The Transfer Balance Cap has seen a dramatic change in the tax status of SMSF assets, Class Ltd has found.
The introduction of the Transfer Balance Cap – which limits the amount that can be held in pension/retirement phase – has been followed by an almost doubling in accumulation phase assets. Almost 25% of SMSF assets in pension phase have lost that tax-free status.
$200 billion increase in SMSF accumulation phase assets
According to the Class figures – in the June 2018 SMSF Benchmark Report – SMSFs held $222 billion worth of assets in accumulation phase in March 2017, . By 30 June 2018 this figure was $422 billion, a 90% increase. The Transfer Balance Cap applies from 1 July 2017.
“Two years after the 2016 budget announcement, the SMSF industry operates in a vastly different way. Sweeping super reform has impacted how often funds are processed, how often they are reported on, how CGT relief and actuarial certificates are managed and of course, the total asset value that can be held in pension phase,” said Class.
“The net result is a tectonic shift in assets.”
31% of SMSF assets were held in pension phase in March 2017. By June 2018 only 14% are in pension phase. Comparing ‘mixed phase’ – part pension and part accumulation – the proportion increased from 45% to 57% over the same time period.
“The forced shift of assets out of pension phase has dramatic tax implications for SMSFs. Assuming a modest return on assets for the 2018 financial year, we estimate this shift will result in an increase in the gross tax due on SMSF earnings of nearly 90% from 2017 – a massive impact,” said Class CEO Kevin Bungard.
Class calculates, roughly, this additional tax to be approximately $1 billion in 2017/18. Around $800 million of this relates to assets moved from pension to accumulation phase and about $200 million from the TRIS changes.
On way in which SMSFs seem to have responded to the changes is by a “notable” increase in contribution splitting and re-contributions. Class says this has led to a “significant” improvement to the gender gap in SMSF assets and balances, a “silver lining” from the reforms.
Labor’s imputation credit policy
Class also argues against Labor’s imputation credits policy.
“Given the impact of the 2016 super reforms, we don’t consider the proposed Labor policy to further increase the tax burden on self-funded retirees by reducing imputation credits for SMSFs is appropriate, especially if it disproportionately impacts SMSFs compared to APRA funds.”
“If the proposed changes go through, SMSFs will not only be subject to 15% income tax on a higher portion of their assets (now in accumulation), but they may also lose their tax credits on their pension and accumulation assets.”