Transfer balance cap and transfer balance accounts

Transcription

1 Transfer balance cap and transfer balance accounts Peter Burgess, SuperConcepts August 2017

2 What you need to know The content of this presentation has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. You should obtain a copy of the relevant Product Disclosure Statement (PDS) before making a decision to invest in any financial product. Any advice in this presentation is provided by SMSF Administration Solutions Pty Ltd, ACN , AFSL No which is part of the AMP group of companies. 2

3 Overview Recap Recent developments Strategies 3

4 Recap 4

5 Transfer balance cap Cap on the amount of capital that can be transferred into the retirement phase of superannuation. 5

6 Indexation of the general TBC Increased in $100,000 increments in line with the CPI. Based on last 12 month average CPI change Based on 10 year average CPI change General TBC 2018/19 $1,632,720 $1,634,817 $1.6m 2019/20 $1,667,278 $1,672,277 $1.6m 2020/21 $1,702,568 $1,710,596 $1.7m ITAA 1997, s

7 Personal TBC v General TBC Client commences a pension on 1 July 2017 with a pension balance of $1,120,000 (70% of TBC used). $1.7m $1.630m $1.6m Personal TBC increased by unused cap % x $100,000 Personal TBC General TBC S294-40(2) 2017/ / / /21 7

8 Transfer balance accounts Transfer balance credit Transfer balance debit 8

9 Transfer balance accounts Transfer balance credit Transfer balance debit Value of all retirement phase income streams at 30 June 2017 Value of retirement phase income streams commenced from 1 July 2017 Value of reversionary pensions Excess transfer balance earnings that accrue on any excess transfer balance amount Payments in respect of a LRBA which increases the value of retirement phase interests 9

10 Transfer balance accounts Contribution must arise from: a) The settlement of a personal injury claim that is based on the commission of a wrong, or a right created by statute, effected by a written settlement agreement between the parties Transfer balance debit b) Settlement of a personal injury claim arising under an Australian workers compensation law, or c) The order of a court made in respect of a claim that is based on the commission of a wrong, or a right created by statute. Transfer balance credit Value of all retirement phase income streams at 30 June 2017 Fraud If the offender is convicted, the super fund member is able to notify the Commissioner and receive a debit in their TBA. Value of retirement phase income streams commenced from 1 July 2017 Bankruptcy and void transactions If interest Value reduced of reversionary because of payments pensions required to comply with the Bankruptcy Act 1966, the individual is able to notify the Commissioner and receive a debit in their TBA. Excess transfer balance earnings that accrue on any excess transfer balance amount Payments in respect of a LRBA which increases the value of retirement phase interests Commutations Structured settlement contributions Certain events resulting in a reduction in a super interest fraud, dishonesty and void transactions Payment split upon divorce or relationship breakdown Failure to comply with pension standards Payment split lump sum payment to ex spouse A debit will arise in the member spouse TBA equal to the lump sum commutation. If the non-member spouse commences a pension, a credit will arise in their TBA. Failure to comply with a commutation authority Payment split achieved via splitting the pension payments A credit to the full value of the super interest arises in non-member spouse s TBA. Each spouse receives a debit equal to the other spouse s respective Non-commutable proportion of the value excess of the super transfer interest. balance 10

11 Capped defined benefit income streams Certain commutation-restricted incomes streams started before 1 July Pension type Special value 1. Lifetime pension (regardless of when it started) Annual entitlement x Lifetime annuity Annual entitlement x Life expectancy pension Annual entitlement x remaining term 4. Life expectancy annuity Annual entitlement x remaining term 5. Market linked pension Annual entitlement x remaining term 6. Market linked annuity Annual entitlement x remaining term s (1). Flexi Pensions ITAR 1997 Schedule 1B. 11

12 Annual entitlement First payment Days in payment period x 365 Example $2,000 pension payment paid every fortnight. Annual entitlement = $2,000/14 x 365 = $52,000 12

13 Defined benefit income cap Relevant if receiving defined benefit income that is subject to concessional tax treatment. Concessional tax treatment if: a) 60 years of age or over, or b) Under 60 years of age and a death benefits dependant, where the deceased died at 60 years of age or over. Income cap = General TBC divided by 16 (i.e. $100,000 for 2017/18). 13

14 Defined benefit income cap threshold Where your defined benefit income, which receives concessional tax treatment, exceeds your defined benefit income cap, 50% of the excess is assessable income (to which no tax offset applies). If there is an untaxed element, the tax offset is reduced by 10% of the excess defined benefit income amount. 14

15 Reduced defined benefit income cap If you have more than one defined benefit income stream your cap is reduced by any defined benefit income which is not subject to concessional tax treatment* Only defined benefit income which receives concessional tax treatment is then counted against the reduced cap. 15

16 Reduced defined benefit income cap case study As the reversionary beneficiary of her late husband s state super pension, Sue aged 58, receives defined benefit income equal to $40k per annum. Her husband was 61 when he died. Sue also has a MLIS (commenced before 1 July 2017) and receives $70k per annum from this pension. Sue s defined benefit income cap for 2017/18 is: $30k (i.e. $100k $70k). Has Sue exceeded her defined benefit income cap? 16

17 PCG 2017/5 Commutation requests made before 1 July 2017 to avoid exceeding the $1.6m transfer balance cap The amount of the commutation is required to be worked out by the trustee and reflected in the SMSF s financial accounts for the year ended 30 June

18 Calculating the commutation amount Other Income Streams Required commutation amount Other Income Streams Required commutation amount $1.6m Capped defined benefit balance No Debit notice issued for this amount $1.6m Capped defined benefit balance 18

19 Case study commutation amount At 30 June 2017, Janice is receiving both a capped defined benefit income stream (special value of $2m) and an AB income stream valued at $500k. What is the required commutation amount? Will a non-commutable excess transfer balance debit appear in the client s TBA? 19

20 Excess determination process Includes excess transfer balance earnings Excess transfer balance determination issued. States the crystallised reduction amount and includes a default commutation notice. May elect an alternative income stream to commute. Election must be made within 60 days and is irrevocable. If 60 days after the determination is issued there is still an excess transfer balance, the ATO will issue a commutation authority to the super provider(s). The super provider that receives the commutation authority must commute the amount stated on that authority in most circumstances. Excess amounts can also be removed voluntarily at anytime by the individual. 20

21 Excess transfer balance tax 15% 15% 2017/ /19 onwards Earnings that attract excess transfer balance tax include earnings after a determination is issued (even though those earnings do not need to be removed from the fund) No excess transfer balance tax if on 1 July 2017 you are over the cap by less than $100,000 and the excess is removed by 31 December

22 Recent developments 22

23 Structured settlements Legislation now provides an alternative TBA DR to the one generally available under s294-80(1) Structured settlement contribution contributed prior to 1 July 2017 TBA DR Super income stream 23

24 LRBAs For SMSF and SAF members, a TBA CR will arise if a payment is made in respect of an LRBA that increases the value of a super income stream interest Only applies to borrowing contracts entered into on or after 1 July 2017 Does not apply when refinancing a borrowing entered into prior to 1 July 2017, or to contracts in place but not completed prior to 1 July

25 Transfer balance credit for LRBA repayments SMSF No application Member Borrowing Pension interest Property Accumulation interest Cash & other assets 25

26 Transfer balance credit for LRBA repayments SMSF Member Borrowing Pension interest Accumulation interest Property Cash & other assets Cash 26

27 Strategies 27

28 Maximising the fund s ECPI claim Ian, aged 60, is the only member of his SMSF. His AB pension balance at 30 June 2017 was $2m (which represents his entire fund balance). Ian requires $80k per annum from his pension (minimum pension = $64k). Ian wants to retain his excess pension balance in his fund. What can he do to maximise his fund s ECPI claim? 28

29 Effect on claim for ECPI 82.00% ECPI % 80.00% 78.00% 76.00% 74.00% 72.00% 70.00% ECPI - 1 (P&A) ECPI - 1 (P) P&A = min pension from pension account, excess from accumulation account. Assumes 6% net earning rate. 29

30 Maximising the fund s ECPI claim Trevor and Helen, aged 63 and 58 respectively, both have AB pensions valued at $2m as at 30 June Their only income is from their AB pensions. 30

31 Consider Tax SMSF 100% ABPs 100% ECPI Fund tax = 0 Pre 1 July 2017 Only income is ABPs personal tax = 0 $2m ABP $2m ABP 31

32 Consider Tax SMSF TBC applies 80% ECPI 20% Assessable Fund 15% $800k 4.5% = $36,000 Fund 15% tax = $5,400 Only income is ABPs personal tax = 0 $1.6m ABP $400k Accum $1.6m ABP $400k Accum Both have $18,200 personal Tax free threshold 32

33 Consider Tax SMSF TBC applies 100% ECPI 0% Assessable Fund tax = 0 $1.6m ABP $400k personal $1.6m ABP $400k personal Each member: Income on 4.5% = $18k personal tax = 0 33

34 Partial commutation of excess min pension What if the excess minimum pension amounts are taken as partial commutations each year and Trevor passes away? 34

35 Partial commutation of excess min pension SMSF 100% ABPs 2023 $1,732,231 ABP $1,801,860 ABP 35

36 Partial commutation of excess min pension Helen s TBA Income required Min pension TBA Event Debit Credit Balance 2017 Existing pension 1,600,000 1,600, ,000 64,000 Partial commutation 16,000 1,584, ,000 65,280 Partial commutation 14,720 1,569, ,000 66,586 Partial commutation 33,414 1,535, ,000 67,917 Partial commutation 22,083 1,513, ,000 69,276 Partial commutation 25,724 1,468, ,000 70,661 Partial commutation 19,339 1,468, Partial commutation 1,600,951 (132,231) Reversionary pension 1,732,231 1,600,000 = 1,732, ,468,720 1,600,000 36

37 With partial commutations Event Pension Accumulation Total death of spouse 1,801, ,801,860 Partial commutation (1,600,951) 1,600,951 0 Reversionary pension 1,732,231 1,732,231 1,933,140 1,600,951 3,534,091 ECPI% = 54.70% 37

38 Without partial commutations TBA Event Debit Credit Balance Existing pension 1,600,000 1,600,000 Partial commutation 1,732,231 (132,231) Reversionary pension 1,732,231 1,600,000 Event Pension Accumulation Total death of spouse 1,801, ,801,860 Partial commutation (1,732,231) 1,732,231 0 Reversionary pension 1,732,231 1,732,231 1,801,860 1,732,231 3,534,091 ECPI% = 50.99% 38

39 Market linked income streams Colin has a MLIS with a market value at 30 June 2017 of $1.1m and a remaining term of 10 years. The payment factor is 8.32 and the selected annual pension is $132k (special value at 30 June 2017 was $1.32m). Colin also has an AB pension with a balance of $400k as at 30 June

40 Capped DB income streams debit values Product Product definition Debit value Lifetime pensions SISR 1.06(2) Starting special value less previous debits Life expectancy pensions SISR 1.06(7) Special value at the relevant time* Market-linked pensions SISR 1.06(8) Special value at the relevant time *Disregard any previously associated Debits. S (6) of the ITAA

41 Market linked income streams Colin decides to commute and re-start his MLIS as at 1 August The remaining term of his MLIS at 1 August 2017 is still 10 years and the market value of his MLIS is $1.15m. Date Transaction Debit Credit Transfer balance 1 July 2017 Capped defined benefit income stream $1,320,000 $1,320,000 1 July 2017 Account based pension $400,000 $1,720,000 1 August 2017 Capped defined benefit income stream commutation $1,320,000 $400,000 1 August 2017 MLIS commencement $1,150,000 $1,550,000 Excess transfer balance earnings $938 $1,550,938 41