Talking Tech September 2013

Transcription

1 TT9/2013 Talking Tech September 2013 Welcome to the September edition of Talking Tech. This month we cover: Coalition s proposals Restricted insurance cover through super from 1 July 2014 ASIC guidance for SMSF advice Partial commutations and minimum annual amounts within a SMSF Segregating current pension assets within an SMSF SMSF supervisory levy Social security figures from 20 September Coalition s proposals The Coalition has formed Government following the election result. The main proposals of the new Government impacting financial advisers include: Reducing the company tax rate to 28.5% from 1 July Repealing the carbon tax. Introducing a 26 week paid parental leave scheme at actual wage (capped at $150,000 pa) or the national wage (whichever is the greater) plus super (other conditions apply) from 1 July This will be funded by imposing a 1.5% levy on companies for earnings above $5 million. Not proceeding with the previous Government s proposed changes to fringe benefits tax and cars. Repealing the carry-back company tax loss measure. Deferring subsequent increases in the super guarantee rate by 2 years. That is, the present rate of 9.25% would increase to 9.5% in 2016/17 (rather than 2014/15). The rate would increase to 12% in 2021/22 (rather than 2019/20). Repealing the low income super contribution. The low income super contribution effectively refunds the tax (up to $500) on the concessional contributions of low income earners. Revisiting the amount of the concessional contribution caps and the co-contribution once the budget returns to a strong enough position. Indexing Defence Forces Retirement Benefits (DFRB) and Defence Force Retirement and Death Benefits (DFRDB) military super pensions for people aged 55 and over using the same indexation method as age pension from 1 July Indexing the income thresholds for the Commonwealth Seniors Health Card by the Consumer Price Index. The current thresholds are $50,000 for singles and $80,000 for couples. Indexation will occur annually in September with the first indexation in September Implications for your clients These proposals need to pass through Parliament before becoming law and may be subject to further change during this process. Abandoning the previous Government s proposed changes to fringe benefits tax and cars does not require any legislation to pass. Restricted insurance cover through super from 1 July 2014 From 1 July 2014, super fund trustees will be restricted to offering insurance contracts where a condition of release is available to the member upon successful claim. This measure impacts all super fund offerings (including SMSFs), not just MySuper and forms part of the Stronger Super measures. Before 1 July 2014, trustees can acquire certain insurance contracts, such as own occupation TPD and trauma, whereby the benefits may not be accessible by the member. From 1 July 2014, super fund trustees can only acquire insurance contracts providing cover for death, terminal medical condition, permanent incapacity and temporary incapacity. This measure ensures that benefits are available for the member if there is a successful claim on the insurance contract. The prohibition does not apply to the continued provision of insured benefits to members who joined a fund before 1 July That is, existing

2 insurance arrangements in respect of members who had joined the fund prior to 1 July 2014 would not be affected. These members can increase or decrease their cover from 1 July the time commitment and skills needed to run an SMSF effectively. the costs associated with setting up, running and winding up an SMSF. Apart from the any occupation TPD definition, all other TPD definitions would not be available to new fund members from 1 July Clients who want own or other modified definitions of TPD should consider becoming a member of the fund and establish cover before 1 July Similarly, trauma insurance through super would not be available to new members from 1 July 2014 and clients should consider establishing cover beforehand if required. The changes may impact some SMSF estate planning strategies, in particular a crossinsurance style ownership arrangement. Under cross-insurance, the life insured is member A and the insurance proceeds are credited to the account of member B. The aim is to provide enough liquidity in the fund to pay a death benefit to A s estate without having to sell a lumpy asset, such as a property. This type of arrangement would not be permitted for new cover from 1 July As the exemption requires the continued provision of benefits by the trustee to the member, a lapse in cover or rollover to another fund will lose the exemption. ASIC guidelines for SMSF advice ASIC has released proposed guidelines for advisers to improve the disclosure of information that may influence a decision to establish a SMSF. ASIC will finalise the guidelines in February Under the proposed guidelines, advisers need to: warn clients that SMSFs do not have access to the compensation arrangements (under super law) in the event of theft or fraud. explain other matters that may influence the client s decision to set up an SMSF, including: the duties and obligations associated with running an SMSF, including that trustees remain responsible for managing the fund even if they outsource some or all of their responsibilities. the risks associated with running an SMSF. the need to develop and implement an appropriate investment strategy for an SMSF. the need to consider and develop an exit strategy for an SMSF. the possibility that the laws and policies that affect SMSFs may change. Super law provides that the trustee of an APRA regulated super fund may apply to the Minister for compensation if the fund suffers loss because of fraudulent conduct or theft, and the loss has resulted in a substantial reduction of the fund which makes it difficult for the fund to pay benefits. The compensation is funded through a levy imposed on APRA regulated super funds. SMSFs are not eligible to receive compensation (under super law) for any loss suffered as a result of fraud or theft. SMSF trustees can choose to take legal action against those who engaged in the fraudulent conduct or theft. Clients considering a SMSF should also note that members do not have access to the Superannuation Complaints Tribunal (SCT) to resolve complaints. The SCT deals with complaints about the decisions and conduct of trustees and other decision makers in relation to super. SMSF trustees must resolve issues between themselves and where trustees cannot agree, they would need to proceed to court. This can be a costly and lengthy process. Implications for advisers Under the proposed guidelines, statements of advice would need to be reviewed to ensure compliance with the new disclosure requirements. If access to compensation arrangements and the SCT are important to a client, then a public offer fund may provide additional advantages in comparison to a SMSF. Partial commutations and minimum annual amounts within a SMSF A partial commutation from an account based pension can be counted against the minimum annual amount required to be paid from that pension. Recently, Self Managed Superannuation Funds Determination (SMSFD) 2013/2 was released that explores this concept within the SMSF environment. This Determination highlighted the following: A partial commutation of a transition to retirement account based pension cannot count against the minimum annual amount. 2

3 A payment made upon full commutation cannot count against the minimum annual payment (as the account based pension ceases before the payment is made). The partial commutation counted against the minimum annual payment may be paid in cash or in-specie. A partial commutation that is rolled over on or after 6 June 2009 cannot count towards the minimum annual amount. Payments made under a payment split count towards the minimum annual amount. For a partial commutation to occur, the member must make an election to pay a partial commutation before any payment is made. A partial commutation that counts against the minimum annual amount is taxed as a super lump sum, not as an income stream benefit. Example Declan is receiving an account based pension within his SMSF (in the 2013/14 financial year). Declan requests, in accordance with the rules of the fund, to partially commute $12,000 to be paid into his personal bank account. As Declan s pension did not cease as a result of the partial commutation and the partial commutation was not rolled over, the partial commutation will count towards the minimum annual amount required to be paid from that account based pension within the SMSF. For a retail super fund, check if the account based pension provider allows a partial commutation to count against the minimum annual amount and what administration process must be followed to do it. Segregating current pension assets within an SMSF The ATO has released Draft Tax Determination TD 2013/D7 which provides guidance on when an asset of a super fund is a segregated pension asset. Income from assets supporting an income stream within an SMSF is exempt from tax. This is called exempt current pension income (ECPI). Assets supporting an income stream may either be segregated or unsegregated. If assets supporting an income stream are not specifically set aside for paying that income stream benefit, then the pension assets are unsegregated. Where current pension assets are unsegregated the SMSF must obtain an actuarial certificate that certifies the proportion of the SMSF s income that is tax exempt. Actuarial certificates If assets supporting an income stream are specifically identified as having the sole purpose of supporting an income stream the assets are segregated (known as segregated current pension assets). No actuarial certificate is required if the SMSF has segregated pension assets and within the relevant financial year they do not pay an income stream other than an account based, market linked or allocated pension. The income from the segregated pension assets is tax exempt. Otherwise, the SMSF will need an actuarial certificate to certify the proportion of the SMSF s income that is tax exempt. Often the cost of obtaining an actuarial certificate for unsegregated assets is less expensive than the accounting costs for segregating pension assets. For clients under age 60, compare whether a partial commutation or pension payment is more tax advantageous for the client (ie lump sum tax versus tax on pension payment). Where relevant, consider the reduced Centrelink deductible amount if a partial commutation occurs. Pension payments from an account based pension cannot be paid in-specie. Counting an in-specie partial commutation against the minimum annual amount may circumvent this issue. Where a partial commutation is paid in-specie, the asset paid in-specie is no longer supporting the account based pension when it is disposed by the SMSF. The tax implications of this disposal should be considered. Identifying the assets For an asset to be a segregated current pension asset the whole asset must be used to back the pension. If the market value of the asset exceeds the account balance supporting the income stream, it cannot be a segregated current pension asset. Shares and units can be segregated where they can be specifically identified, or where sufficient accounting records are maintained (relating to acquisition and disposal) to specifically identify the shares or units. Each share or unit is treated as a separate asset. If shares or units are not specifically identifiable and accounting records are insufficient, the shares or units can only be segregated where their market value does not exceed the account balance supporting the income 3

4 Example An SMSF holds the following assets: Bank account - $5,000 Commercial property - $1,200,000 Shares (specifically identifiable) - $800,000 Shares (not specifically identifiable) - $200,000 Units (specifically identifiable) - $400,000 The SMSF s current pension liabilities are $1,100,000. The property cannot be a segregated current pension asset as the market value of the property exceeds the account balance supporting the income Shares that are not specifically identifiable ($200,000) can be segregated as they do not exceed the account balance supporting the income All or part of the shares or units specifically identifiable can be segregated. Total assets backing supporting the income stream cannot exceed the SMSF s current pension liabilities of $1,100,000. The SMSF identifies the shares that are not specifically identifiable ($200,000), the shares specifically identifiable ($800,000) and part of the units that are specifically identifiable ($100,000) as having the sole purpose of supporting the income These assets are now segregated current pension assets and any income from this assets are tax exempt (ECPI). Income from the commercial property, the bank account and the units not supporting the income stream is taxable. Identifying the type of pension and segregating the assets Segregation is only required to be done at a fund level (holistic level), it is not required at an individual pension account level. Where an SMSF only has members receiving an account based, market linked or allocated income stream (no accumulation members or recipients of other income stream types) and the fund s assets do not exceed the value of the current pension liabilities, then the assets are taken to be segregated and the investment returns on these assets are tax exempt. Where an asset is a segregated current pension asset for only part of the income year, only the income that is received from the asset at the time it was segregated will be tax exempt. If an asset is disposed of shortly after being segregated (resulting in an assessable capital gain), ATO Draft Taxation Determination (TD 2013/D7) raises the possibility of tax avoidance (Part IVA the Tax Act). If, in the ATO s opinion the asset was not being dealt with for the sole purpose of enabling the fund to discharge it s pension liabilities (it was segregated so that the realised capital gain would be tax exempt) then the realised capital gain would not be ECPI and tax is payable. TD 2013/D7 also addresses the issue of segregating bank accounts. Based on this determination, if an SMSF wanted to hold a bank account as a segregated current pension asset, it would be advisable to have a second general bank account for the day to day operation of the fund. Where, by necessity, amounts are paid to a single bank account that is a segregated current pension asset, a corresponding transfer from the segregated bank account should be made within a reasonable time. For example, where only part of the shares in a company are segregated current pension assets but the dividend for all of those shares are paid into a segregated bank account, dividends for the shares that are not segregated current pension assets are transferred out of the segregated bank account within 28 days. If an incidental expense is payable by the fund relating to the operation of the fund generally and is not subject to apportionment, you can pay such an incidental expense from the segregated bank account. For example, you can pay the annual supervisory levy from the segregated bank account where all members are pension members. If an SMSF is paying an income stream benefit they must consider whether to segregate the pension assets or not. Factors to consider would be the comparative expense and any tax advantages that may be obtained. When choosing which assets to segregate for the sole purpose of enabling the fund to discharge its pension liabilities, consideration should be given to maximising the potential tax benefits and which assets to draw down from to actually pay the current pension payment. Where an asset is disposed of shortly after becoming a segregated current pension, the ATO may apply tax avoidance if the asset is not being dealt with for the sole purpose of enabling the fund to discharge its pension liabilities. If an SMSF wants to hold a bank account as a segregated current pension asset it may be prudent to maintain a second general bank account for the day to day operation of the fund. 4

5 SMSF supervisory levy The increase to the ATO SMSF Supervisory levy increase has been legislated. Trustees must pay the supervisory levy in advance rather than in arrears. The table below details the ATO supervisory for established funds: SMSF annual return Levy payable 2013 $321 ($191 + $130)# 2014 $388 ($259 + $129)* 2015 $ $259 #100% of 2013 levy ($191) + 50% of 2014 levy ($130) *100% of 2015 levy ($259) + 50% of 2014 levy ($129) The table below details the ATO supervisory for newly registered funds: SMSF annual return Levy payable Maximum pension 1 single Maximum pension 1 couple each Pension upper income threshold single Pension upper income threshold couple (combined) Pension upper asset threshold single homeowner Pension upper asset threshold couple homeowner (combined) Maximum allowance 1 single age 22 or over (no children) Maximum allowance 1 couple each 1. includes supplement(s) Old rate New rate $ $ pf $ pf $ pf $1, pf $1, pf $2, pf $2, pf $735,750 $748,250 $1,092,000 $1,110,500 $ pf $ pf $ pf $460 pf 2013 $321 ($191 + $130) 2014 $388 ($129 + $259) 2015 $518 ($259 + $259) 2016 $518 ($259 + $259) For more information on the ATO supervisory levy, please refer to the following link: The increased rates and upper asset/income thresholds increase any social security entitlements your clients receive. Furthermore, clients who were previously ineligible may have become eligible following the increased thresholds and should apply to Centrelink to-2016-financial-years/ Social security figures from 20 September Increased payment rates and thresholds The rates and thresholds below apply to nontransitional recipients from 20 September Transitional arrangements apply to pensioners with certain entitlements as at 19 September For further details, including transitional rates and nonhomeowner thresholds, refer to our social security fact sheet. Talking Tech has been produced by OnePath Technical Services and is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation or needs. Before making a recommendation based on this publication, consider its appropriateness based on the client s objectives, financial situation and needs. OnePath Technical Services is not a registered tax agent under the Tax Agent Services Act Your client should refer to a registered tax agent before relying on information in this publication that may impact their tax obligations, liabilities or entitlements. 5