Navigating super law changes with confidence

Hi Monica

A widely held misconception within the professional advisory community was that a TRIS automatically reverts to an account based pension for a retiree where all conditions of release are satisfied. .However, the ATO has recently stated that a TRIS must be commuted first and then a new account based pension started.

Apart from the revelation that many now trapped older retired TRIS pensioners will lose their Commonwealth Health Benefits Card because they commute and start a new Account based pension (after 31 Dec 2015), another serious issue has emerged.

Many of these retirees followed the “expert advice” in good faith and made withdrawals in excess of the 10% limit on the basis that their TRIS had converted to an account based income stream. Accordingly, they have breached the rules and are subject to severe income tax penalties.

Given that these breaches have been going on undetected it is inescapable that ATO has been asleep at the wheel and has accepted the legitimacy of these withdrawals. Otherwise it would have issued bulletins alerting the industry that these breaches were occurring by dint of the illegal or in fact non-cessation of the TRIS.

QUESTION:
Are you aware if the industry is requesting the ATO to retrospectively fix;-
a) the loss of Health card trap; and
b) the inadvertent breach of TRIS rules on the assumption it had converted to an account based income stream.

Thanks
Rod

This statement in the above article regarding future indexation of the cap is slightly different to the advice I received from my local Federal member. "Where an SMSF member exceeds their $1.6 million pension cap by less than $100,000 at 30 June 2017, the new law allows the member six months to remove the excess from the member’s pension account. However, the member will still be recorded as having exceeded their $1.6 transfer balance cap and will not be eligible for any indexed increases of the cap in the future, even if they reduce their pension account balance below $1.6 million."

The advice I have received is as follows:

"If an individual transfers the full $1.6million into a retirement phase account, the individual will not be able to transfer any more into the retirement phase as they have already utilised 100 per cent of their cap space.

If an individual transfers $800,000 into a retirement phase account, they will have utilised 50 per cent of the cap space. If the cap is later indexed to, for example, $1.7million, they will be able to transfer an additional 50 percent of the indexed cap, being $850,000."

This is a further example of the confusion there is about the changes to superannuation. The ATO needs to get its act together and hold seminars and workshops to allay the concerns of SMSF Trustees before 1 July 2017.

Please note we have posted a follow up article by Monica addressing the above questions, but she may not be able to respond directly to further questions for a while and readers should refer to their financial adviser.

Hi Monica,
My future investment plans depend greatly on the following:

(a) Excluding partial commutations, post 2017 if the value of assets in my pension account fall below $1.6m (e.g. another GFC) under what circumstances can I transfer money in from my accumulation account to bring the balance back to $1.6m?

(b) Can I segregate my superannuation holdings into two separate accounts - pension and accumulation - so that they are treated independently?

If (a) is not possible I shall need to adopt a very conservative investment policy for funds in the pension phase.
If (b) is possible, I can consider stable income investments in my pension account and growth investments such as equities in my accumulation account.

Given that members of defined benefit schemes are guaranteed no reduction in their pension payments during their lives, it would seem unfair for the government to treat self funded retirees differently. There is a good chance that some pension accounts will be adversely affected by financial events over the next 30 years or so.

Does the deceased's pension remain in pension mode (ie zero tax) for the 12 months after death?

Thanks for the questions. Rather than reply individually, Monica will respond with a Q&A article early next week.

Is it correct that anything in excess of $1.6m pension cap after 1/7/17 I.e in accumulation has to be removed from being held in superannuation on the death of a spouse if the reversionary benificary has in excess of the $1.6m already
I understand the $1.6m from the deceased spouse could be held in the remaining spouses accumulation account
Do you have to continue to take the minimum % from the deceased spouses pensions

Monica, I have some questions which I would appreciate your view on.

Firstly, if a SMSF currently has segregated accounts with two pensions which add up to more than $1.6m, the excess has to be transferred to accumulation. If one of those pensions is 100% tax free component, how is this accounted for in ensuing years? This is important because 100% tax free pensions are passed tax free to non dependants on death.

Secondly, can a fund decide to transfer excess assets from pension to accumulation at any time up to 30 June and lock in the CGT concession (or not, if it is in a loss position), or must it be done on 30 June?

Thirdly, if segregation is not allowed after 30 June, does the $1.6m increase/decrease in value in accordance with the overall fund's performance? Are cash flows into (eg contributions) and out of (eg pension payments) taken into consideration when calculating the ongoing value of the $1.6m. Or does the $1.6m remain constant?

Further to the above comment, if the amount in total is over the $1.6 million and not segregated, the process is the actuarial report to determine the tax payable each year. In this circumstance is the amount of $1.6 million capped and not allowed to be indexed each year?

I must be missing something. Many experts say things like "Amounts above the cap need to be moved to the accumulation phase or taken out as a lump sum."

I thought any amount could be left in an SMSF and if the balance is above $1.6 million, an actuary will determine how much tax is payable. There is no ability to segregate, but nor is there a requirement to move money out to an accumulation account. It can stay in one account.

From what I understand a SMSF member can have one accumulation account and multiple pension accounts. So I'm assuming any excess over $1.6 mil is transferred from the pension account(s) to the accumulation account.

What I'm wanting to know is if new Pension documentation needs to be replace the existing ones?

In general terms, if one has an income stream on 30 June 2017, the value of the income stream on 1 July 2017 will be a credit against the transfer balance account.

If the income stream is valued at more than $1.6 million (with some temporary relief for income streams between $1.6 million and $1.7 million) the disincentive in not bringing down income stream balance to $1.6 million is the imposition of excess transfer balance tax. This tax is based on notional earnings rate (for example, last FY it was 9.2%) of the excess charged at 15% for first time breach and 30% for second then breach. So unless the pension assets are generating more than the notional earnings rate, can't see many reasons to deliberately keep a pension balance in excess of the $1.6 million transfer balance cap.

Nonetheless, within the rules, if no action is taken, the ATO will send a commutation authority to the super fund, mandatorily compelling them to transfer the excess back to accumulation.

The longer no action is taken in not comply with the transfer balance cap, the bigger the resultant excess transfer balance tax.

The need for an actuarial certificate for a small fund is a separate issue in relation to calculation of tax - referred to as exempt current pension income.

Whether one is accumulation or pension has various downstream impacts, for example which component do the earnings add to, minimum pension payment levels, CGT upon death etc