Transfer Balance Cap is overly complex, 1 July 2017 start date unlikely

The $1.6 million Transfer Balance Cap, proposed in the 2016 Budget, is unnecessarily complicated and unlikely to be able to be implemented by the 1 July 2017 start date, according to submissions in response to the draft legislation.

Treasury recently released draft legislation, the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016, for consultation. Included in the draft Bill is the Transfer Balance Cap.

In its submission the Australian Institute of Superannuation Trustees (AIST) says there are “considerable impediments”, including in terms of time and cost, to implementing the Transfer Balance Cap by the set date.

“Superannuation funds are unlikely to be able to fully implement this measure by 1 July 2017 if the establishing legislation and regulation has not passed both houses of parliament by the end of 2016,” says the AIST submission.

“Even if the legislation passes both houses of Parliament before the end of March 2017, there will be a great deal of work required in order to merely ensure that funds are able to report retirement income stream information to the ATO accurately.”

Additionally AIST says that the method to calculate Transfer Balance Cap account balances is “unduly complicated” and the costs will be paid by all superannuants, not just those with high balances.

“While the Government has emphasised that very few people will be impacted by this measure, processes, business rules and system changes need to be made by all superannuation funds. This an expensive and time-consuming process, and means that the costs will be borne by all superannuation fund members, and not just the few who are directly impacted by the measures.”

The Tax Institute, in its submission on the draft legislation, also says that the 1 July 2017 start date is unrealistic.

“Members of the Institute’s Superannuation Committee also consider a start date of 1 July 2017 for many of the measures in the package is not realistic given the uncertainty around the final form of the legislation and the considerable systems and other work that trustees and administrators need to do to implement the measures.”

The Institute is also critical of the amount of time allowed for consultation on the changes.

“We submit that the consultation period for the superannuation reform package should be extended to allow a more considered redrafting of the exposure drafts. A consultation period of nine business days has been provided for the public to provide comments on Tranche 2, which comprises approximately 220 pages of exposure drafts and explanatory memoranda. This is an insufficient period to provide considered comments on this significant and complex material, which taxpayers and their advisers will be dealing with for decades to come.”

Though there apparently has been some confidential consultation on the draft legislation.

“While the explanatory memoranda for Tranche 2 predicts further consultation on some discrete issues, this form of ad hoc consultation coupled with the release of the superannuation reform package in tranches increases the risk of interaction issues, consequential amendments and any necessary transitional relief not being fully considered or identified.”

“We are concerned that the exposure drafts are inconsistent with the subsidiary objective of superannuation that the superannuation system be simple, efficient and provide safeguards. In particular, the drafting of Tranche 2 is overly complex and cannot be readily understood without reference to explanatory memoranda, which do not have legal force on a standalone basis.”

The Institute concurs with AIST, in that the costs of administering the Transfer Balance Cap will be borne by all super fund members. It is noted in the submission that the Treasurer has said that 96% of people will be better off or unaffected by the superannuation changes announced in the 2016 Budget. “The Institute wishes to point out that the likely substantial administrative costs of implementing these measures will not be limited to those individuals directly impacted by the measures in revenue terms.”

“Significant education, updating documentation, upskilling process and reporting costs will also be incurred by the industry and that will be incurred all members to implement the systems necessary to comply with these measures.”

The Tax Institute says introducing legislation to enact the Transfer Balance Cap to Parliament before the end of the calendar year is “ambitious” and a 1 July 2017 start date “provides insufficient lead time to finalise and implement the measures”.

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9 Replies to “Transfer Balance Cap is overly complex, 1 July 2017 start date unlikely”

  1. I was under he impression all superannuation changes where not going to be retrospective. Surely new rules could be bought in from next July with ease, just new reporting methods and bench marks. Would it not be easier to drop for all concerned, it is time wasting and an attempt to capture tax from people who have planned all of their life for retirement and only affects a few. Use your time dealing with the bigger issues of Australia and help grow the economy and infrastructure so $1.6 million is the norm for people’s super.

  2. It seems to me that a far simpler implementation achieving exactly the same outcome would be to simply change the taxation so that the proportion of fund income attributable (pro rata) to pension fund balances greater than $1.6m (indexed) would be subject to 15% tax. No complicated shifting of funds from pension back to accumulation accounts, no complex calculations of the proportion of the cap that has been used, no impediment to rebuilding pension fund balances in the event of a major market crash, etc etc.

      1. No – that wouldn’t be in the spirit of the policy. The goal is to simplify administration without creating huge loopholes.

    1. The Labor policy of taxing pension phase super fund income above a certain threshold is not without its own administrative issues. In 2013, when Labor was in government and Bill Shorten was the Minister for Superannuation and Financial Services, a very similar policy was announced, but then not enacted. Unlike that policy the one Labor took to the election didn’t set out how capital gains would be treated and the $75,000 threshold wasn’t going to be indexed. Also, consider the time lag in reporting information between super funds – if the threshold was per person than super funds are going to need to know how much income other funds have earned in relation to a member before they can calculate how much tax is payable. But superannuation pensions are recalculated on 1 July. Plus some SMSFs will not be reporting income figures to the ATO until 11 months after this date.

      Labor super policy to create administration nightmare

  3. Really stupid the Labour party had the best proposal to seek to tax income not asset base above a threshold @15%. This was seeking to create the same but its administration cost is huge. All our legislation ( or most) seeks to tax levels of income. This also allows Pollies to get away with tax free Super as they are paid an annuity or income and not correlated to assets.

    Time we all faced the same tax …

  4. The whole thing is crazy. My large APRA super fund can’t just move the excess out of the pension. They have to terminate the pension, move the funds back to accumulation and then start a NEW pension. In most cases this triggers a buy/sell spread which costs the member $$$$$$. In order to avoid the buy/sell spread the super fund has to use a highly manual process.

    Last time I added substantial funds to my pension (via the cancel, transfer, create new, process) it took a week. Imagine how much work will be required even if it is only 1% of members who need to do this.

    Don’t start me the NCC and its associated (different) $1.6M limit and how this will create even more work as people scramble to take advantage of the old rules before 1 July 2017.

  5. Just think how fund trustees will administer this nonsense….For example in order for a pension fund to remain tax free it must pay a minimum pension which for example at age 65 is 5% of the pension assets . Therefore fund Trustees must segregate enough cash in the $1.6 million to enable the pension. Because in most funds 5% is above the current earning rates and as you cannot top up the $1.6 million transfer cap – pension fund assets will need to be sold to maintain tax free status. Pension funds will decline in value over time. This is an unintended consequence.

    And as for superannuation generally, as you cannot contribute more than $100,000 per annum then for a lot of fund members this changes the endgame strategy to a really nice house……and a part age pension!

    Just what we did not want…..increased reliance on the age pension
    Graeme

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