By Mark Ellem
When it comes to the super reforms, most of the discussion to date has centred on the $1.6 million transfer balance cap and CGT relief. But as things start to settle a little, what is becoming clearer is that there are many other factors and compliance issues to consider.
Here’re some, that in our view, are also important.
Whilst the lodgement timeframe for SMSFs has been settled, the question to ask yourself, as a practitioner, is whether the deferral lodgement program for SMSFs is in the client’s best interest?
Where a person exceeds their transfer balance cap (TBC), early lodgement of the transfer balance account report (TBAR) will limit the amount of notional earnings calculated, which is subject to tax at 15% or 30%, depending upon whether it is a person’s first or subsequent breach of their TBC. It could also be as simple as identifying the excess soon after it occurs and arranging for the relevant partial commutation of the pension either back to accumulation or as a lump sum out of the fund. But the question is, how quickly would this excess be identified if the fund is being processed on an annual, rather than a daily, basis?
Deferred reporting could also lead to an incorrect excess TBC determination being issued by the ATO, that would need to be dealt with, at the client’s cost and discomfort. This is likely to occur when transferring a pension from an SMSF to an APRA regulated fund, who are required to lodge TBARs 10 business days after the end of the month.
Post 1 July 2017, identifying transition to retirement income stream (TRIS) members who have retired or are approaching retirement is critically important. The same applies for members who may be approaching age 65 regardless of their employment status. From 1 July 2017, assets supporting the payment of a TRIS are no longer exempt from the 15% earnings tax. However, investment income derived from assets supporting the payment of a TRIS to a member are still eligible for this tax exemption if the member notifies the trustees that they have satisfied a full condition of release under the superannuation laws (note the requirement to notify the trustee doesn’t apply if the member is turning age 65, as this is an automatic condition of release under the superannuation rules).
This tax exemption only applies from the time the TRIS member turns age 65, or if under age 65, from the time the trustees are notified that the member has satisfied a condition of release. To ensure their fund’s entitlement to exempt current pension income is maximised, TRIS members who are under age 65 should formally notify the trustees that they have satisfied a full condition of release as soon as possible after this event occurs. It’s also important for SMSF trustees to correctly record the TRIS as a ‘TRIS in retirement phase’ from that time on to avoid any confusion or errors being made when the fund accountant or actuary is calculating the fund’s entitlement to exempt current pension income.
It’s also worth noting that on the day a TRIS member turns 65, or on the day they notify the trustees that they have satisfied a full condition of release, the member’s TRIS account balance will be assessed against their TBC. So it’s important to ensure this does not result in the member exceeding their TBC. This means, in some situations, you may need to take action before the member notifies the trustees that they have satisfied a condition of release to reduce their TRIS balance.
If the TRIS client is about to turn 65 you may need to arrange for amounts in excess of the member’s TBC to be transferred back to the accumulation phase on or before they reach age 65, or cash out the excess balance if it’s an unrestricted non-preserved benefit. Alternatively, the excess amount could be withdrawn from the fund on their 65th birthday.
To provide sufficient time for TRIS clients who are likely to have a balance in excess of their TBC to take appropriate action, planning for a full condition of release event should occur well before the anticipated event. If that’s not possible, and the TRIS client is under 65, consideration may need to be given to defer notifying the trustees that a full condition of release has been satisfied until action has been taken to avoid the excess pension balance situation.
Members affected by the introduction of the TBC will most likely have an accumulation account, as well as at least one pension account. Whilst the minimum pension factors have not changed, the quantum of minimum pension will have reduced, as it will be based on pension balances and not accumulation. For those members drawing more than the required minimum, consideration should be given to drawing the excess from their accumulation account, as this will assist with maximising the fund’s claim for exempt current pension income (ECPI). Many SMSFs will no longer be enjoying 100% tax free status and will be wanting to ensure that the maximum ECPI claim is achieved each year.
It is not uncommon for a surviving spouse to move their death benefit pension to another superannuation provider. But under the rules which existed prior to 1 July 2017, to avoid an adverse tax outcome, the surviving spouse had to wait until the expiration of the ‘death benefit period’ before affecting the transfer to the new superannuation fund.
Even after waiting for the ‘death benefit period’ to pass, once the death benefit pension had been transferred to the new fund and a new pension commenced, the new pension lost any link to being a death benefit pension. Consequently, if the surviving spouse was under age 60, the taxable component of the pension is assessable, but with no 15% tax offset which would have otherwise applied if the pension had not been transferred to the new fund.
From 1 July 2017, it is possible to roll over death benefit entitlements to other funds without having to wait for the expiration of the ‘death benefit period’. In effect, the death benefit period has been abolished. Once the amount has been rolled over it will continue to be recognised as a death benefit superannuation interest and must be used to commence an income stream from the recipient fund or cashed out as a lump sum. This allows a beneficiary to rollover a death benefit pension to a fund of their choice, including an SMSF and retain the concessional tax treatment associated with a superannuation income stream death benefit (i.e. tax offset equal to 15% of the taxable component for those under age 60 and tax-free status if the pension is commuted and paid out to the spouse as a lump sum benefit).
However, in order to ensure this concessional tax treatment is maintained, it’s important that the receiving fund is correctly notified that the benefit transferred is in respect of a death benefit superannuation interest. This is also important because a death benefit superannuation interest, including pensions that revert on a member’s death to a reversionary beneficiary cannot be commuted back to the accumulation phase. If these types of transfers are not correctly identified or recorded by the SMSF administration system, there is a higher risk of compliance breaches and incorrect tax outcomes occurring.
In the past it has only been necessary for SMSFs to register as a PAYG withholder if the fund was required to withhold tax from pension payments. This generally meant only SMSFs paying pensions to member under the age of 60 had to register as a PAYG withholder.
However, as a result of the super reforms and the introduction of the defined benefit income cap, where a member of the SMSF is receiving one or more of the following types of capped defined benefit pensions, the SMSF is required to register as a PAYG withholder regardless of the age of the pension member and regardless of whether the fund has an actual withholding liability:
To enable the SMSF to calculate the correct amount of tax to withhold, an SMSF member who is receiving one of the above types of pensions, is also required to provide their fund with a tax file number (TFN) declaration.
As mentioned earlier, many SMSF members who previously only had a pension account in their fund may now, by virtue of the introduction of the $1.6 million transfer balance cap, also have an accumulation account in their fund. From an estate planning perspective, unless these members have taken action to protect this accumulation account, in the event of their death, it could end up in the hands of unintended beneficiaries. This is particularly relevant for clients who have a reversionary pension nomination in place because prior to the introduction of the transfer balance cap they had the peace of mind knowing that in the event of death their benefit would automatically revert to their spouse.
Clients who have had their estate plans disrupted in this way may need to consider putting in place a binding death benefit nomination for their accumulation balance. Care needs to be taken to ensure the fund’s trust deed allows for binding death benefit nominations and that any process of putting in place such a s nomination, if stipulated in the deed, is carefully followed.
The super reforms are changing the approach to SMSF administration and compliance, from the traditional annual in arears method, to a more progressive, even daily, method, utilising technology to drive efficiency, growth and profitability. SMSF administration will require a more proactive approach, not only to meet regulatory and reporting requirements, but to simply meet client demands and expectations.