The Ying and Yang of post reform strategies Paper written by: Mark Ellem Executive Manager, SMSF Technical Services, SuperConcepts

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1 The Ying and Yang of post reform strategies Paper written by: Mark Ellem Executive Manager, SMSF Technical Services, SuperConcepts 0 P a g e

2 The Scenario Glory, aged 81, has the following benefits in the Fabulous SMSF: ABP $1m; TAP account balance of $500k (special value credit for TBC was $600k); accumulation $100k; ABP and TAP paying minimum but still does not need level of income being paid and would like to reduce it Jay Jay, aged 83, has the following benefits in the Fabulous SMSF: ABP $1.6m. Glory and Jay Jay: Still living in 4 bedroom family home (outside super) worth $4m thinking of selling to buy smaller apartment with water views for about same value; Most assets in SMSF but have $600k in cash and term deposits outside of the SMSF Clara, aged 61 and child of Glory and Jay Jay: sold half of her interest in family business to her brother. Retains 25%; 1 P a g e

3 has TTR pension - $1.1m in the Fabulous SMSF; recently resigned from full time employment with family business and works one day per week in local art gallery. Intends to fully retire in a couple of years when her spouse retires and then plan to travel a lot. Mitch, aged 58 and child of Glory and Jay Jay: Continues to own and run the family business; has $1.405m accumulation balance in the Fabulous SMSF; wants to make large NCC in the future; has spouse with very low super benefits. The SMSF had been running segregated pools for tax and investment purposes up until 30 June 2017 converted to unsegregated due to $100k commutation from Glory s ABP, due to TBC. Whilst the SMSF cannot use the segregated method to claim exempt current pension income (ECPI) for 2017/18 and most likely following income years, they want to keep assets segregated for investment purposes. Fund assets include BRP valued at $2.5m, leased to family business. Unrealised capital gain of $100k. Other assets include shares and cash. Limitation on use of segregated method to claim ECPI from 1 July 2017 As an integrity measure, the capacity for SMSFs and small APRA funds to use the segregated method to claim ECPI has been restricted, from 1 July SMSFs or Small APRA Funds (SAFs) will not be able to use the segregated method for to claim ECPI after 1 July 2017 if: At any time during the income year, there is least one superannuation interest which is in the retirement phase (this excludes TRISs as they are not retirement phase pensions), and At 30 June of the prior income year, a fund member has a total superannuation balance that exceeds $1.6m; and that member of the fund is in receipt of a current superannuation income stream (excluding TRIS). However, this restriction does not affect the SMSF s ability to provide separate investment strategies for fund members. Effectively, the fund can be segregated for accounting purposes, whilst claiming ECPI using the unsegregated or proportionate method. Income from fund assets will be allocated to member accounts to which the assets has been segregated, in compliance with SISR For example, income from fund assets segregated to member pension accounts will be credited to those pension accounts. However, when it comes to calculating the fund s tax liability, this will be determined using the unsegregated method, at the fund level. The question then arises as how tax will be allocated across member accounts. One approach could be that as the tax expense is at a fund level, it would be treated similarly to other fund expenses, for example, accounting 2 P a g e

4 fees and audit costs and allocated to member accounts on a proportionate basis, in compliance with SISR However, this will result in tax expense being deducted from member pension accounts. Whilst pension members may not expect their pension accounts to be reduced by fund income tax, as the SMSF must use the unsegregated method to calculate tax, under this approach, the expense is effectively shared across all member accounts, proportionately. With this in mind, consideration should be given to the additional administration and accounting required to treat the fund as segregated for accounting purposes, but to calculate tax on a pooled basis. The methodology for allocating tax in such fund should be discussed with the SMSF trustee(s), as it should be their decision. Factors that may influence the methodology chosen include, what the trust deed says and whether the methodology chosen can easily be accounted for. A viable option would be to separate the members into their own SMSF, based on their stage of life, that is, retirement phase members in one SMSF and accumulation member in another. Transferring members out of the SMSF When the decision is made to move the members into separate funds, the question is which members Jay Jay and Glory or Clara and Mitch? The transaction costs will be a determining factor, along with Investment Strategy. Fund assets that were eligible for CGT relief would have at their cost base reset, where the market value was greater than cost. As the assets, supporting the pension accounts, were segregated current pension assets there is no assessable notional gain on reset. Which fund assets were segregated current pension assets? Was the BRP a segregated current pension asset that had its cost base reset to the $2.5m market value? There will also be transaction costs for moving assets from one SMSF to another, particularly the BRP, if it is selected by the trustee to transfer out to another fund. You will also have to ensure that when transferring assets from one SMSF to another that the receiving SMSF does not contravene s.66 SISA, that is, the asset is an exempt asset that can be acquire from a related party. A further consideration is the fund s Investment Strategy. If the BRP is retained in the fund with Jay Jay and Glory, is this an appropriate asset to have considering both members are in draw down phase? Further, given the age of Jay Jay and Glory and the restriction of the TBC, there may be a requirement to transfer the property out of the SMSF as a death benefit payment in the future. Given it is the BRP of the business run by Clara and Mitch, how would this effect their business? Should the BRP be retained in an SMSF with Clara and Mitch as the members, given they are much younger? These factors will determine which members stay in the fund and which assets are retained. TBAR Reporting Where a pension in retirement phase is transferred to another super fund it will result in there being a TBA event, which must be reported. This is due to the pension in the first fund being fully commuted, a TBA debit event, rolled as accumulation to the second fund and a new pension commenced, a TBA credit event. Note: prior to the commutation in the first fund, ensure that the required pro-rata minimum pension is paid, otherwise the fund will not be entitled to claim ECPI in relation to that pension. 3 P a g e

5 Conversely, ensure the pro-rata minimum pension is paid in the second fund, by 30 June to allow the fund to claim ECPI. Whilst there are relaxed reporting requirements for SMSFs, there is benefit in reporting as soon as possible, not just by the due date, whether that be quarterly or annually. For the Fabulous SMSF, as it had retirement phase pensions in existence at 30 June 2017 and had at least one member with a total super balance at 30 June 2017 of at least $1m, it s TBAR reporting will be as follows: For the retirement phase pensions in place at 30 June 2017 for Jay Jay and Glory, reporting is required by 1 July For relevant TBC events that take place in the 2017/18 financial year, for example commuting a pension, the due date for lodgement of the TBAR will be required to lodge the TBAR for 2017/18 events by 28 October For relevant TBC events that take place from 1 July 2018, the reporting deadline will be within 28 days after the end of the financial quarter in which the event occurred. Tip: Where a person exceeds their TBC, early lodgement of the TBAR will limit the amount of notional earnings calculated, which is subject to tax at 15% or 30%, depending upon whether it is a person s first or subsequent breach of their TBC. It could also be as simple as identifying the excess soon after it occurs and arranging for the relevant partial commutation of the pension either back to accumulation or as a lump sum out of the fund. But the question is, how quickly would this excess be identified if the fund is being processed on an annual rather than a daily basis? Deferred reporting could also potentially lead to an incorrect excess TBC determination being issued by the ATO, that then would have to be dealt with. If it is decided to transfer Jay Jay and Glory to a new SMSF or other superannuation fund, their respective pension(s) will be fully commuted, rolled over and a new pension commenced in the receiving fund you do not rollover the pension, it is fully commuted and rolled as an accumulation interest (except for a death benefit pension, which retains it tax components). From an administration perspective, the following should be noted: Prior to the full commutation of the pension, SISR 1.07D (account based pensions) and 1.07C (market linked pensions) requires a pro rata minimum pension to be paid; As the benefit is rolled as an accumulation interest (except for death benefit pension), the tax components could be mixed, within the sending fund, where the member has an accumulation interest, or in the receiving fund, where the member has an accumulation interest. For the receiving fund, this would occur where it is an SMSF, as members of an SMSF can only have one accumulation interest, per regulation (2) ITAR 97. The commutation of the pension will be a debit to the member s Transfer Balance Account (TBA) and must be reported to the ATO on a TBAR by the due date; 4 P a g e

6 The commencement of the new pension in the receiving fund will be a credit to the member s TBA and must be reported to the ATO on a TBAR by the due date. Market Linked Pensions & TBC Glory has a SISR 1.06(8) Market Linked Pension (MLP), in place as at 30 June For TBA purposes this pension is defined as a capped defined benefit pension, per s ITAA 97. Glory will have a credit to her TBA, as at 1 July 2017, which will be equal to the special value, which is calculated per s (3) ITAA 97, as annual entitlement x remaining term. This has been calculated at $600,000, even though the capital backing the MLP is only $500,000. Beware potential TBC trap on rollover of MLP: When completing the TBAR for a capped defined benefit pension, ensure that you correctly calculate the special value and insert at item 18. The form does not ask for the annual entitlement and remaining term, just the value. In this case, the author is aware of situations where a MLP s actual account balance, rather than its special value was mistakenly reported for TBC purposes. Where a MLP is commuted, a debit will arise in the member s TBA. For a MLP, the debit of a full commutation is calculated per s (1)(a) ITAA 97. The debit value, for a MLP, is defined in s (6) ITAA 97 and is the special value, at that particular time. Where Glory fully commuted her MLP to either change the term of the pension, by re-commencing a new MLP in the Fabulous SMSF, or roll over to another superannuation fund and commence a new MLP, there would be a debit value to her TBA. As outlined in the Explanatory Memorandum to the amending bills 1, the debit value of an MLP on full commutation would be the value equal to the annual entitlement x remaining term, just before the full commutation. That is, the special value of the commutation is calculated as if the MLP would continue. 1 Explanatory Memorandum to Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 Example 3.30 and 3.31 Beware potential double counting trap on rollover of MLP: It is important to note that despite the guidance (including examples) provided by the Explanatory Memorandum on how to calculate the debit value when commuting a MLP, the author is aware that the ATO has identified a potential drafting issue with the calculation of the debit value in the legislation, which could result in the debit value of a full commutation of a MLP always being zero. The ATO has noted that this is not the intent of the legislation and that it is contrary to the Explanatory Memorandum, including the example provided (Examples 3.30 & 3.31). However, unless the drafting error is rectified the 5 P a g e

7 technical effect of this interpretation is a double count of the special value credit for Glory s existing 30 June 2017 MLP and the new MLP commenced after 30 June Note advisers considering fully commuting a MLP, maybe to allow a MLP to be rolled over to a different fund, may wish to seek guidance from the ATO before proceeding with any advice. One reason to affect the re-commencement of a MLP after 30 June 2017 is that the post 30 June 2017 MLP is not included in the definition of a capped defined benefit pension, per s , as it would not be in retirement phase just before 1 July 2017, as required per s (1)(b). Consequently, the value for TBC purposes that would arise in Glory s TBA for the post 30 June 2017 would be equal to the actual commencement value of the MLP, rather than based on the special value. This could result in a lower amount counting towards Glory s TBC, however, will depend upon the debit value arising, if any, from the commutation of the pre-1 July 2017 capped defined benefit pension MLP. Another reason is the $100,000 capped defined benefit income cap amount. For a pre-1 July 2017 capped defined benefit pension MLP, if the annual pension amount is more than $100,000, then 50% of the excess will be fully assessable to the member and taxed at marginal tax rates. This rule was introduced primarily to offset the fact that where a member s TBC count was more than $1.6m and the excess was in relation to a capped defined benefit income stream, that excess could remain in retirement phase and enjoy income tax exemption as such a pension could not be commuted. However, there may be scenarios that while the value of the member s TBA is under the $1.6m TBC, the value of the member s pension payments received from the MLP exceeds the defined benefit income cap of $100,000. For these members, 50% of the excess over $100,000 is taxed at their marginal tax rate. However, if the MLP was not defined as a capped defined benefit income stream (CDBIS), the defined benefit income cap would not apply and 100% of the pension payments received by a member, aged at least 60, would be tax free. In this case, only MLPs in place at 30 June 2017 are included in the definition of CDBIS. Therefore, a full commutation of the pre-1 July 2017 MLP to facilitate a rollover and commencement of a new MLP post 30 June would mean the MLP is not a CDBIS and consequently no amount would be assessable, as they would be expected to be at least age 60. However, as noted above, until the issue of the debit value for the commutation of the pre-1 July 2017 MLP is clarified, any such strategy may be best delayed. Capped defined benefit income streams & PAYG Withholding As part of the 1 July 2017 superannuation reforms, the standard process for withholding tax from certain capped defined benefit pensions has changed. The change may result in a pensioner receiving a lower net pension due to the requirement for the SMSF to withhold PAYG tax from the pension payments. The change applies to any of the following types of pensions that were being paid as at 30 June 2017 and are still being paid after 1 July 2017: SISR 1.06(2) Lifetime complying pensions, commenced at any time; SISR 1.06(7) Fixed term pensions, commenced prior to 1 July 2017; & 6 P a g e

8 Market-linked pensions, commenced prior to 1 July 2017 (generally a pension that has a set annual level which is based on an account balance and the number of years the pension has to run, cannot be taken as a lump sum and ceases when the payments have been made for the set number of years). SMSFs that are impacted may have an obligation to withhold tax from each pension and will need to be registered for PAYG withholding with the ATO, regardless of whether the fund has an actual withholding liability. The fund will need to calculate how much tax, if any, is to be deducted from each pension payment. This will be determined based on two key elements, namely, the level of annual gross pension to be paid and holding a completed Tax file number (TFN) declaration form for each pensioner. As most of these pensions have been exempt from PAYG withholding, prior to 1 July 2017, it will be a new task to each capped defined benefit income stream recipient to complete a TFN declaration form and return to the fund s accountant/administrator to lodge with the ATO, again, regardless of whether there is any amount to be withheld. Depending on how the member completes their TFN declaration, will determine whether the fund is to include the tax-free threshold in its PAYG calculations. Each capped defined benefit income stream recipient will receive an annual PAYG withholding summary to be incorporated into their personal tax return. Beware: SMSFs that only have members who are at least age 60 may still need to register as a PAYG Withholder. Where any member is receiving a capped defined benefit income stream, the SMSF must register as a PAYG Withholder, determine the amount of the withholding, report and remit to the ATO and issue an annual PAYG Summary Statement. Level of claim for ECPI Where the Fabulous SMSF is reduced to 2 members, for example, Jay Jay and Glory, the ECPI% will increase as there is a lower portion of the fund in accumulation accounts. The ECPI% could be increased to 100% where Glory withdraws all of her accumulation account. It could also be achieved if Glory restructures her MLP from a pre-1 July 2017 capped defined benefit income stream MLP to a post 30 June 2017 MLP. However, note our comments in the previous section amount the issue of calculating the debit value. Tip: With the introduction of the TBC, affected SMSF members will have both pension and accumulation accounts, where previously, they may only have had a pension account. If this was their sole source of income in retirement, they would not incur tax at either the fund level or personal level, provided they were at least age 60. However, with any accumulation account(s) held by the SMSF, there will be a portion of the fund s income subject to fund 15% tax. Given this, enquiries should be made as to the level of 7 P a g e

9 taxable income for the member and particularly if they are using their tax-free threshold. If not, then consideration could be given to withdrawing some or all of the accumulation account and effectively reducing the tax rate from 15% to zero, by using the member s tax-free threshold and applicable tax offsets. Just a word of warning, in addition to complying with the licensing rules, once benefits are withdrawn from superannuation it may be difficult or impossible to get them back in if it is subsequently realised that it was better to leave the capital inside super. Focus on Clara Clara has sold half her interest in the family business to Mitch, her brother, retaining a 25% interest. She is aged 61 and has recently resigned from the family business and now works one day a week at the local art gallery. Her intention is to fully retire in a couple of years. When did Clara retire? The notion of retirement for some may mean the gold watch, retirement party and oversized Sad to see you go card but under the super law it is quite different. Retirement for super purposes depends on retirement age, your intentions and ceasing work. Anyone who is aged 60 to 64 is considered to have retired when an employment arrangement has ceased. For Clara, this means that when she resigned from her employment with the family business, including her directorship, as this occurred after she attained age 60, all of her superannuation benefits became unrestricted non-preserved. The removal of the tax exemption has created the concept of a TRIS in retirement phase and a TRIS not in retirement phase. A TRIS in retirement phase is tax exempt on any income earned on fund investments that support it. The value of a TRIS in retirement phase is counted against the member s transfer balance cap. A TRIS moves from not being in retirement phase to retirement phase if the fund has been notified that the member is totally and permanently disabled, is terminally ill or where aged under 65, but attained their preservation, has retired. If the fund has not been notified of one of these events it will remain a TRIS not in retirement phase. Beware: A TRIS not in retirement phase cannot automatically convert to an Account Based Pension once the member satisfies a condition of release with a nil cashing restriction. Where the member meets these requirement and notifies the trustee (or automatic where attaining age 65), the TRIS will become a TRIS in retirement phase. If the member wishes for the pension to be an Account Based Pension, the TRIS will have to be fully commuted and re-commenced as an Account Based Pension. Once Clara notifies the trustee(s) that she has met a condition of release, the TRIS will become a TRIS in retirement phase. The 10% maximum pension limit will be removed and Clara will be able to request lump sum commutations. Further, the fund will be required to lodge a TBAR as the value of the TRIS, at the time of converting to a TRIS in retirement phase, will count towards Clara s TBC and will be a credit to her TBA. 8 P a g e

10 Note: The TRIS does not convert to a TRIS in retirement phase until the member notifies the trustee(s) of the event that causes their benefits to become unrestricted non-preserved. However, this only applies for a member aged 60 to 64. Where the member s benefits become unrestricted non-preserved due to the member attaining age 65, then no notification is required the benefits automatically become unrestricted non-preserved and the TRIS becomes a TRIS in retirement phase. Tip: What process do you have in place to monitor clients aged 60 to 65? For those clients aged 60 to 64 a review of their gainful employment history since turning 60 should be conducted. Have they ceased any arrangement of gainful employment since attaining age 60? If so, then all of their benefits become unrestricted non-preserved. This is not just an issue for those members with a TRIS, those with just accumulation accounts may have comfort in knowing that their benefits are accessible, due to ceasing an arrangement of gainful employment, at any time in the future. For those members approaching 65 with a TRIS, plan to be able to lodge the TBAR by the relevant due date is the fund a quarterly or annual reporter? Whilst benefits may become unrestricted non-preserved due to a member, at least age 60, but not yet 65, ceasing an arrangement of gainful employment, future contributions and earnings will continue to be subject to the preservation rules. To be able to access, the member would have to satisfy another condition of release with a nil cashing restriction, for example, turning age 65 or permanent retirement from gainful employment. For Clara, at the time of her termination of gainful employment with the family business, if her TRIS was valued at $1.1m, then the entire amount would become unrestricted non-preserved, as she has ceased an arrangement of gainful employment after attaining age 60. However, if contributions were received by a fund, for example, from her one day a week job at the local art gallery, they would be subject to preservation, as well as the earnings on those contributions. However, had Clara stated that after her termination of gainful employment with the family business, she never intended to be gainfully employed on at least a part-time basis, then any future personal contributions and earnings would not be subject to preservation. Only where Clara went back to gainful employment on at least a part-time basis would contributions received by the fund be subject to preservation. Focus on Mitch Mitch continues to run and work in the family business. He has increased his share of ownership with the recent acquisition of half his sister s (Clara) interest. He wishes to maximise his superannuation with large non-concessional contributions. His spouse had very low benefits inside of superannuation. Some options for Mitch to consider include: 1. Gift to his spouse to maximise non-concessional contribution cap as well under $1.6m; 9 P a g e

11 Where Mitch s spouse is under age 65 and has a total superannuation balance of less than $1.4m at 30 June prior, the spouse can make a maximum non-concessional contribution of $300,000 in year 1, with no further non-concessional contributions in years 2 and Implement a contribution splitting strategy The contribution splitting rules can also be utilised to allow a spouse to maximise the non-concessional cap, by keeping a member under the $1.6m total superannuation balance cap or the relevant trigger points for the non-concessional contribution bring forward rule. Only concessional contributions can be split to a spouse. A spouse includes a person: You are legally married to; You are in a relationship with that is registered under certain state or territory laws, including same sex relationships; Of the same or of a different sex, who lives with you on a genuine domestic basis in a relationship as a couple (known as a de facto spouse ). Whilst the spouse for who the concessional contributions were originally made can be of any age, their spouse must meet the following criteria: They are aged less than their preservation age ; or They are aged between their preservation age and 65 and are not retired. The application to split concessional contributions to an eligible spouse is made in the income year immediately after the income year in which the contributions were made. However, the application to split can be made in the year of income the contributions were made only where the contribution spouse s entire benefit is being withdrawn before the end of that income year as a rollover, transfer, lump sum or combination of these. Further, the maximum amount of the concessional contribution that can be split to their spouse is 85% of the concessional contributions. This allows for the 15% fund income tax on the concessional contribution. A member wishing to split their concessional contributions with their spouse should complete a Contributions Splitting form (NAT ) and send to the superannuation fund. For an SMSF, this means holding the form on file for audit purposes. The application form is not required to be sent to the ATO. 3. Determine prior 30 June TSB on a net market value basis Individuals may be able to access the bring forward period for their non-concessional contributions cap equal to two or three times the annual cap, depending on their total superannuation balance. Where an individual is eligible to bring forward their non-concessional in the 2017/18 financial year, their cap for the first year is set out in the following table: 10 P a g e

12 Total superannuation balance on 30 June 2017 Non-concessional contributions cap for the first year Bring forward period Less than $1.4 million $300,000 3 years $1.4 million to less than $1.5 million $1.5 million to less than $1.6 million $200,000 2 years $100,000 No bring forward period, general non-concessional contributions cap applies $1.6 million or more Nil N/A For a member like Mitch, who only has an accumulation account, his total super balance is based on his accumulation phase interest. This is generally determined as part of the preparation of the SMSF s annual financial statements. In relation to a SMSF preparing its annual financial statements section 35B(2) of SISA states that: The regulations may provide for or in relation to the preparation of accounts and statements covered by subsection (1). If the regulations do so, the accounts and statements covered by subsection (1) must be prepared in accordance with the regulations. Applying since the 2012/13 income year, Regulation 8.02B of the Superannuation Industry (Supervision) Regulations 1994 ( SISR ) states that: 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. The draft version of this legislation stated that assets would need to be disclosed in the fund s annual financial statements at net market value, which would require selling costs of the asset to be deducted from the asset s market value. This would have required administrators, accountants and auditors of SMSF to have knowledge of selling costs across the different asset classes and would have added significant costs of compliance. Thankfully, in the final version, the requirement was changed from net market value to market value as market value was already defined under section 10 of SISA as it was used in relation to the in-house asset rules. Total super balance is defined in s ITAA 97, which includes a member s accumulation phase interest. The accumulation phase interest is defined in s ITAA 97 as the total amount of the 11 P a g e

13 superannuation benefits that would become payable if the individual voluntarily caused the interest to cease at that time. This would include any selling costs associated with the disposal of asset. So, on one hand, Mitch s accumulation interest per the SMSF s annual financial statements is $1,405,000, based on the assets being disclosed at market value, however, should selling costs be taken into consideration, the amount that would become payable could be less than $1.4m. This difference can mean an additional $100,000 that Mitch could make as a non-concessional contribution. The value of Mitch s accumulation phase interest will be reported in the Member information section of the SMSF annual return and will be the $1.405m figure. Where this does not equal the member s accumulation phase interest value, the fund can report this additional information via the TBAR. Information reported on the TBAR (item 15, 17 & 18) will override any account balances reported in the SMSF annual return for the purposes of total super balance. This additional reporting is optional and at the discretion of the fund. Jay Jay & Glory Sale of family home Jay Jay and Glory have a family home, worth $4m and are thinking of selling it to buy a smaller apartment, with water views. They expect the cost of the new apartment will use all of the sale proceeds from the current family home. They also have a term deposit, in joint names of $600,000. This amount, currently, could not be contributed to superannuation, as they are both over age 75. However, the new Downsizer Contribution rules do provide scope for the following category of people to make a personal contribution: At least age 65, not yet 75, but cannot meet the work test ; Aged at least 75; At least age 65 with a prior 30 June total super balance of more than $1.6m. In short, the Downsizer Contribution rules allows a person to make a superannuation contribution without having to meet the work test and without reference to total super balance, where: Individual is over age 65; Individual, or their spouse, has held the property for 10 years; Downsizer contribution cap = lessor of $300k & total proceeds received; The dwelling is in Australia and is not a mobile home; Sale contract entered into on or after 1 July 2018; Contribution is made within 90 days of home changing ownership. For Jay Jay and Glory, to utilise the Downsizer Contribution rules they would have to delay signing any sale contract for their home until 1 July They also need to satisfy the other requirements, for example, the 10-year holding period. 12 P a g e

14 The Downsizer Contribution rules do not require the contribution to come from the proceeds of the sale of the home. Consequently, whilst it is expected that all the proceeds from the sale of the existing family home will be used to buy the new apartment, Jay Jay and Glory can use the $600,000 term deposit to make their respective maximum $300,000 Downsizer Contribution. Consideration will need to be given as to which fund any contribution, under the Downsizer Contribution rules, is made, as this could affect the fund s claim for ECPI, as well as the method used to claim ECPI. Claiming ECPI 2017/18 & beyond In the September 2017 SMSF News Alert (issue 14), the ATO confirmed its view regarding the approach to claiming ECPI in an SMSF that consisted wholly of pensions for only part of a financial year. In short, a fund uses the segregated method to claim ECPI during that part of the financial year the fund consisted wholly of pensions and the unsegregated method to claim ECPI for the balance of the financial year. However, the News Alert also noted that they have made an administrative concession with respect to their compliance approach for the 2016/17 year and prior. In relevant instances, SMSF trustees will not face compliance action for prior years ECPI calculations where those calculations were based upon an industry practice that is not consistent with the ATO s view of the law. We see this approach by the ATO as a good, practical outcome. On one hand, it confirms our interpretation of how ECPI should be claimed by a fund that has both segregated and unsegregated pension assets in the one financial year. On the other, by allowing application of industry practice for the 2016/17 financial year, using the unsegregated method for the entire year, even though for part of the year the fund was wholly in pension, it will provide some breathing space for actuaries, accountants and software providers to review what changes may need to be implemented to apply the ATO s view in the 2017/18 and following years. Jay Jay s passing In the event of Jay Jay s passing, leaving Glory as the sole member of the fund, the advice considerations include: How much of Jay Jay s death benefits can be retained in the fund given the TBC; Will Glory commute part of her ABP back to accumulation to allow retention of Jay Jay s benefits in the fund; What is the TBC and TBAR reporting time frames for the fund; Does Glory wish to continue with the Fabulous SMSF or rollover her benefits to another fund, for example, a retail fund; From a tax perspective, would it be better for Glory to withdraw benefits from super and hold outside, except for the market linked pension, which must remain inside super and run its term; What changes are required for Glory s Estate Plan. From an administration and compliance perspective: 13 P a g e

15 A Rollover Benefits Statement needs to be completed where any benefits are transferred to another superannuation fund. Note there is a separate Rollover Benefits Statement in respect of the rollover of a death benefit, including a death benefit pension; Where pensions are rolled over to another superannuation fund, the relevant minimum pension payment standards must be satisfied; Be aware of the potential to mix tax components in either the sending fund or receiving fund, where the member has an accumulation account; The commutation and re-start of a pension is a TBC event, which requires reporting via a TBAR, within the relevant reporting time frame. Whilst an SMSF has a deferred TBAR reporting timeframe, where rolling over to an APRA regulated fund, note that they will report the TBAR event (the commencement of the new pension) within 10 business days after the end of the month. Where the TBAR for the SMSF, reporting the pension commutation, is lodged after the APRA regulated fund s TBAR for the pension commencement, this may result in the member s TBA exceeding the TBC. The Adviser and The Accountant The Ying and the Yang Post super reforms it is even more important for the Adviser and the Accountant/Administrator to have an understanding and appreciation of each other s role. For any strategy, there will be administration and compliance requirement, which could have an influence on the strategy itself or present some administrative challenges. These challenges, which whilst may be overcome, could result in additional administration and even audit costs to the fund, which the client was not aware of at the time of giving the go ahead for the strategy. The best client outcome will be where the adviser and accountant/administrator are working together to ensure that the administrative and compliance requirement are matched to the strategy. Mark Ellem, SuperConcepts 2018 This presentation is for general information only. Every effort has been made to ensure that it is accurate; however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author. 14 P a g e