Since the introduction of the $1.6 million retirement cap, it’s had accountants shaking their heads and here’s why.

Before the $1.6 million retirement cap, if a member of a Self-Managed Super Fund (SMSF) had a balance of $2,000,000 and had retired from the workforce, any earnings from this balance would have been tax free. Not a bad reward for a life of working hard, putting money aside, making smart investment decisions and accepting help along the way by industry professionals. But from 1 July 2017, the ATO put a cap on how much a member’s balance can be in retirement phase.

Recently, we achieved a great result for a client of ours caught up in the $1.6 million saga.

The client was a member and trustee of a self-managed superannuation fund, his member balance was $2.2 million comprising of:

  • $1,600,000 in pension phase
  • $600,000 in accumulation phase

This means even though the Trustee was fully retired (at the age of 70), tax will be payable on 27.27% of the fund’s earnings. Where just two financial years ago (before the introduction of the $1.6 million retirement cap) the fund was paying nil tax on earnings as a result of the SMSF being in full pension phase.

After discussing the accounts in our annual year end meeting, it was discovered a $500,000 term deposit in the superannuation fund was soon to mature. At the same time, the trustee was looking for a home to settle into for retirement.

After discussing a number of options, and ensuring all eligibility criteria was met, our office was able to assist the Trustee to make a lump sum payment from the SMSF to his personal name for $500,000 for which the trustee will use the funds to purchase his retirement dream home. The Lump Sum payment could be applied against the accumulation balance (amount not in pension/retirement phase) reducing the member balance that the Trustee was paying tax on.

Now the Trustee has a $1,700,000 member balance of which only $100,000 has tax being paid on it (equating to 5%, down from 27.27%) and $500,000 in his personal account ready for a mortgage free retirement in a small unit close to the beach.

We will continue to work with the Trustee to ensure his retirement nest egg isn’t eaten up in paying unnecessary tax.

This is general advice only. Everyone’s situation is different. You should always speak with your accountant or financial planner first.