By Peter Burgess
It’s been a big week for the SMSF sector. Not only was the final piece of legislation put in place to give full effect to the government’s superannuation reform package but, less than 48 hours later, the government announced plans to make technical changes to some aspects of the legislation.
Some of the changes slated were expected and welcomed, for example the minor and very technical changes to the way the capital gains tax relief rules will work to ensure they work as intended.
Another expected and welcomed change is the proposed amendment to the rules to ensure a transition to retirement income stream (TRIS) which has automatically been converted to an account based pension because you have satisfied a full condition of release, will no longer be classified as a TRIS.
It is common industry practice for a TRIS to be automatically converted to an account based pension (that is an account based pension that is not classified as a TRIS) once you have satisfied a full condition of release (for example reaching age 65 or retiring from the workforce if you are under 65 but have reached your preservation age).
But, it may come as a surprise to many, that a TRIS does not, at least in a technical sense, cease to be a TRIS, simply because you have satisfied a full condition of release. The pension continues to be a TRIS unless the pension is stopped and a new account based pension is commenced.
Prior to 1 July 2017, whether a pension is still considered a TRIS has little legislative or taxation significance. The assets supporting the payment of a TRIS are exempt from income tax in the same manner the assets supporting the payment of an account based pension are exempt from tax. The only real difference is that pension payments payable on an annual basis from a TRIS cannot exceed 10 per cent of the pension account balance unless the member has satisfied a full condition of release.
However, from 1 July 2017, the assets supporting the payment of a TRIS will no longer be exempt from income tax and will be subject to tax in the same manner as assets held in the accumulation phase of super.
So without this legislative change many individuals, who may not even be aware that their pension is still a TRIS, would no longer be entitled to an earnings tax exemption on the asset supporting that TRIS post 30 June 2017.
What was unexpected in this week’s slated changes announced by the government is the proposed change to the calculation of an individual’s ‘total super balance’ where there is a limited recourse borrowing arrangement (LRBA) in place. The proposed amendment will count the outstanding balance of a LRBA each year towards the member’s annual total super balance.
So if a member has a super balance of $1 million at 30 June and they have an LRBA in place with an outstanding balance of say $600,000 at 30 June, their non-concessional contributions cap will be zero for the next income year.
It appears this change is being made to overcome situations where an SMSF member withdraws a lump sum amount from their fund and then lends back the money to the SMSF to purchase an asset through a LRBA – and in the process circumventing the contribution caps by allowing these individuals to keep their net balance below the total super balance threshold.
What’s not clear at this stage is how the outstanding LRBA balance would be allocated to a member’s total super balance in situations where there is more than one member in the fund.
It is also proposed that a change will be made to the transfer balance credit provisions so that where a member has a transfer balance account, the amount of the repayment of the principal and interest of an LRBA will appear as a credit in the member’s transfer balance account.
Again it’s unclear at this stage how this would work in situations where there are multiple members in the SMSF.
The government intends to legislate these changes in the winter sittings to ensure they are enacted by 1 July 2017. If time allows, draft legislation will be released for consultation.
