Super Reform in Practice - Knowledge Shop · Webinar 4: Pre and post 30 June SMSF administration...
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Super Reform in Practice Webinar 4: Pre and post 30 June SMSF administration March 2017
Transcript of Super Reform in Practice - Knowledge Shop · Webinar 4: Pre and post 30 June SMSF administration...
Web 4 Super Reform in Practice 1
Super Reform in Practice Webinar 4: Pre and post 30 June SMSF administration
March 2017
Web 4 Super Reform in Practice 2
Contents Slides ....................................................................................................................................................................... 4
Notes ..................................................................................................................................................................... 20
SMSF asset valuations ........................................................................................................................................... 20
General valuation principles ......................................................................................................................... 20
SIS Regulation 8.02B: Asset must be valued at market value ....................................................................... 21
Valuation issues moving forward ................................................................................................................. 22
Pension commencement & balances .................................................................................................................... 23
When is a transition retirement pension not a transition to retirement pension? .............................................. 23
Industry debate on TTR conversion .............................................................................................................. 24
Tracking member contributions & balances ......................................................................................................... 24
Other super funds? ....................................................................................................................................... 25
Payments above the minimum: pension or commutation? ................................................................................. 25
Commuting pensions to comply with the transfer balance cap?.......................................................................... 26
Maximising exempt current pension income ....................................................................................................... 27
Ways to maximise ECPI ................................................................................................................................. 27
SMSF trust deeds .................................................................................................................................................. 28
Additional information to come ............................................................................................................................ 29 The information contained herein is provided on the understanding that it neither represents nor is intended to be advice or that the authors or distributor is engaged in rendering legal or professional advice. Whilst every care has been taken in its preparation no person should act specifically on the basis of the material contained herein. If assistance is required, professional advice should be obtained. The material contained in the Super Reform in Practice Webinar Series should be used as a guide in conjunction with professional expertise and judgement. All responsibility for applications of the Super Reform in Practice Webinar Series and for the direct or indirect consequences of decisions based on the Super Reform in Practice Webinar Series rests with the user. Knowledge Shop Pty Ltd, directors and authors or any other person involved in the preparation and distribution of these slides, expressly disclaim all and any contractual, tortious or other form of liability to any person in respect of these notes and any consequences arising from its use by any person in reliance upon the whole or any part of the contents of these notes. Copyright © Knowledge Shop Pty Ltd March 2017 All rights reserved. No part of these slides should be reproduced or utilised in any form or by any means, electronic or mechanical, including photocopying, recording or by information storage or retrieval system, other than specified without written permission from Knowledge Shop Pty Ltd. Please direct any questions regarding the webinar to: Knowledge Shop Pty Ltd Level 2, 115 Pitt St, Sydney 2000 Tel: 1800 800 232
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Web 4 Super Reform in Practice 4
Slides
Super Reform in Practice 4:Pre and post 30 June SMSF administration
Garth McNally
Director | Hayes Knight
Introduction
• 1 July 2017 will come and go just like any other day
– Yes: There are some BIG changes coming in
– Yes: There are MANY clients that will need help preparing
– Yes: We will all be BUSY
• BUT… 1 July is just the start of the new reform
measures. They do not end on 1 July: It is only the
beginning!
• These changes may require a change in approach to
SMSF Administration
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What we will cover
• Asset Valuations
• Pension Commencement
• Transition to Retirement Pensions
• Pension Payment or Lump Sum?
• Commuting Pensions? Which one?
• Maximising Exempt Current Pension Income
• Trust Deeds
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Web 4 Super Reform in Practice 5
What we still need to find out
• Formal process to reduce members pension balance below $1.6m. Will requests & minutes suffice?
• What additional reporting obligations will be imposed?
– New labels in tax returns
– Break up of member balances between pension & accumulation
– Transaction amounts and dates of movements within the members transfer balance account?
– Details on the CGT election form
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Asset Valuations
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How do your clients manage valuations?
• Do they actually do anything?
• Do they rely upon you to do what needs to be done?
• Do they (or you) use professional valuation service providers?
• Every year? Every 3 years? Never!
• Have the SIS Regulation requirements been met? Reg. 8.02B
• Have you reviewed the ATO Valuation Guidelines for SMSF’s?
• Have you considered what the Auditing Standards (ASA 500)
and the AUASB (GS 009) require?
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Web 4 Super Reform in Practice 6
Valuation issues pre 1 July 2017
We suggest that proper valuations be carried out in the lead
up to 30 June. Why?
Transfer balance cap of $1.6m
Existing pensions: Are clients over this already without knowing?New pensions: What will be counted against the $1.6m cap?
Restriction on making further NCCs
Is the balance as at 30 June already above $1.6m?
Transitional CGT relief What is the value for the resetting of the cost base on assets? What evidence will be held?
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Valuation issues pre 1 July 2017
We suggest that proper valuations be carried out in the lead
up to 30 June. Why?
Transfer balance cap of $1.6M
Existing pensions: Are clients over this already without knowing?New pensions: What will be counted against the $1.6M cap?
Restriction on making further NCC’s
Is balance as at 30 June already above $1.6M?
Transitional CGT relief What is the value for the resetting of the cost base on assets?
Is there sufficient and appropriate evidence to show what has been done
and how the valuation has been arrived at?
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Are there any changes from 1 July 2017?
• Not necessarily a change to the valuation
requirements or rules – BUT more a change to
HOW and WHEN we will rely on these
valuations!
• Having up to date information will be even
more important!
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Web 4 Super Reform in Practice 7
Valuation issues post 1 July 2017
What about from 1 July 2017?
Transfer balance cap of $1.6m
Existing pensions: Are clients over this already without knowing?New pensions: What will be counted against the $1.6m cap?
Restriction on making further NCCs
Is balance as at 30 June already above $1.6m?
Carried forward unused CCs
Is balance already above $500k?
Death benefit / Reversionary pensions
What is the value of the pension to be assessed against the recipients $1.6m cap?
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Valuation issues post 1 July 2017
• What about from 1 July 2017?
Transfer balance cap of $1.6m
Existing pensions: Are clients over this already without knowing?New pensions: What will be counted against the $1.6M cap?
Restriction on making further NCC’s
Is balance as at 30 June already above $1.6M?
Carried forward unused CCs
Is balance already above $500K?
Death benefit / Reversionary pensions
What is the value of the pension to be assessed against the recipients $1.6m cap?
Again, is there sufficient and appropriate evidence to show what has been done
and how the valuation has been arrived at?
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Pension Commencement
& Balances
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Web 4 Super Reform in Practice 8
Pension commencement
• What does the SMSF Trust Deed require for a
pension to commence?
– Make sure that ALL requirements are met
• What does the deed say about using segregated
assets? Is this allowed? What process was required?
Has this process been followed?
– Particular focus area for 2017 financial year for CGT relief
provisions
– DO NOT BACK DATE PENSION DOCUMENTS
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Pension commencement
• How was the pension commencement
balance arrived at? How were the assets used
to commence the pension valued?
– Process?
• Will any questions be raised around the
process and the application under the $1.6m
cap?
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When is a TTR no longer a TTR?
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Web 4 Super Reform in Practice 9
Key points
• TTR’s are not caught under the $1.6m transfer
balance cap
• BUT… fund earnings on TTRs post 1 July 2017 are no
longer tax exempt
• Review the SMSF trust deed to see:
– Are TTR’s allowed
– Any specific rules around TTRs
– When does the TTR become a standard account based
pension and what process is required?
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Conversion of a TTR?
• Current industry debate
• Awaiting Regulator comment on this – what process
do they expect to see?
• What are our concerns?
– Does the TTR need to be commuted (ceased) and then a
new pension commenced?
– Can a TTR “auto-convert” to a standard account based
pension when a further condition of release is met (age 65,
retirement etc.)
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Conversion of a TTR?
• What are our concerns?
– What about clients who were in a TTR at some
stage and we have since “converted” these to
standard account based pensions?
• Did we carry this out appropriately?
• Or, if not, is the pension still a TTR?
• Will the earnings be exempt from 1 July 2017?
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Web 4 Super Reform in Practice 10
Conversion of a TTR?
• What are our concerns?
– Will trust deed and pension document wording be
enough?
– What if the trust deed or pension documents
contain “auto-conversion” clauses where a new
condition of release is met & the TTR balance is
above $1.6m at that time? Will this create an
excess transfer balance account immediately?
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Tracking member contributions
& balances
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Record keeping - Contributions
• Having accurate member contribution data will be
important
• The ATO may have records but how accurate are they
likely to be?
– Anyone remember the RBL days?
• Having your own records will assist in managing
errors
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Web 4 Super Reform in Practice 11
Record keeping - Contributions
• Not just contributions to the SMSF! All funds
• Clients often have more than one fund
– Held for insurance purposes: Any “deemed” contributions?
– Some SMSF insurance policies are actually held in separate
policies held inside other super funds – is there a balance?
– Older work place super funds?
– Defined benefit pensions?
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Record keeping - Pensions
• Again, concise records of pension commencements will be important
• Dates, balances, transfer balance account records etc.
• Commutations (partial of full) – debit against transfer balance account: Date & Amount
• Date death benefits commence to be paid as a pension and their balance
• Balance of reversionary pensions commenced
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Live data
• The use of SMSF specific software may assist
• Real life, up to date balances can be viewed
– Data only as good as what goes in and data feeds
provided!
• Can assist when giving advice on pension balances
and accumulation balances
• If you still use excel spreadsheets, things may get
harder!
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Web 4 Super Reform in Practice 12
Payments above the minimum:
Pension or Commutation?
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Accessing benefits
• What if the minimum pension payment is not
sufficient for the client?
– Do they take extra pension payments?
– Do they take lump sums from accumulation?
– Do they take a commutation from the pension?
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Accessing benefits
• Commutations from a pension (partial or full) will
result in a debit to the members transfer balance
account
• This could mean client could purchase (commence)
another pension at a later stage
– However, pension payments do not result in debits to the
transfer balance account
– Pension payments above the minimum will not reduce the
members transfer balance account
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Web 4 Super Reform in Practice 13
Review
• Client’s age
– If over 60, pensions or lump sums are tax free
– If under 60: Are the tax components in pension or
accumulation different? Any tax benefit available to the
client?
– If the client is getting ‘older’ which interest should be
reduced for estate planning purposes (higher taxable %
interest)?
• Who will receive the death benefit?
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Commuting pensions to comply
with the Transfer Balance Cap?
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Clients with multiple pensions?
• Separate pensions may have been maintained for estate planning purposes
– Different tax components?
– Different start dates (Centrelink etc.)?
• Which pension should be stopped?
• Is there a standard approach:
– Should we hold taxable or tax free benefits in pension?
– Should we hold taxable or tax free benefits in accumulation?
• We don’t think there is a one size fits all approach.
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Considerations
Issue Consideration
Earnings Accumulation phase: Allocated to taxable componentPension phase: Allocated on proportionate basis
Could tax free component in accumulation phase be eroded with earnings being allocated to taxable component?
Could tax free component in pension phase increase with earnings where the pension has a high tax free %?
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Considerations
Issue Consideration
Who is the Death benefit recipient?
If a tax dependent (spouse, dependent child etc.) they will receive all benefits tax free when paid as a lump sum, or tax free pension where deceased (or recipient is over 60.
If a non tax dependent, tax payable on lump sum taxable component (+/- 15%).
If pension is likely to be exhausted, then should tax-free be held on accumulation side?
If accumulation likely to be exhausted and passing to non tax dependents, then should tax-free be held on pension side?
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Considerations
Issue Consideration
Age of member How long is the pension likely to be in existence?
Will the accumulation account be fully utilised? If accumulation account holds high taxable component % and is going to be spent, then these payments to member are tax free when over 60 anyway!
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Web 4 Super Reform in Practice 15
Planning
• Why not put a spreadsheet together with life
expectancy, expected draw downs and tax
components
• Real life client scenarios
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Restriction on using segregated
approach from 1 July 2017
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New restriction
• SMSFs / SAFs can no longer use segregated asset approach from 1 July 2017 for tax purposes where:
– At least 1 member is in retirement phase; and
– At 30 June of PRIOR financial year one member in the fund:
• Has a super balance (in all funds) above $1.6m*
• That member is taking a pension (from any fund)
• Not relevant for TTRs
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Web 4 Super Reform in Practice 16
Maximising exempt current pension income
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The issue is…
• Some clients may be forced to hold an accumulation
interest post 1 July
• ECPI is based on the value of pension interests in the
fund vs. the total fund value worked out over the
year
– The higher the pension balance the better
– The longer the pensions are in place the better
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Some thoughts…
Suggestion Reason
• Contributions be made late in the year
• Accumulation balance is then lower for longer
• Pension payments made later in the year
• Pension balance is then higher for longer
• Commence pensions earlier in year
• Pension balance is higher for longer.• Delay pension payments till late in year
• Access accumulation benefits if allowed & earlier in year
• Pension balance remains higher & for longer
• Accumulation balance remains lower & for longer
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Web 4 Super Reform in Practice 17
Other considerations
• Can income be brought forward into the
current financial year where ECPI may be
higher (or even 100%)?
– Rent?
– Term deposits maturing soon? Consider shorter
term for re-investment so income falls in this year
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Other considerations
• Large expenses for SMSF? Rental property
repairs / renovations etc.?
– Delay until 1 July 2017 for ECPI outcomes
– Carried out in 2017 FY if $1.6m is an issue?
Be careful with tax avoidance schemes
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Trust Deeds: Time to update?
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Web 4 Super Reform in Practice 18
Take care
• Will new Trust Deed actually be better than
what is already in place?
• Are there clauses in the current deed that
have been added for client specific purposes?
Will these clauses be carried over to the new
deed?
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Considerations
• Adding reversionary nominations to existing pensions without commuting – does the deed allow?
• Can different member accounts (interests) be dealt with separately for death benefit purposes?
• Can a death benefit be rolled over? Does the deed allow death benefits to be rolled in?
• What does the deed allow in regards to segregation – for investment purposes etc.? Are the clauses different or linked to those for tax purposes?
• Conversion of a TTR to a standard account based pension
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Considerations
• Commutations of existing pensions – what is allowed,
what process is required?
• Acceptance (rejection) of contributions where caps have
already been reached?
• Death benefit nominations – are they allowed? What
takes precedence, a DBN or a Reversionary Pension?
• Reversionary pensions – are they automatic? No trustee
discretion?
• Ability to use enduring powers of attorney
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Web 4 Super Reform in Practice 19
Estate Planning
• Many existing arrangements will need to be revisited
– Reversionary pensions: The amount held in the pension
could be lower than what it was ($1.6m cap). Is this still
appropriate.
– Death benefit nominations for new accumulation interests
that have not been in existence before. How will these be
dealt with?
– Payments to the members estate may now be greater than
what was initially planned. Is this appropriate?
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Reform has changed the game plan. Master the strategies
for the new environment.
Per 17 May | Bri 19 May | Syd 26 May | Mel 2 Jun
Web 4 Super Reform in Practice 20
Notes
In this fourth session of our Super Reform in Practice Web Series, we look at the issues that need to be
considered in the overall management and administration of our client’s Self Managed Super Funds.
We will cover:
Current and future year valuation issues – when independent asset valuations will be required or
suggested
Pension start dates and balances
Tracking contributions and record keeping requirements
Maximising exempt current pension income where a client needs to maintain an accumulation
account
The importance of accurate balance transfer account data
SMSF specific software and real time data
SMSF asset valuations
Although there does not seem to be any new, specific requirements for the valuation of SMSF assets in
relation to the new super reform rules, it will certainly be an area of focus for both the ATO and SMSF
auditors.
With the introduction of the $1.6m transfer balance cap, the valuation process used for assets inside an
SMSF will surely be scrutinised. We suggest that trustees should at least consider obtaining up to date
valuations on assets as 30 June approaches. This would be particularly relevant for clients that have
balances close to the $1.6m transfer balance cap and for clients looking to use the transitional CGT relief
measures when resetting the cost base on assets.
Determining the market value for assets for the CGT reset rules will be important and your clients may
need to be able to demonstrate how these values have been arrived at.
General valuation principles
There are existing valuation requirements set out in SIS Regulation 8.02B:
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SIS Regulation 8.02B: Asset must be valued at market value
For subsection 35B(2) of the Act, for the year of income 2012-13 and any later year of income, when
preparing accounts and statements required by subsection 35B(1) of the Act, an asset must be valued at
its market value.
Note: Market value is defined in subsection 10(1) of the Act.
"Market value ", in relation to an asset, means the amount that a willing buyer of the asset could
reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were
made:
(a) That the buyer and the seller dealt with each other at arm's length in relation to the sale;
(b) That the sale occurred after proper marketing of the asset;
(c) That the buyer and the seller acted knowledgeably and prudentially in relation to the sale.
The ATO also provides further information and guidance on SMSF asset valuations in their guide:
“Valuation guidelines for Self Managed Super Funds”.
Although the above SIS Regulation and ATO Guidance do not specifically require the use of independent
and professional valuations in all cases, we would suggest that with the upcoming changes regarding the
$1.6m transfer balance cap and the CGT relief rules, it would seem prudent that the trustees look to do
this.
Further to this, SMSF auditors will need to consider the requirements set out in the Auditing Standard ASA
500: Audit Evidence.
This auditing standard requires the funds auditor to obtain “sufficient appropriate audit evidence to draw
reasonable conclusions”. The funds auditor would therefore want to know how the Trustees arrived at
the valuation outcome, what process was entered into and what assumptions were made in this process.
Further to this, Guidance Statement GS 009: Auditing of Self Managed Superannuation Funds, the
Auditing and Assurance Standards Board guide for SMSF auditors, sets out further details on the auditor’s
role in reviewing valuations. These details include the following:
“The auditor evaluates whether the valuation method employed is consistent with the financial
reporting framework adopted and the policies described in the accounting policy notes, whether
the method of measurement is appropriate in the circumstances and that the method adopted
has been applied consistently.
It is not the role of the auditor to value the assets. The auditor assesses the valuation method and
evaluates the valuation for accuracy and reasonableness. The auditor assesses the risks of
material misstatement of the asset values and designs and performs audit procedures in response
to the assessed risks. For example, the valuation of business real property operated by the
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trustees is likely to be high risk as the valuation method may be very subjective, where as the
valuation of listed securities will generally be low risk as publicly quoted prices are available. The
nature, timing and extent of audit procedures will vary significantly as a result of the assessed
risks and the complexity of the valuation method adopted. Substantive procedures may include:
(a) Testing the trustees’ significant assumptions, the valuation model and the underlying data, such as future cash flows and discount rates used in valuing business real property;
(b) Developing independent fair value estimates to corroborate the appropriateness of the valuation, such as obtaining an agent’s property valuation for comparison to the trustees’ valuation; or
(c) Considering the effect of subsequent events, such as the subsequent sale of an asset, on the valuation and disclosures.”
In discussions with many accounting firms over the years, it has become apparent that many firms take a
“3 year” approach to valuations. That is, formal valuations of assets are carried out every 3 years with
Trustee valuations used in between.
If this is the approach you are taking then we assume that for each year of Trustee valuation that there is
sufficient evidence to show how the Trustees have in fact arrived at their position. We would also suggest
that even if the current 2016 / 2017 year is not one of the years where formal valuations are obtained,
that the Trustees consider doing so anyway.
Valuation issues moving forward
There has been a lot of coverage on the changes coming into effect on 1 July 2017, and rightly so. These
are the most significant changes to superannuation over the last 10 years. But what we also need to keep
in mind is the effect that these changes will have each and every year from July 2017 and the valuation
area is one that you will need to be on top of.
We have covered the valuation issues around the $1.6m transfer balance cap above, but also note that
this will be relevant every time a client looks to commence a new pension from 1 July 2017. Your clients
will need to be aware of the value of the assets in their fund to ensure that the members transfer balance
account remains with the cap.
There are further valuation considerations when you look at other changes under the super reform
measures, including:
Restriction on making non-concessional contributions where the clients total superannuation
balance is above $1.6m.
Restriction on carrying forward unused concessional contributions (from 1 July 2018) when the
client’s total super balance exceeds $500,000.
Moving assets from being segregated current pension assets to being segregated non-current
pension assets pre 30 June 2017 and also post 30 June 2017.
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Each of the above issues or events may require the client to have accurate valuation data maintained for
the fund’s assets.
Pension commencement & balances
Another area that will be under close scrutiny over the upcoming 12 months will be pension
commencement dates and balances. The ATO have already identified this as another key risk area.
We suggest that the regulator will also want to see appropriate evidence as to the values arrived at for
the pension commencement; how the trustees have arrived at this position.
Keep in mind that the value of member pensions can grow over time and this growth will not cause an
issue for the client under the cap. It is only the “purchase prices” of the pension that will get caught, not
earnings (or losses!). Some clients may find it tempting to use a lower value for an asset on
commencement of the pension so the $1.6m is complied with but then use the real value in future years
where the “growth” is not assessed against the cap.
Sufficient evidence will also be needed to show the commencement date of pensions. This is of course
linked to the above valuation issues. Keep in mind that a pension commencement date will be based on
the trust deed rules. What does the deed require? What does this set out in regards to pension start
dates?
You should also familiarise yourself with the ATO tax ruling TR 2013/5: When an income commences and
ceases.
As obvious as this may sound, DO NOT BACKDATE pension commencement documentation. We have
seen a number of articles on this, especially around the 9 November 2016 assessment date for CGT relief
and where claims may be made that “the fund’s assets were segregated at that time; we just hadn’t put in
place the appropriate documentation yet!”
Be careful. Be very careful!
When is a transition retirement pension not a transition to
retirement pension?
When does a transition to retirement (TTR) pension become a standard account based pension? What
process is required? Will it happen automatically and therefore cause an issue under the members $1.6m
transfer balance account immediately?
Web 4 Super Reform in Practice 24
Keep in mind that a TTR is not assessed against the members $1.6m transfer balance account. However,
once the TTR is changed to a standard account based pension it will get caught. It would therefore be a
good idea to review when this may happen.
Industry debate on TTR conversion
There is current debate happening within the super industry on this at the moment. The main concerns
being discussed include:
What are the regulators expectations for when a TTR changes to a standard account based pension?
Consider clients who may have had a TTR in the past but this has since been changed to a standard
account based pension. Was this done to the satisfaction of the ATO? If not, is that pension still a TTR
and therefore the earnings in the fund assessable?
Will this “conversion” happen automatically when the client meets a further condition of release such
as retirement or attaining age 65?
Will the existing TTR need to be commuted and then a new, standard account based pension need to
be commenced?
What if the SMSF trust deed provides rules or requirements that are not in line with the regulators
expectations?
Some trust deeds and pension documents may contain an auto-conversion clause so that when the
member meets a further condition of release such as attaining age 65 or retirement that their TTR
automatically becomes a standard account base pension. If this is accepted by the regulator then this
automatic conversion could cause the $1.6m transfer balance cap to be exceeded immediately. It may be
that specific trust deed wording or pension document wording could be used to stop this happening.
It would also be worth reviewing trust deeds to see what process is required for this conversion, as some
trust deeds may require that the TTR first be commuted and then a new pension commenced. This could
then cause an issue with blending of tax components in accumulation phase.
We are expecting further comments from the ATO on this issue.
Tracking member contributions & balances
It is always best practice to have clear and concise records relating to all client matters but when it comes
to super contributions, it is even more important.
From 1 July 2017, the tracking of contribution and pension balances will become more of an issue as you
will need to rely upon these records or data to provide correct and accurate to clients.
We feel that the use of SMSF specific software will assist in this process as some of the software providers
in this space offer up to date, “real life balance” information.
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The ATO has indicated that they will be able to provide similar information on contribution amounts and
transfer balance account records but we feel that where you have accurate data and records, the ATO
information will be used more as a “back up” or for confirmation purposes.
Other super funds?
Also keep in mind that some clients may have balances in other funds, held separate to their SMSF. In
some cases, these funds may even be receiving contributions.
Some of the arrangements we often see include:
Holding an insurance policy or benefit in another industry, retail or employer fund. In many cases
these separate funds receive contributions to keep the insurance running.
Some clients may have multiple super funds – funds established through older work
arrangements. This is of course, quite common.
Some clients may hold an interest in a defined benefit fund.
It would be prudent to ask your clients appropriate questions to establish if this may be relevant for them
and just as important, keep accurate written records of these conversations.
Payments above the minimum: pension or commutation?
The new rules around capping the purchase price of pensions does not restrict your clients from holding
more than $1.6m in superannuation. Any balance above the $1.6m can be maintained within the
accumulation phase of superannuation.
Access to these benefits in the accumulation phase will not change. So where the client has met a full
condition of release on these benefits (retirement, age 65 etc.) or where these benefits are unrestricted
non-preserved, the client can request a lump sum payment from their accumulation account, deed
permitting.
The taxing of these benefits in the hands of the individual will not change. So where the client is over age
60, these payments will still be tax-free.
If your clients need to access more than their minimum pension payment amount, you may need to assist
in determining the most appropriate way for this to be done. From which interest will they access this
additional amount?
Do they take additional pension payments above the minimum?
Do they request a partial commutation from their pension?
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Do they request a lump sum payment from their accumulation account?
There will not be any one solution that works for all your clients, but there may be some general
principles that could apply. We suggest that you keep in mind:
A commutation (partial or full) from a pension will result in a debit to the members transfer
balance account. This could allow the client to move other, additional money into a pension.
Whereas pension payments DO NOT result in a debit to the members transfer balance account.
What are the tax components of the members separate accounts (member interests)? Is there
any tax benefit to the client in accessing amounts from any of these accounts? This may be more
relevant for clients under age 60.
Who is, or may be, the recipient of any remaining balance in these separate member accounts? Is
there an estate planning benefit in reducing one particular account?
Commuting pensions to comply with the transfer balance
cap?
Some clients may currently hold separate pensions in their SMSF. For certain clients this could have been
carried out under an estate planning strategy.
Where clients have multiple pensions and the total pension balances are in excess of the $1.6m limit,
specific attention will need to be given as to which of these pension(s) should cease and which ones will
continue from 1 July 2017.
It may be that some of these pensions contain a high tax-free component. Remember that tax-free super
amounts will pass to non-dependent beneficiaries tax free, whereas death benefits that are made up of
taxable components and paid to non-dependents will usually be taxed at the recipients marginal rate or
17% (15% through an estate), whichever is lower.
This should of course be taken into consideration when determining which pension should continue and
which should cease.
Some other issues we believe you should consider include:
Earnings on assets in accumulation phase are added to the taxable component:
If the accumulation account is made up of a high tax-free component then the tax-free
component may slowly be eroded over time with earnings.
Earnings on assets in pension phase are added proportionately to the existing tax components:
If the pension phase is made up a high tax-free component then this may grow, as earnings will
be added to the tax-free component. HOWEVER, the client MUST also take pension payments
each year!
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Who will be the likely recipient of the member’s death benefit and will they be tax dependents
at that time?
If all recipients are tax dependents, then there may not necessarily be an estate planning issue.
However, keep in mind that a person(s) may be a tax dependent now but may not be at the time
of death.
How old is the member; that is, how long will the pension likely be in existence and how long
will the accumulation account exist for?
This could provide an insight into what balances may be left behind and what the tax components
could look like.
Is the client likely to access their accumulation benefits over time?
That way if the accumulation balance was to hold a higher taxable component it would not
matter from an estate planning perspective as the accumulation account may be reduced to nil
anyway and if the member is aged 60 or above, these benefits accessed over time would be tax
free anyway.
Although this may at first seem complicated, you could easily put together a spread sheet and do some
calculations on what the projected balances of each client’s account and tax components may be over
time.
Maximising exempt current pension income
With the new $1.6m transfer balance cap in place from 1 July 2017, many clients will need to now hold
part of their superannuation balance in the accumulation phase where tax will be payable on fund
earnings.
Add to this the further restriction on many SMSFs (and Small APRA funds) from using the segregated asset
approach from 1 July 2017, looking at ways to maximise the funds exempt current pension income (ECPI)
for the 2018 and later financial years will be an important part of the fund administration process.
A funds ECPI is essentially calculated based on the value of the fund in pension phase compared to the
fund’s total value over the financial year; so the higher the value of pensions (hence the lower the
accumulation balances) and the longer the pensions are in place during the year, the better the ECPI
outcome.
Ways to maximise ECPI
There are some simple ways to maximise the funds ECPI but in many cases, you will need to assist your
clients with these; that is, they will need to know and plan ahead.
Can contributions be delayed until later in the financial year? If this can be managed, it would mean that the funds accumulation balance is lower throughout the year.
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Can pension payments be made later in the financial year so, the average pension balances remain higher throughout the year?
Are clients eligible to access money from the accumulation phase first before the pension phase? That may assist in keeping average pension balances higher throughout the year. Obviously the clients overall financial and tax position needs to be considered before they start accessing money from the accumulation phase.
Can clients commence pensions early in the year so the fund is in pension phase longer? Again if the pension starts early in the year and pension payments are delayed until later in the year, then the funds ECPI should be higher.
Can income for the 2018 financial year be brought into account during the 2017 year? For some clients, those entirely in pension phase in 2017; the ECPI could be 100% in 2017. Of course you should not enter into tax avoidance schemes.
If re-investing Term Deposits now, consider a shorter term til maturity for any new Term Deposit so that all income will be picked up in the current 2017 financial year and taxed at the funds tax rate in 2017, which could be 0%.
If large expenses need to be incurred (property renovations / improvements), can these be delayed until 1 July 2017 for ECPI benefit or brought forward pre 1 July 2017 to manage any $1.6m transfer balance account issues.
SMSF trust deeds
There are a number of changes being introduced under the super reform measures that will require you
to review your clients trust deeds and see if they are still relevant or if updates may be required.
Before you go and change all your client’s trust deeds, it would be important to see what they actually
have now and if being replaced, what they will end up with! Is the new deed actually any better? Does it
allow what the old deed allowed? Does it meet the client’s needs moving forward?
Some of the things to look out for may include:
Client specific clauses that may have been inserted into the current deed that may be lost if the
deed is updated or replaced?
Can reversionary beneficiaries be added (or amended) to existing pensions without the need to
stop and restart the pension?
Can different member accounts be dealt with separately for death benefit purposes?
Does the deed allow death benefit pensions to be rolled out of the fund or rolled in to the fund?
What does the deed allow in regards to segregation for investment purposes? Is this a stand-
alone clause or is it part of the overall rules for tax segregation that may no longer be allowed
from 1 July 2017?
What does the deed require for converting TTRs to standard account based pensions?
Can existing pensions be commuted and what is the required process?
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Are there acceptance or rejection clauses for excess contributions?
What takes precedence – a death benefit nomination or a reversionary pension? Is this
appropriate for the client?
Additional information to come We feel that there are still a number of issues where further information should be provided by the
regulator. Some of these include:
What the “formal” process to reduce the member’s pension balances back below the $1.6m cap
will be. How will this be carried out as at 30 June 2017 when the member’s final balance may not
yet be determined? Will a member request and trustee minute in place as at 30 June (or earlier)
suffice?
What additional reporting obligations will be placed on trustees? New labels will be added to the
tax return to report on member accumulation and pension balances vs. a members overall
balance but what will we need to include?
Transactions and dates of transactions in and out of the member’s personal transfer balance
account – what do we need to report and how will this be reported?
