Retirees are being urged to talk to their accountant  ahead of a mooted increase in the $1.6 million super balance cap.

It was tipped the cap - one of the biggest reforms to superannuation - could this year rise to $1.7 million and affect the retirement plans of self-managed super fund trustees.

"If this does happen it would mean that everyone who has commenced using their transfer balance account, but not used up their entire cap, needs to re-calculate their remaining transfer balance cap," says actuary and head of technical services at Accurium, Melanie Dunn.

"There will no longer be one single transfer balance cap which applies to all retirees."

The $1.6 million transfer balance cap introduced on 1 July 2017 is one of the biggest changes of recent years. For SMSF members in pension phase, this change caps at $1.6 million – for life – the amount that can be transferred and held in a tax-free retirement phase account.

Fund members receiving a pension or annuity valued at more than this must transfer the excess back into the accumulation phase or pay additional tax.

Dunn says this figure could have been indexed for the first time on 1 July this year, which would lift the cap to $1.7 million.

But December's consumer price index data released on Wednesday showed a slight rise in inflation, which grew to 1.8 per cent in the last month of 2019.

This scotches expectations of a rate cut from the Reserve Bank of Australia when it meets next Tuesday.

It also means a change to the transfer balance cap is now not expected until 1 July 2021, but Dunn urges SMSF members to see their accountant as soon as possible to establish how the change will affect them.

As part of this, Dunn notes that an estimated transfer balance cap versus their current cap can be taken into account when setting pension strategies for the coming year. This is crucial because it may affect decisions around pension commencements and commutations – when lump sums are withdrawn from the SMSF.

How to handle disregarded small fund assets

The issue of disregarded small fund assets, and how these affect members' eligibility for exempt current pension income (ECPI), was a pressing concern among Dunn's clients in 2019.

A fund has disregarded small fund assets in the following financial year when any member is in retirement phase and has a total super balance of more than $1.6 million at 30 June.

ECPI is the income an SMSF earns from assets that are held to support retirement phase income streams, and is exempt from income tax. It is claimed in the SMSF annual return, when all assets are assessed at current market value.

"As we head into 2020, trustees should remember that the disregarded small fund asset status of a fund is not fixed; it can change each year," Dunn says.

The same test that members would have applied on 30 June 2019 must be repeated on 30 June 2020 to determine how the fund must claim ECPI in 2020-21. This could be different to the current method required for 2019-20.

"It's important to think about this now, as it may impact the strategies that are put in place for the 2020-21 income year, in particular around realising significant capital gains or losses," Dunn says.

She expects another change to the ECPI rules from 1 July 2020, on the back of the federal government’s proposed red-tape reduction measures from the 2019 Budget.

A likely change is that pension assets can no longer be deemed to be segregated. The release of draft legislation will shed more light on the detail. This will mean the strategies and methods used to claim ECPI will revert to those used before the last changes were introduced pre-1 July 2017.

"A fund by default will be unsegregated for ECPI, unless the trustee elects to employ a segregated asset strategy – which will mean the segregated method could be used to claim ECPI on segregated pension assets," Dunn says.

"That is, of course, unless the fund is solely in retirement phase where it will meet the definition of segregated pension assets, and if it does not have disregarded small fund assets it can claim income under the segregated method."

A second part of these changes proposed in the 2019 Budget was waiving the requirement for an actuarial certificate where funds are caught by the disregarded small fund asset rules.
This means members can continue to claim a 100 per cent exemption, without needing to pay for an actuarial certificate.

Standing up for SMSF trustees

SMSF Association chief executive John Maroney also acknowledges the introduction of the $1.6 million transfer balance cap as the biggest change in retirement income for many years.

But his organisation is this year more focused on working with politicians to protect the interests of SMSF trustees.

Labor’s proposal to scrap refundable franking credits was among the most contentious issues ahead of the election in May last year.

"This could have had a severely negative impact on the SMSF sector. We're currently talking with the Labor party about some negative policies that we're hoping they'll walk away from".

The federal Opposition leader Anthony Albanese earlier this month announced it wouldn't take the same policy on franking credits to the next election and would leave specific policy comments until closer to the poll.

Maroney and his team are fine-tuning their contribution to the Retirement Income Review ahead of the deadline next month.

Maroney expects the issue of SMSF member numbers – which would only affect a small cohort who may want to add additional family members to their fund – will be addressed in parliament "in the near future".

"We are also still waiting to learn what the government will do with some of its proposals in the 2018 budget, including the increase in the maximum number of members from four to six and the proposal to shift the frequency of audits of some SMSFs from annual to three-yearly," he says.

But he is less hopeful of the changes to audit requirements being introduced, given opposition from various groups including his own.

Increasing membership numbers from four to six would affect few SMSFs but may have implications for estate planning.

"Our message is that the past 30 years of regulation have focused on the accumulation phase, but it's now focused on drawdown," Maroney says.

Another key concern is financial advice, which Maroney says must put the customer first.
"We believe that a more customer-centric advice framework is needed, where consumers can receive trusted and professional advice.

"Consumers really want affordable advice, delivered with the help of sophisticated technology, via a system of open superannuation similar to the open banking environment with clear consumer data rights."

Maroney says this will require a rebuilding of trust from all in the financial system and a focus on what is in the best interests of the consumer "in reality rather than in theory".