Tracey Scotchbrook, SMSF Specialist Advisor and Director of Superology, discusses the superannuation changes which came into effect on 1 July 2017. Tracey will present a seminar and interactive workshop on Pension Planning: The Long and Short Run, at the 5th Annual Small Business Tax Essentials and SMSFs: Risks and Opportunities Conference on 11 June.
The superannuation changes which came into effect on 1 July 2017 have added a layer of complexity that needs to be carefully considered and contemplated. Buried within this complexity is a very real latent risk for advisors or practitioners. It is therefore essential that these issues are brought to clients attention and actively discussed and addressed when commencing a new pension or reviewing a client’s pension strategy.
There are many aspects of superannuation pensions that remain unchanged in a post 30 June 2017 world. So what hasn’t changed?
- Preservation age
- Conditions of release
- Definition of retirement
- Income tax treatment of pensions in the hands of the pension recipient
- Types of pensions available: Account based pensions, Transition to retirement pensions continuing
- Calculation of minimum pensions and in the case of transition to retirement pensions maximum pension amounts
- The need to review and adhere to the Fund Deed rules
- Cashflow requirements of the member
- Liquidity requirements of the fund
- Estate planning review and consideration – How does the new pension fit into the current estate plan? Should the pension be reversionary or not? Does the estate plan need to be updated?
By contrast, what has changed?
- Loss of ECPI for transition to retirement pensions
- Introduction of transfer balance cap ($1.6m) (“TBC”) and transfer balance account (“TBA”), which limit the amount of capital that can be used to commence a tax free retirement phase pension
- Changes to ECPI calculations. Restrictions apply on the use of segregated fund method for ECPI calculation for ‘disregarded small fund assets’ (ITAA97 295-387)
- Transfer balance account reporting (“TBAR”) – either quarterly or annually
- Introduction of the concept of a transition to retirement pension in retirement phase
With that in mind, what are some of the things practitioners need to consider when advising their clients?
Where amounts in excess of the minimum pension are withdrawn, are these treated as lump sum commutations? For couples, from which member do you allocate the commutation? Remember that commutations will be a debit to the member’s TBA.
- Is one member more likely to receive a death benefit?
- What are the ages and/or health status of the members?
Is a reversionary pension going to deliver the best outcome?
- Will the surviving spouse exceed their TBC? Excess amounts will need to be withdrawn or rolled back into accumulation.
- Will the fund have sufficient proceeds to payout lump sum death benefits where the deceased member’s balance
- What are the costs and administration requirements of complying with the TBAR
The concept of the $1.6m transfer balance cap is well understood. However the long term impacts of the TBC particularly for the impacts on estate planning are not necessarily as well understood. It is not just those clients who individually have $1.6m or more in superannuation balances. Consideration must also be given to those who individually have less than $1.6m in superannuation but when combined will exceed $1.6m.
The flow on consequences in these types of scenarios can result in the
- Balances from member’s pension accounts rolling back into accumulation in order to receive a death benefit pension from their spouse
- Where the deceased member’s balance exceeds $1.6m, the excess amount must be paid out as a lump sum and can no longer be retained in superannuation as a death benefit pension
- Capital gains tax consequences depending on the timing of the sale of assets due to funds who meet the definition of a disregarded small fund assets unable to segregate for income tax purposes.
- Timing of reporting of death benefit pensions for TBAR. Although the amount does not count towards a member’s transfer balance account until 12 months after the date of death, the value of the reversionary pension must be reported for the reporting period applicable for the date of death. For example a pension member dies on 25 June 2019, if required to report quarterly, the value of the reversionary pension must be reported for the beneficiary by 28 July 2019. Earlier TBAR reporting may be necessary to avoid excess TBA amounts
Transfer balance cap means that for many the ability to retain superannuation proceeds within the superannuation environment on the death of a spouse is no longer necessarily possible.
Method of calculating ECPI
- Inability to segregate for funds with disregarded small fund assets
Commutations – where amounts over the min pension payment amount do you undertake commutations to adjust the member’s TBA balance? Where appropriate from which member do you make the commutation? The member with the highest balance?
Tracey Scotchbrook is a SMSF Specialist Advisor and Director of Superology Pty Ltd with 15 years’ experience. Early in her accounting career Tracey had the opportunity to work with self-managed superannuation funds, setting her on the pathway to specialisation. She is actively involved in the SMSF Association (“SMSFA”) and is the former WA Chapter Chair and National Membership Committee Member. Her accreditations include: SMSF Specialist Advisor (SSA) with the SMSF Association, CA and CPA SMSF Specialist, and Charted Tax Advisor with the Tax Institute. Tracey is a regular presenter to industry professionals and trustees, commentator, educator, and writer. In 2009 Tracey was awarded the Praemium Scholarship by the SMSFA. Contact Tracey at [email protected] or connect via LinkedIn or Twitter