TAX Alert – The new super law – SMSFs and what you need to do before 1 July

25 May 2017

Publications

A lot has been said about what needs to be done before 1 July 2017 to deal with the new changes to the super law.  The purpose of this article is to provide our view on what should be done before 1 July 2017.  It focuses on self managed superannuation funds (SMSFs).  This article is in broad terms only and does not deal with all the relevant issues.

WHAT WE CONSIDER IS IMPORTANT TO DO BEFORE 1 JULY 2017

Complying with the $1.6m transfer balance cap

If a super fund member is going to have one or more account based (including the old allocated) pensions with total account balances at 1 July 2017 that exceed $1.6m, then some part of the pension(s) should be commuted before 1 July 2017.  This will mean the total of such pension account balance(s) will not exceed $1.6m.  (Under transitional rules, the total of such pension account balance(s) could be $1.7m up to 31 December 2017 if certain conditions are satisfied.)

The consequences of exceeding the cap will be avoided if the commutation occurs.  These consequences are excess transfer balance tax, and an excess transfer balance determination and commutation authority from the ATO.

With SMSFs, as it will generally not be possible to know the exact account balances at 30 June 2017, the commutation process and documents should comply with the ATO’s guidelines in Practical Compliance Guideline PCG 2017/5.  This includes, amongst other important aspects, complying with the terms of the pensions(s) and the super fund trust deed to implement any commutation.  It is likely pension(s) can generally be commuted without amending the trust deed, but both the pension terms and the trust deed need to be reviewed to determine what precisely needs to be done.

If someone is receiving a non-commutable pension, such as a market linked pension, special rules impact on the above.  Such non-commutable pensions cannot, and do not need to, be commuted to comply with the new law.

CGT transitional rules

If a super fund is exempt from tax using the segregated assets approach, and it wants to use the CGT transitional rules that will allow a ‘step up’ to market value of CGT assets, then the fund must, before 1 July 2017, take action so that the relevant asset ceases to be a ‘segregated current pension asset’.  This could involve commuting part of a pension, or making further contributions to the fund.  Something needs to be done, even if no member of the fund would have a pension account that would exceed $1.6m.

The law is proposed to be changed so that no specific action is required for a super fund that pays a transition to retirement pension, and the fund continues paying the pension at the start of 1 July 2017. However, no exemption will apply for fund earnings that support transition to retirement pensions after 30 June 2017.

Nothing in particular needs to be done for the CGT transitional relief if the fund is using the actuarial, proportionate method.

Non concessional contributions

 For anyone with more than $1.6m in super, this will likely be the last year in which they can make non concessional contributions.  Also, the maximum will reduce from $180,000 a year ($540,000 using the bring forward rule if the relevant criteria are satisfied) to $100,000 a year ($300,000 using the bring forward rule).  So this will be the last financial year in which certain people will be able to make non concessional contributions, or make such contributions to the level currently allowed.

Other action

Other action that could be considered prior to 1 July 2017 includes:

  • Selling assets that would not be eligible for the transitional CGT rules (eg assets acquired on or after 9 November 2016). However, you need to take into account the application of the general anti-avoidance provisions in Part IVA and the ATO’s views on ‘wash sales’.
  • Establishing a 2nd SMSF to assist with complying with the new law. However, you need to take into account the application of the general anti-avoidance provisions in Part IVA and the views already expressed by the ATO about the application of Part IVA to establishing a 2nd SMSF.
  • Reviewing lifetime, life expectancy and market linked pensions being paid by SMSFs and determining whether they should be restructured, and if so, restructuring them.
  • ‘Turning off’ transition to retirement pensions if they are no longer appropriate in view of a super fund no longer being entitled to tax exemptions in relation to such pensions after 30 June 2017. Consider, however, whether the pension should be ‘turned off’ after 30 June 2017 in view of the proposed changes to the CGT transitional rules for segregated assets.
  • Reviewing death benefit and reversionary pension nominations. The added flexibility of administering reversionary pensions may be preferred by fund members over binding death benefit nominations, to avoid, amongst other things, excess transfer balance tax possibly arising upon the death of a member (as discussed below).

WHAT WE CONSIDER DOES NOT GENERALLY NEED TO BE DONE BEFORE 1 JULY 2017, BUT COULD BE A GOOD IDEA TO DO AT SOME TIME

 Amending super fund trust deeds

 It is unlikely that many super fund trust deeds would need to be amended prior to 1 July 2017, in the sense that they would breach the super or tax law if they were not amended.  If a deed contained the rules of a pension that did not allow commutations, and a pension had to be commuted to comply with the $1.6m pension cap or the CGT transitional rules for segregated pension assets, then the deed would need to be amended.  But this would be rare.

Many if not most super fund trust deeds contain provisions that give the trustee the power to comply with the relevant tax and super law from time to time.  So it is unlikely that many deeds would need to be amended to comply with, for example, the new law in relation to excess transfer balance tax, and excess transfer balance determinations and commutation authorities.   However, there are some aspects of the new law that mean there would be good reasons to amend a deed, at least in relation to certain people receiving pensions.  For example:

  • You generally do not want to exceed the relevant pension cap, currently $1.6m. The deed could have specific provisions dealing with the cap not being exceeded for pensions that commence or continue after 30 June 2017.
  • Under proposed changes to the law, transition to retirement pensions will automatically become superannuation income streams ‘in the retirement phase’ on the recipient satisfying a condition of release such as retirement (as defined) or turning 65. At that point, the cap rules will be applied, but the fund’s adviser may not know that it happened.  It would generally be beneficial if the deed had automatic commutation provisions in relation to such pensions, if not commuting would have adverse tax consequences.
  • After 30 June it will generally be better for a person to withdraw moneys from their accumulation rather than pension account(s), and anything withdrawn from their pension account(s) above the minimum required to comply with the super law will be better as a commutation rather than a pension payment. This enables better use of the cap rules.  It would accordingly be beneficial if the deed had automatic payment provisions that dealt with where the payments come from, and what they are.

Many funds will not need these enhancements (eg funds with members who would never exceed the $1.6m pension transfer balance cap).  However, it will generally cost more to review a super fund deed, consider the members’ particular circumstances, and advise on whether or not the deed needs to be amended than to simply amend the deed.

Converting pensions to reversionary pensions

 Generally, it is better under the new law if pensions automatically revert to a spouse, even if the pension transfer balance cap would be exceeded.  This is because the spouse will have a year from the date of death of the person receiving the pension to sort out what needs to be done. The amount that will be taken into account for the surviving spouse will be the deceased’s pension account balance(s) at the time of death.  Automatically reversionary pensions also make it easier to comply with the minimum pension payment rules and the rules relating to tax exemptions for a super fund after the death of a person receiving a pension.

However, it is not strictly necessary to rush into converting pensions to reversionary pensions.  We consider that this should be done as part of an estate planning exercise, to make sure that all the relevant ramifications are properly considered.

Valuations

If a member is to have a pension account of $1.6m at 30 June, and/or the fund is going to use the CGT transitional rules, the assets of the fund will need to be valued.  This does not mean that a valuation needs to be obtained prior to 1 July.

Where the fund has assets such as real estate or units in private unit trusts, the trustee will need to consider how to appropriately value the assets taking into account the ATO’s guidelines on valuing super fund assets, which have been updated to deal with the new law.  The trustee should consider, in particular, when a valuation from a qualified valuer should be obtained.

OUR SERVICES

Our services in relation to commutations required to comply with the $1.6m transfer balance cap include reviewing super fund trust deeds and pension documents to advise on what needs to be done, and preparing all relevant documents.  Our fees depend upon what we are asked to do, and the number of super funds we work on for a particular adviser, and how different the deeds and pension terms are.  We can provide information on the likely fees.

Our fees for amending a super fund deed to deal with the new law are $530 a fund plus GST ($583 including GST).  We also give ‘bulk discounts’, depending on the number of super funds we work on for a particular adviser.  We can provide further information on any ‘bulk discount’ fees.

Our fees for any other work depend upon the work required.  We can provide estimates of fees for any other work.

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Written by:

Philip de Haan | Partner| +61 2 9020 5703 | pdehaan@tglaw.com.au

George Hodson | Partner | +61 8 8236 1397 | ghodson@tglaw.com.au