Super Reform in Practice

Transcription

1 Super Reform in Practice Webinar 4: Pre and post 30 June SMSF administration March 2017 Web 4 Super Reform in Practice 1

2 Contents Slides... 4 Notes SMSF asset valuations General valuation principles SIS Regulation 8.02B: Asset must be valued at market value Valuation issues moving forward Pension commencement & balances When is a transition retirement pension not a transition to retirement pension? Industry debate on TTR conversion Tracking member contributions & balances Other super funds? Payments above the minimum: pension or commutation? Commuting pensions to comply with the transfer balance cap? Maximising exempt current pension income Ways to maximise ECPI SMSF trust deeds Additional information to come The information contained herein is provided on the understanding that it neither represents nor is intended to be advice or that the authors or distributor is engaged in rendering legal or professional advice. Whilst every care has been taken in its preparation no person should act specifically on the basis of the material contained herein. If assistance is required, professional advice should be obtained. The material contained in the Super Reform in Practice Webinar Series should be used as a guide in conjunction with professional expertise and judgement. All responsibility for applications of the Super Reform in Practice Webinar Series and for the direct or indirect consequences of decisions based on the Super Reform in Practice Webinar Series rests with the user. Knowledge Shop Pty Ltd, directors and authors or any other person involved in the preparation and distribution of these slides, expressly disclaim all and any contractual, tortious or other form of liability to any person in respect of these notes and any consequences arising from its use by any person in reliance upon the whole or any part of the contents of these notes. Copyright Knowledge Shop Pty Ltd March 2017 All rights reserved. No part of these slides should be reproduced or utilised in any form or by any means, electronic or mechanical, including photocopying, recording or by information storage or retrieval system, other than specified without written permission from Knowledge Shop Pty Ltd. Please direct any questions regarding the webinar to: Knowledge Shop Pty Ltd Level 2, 115 Pitt St, Sydney 2000 Tel: Web 4 Super Reform in Practice 2

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4 Slides Super Reform in Practice 4: Pre and post 30 June SMSF administration Garth McNally Director Hayes Knight Are your SMSF trust deeds up to date? All web attendees & Knowledge Shop members receive instant platinum membership up to 33% off! Interested? us or respond to our Introduction 1 July 2017 will come and go just like any other day Yes: There are some BIG changes coming in Yes: There are MANY clients that will need help preparing Yes: We will all be BUSY BUT 1 July is just the start of the new reform measures. They do not end on 1 July: It is only the beginning! These changes may require a change in approach to SMSF Administration What we will cover Asset Valuations Pension Commencement Transition to Retirement Pensions Pension Payment or Lump Sum? Commuting Pensions? Which one? Maximising Exempt Current Pension Income Trust Deeds Web 4 Super Reform in Practice 4

5 What we still need to find out Formal process to reduce members pension balance below $1.6m. Will requests & minutes suffice? What additional reporting obligations will be imposed? New labels in tax returns Break up of member balances between pension & accumulation Transaction amounts and dates of movements within the members transfer balance account? Details on the CGT election form Asset Valuations How do your clients manage valuations? Do they actually do anything? Do they rely upon you to do what needs to be done? Do they (or you) use professional valuation service providers? Every year? Every 3 years? Never! Have the SIS Regulation requirements been met? Reg. 8.02B Have you reviewed the ATO Valuation Guidelines for SMSF s? Have you considered what the Auditing Standards (ASA 500) and the AUASB (GS 009) require? Web 4 Super Reform in Practice 5

6 Valuation issues pre 1 July 2017 We suggest that proper valuations be carried out in the lead up to 30 June. Why? Transfer balance cap of $1.6m Restriction on making further NCCs Transitional CGT relief Existing pensions: Are clients over this already without knowing? New pensions: What will be counted against the $1.6m cap? Is the balance as at 30 June already above $1.6m? What is the value for the resetting of the cost base on assets? What evidence will be held? Valuation issues pre 1 July 2017 We suggest that proper valuations be carried out in the lead up to 30 June. Why? Is there sufficient and appropriate Transfer balance cap of Existing pensions: Are clients over this already without $1.6M evidence to knowing? show what has been done New pensions: What will be counted against the $1.6M and how cap? the valuation has Is been balance arrived as at 30 June already at? above $1.6M? Restriction on making further NCC s Transitional CGT relief What is the value for the resetting of the cost base on assets? Are there any changes from 1 July 2017? Not necessarily a change to the valuation requirements or rules BUT more a change to HOW and WHEN we will rely on these valuations! Having up to date information will be even more important! Web 4 Super Reform in Practice 6

7 Valuation issues post 1 July 2017 What about from 1 July 2017? Transfer balance cap of $1.6m Restriction on making further NCCs Carried forward unused CCs Death benefit / Reversionary pensions Existing pensions: Are clients over this already without knowing? New pensions: What will be counted against the $1.6m cap? Is balance as at 30 June already above $1.6m? Is balance already above $500k? What is the value of the pension to be assessed against the recipients $1.6m cap? Valuation issues post 1 July 2017 What about from 1 July 2017? Transfer balance cap of Existing pensions: Are clients over this already without $1.6m knowing? Again, is there New pensions: sufficient What will and be counted appropriate against the $1.6M cap? evidence to show what has been done Is balance as at 30 June already above $1.6M? and how the valuation has Is been balance already arrived above at? $500K? Restriction on making further NCC s Carried forward unused CCs Death benefit / Reversionary pensions What is the value of the pension to be assessed against the recipients $1.6m cap? Pension Commencement & Balances Web 4 Super Reform in Practice 7

8 Pension commencement What does the SMSF Trust Deed require for a pension to commence? Make sure that ALL requirements are met What does the deed say about using segregated assets? Is this allowed? What process was required? Has this process been followed? Particular focus area for 2017 financial year for CGT relief provisions DO NOT BACK DATE PENSION DOCUMENTS Pension commencement How was the pension commencement balance arrived at? How were the assets used to commence the pension valued? Process? Will any questions be raised around the process and the application under the $1.6m cap? When is a TTR no longer a TTR? Web 4 Super Reform in Practice 8

9 Key points TTR s are not caught under the $1.6m transfer balance cap BUT fund earnings on TTRs post 1 July 2017 are no longer tax exempt Review the SMSF trust deed to see: Are TTR s allowed Any specific rules around TTRs When does the TTR become a standard account based pension and what process is required? Conversion of a TTR? Current industry debate Awaiting Regulator comment on this what process do they expect to see? What are our concerns? Does the TTR need to be commuted (ceased) and then a new pension commenced? Can a TTR auto-convert to a standard account based pension when a further condition of release is met (age 65, retirement etc.) Conversion of a TTR? What are our concerns? What about clients who were in a TTR at some stage and we have since converted these to standard account based pensions? Did we carry this out appropriately? Or, if not, is the pension still a TTR? Will the earnings be exempt from 1 July 2017? Web 4 Super Reform in Practice 9

10 Conversion of a TTR? What are our concerns? Will trust deed and pension document wording be enough? What if the trust deed or pension documents contain auto-conversion clauses where a new condition of release is met & the TTR balance is above $1.6m at that time? Will this create an excess transfer balance account immediately? Tracking member contributions & balances Record keeping - Contributions Having accurate member contribution data will be important The ATO may have records but how accurate are they likely to be? Anyone remember the RBL days? Having your own records will assist in managing errors Web 4 Super Reform in Practice 10

11 Record keeping - Contributions Not just contributions to the SMSF! All funds Clients often have more than one fund Held for insurance purposes: Any deemed contributions? Some SMSF insurance policies are actually held in separate policies held inside other super funds is there a balance? Older work place super funds? Defined benefit pensions? Record keeping - Pensions Again, concise records of pension commencements will be important Dates, balances, transfer balance account records etc. Commutations (partial of full) debit against transfer balance account: Date & Amount Date death benefits commence to be paid as a pension and their balance Balance of reversionary pensions commenced Live data The use of SMSF specific software may assist Real life, up to date balances can be viewed Data only as good as what goes in and data feeds provided! Can assist when giving advice on pension balances and accumulation balances If you still use excel spreadsheets, things may get harder! Web 4 Super Reform in Practice 11

12 Payments above the minimum: Pension or Commutation? Accessing benefits What if the minimum pension payment is not sufficient for the client? Do they take extra pension payments? Do they take lump sums from accumulation? Do they take a commutation from the pension? Accessing benefits Commutations from a pension (partial or full) will result in a debit to the members transfer balance account This could mean client could purchase (commence) another pension at a later stage However, pension payments do not result in debits to the transfer balance account Pension payments above the minimum will not reduce the members transfer balance account Web 4 Super Reform in Practice 12

13 Review Client s age If over 60, pensions or lump sums are tax free If under 60: Are the tax components in pension or accumulation different? Any tax benefit available to the client? If the client is getting older which interest should be reduced for estate planning purposes (higher taxable % interest)? Who will receive the death benefit? Commuting pensions to comply with the Transfer Balance Cap? Clients with multiple pensions? Separate pensions may have been maintained for estate planning purposes Different tax components? Different start dates (Centrelink etc.)? Which pension should be stopped? Is there a standard approach: Should we hold taxable or tax free benefits in pension? Should we hold taxable or tax free benefits in accumulation? We don t think there is a one size fits all approach. Web 4 Super Reform in Practice 13

14 Considerations Issue Consideration Earnings Accumulation phase: Allocated to taxable component Pension phase: Allocated on proportionate basis Could tax free component in accumulation phase be eroded with earnings being allocated to taxable component? Could tax free component in pension phase increase with earnings where the pension has a high tax free %? Considerations Issue Who is the Death benefit recipient? Consideration If a tax dependent (spouse, dependent child etc.) they will receive all benefits tax free when paid as a lump sum, or tax free pension where deceased (or recipient is over 60. If a non tax dependent, tax payable on lump sum taxable component (+/- 15%). If pension is likely to be exhausted, then should tax-free be held on accumulation side? If accumulation likely to be exhausted and passing to non tax dependents, then should tax-free be held on pension side? Considerations Issue Consideration Age of member How long is the pension likely to be in existence? Will the accumulation account be fully utilised? If accumulation account holds high taxable component % and is going to be spent, then these payments to member are tax free when over 60 anyway! Web 4 Super Reform in Practice 14

15 Planning Why not put a spreadsheet together with life expectancy, expected draw downs and tax components Real life client scenarios Restriction on using segregated approach from 1 July 2017 New restriction SMSFs / SAFs can no longer use segregated asset approach from 1 July 2017 for tax purposes where: At least 1 member is in retirement phase; and At 30 June of PRIOR financial year one member in the fund: Has a super balance (in all funds) above $1.6m* That member is taking a pension (from any fund) Not relevant for TTRs Web 4 Super Reform in Practice 15

16 Maximising exempt current pension income The issue is Some clients may be forced to hold an accumulation interest post 1 July ECPI is based on the value of pension interests in the fund vs. the total fund value worked out over the year The higher the pension balance the better The longer the pensions are in place the better Some thoughts Suggestion Contributions be made late in the year Pension payments made later in the year Commence pensions earlier in year Access accumulation benefits if allowed & earlier in year Reason Accumulation balance is then lower for longer Pension balance is then higher for longer Pension balance is higher for longer. Delay pension payments till late in year Pension balance remains higher & for longer Accumulation balance remains lower & for longer Web 4 Super Reform in Practice 16

17 Other considerations Can income be brought forward into the current financial year where ECPI may be higher (or even 100%)? Rent? Term deposits maturing soon? Consider shorter term for re-investment so income falls in this year Other considerations Large expenses for SMSF? Rental property repairs / renovations etc.? Delay until 1 July 2017 for ECPI outcomes Carried out in 2017 FY if $1.6m is an issue? Be careful with tax avoidance schemes Trust Deeds: Time to update? Web 4 Super Reform in Practice 17

18 Take care Will new Trust Deed actually be better than what is already in place? Are there clauses in the current deed that have been added for client specific purposes? Will these clauses be carried over to the new deed? Considerations Adding reversionary nominations to existing pensions without commuting does the deed allow? Can different member accounts (interests) be dealt with separately for death benefit purposes? Can a death benefit be rolled over? Does the deed allow death benefits to be rolled in? What does the deed allow in regards to segregation for investment purposes etc.? Are the clauses different or linked to those for tax purposes? Conversion of a TTR to a standard account based pension Considerations Commutations of existing pensions what is allowed, what process is required? Acceptance (rejection) of contributions where caps have already been reached? Death benefit nominations are they allowed? What takes precedence, a DBN or a Reversionary Pension? Reversionary pensions are they automatic? No trustee discretion? Ability to use enduring powers of attorney Web 4 Super Reform in Practice 18

19 Estate Planning Many existing arrangements will need to be revisited Reversionary pensions: The amount held in the pension could be lower than what it was ($1.6m cap). Is this still appropriate. Death benefit nominations for new accumulation interests that have not been in existence before. How will these be dealt with? Payments to the members estate may now be greater than what was initially planned. Is this appropriate? Reform has changed the game plan. Master the strategies for the new environment. Per 17 May Bri 19 May Syd 26 May Mel 2 Jun Web 4 Super Reform in Practice 19

20 Notes In this fourth session of our Super Reform in Practice Web Series, we look at the issues that need to be considered in the overall management and administration of our client s Self Managed Super Funds. We will cover: Current and future year valuation issues when independent asset valuations will be required or suggested Pension start dates and balances Tracking contributions and record keeping requirements Maximising exempt current pension income where a client needs to maintain an accumulation account The importance of accurate balance transfer account data SMSF specific software and real time data SMSF asset valuations Although there does not seem to be any new, specific requirements for the valuation of SMSF assets in relation to the new super reform rules, it will certainly be an area of focus for both the ATO and SMSF auditors. With the introduction of the $1.6m transfer balance cap, the valuation process used for assets inside an SMSF will surely be scrutinised. We suggest that trustees should at least consider obtaining up to date valuations on assets as 30 June approaches. This would be particularly relevant for clients that have balances close to the $1.6m transfer balance cap and for clients looking to use the transitional CGT relief measures when resetting the cost base on assets. Determining the market value for assets for the CGT reset rules will be important and your clients may need to be able to demonstrate how these values have been arrived at. General valuation principles There are existing valuation requirements set out in SIS Regulation 8.02B: Web 4 Super Reform in Practice 20

21 SIS Regulation 8.02B: Asset must be valued at market value For subsection 35B(2) of the Act, for the year of income and any later year of income, when preparing accounts and statements required by subsection 35B(1) of the Act, an asset must be valued at its market value. Note: Market value is defined in subsection 10(1) of the Act. "Market value ", in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made: (a) That the buyer and the seller dealt with each other at arm's length in relation to the sale; (b) That the sale occurred after proper marketing of the asset; (c) That the buyer and the seller acted knowledgeably and prudentially in relation to the sale. The ATO also provides further information and guidance on SMSF asset valuations in their guide: Valuation guidelines for Self Managed Super Funds. Although the above SIS Regulation and ATO Guidance do not specifically require the use of independent and professional valuations in all cases, we would suggest that with the upcoming changes regarding the $1.6m transfer balance cap and the CGT relief rules, it would seem prudent that the trustees look to do this. Further to this, SMSF auditors will need to consider the requirements set out in the Auditing Standard ASA 500: Audit Evidence. This auditing standard requires the funds auditor to obtain sufficient appropriate audit evidence to draw reasonable conclusions. The funds auditor would therefore want to know how the Trustees arrived at the valuation outcome, what process was entered into and what assumptions were made in this process. Further to this, Guidance Statement GS 009: Auditing of Self Managed Superannuation Funds, the Auditing and Assurance Standards Board guide for SMSF auditors, sets out further details on the auditor s role in reviewing valuations. These details include the following: The auditor evaluates whether the valuation method employed is consistent with the financial reporting framework adopted and the policies described in the accounting policy notes, whether the method of measurement is appropriate in the circumstances and that the method adopted has been applied consistently. It is not the role of the auditor to value the assets. The auditor assesses the valuation method and evaluates the valuation for accuracy and reasonableness. The auditor assesses the risks of material misstatement of the asset values and designs and performs audit procedures in response to the assessed risks. For example, the valuation of business real property operated by the Web 4 Super Reform in Practice 21

22 trustees is likely to be high risk as the valuation method may be very subjective, where as the valuation of listed securities will generally be low risk as publicly quoted prices are available. The nature, timing and extent of audit procedures will vary significantly as a result of the assessed risks and the complexity of the valuation method adopted. Substantive procedures may include: (a) Testing the trustees significant assumptions, the valuation model and the underlying data, such as future cash flows and discount rates used in valuing business real property; (b) Developing independent fair value estimates to corroborate the appropriateness of the valuation, such as obtaining an agent s property valuation for comparison to the trustees valuation; or (c) Considering the effect of subsequent events, such as the subsequent sale of an asset, on the valuation and disclosures. In discussions with many accounting firms over the years, it has become apparent that many firms take a 3 year approach to valuations. That is, formal valuations of assets are carried out every 3 years with Trustee valuations used in between. If this is the approach you are taking then we assume that for each year of Trustee valuation that there is sufficient evidence to show how the Trustees have in fact arrived at their position. We would also suggest that even if the current 2016 / 2017 year is not one of the years where formal valuations are obtained, that the Trustees consider doing so anyway. Valuation issues moving forward There has been a lot of coverage on the changes coming into effect on 1 July 2017, and rightly so. These are the most significant changes to superannuation over the last 10 years. But what we also need to keep in mind is the effect that these changes will have each and every year from July 2017 and the valuation area is one that you will need to be on top of. We have covered the valuation issues around the $1.6m transfer balance cap above, but also note that this will be relevant every time a client looks to commence a new pension from 1 July Your clients will need to be aware of the value of the assets in their fund to ensure that the members transfer balance account remains with the cap. There are further valuation considerations when you look at other changes under the super reform measures, including: Restriction on making non-concessional contributions where the clients total superannuation balance is above $1.6m. Restriction on carrying forward unused concessional contributions (from 1 July 2018) when the client s total super balance exceeds $500,000. Moving assets from being segregated current pension assets to being segregated non-current pension assets pre 30 June 2017 and also post 30 June Web 4 Super Reform in Practice 22

23 Each of the above issues or events may require the client to have accurate valuation data maintained for the fund s assets. Pension commencement & balances Another area that will be under close scrutiny over the upcoming 12 months will be pension commencement dates and balances. The ATO have already identified this as another key risk area. We suggest that the regulator will also want to see appropriate evidence as to the values arrived at for the pension commencement; how the trustees have arrived at this position. Keep in mind that the value of member pensions can grow over time and this growth will not cause an issue for the client under the cap. It is only the purchase prices of the pension that will get caught, not earnings (or losses!). Some clients may find it tempting to use a lower value for an asset on commencement of the pension so the $1.6m is complied with but then use the real value in future years where the growth is not assessed against the cap. Sufficient evidence will also be needed to show the commencement date of pensions. This is of course linked to the above valuation issues. Keep in mind that a pension commencement date will be based on the trust deed rules. What does the deed require? What does this set out in regards to pension start dates? You should also familiarise yourself with the ATO tax ruling TR 2013/5: When an income commences and ceases. As obvious as this may sound, DO NOT BACKDATE pension commencement documentation. We have seen a number of articles on this, especially around the 9 November 2016 assessment date for CGT relief and where claims may be made that the fund s assets were segregated at that time; we just hadn t put in place the appropriate documentation yet! Be careful. Be very careful! When is a transition retirement pension not a transition to retirement pension? When does a transition to retirement (TTR) pension become a standard account based pension? What process is required? Will it happen automatically and therefore cause an issue under the members $1.6m transfer balance account immediately? Web 4 Super Reform in Practice 23

24 Keep in mind that a TTR is not assessed against the members $1.6m transfer balance account. However, once the TTR is changed to a standard account based pension it will get caught. It would therefore be a good idea to review when this may happen. Industry debate on TTR conversion There is current debate happening within the super industry on this at the moment. The main concerns being discussed include: What are the regulators expectations for when a TTR changes to a standard account based pension? Consider clients who may have had a TTR in the past but this has since been changed to a standard account based pension. Was this done to the satisfaction of the ATO? If not, is that pension still a TTR and therefore the earnings in the fund assessable? Will this conversion happen automatically when the client meets a further condition of release such as retirement or attaining age 65? Will the existing TTR need to be commuted and then a new, standard account based pension need to be commenced? What if the SMSF trust deed provides rules or requirements that are not in line with the regulators expectations? Some trust deeds and pension documents may contain an auto-conversion clause so that when the member meets a further condition of release such as attaining age 65 or retirement that their TTR automatically becomes a standard account base pension. If this is accepted by the regulator then this automatic conversion could cause the $1.6m transfer balance cap to be exceeded immediately. It may be that specific trust deed wording or pension document wording could be used to stop this happening. It would also be worth reviewing trust deeds to see what process is required for this conversion, as some trust deeds may require that the TTR first be commuted and then a new pension commenced. This could then cause an issue with blending of tax components in accumulation phase. We are expecting further comments from the ATO on this issue. Tracking member contributions & balances It is always best practice to have clear and concise records relating to all client matters but when it comes to super contributions, it is even more important. From 1 July 2017, the tracking of contribution and pension balances will become more of an issue as you will need to rely upon these records or data to provide correct and accurate to clients. We feel that the use of SMSF specific software will assist in this process as some of the software providers in this space offer up to date, real life balance information. Web 4 Super Reform in Practice 24

25 The ATO has indicated that they will be able to provide similar information on contribution amounts and transfer balance account records but we feel that where you have accurate data and records, the ATO information will be used more as a back up or for confirmation purposes. Other super funds? Also keep in mind that some clients may have balances in other funds, held separate to their SMSF. In some cases, these funds may even be receiving contributions. Some of the arrangements we often see include: Holding an insurance policy or benefit in another industry, retail or employer fund. In many cases these separate funds receive contributions to keep the insurance running. Some clients may have multiple super funds funds established through older work arrangements. This is of course, quite common. Some clients may hold an interest in a defined benefit fund. It would be prudent to ask your clients appropriate questions to establish if this may be relevant for them and just as important, keep accurate written records of these conversations. Payments above the minimum: pension or commutation? The new rules around capping the purchase price of pensions does not restrict your clients from holding more than $1.6m in superannuation. Any balance above the $1.6m can be maintained within the accumulation phase of superannuation. Access to these benefits in the accumulation phase will not change. So where the client has met a full condition of release on these benefits (retirement, age 65 etc.) or where these benefits are unrestricted non-preserved, the client can request a lump sum payment from their accumulation account, deed permitting. The taxing of these benefits in the hands of the individual will not change. So where the client is over age 60, these payments will still be tax-free. If your clients need to access more than their minimum pension payment amount, you may need to assist in determining the most appropriate way for this to be done. From which interest will they access this additional amount? Do they take additional pension payments above the minimum? Do they request a partial commutation from their pension? Web 4 Super Reform in Practice 25

26 Do they request a lump sum payment from their accumulation account? There will not be any one solution that works for all your clients, but there may be some general principles that could apply. We suggest that you keep in mind: A commutation (partial or full) from a pension will result in a debit to the members transfer balance account. This could allow the client to move other, additional money into a pension. Whereas pension payments DO NOT result in a debit to the members transfer balance account. What are the tax components of the members separate accounts (member interests)? Is there any tax benefit to the client in accessing amounts from any of these accounts? This may be more relevant for clients under age 60. Who is, or may be, the recipient of any remaining balance in these separate member accounts? Is there an estate planning benefit in reducing one particular account? Commuting pensions to comply with the transfer balance cap? Some clients may currently hold separate pensions in their SMSF. For certain clients this could have been carried out under an estate planning strategy. Where clients have multiple pensions and the total pension balances are in excess of the $1.6m limit, specific attention will need to be given as to which of these pension(s) should cease and which ones will continue from 1 July It may be that some of these pensions contain a high tax-free component. Remember that tax-free super amounts will pass to non-dependent beneficiaries tax free, whereas death benefits that are made up of taxable components and paid to non-dependents will usually be taxed at the recipients marginal rate or 17% (15% through an estate), whichever is lower. This should of course be taken into consideration when determining which pension should continue and which should cease. Some other issues we believe you should consider include: Earnings on assets in accumulation phase are added to the taxable component: If the accumulation account is made up of a high tax-free component then the tax-free component may slowly be eroded over time with earnings. Earnings on assets in pension phase are added proportionately to the existing tax components: If the pension phase is made up a high tax-free component then this may grow, as earnings will be added to the tax-free component. HOWEVER, the client MUST also take pension payments each year! Web 4 Super Reform in Practice 26

27 Who will be the likely recipient of the member s death benefit and will they be tax dependents at that time? If all recipients are tax dependents, then there may not necessarily be an estate planning issue. However, keep in mind that a person(s) may be a tax dependent now but may not be at the time of death. How old is the member; that is, how long will the pension likely be in existence and how long will the accumulation account exist for? This could provide an insight into what balances may be left behind and what the tax components could look like. Is the client likely to access their accumulation benefits over time? That way if the accumulation balance was to hold a higher taxable component it would not matter from an estate planning perspective as the accumulation account may be reduced to nil anyway and if the member is aged 60 or above, these benefits accessed over time would be tax free anyway. Although this may at first seem complicated, you could easily put together a spread sheet and do some calculations on what the projected balances of each client s account and tax components may be over time. Maximising exempt current pension income With the new $1.6m transfer balance cap in place from 1 July 2017, many clients will need to now hold part of their superannuation balance in the accumulation phase where tax will be payable on fund earnings. Add to this the further restriction on many SMSFs (and Small APRA funds) from using the segregated asset approach from 1 July 2017, looking at ways to maximise the funds exempt current pension income (ECPI) for the 2018 and later financial years will be an important part of the fund administration process. A funds ECPI is essentially calculated based on the value of the fund in pension phase compared to the fund s total value over the financial year; so the higher the value of pensions (hence the lower the accumulation balances) and the longer the pensions are in place during the year, the better the ECPI outcome. Ways to maximise ECPI There are some simple ways to maximise the funds ECPI but in many cases, you will need to assist your clients with these; that is, they will need to know and plan ahead. Can contributions be delayed until later in the financial year? If this can be managed, it would mean that the funds accumulation balance is lower throughout the year. Web 4 Super Reform in Practice 27

28 Can pension payments be made later in the financial year so, the average pension balances remain higher throughout the year? Are clients eligible to access money from the accumulation phase first before the pension phase? That may assist in keeping average pension balances higher throughout the year. Obviously the clients overall financial and tax position needs to be considered before they start accessing money from the accumulation phase. Can clients commence pensions early in the year so the fund is in pension phase longer? Again if the pension starts early in the year and pension payments are delayed until later in the year, then the funds ECPI should be higher. Can income for the 2018 financial year be brought into account during the 2017 year? For some clients, those entirely in pension phase in 2017; the ECPI could be 100% in Of course you should not enter into tax avoidance schemes. If re-investing Term Deposits now, consider a shorter term til maturity for any new Term Deposit so that all income will be picked up in the current 2017 financial year and taxed at the funds tax rate in 2017, which could be 0%. If large expenses need to be incurred (property renovations / improvements), can these be delayed until 1 July 2017 for ECPI benefit or brought forward pre 1 July 2017 to manage any $1.6m transfer balance account issues. SMSF trust deeds There are a number of changes being introduced under the super reform measures that will require you to review your clients trust deeds and see if they are still relevant or if updates may be required. Before you go and change all your client s trust deeds, it would be important to see what they actually have now and if being replaced, what they will end up with! Is the new deed actually any better? Does it allow what the old deed allowed? Does it meet the client s needs moving forward? Some of the things to look out for may include: Client specific clauses that may have been inserted into the current deed that may be lost if the deed is updated or replaced? Can reversionary beneficiaries be added (or amended) to existing pensions without the need to stop and restart the pension? Can different member accounts be dealt with separately for death benefit purposes? Does the deed allow death benefit pensions to be rolled out of the fund or rolled in to the fund? What does the deed allow in regards to segregation for investment purposes? Is this a standalone clause or is it part of the overall rules for tax segregation that may no longer be allowed from 1 July 2017? What does the deed require for converting TTRs to standard account based pensions? Can existing pensions be commuted and what is the required process? Web 4 Super Reform in Practice 28

29 Are there acceptance or rejection clauses for excess contributions? What takes precedence a death benefit nomination or a reversionary pension? Is this appropriate for the client? Additional information to come We feel that there are still a number of issues where further information should be provided by the regulator. Some of these include: What the formal process to reduce the member s pension balances back below the $1.6m cap will be. How will this be carried out as at 30 June 2017 when the member s final balance may not yet be determined? Will a member request and trustee minute in place as at 30 June (or earlier) suffice? What additional reporting obligations will be placed on trustees? New labels will be added to the tax return to report on member accumulation and pension balances vs. a members overall balance but what will we need to include? Transactions and dates of transactions in and out of the member s personal transfer balance account what do we need to report and how will this be reported? Web 4 Super Reform in Practice 29