about family trusts






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