Two key elements of the 1 July ’17 super reforms are CGT relief and the transfer balance cap.
The ATO has released Law Companion Guideline LCG 2016/8 and LCG 2016/9, providing final guidance on:
While only minor adjustments have been made to the Law Companion Guides (LCGs) released for public comment in November last year, the final versions of the LCGs do provide some useful clarifications and additional insights which are summarised below.
The choice to apply for CGT relief is irrevocable and must be made on or before the day a trustee is required to lodge their fund’s 2016/17 income tax return. The final version of the LCG confirms that where the Commissioner has exercised his discretion to defer a fund’s lodgement day (for example, because of exceptional and unforeseen circumstances), the fund’s trustee would be required to make a choice to apply CGT relief on or before the deferred lodgement date.
Note: If the fund’s 2015/16 income tax return is lodged late, the due date for the fund’s 2016/17 income tax return will be 31 October 2017, so it is important to ensure both the 2015/16 and 2016/17 fund income tax returns are lodged on time or by the fund’s approved deferred lodgement date.
The final version confirms that if the fund is using the unsegregated method, the value of the interest supporting a TTR pension does not need to be transferred to the accumulation phase in order to be eligible for CGT relief.
However, in regard to segregated funds with TTR pensions, the LCG acknowledges that while technically some or all of its value should be transferred back to the accumulation phase on or before 30 June 2017, the CGT relief provisions are intended to apply in these situations. The LCG says the government is currently considering legislative options to clarify whether it is necessary for value to be transferred back to the accumulation phase in these situations.
The final version provides additional examples on how the CGT relief measures will work in situations where a fund holds multiple segregated current pension assets for a member with a combined market value exceeding $1.6 million. The LCG confirms that in a segregated fund it is not a condition of the relief rules that the total market value of the assets transferred to the accumulation pool are equal in value to the expected excess in a member’s transfer balance account on 1 July 2017. That is, it is possible to transfer one or more segregated current pension assets to a segregated accumulation pool, and claim CGT relief for those assets, even if the combined market value of the assets transferred exceeds the expected pension excess.
However, given the requirement that from 1 July 2017, an SMSF or SAF with one or more members in the retirement phase with a total super balance exceeding $1.6 million must use the unsegregated approach for tax purposes, these examples only appear relevant to situations where the fund wants to remain segregated for member investment purposes after 30 June 2017, or who decide to transfer current pension assets to the accumulation pool before 30 June 2017 and remain segregated until 30 June 2017.
The final version confirms that merely commencing a pension (including a TTR pension) in an unsegregated fund after 9 November 2016 would not be of concern to the ATO from a Part IVA perspective. However, a commutation of the pension shortly after its commencement is likely to be scrutinised more closely if the purpose of such action appeared consistent with obtaining a tax benefit.
In situations where an unsegregated fund elects to apply CGT relief but chooses not to defer any capital gain, the fund is deemed to have repurchased the CGT asset on 30 June 2017 (and not 1 July 2017 as referred to in the draft LCG).
Note: This means the acquisition date of the asset, and hence the start of the CGT discount period, is reset to 30 June 2017.
Compared to the draft LCG, the final version takes a more cautious approach to the transitional rule which applies to individuals who are over their transfer balance cap by less than $100,000 as at 1 July 2017. The draft LCG says individuals with pension balances approaching $1.7 million should carefully monitor their pension balance and ensure it doesn’t exceed $1.7 million as at 1 July 2017. The final LCG refers to $1.6 million as the relevant threshold.
While individuals will not be liable to pay excess transfer balance tax if they exceed the transfer balance cap by an amount equal to or less than $100,000, and they remove that excess by 31 December 2017, there may be other implications as a result of them exceeding the $1.6 million transfer balance cap.
For example, they will no longer be eligible for any proportional indexation should they ever commence a second pension after 1 July 2017, and if they don’t remove the excess by 31 December 2017 they will be liable to pay excess transfer balance tax.
Note: While not referred to in the final LCG, the Explanatory Memorandum says any breaches of the transfer balance cap committed prior to 1 July 2018 do not count as a ‘first strike’ when assessing the 30 per cent tax rate to apply to any subsequent transfer balance cap breaches. Under the legislation a tax rate of 30 per cent applies to additional excess transfer balance tax assessments the individual receives – as opposed to 15 per cent for the initial breach.
However, an assessment that applies to an excess transfer balance period beginning before 1 July 2018 does not count as an earlier assessment for the purposes of assessing subsequent breaches at the 30 per cent rate. So whilst an individual, who is eligible for the $100,000 transitional measure, may not be entitled to any future indexation of the cap, at least their excess pension balance won’t count for the purposes of determining the 30 tax rate to apply to any subsequent transfer balance cap breaches.
The final version confirms that in situations where a payment split is achieved by dividing income stream benefits, a credit equal to the full value of the super interest that supports the super income stream arises in the transfer balance account of the non-member spouse. However, each spouse will receive a debit equal to the other spouse’s respective proportional entitlement to the super income stream benefits payable from the super income stream.
The final version provides further confirmation that a reversionary pension must ‘automatically revert’ in order to be eligible for the 12-month grace period.
In other words, if the trustees have any discretion over how the death benefit can be paid, and they ultimately decide to pay the benefit as a death benefit pension, a credit will appear in the recipient’s transfer balance account on the day the pension commences and the credit value will be the value of the pension at that time.
If the pension automatically reverts, the credit only appears in the recipient’s transfer balance account 12 months after the date of death and the value of the credit is based on the value of the pension as at the date of death.
To provide you with further guidance on the CGT relief rules we have prepared CGT relief decision trees. These outline the various member and fund decisions that need to be addressed when determining your client’s eligibility to claim CGT relief.
Attend our CGT relief masterclass for a comprehensive walk-through of the decision trees.
While not referred to in the draft or final LCG, we understand the ATO will recognise, for the purposes of assisting members to comply with the $1.6 million transfer balance cap, a pension commutation request received by the trustees prior to the commutation amount being known. The ATO will shortly be releasing some principals and guidelines to assist the industry to formulate appropriate resolutions and commutation requests for this purpose.
Once these ATO guidelines have been released, SuperConcepts will issue a pension commutation request and trustee resolution template which meets the ATO requirements and can be used to assist members to comply with the $1.6 million transfer balance cap. It is expected this template will enable a member to instruct the trustees to process a pension commutation effective 30 June 2017 once the member’s excess pension balance and required commutation amount is known.
The ATO has released further guidance materials to assist you in understanding the super changes and how they apply to your clients. Each piece includes an explanation of the change, what needs to be done before 30 June 2017 and after, and also includes examples illustrating how the change applies to people in different situations. This information has been co-designed with a variety of industry representatives.
These ATO guidance materials provide you with information you can rely on and use in your own client communication materials. You may wish to review these guidance materials and, if appropriate, provide your clients with a copy. To access a Word version of the ATO material, click the following links.
ATO Guidance Note 01 - Transfer Balance Cap
