The final piece of legislation has been put in place to give full effect to the government’s superannuation reform package: The Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017 (the Regulations).
Interestingly the Regulations did not include the following measures which had previously been slated in the draft regulations released for public comment late last year. It appears these measures are now off the table.
The draft regulations proposed expanding the existing exceptions to commutation restrictions to permit the commutation of certain superannuation income streams that are done for the purposes of reducing or avoiding an excess transfer balance.
While it was not entirely clear how this measure would work, it appears the intention was to allow commutations to be made from pensions which are otherwise non-commutable if the commutation is made to reduce an individual’s excess transfer balance.
The government was concerned that this measure may have been used to fully commute defined benefit schemes which is contrary to the broader policy objective with the defined benefit regime.
The draft regulations proposed an amendment to the Income Tax Assessment Act 1997 to remove the need for superannuation funds to obtain an actuary’s certificate when using the proportionate method provided the pension concerned was either an allocated pension, market linked pension or account-based pension.
It appears the intention of this measure was to relieve SMSFs and Small APRA funds (SAFs) from the need to obtain an actuary’s certificate given more of these funds will be required to use the proportionate method in future.
From 1 July 2017, SMSF and SAFs will be prevented from using the segregated approach for tax purposes if any member of the fund has a total superannuation balance of more than $1.6 million and is in the pension phase. This change was intended to reduce the costs for SMSFs, however, the outcome of the consultation process suggested that costs of obtaining an actuary’s certificate have reduced, and that ceasing this obligation may increase costs as the calculation will continue to need to be done.
The Regulations essentially provide the detail and the consequential changes necessary to give full effect to super reforms measures. The measures, most relevant to the SMSF sector, which are covered by the Regulations are summarised below.
The types of superannuation benefits that can be rolled over has been expanded to include a superannuation death benefit. This change will enable a dependant to preserve the concessional tax treatment of a death benefit income stream that is transferred to another fund, and better aligns the tax treatment of those benefits with the cashing and roll-over rules in the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations).
The Regulations introduce an additional requirement that a death benefit that is cashed as one or more pensions must also be a superannuation income stream that is in the retirement phase. If a pension that is paid to a dependant ceases to be in the retirement phase, the interests supporting the income stream must be cashed out as a lump sum, or rolled-over and paid as a new pension that is in the retirement phase. If this does not occur, the pension will cease to satisfy the compulsory cashing rules.
The Regulations amend the rules so that payments made by way of commutation do not count towards the minimum draw-down requirements.
The Regulations remove the fund-capped contributions limits in the SIS Regulations. These limits have previously prevented a fund from receiving a non-concessional contribution that is greater than three times the amount of the non-concessional contributions cap (or the amount of the non-concessional cap if the individual is between 65 and 75).
However, the changes to the non-concessional contributions cap introduced by the Superannuation reforms, and in particular the eligibility conditions in respect of an individual’s total superannuation balance, now mean that it is no longer practical to set a single value for the fund-capped contribution limit. This is because an individual’s cap (including the bring forward cap) is no longer based solely on the individual’s age, but varies depending on the individual’s total superannuation balance.
The Regulations repeal the section of the Income Tax Assessment Regulations 1997 (ITAA 1997) that currently allows individuals to make an election not to treat a payment as a superannuation income stream benefit.
Whether a benefit paid from a superannuation fund is treated as a lump sum or a pension is significant because there are different tax consequences for each.
From a practical perspective, this change means individuals in a transition to retirement income stream (TRIS), will from 1 July 2017, only be permitted to receive a superannuation income stream benefit from their TRIS. Commutations from an account based pension will still be permitted and taxed as a lump sum.
The Regulations amend the ITAA 1997 to remove items that became redundant following the repeal of the anti-detriment income tax deduction by the superannuation reforms passed into law late last year.
