SMSF Association National Conference 2017 Melbourne February

Transcription

1 SMSF Association National Conference 2017 Melbourne February Dancing with the experts the SMSF strategy challenge How to post budget strategies Graeme Colley Executive Manager SMSF Technical and Private Wealth SuperConcepts

2 How to post budget strategies Graeme Colley Introduction As they say, death can be fatal and it s no different for the Liz, Phil and their families. 1 July 2017 is fast approaching and the SMSF family are in need of urgent financial advice. The budget announcement in May 2017 knocked our family off their thrones and they are unsure how, and if, the changes will impact on their retirement savings. Let s see what issues crop up with them and how you as an adviser will be able to solve some of their superannuation and associated problems encountered on the family s road through life. This workshop is designed only for specialist members who have an experienced level of superannuation knowledge. It is assumed you have a level of knowledge about the new superannuation rules to be able to solve the problems raised. You will need to apply that knowledge to the pre and post 1 July 2017 contribution rules, the pension balance caps and estate planning issues presented to you during this workshop. In this workshop we will look at various scenarios stemming from the family profiles that were introduced earlier in this conference and how the superannuation changes have already had an impact on their retirement decisions. You will see things have progressed since the facts and circumstances presented themselves earlier and not necessarily to the best benefit for some family members. As this is a workshop, your contribution to the discussion, both in your groups and as part of the wider audience, is essential. The plan is to provide you with our understanding of the new legislation from different points of view and then let you navigate your way through various scenarios in your group of 10. It will be your job to identify the issues, what can be done to resolve them and develop appropriate strategies. To assist with the workshop additional facts will be introduced as the family s circumstances change over time.

3 Workshop Facts What we know so far In the SMSF Family Profiles the family tree is headed by Phil and Lizzie who are 86 and 84 respectively. We also know they have an only son, Charlie who is 63 and has been married for 10 years to Cammie who is 56. Charlie has three children Harry, Billy (aka Billie) and Simon. Billy is married to Katie and they have two children, Charlotte and Georgie. In this workshop we will consider the impact of the superannuation changes over time on Phil and Lizzie, Charlie and Cammie, Billy and Katie and their children Charlotte and Georgie. What we know about Charlie and Cammie As at 30 June 2016: Cammie and Charlie are members of an SMSF Charlie has $1.2 million in the SMSF Cammie s balance in the SMSF is $300k Cammie is in receipt of a life time defined benefit pension of $55,000 p.a. from a government scheme They have life insurance in their SMSF and Cammie has life insurance in the government fund. Charlie has $600k life and TPD cover in the SMSF They both have life cover in their personal names of $300k each. Charlie has a will which provides that Cammie is the sole beneficiary if she survives him by 30 days. In the event that does not occur the estate will be divided equally between Billy and Harry. Should Billy or Harry pre-decease Charlie then their respective shares will go to their children and in the event either of them has no children the relevant share will go to the other sibling. If they both pre-decease Charlie, the estate will be divided among named charities. Charlie has named Cammie and Billy as his Executors and has executed Enduring Powers of Attorney in favour of Cammie and Billy. Charlie has made a binding death benefit nomination with Cammie as the sole beneficiary. It was made 10 years ago, has not been reviewed since and was witnessed by Cammie. Cammie has a will which provides Charlie is the sole beneficiary if she survives him by 30 days. In the event that does not occur the estate will be divided equally between Billy and Harry, his two children. Should Billy or Harry predecease Cammie then their respective shares will go to their children and in the event either of them has no children the relevant share will go to the other sibling. If they both pre-decease Cammie the estate will go to her sister, Lisa, or Lisa s children whoever is alive at the time of Cammie s death.

4 How to post budget strategies Graeme Colley Cammie has named Charlie and her sister, Lisa, as her executors and has executed an Enduring Power of Attorney in favour of Charlie. When setting up the SMSF, Cammie executed a death nomination document which allocates 50% of her super account to Charlie, 25% to Billy and 25% to Harry. The death nomination was witnessed by Charlie and nothing has been done with it since the SMSF was established. What we know about Billy and Katie Billy is a shareholder, director and site manager in his own housing construction company. Katie is a director and shareholder in the construction company. She is considering going back to work after having the family. Billy and Katie each own 50% of the shares in the construction company. Billy has a balance in an industry superannuation scheme of $43,000. Katie has a balance in an industry fund of $25,500. Katie has, at best, a frosty relationship with her mother-in-law, Cammie Additional Information Trouble on the High Seas Bad news! Phil has had a bit of a problem as he fell off the family yacht, Queen of d Seas, at his 87th birthday party on the Yarra. Unfortunately, he didn t survive the ordeal which put a bit of a dampener on the rest of the party. Police have interviewed both Lizzie and Charlie about the accident but both deny everything. At his father s wake, Charlie overheard a family friend, a well-connected government official, talking about changes to the super rules from 1 July He was particularly annoyed to hear that the contributions caps were being reduced and a $1.6 million balance limit is being introduced. Charlie had an inkling that he might come into some money soon and was planning to make use of the current caps and maximize his retirement savings by making a $180,000 non-concessional contribution in 2016/17 and 2017/18 and then triggering his $540,000 bring forward entitlement in 2018/19 just prior to turning 65. Phil s will leaves all of his assets to Lizzie as she was alive at the time of the accident. At the time of Phil s death, his assets were: Phil Shares Jointly owned Value of the asset ($) Annual Income Franking credits $1.5 million $75k? Tax payable Nil after franking credits*

5 Investment property (25 Royal Mews, Kensington NSW) Owned as joint tenants will revert to Lizzie $520k Family home (46 Buckingham Street, Windsor Downs Vic)** Owned as tenants in common in equal shares $950k $12.6k (possible) No *Grossed up income is $107,142, tax payable is $29,417 and fully franked dividends franking credit is $32,142. #non-arm s length tenant, Harry, pays rent on an ad hoc basis **old house needs work Phil and Lizzie do not have life insurance. However, their home and rental property are insured. Probate for Phil s estate was granted on 20 October Lizzie, who is a very generous person in a royal way, has decided to split the proceeds of the estate on 22 October 2016 as follows: The $1.5 million in listed shares is to be gifted: $750,000 to Charlie and Cammie, and $750,000 to Billy and Katie Lizzie is to take ownership of the Kensington and Windsor Downs properties. Concerned about the lower contribution caps, on 25 October 2016, Charlie decides to contribute the entire $750,000 gifted to him by his mother to his SMSF for both Cammie and himself. Charlie is also concerned about the new $1.6 million transfer balance cap so decides to allocate $300,000 to his super account and the balance, $450,000, to Cammie s super account. Billy is Lizzie s favourite grandson and he has been pestering her and Phil for years about helping him purchase an office and yard for his housing construction company. Lizzie agrees to gift $750,000 to Billy so he can realise his lifelong dream of owning his own business premise. The cost of the business premise is $600,000.

6 How to post budget strategies Graeme Colley Billy decided to purchase the business premise via the use of Charlie and Cammie s SMSF. This requires Billy and Katie to become members and trustees of the SMSF and contribute the $700,000 for the purchase plus amounts to cover legal fees of $5,700, stamp duty of $31,070 (say, $35,000 in total) and to provide a sufficient cash balance for the fund. The business premise was purchased by the SMSF on 25 October 2016 and is located at Castle Hill. Despite the fact that Charlie and Cammie are willing to accept the building at Castle Hill as part of the SMSF they prefer the fund assets to be segregated. Charlie and Cammie are also conscious of the volatility of the construction industry and the risks attaching to it and would prefer that the value of the property be linked to Billy and Katie s balance. They see the building as belonging to Billy and Katie and prefer to benefit from the performance gained from the shares owned by the SMSF which they see as their superannuation investments. For these reasons they have decided to split the fund into the assets relating to Billy and Katie s balance, and those that they consider relate to their balance. Workshop Exercise 1 1. Assuming both Charlie and Cammie want to maximise the combined total of their NCCs for the period ended 30 June 2018, has Charlie done the right thing allocating $300,000 to his super account and $450,000 to Cammie s super account in 2016/17? 2. Assuming Charlie s balance was over $1.6m as at 30 June 2017, what would be the consequences for both Charlie and his fund if a NCC was made for Charlie in 2017/18? 3. Would it be possible for Charlie to make a further NCC once the transfer balance cap has been increased to $1.7m (assuming his balance at 30 June prior was less than $1.7m at the time and all other contribution eligibility rules are satisfied)? Suggested Answers 1. Either Charlie or Cammie should contribute the maximum NCC available in the 2016/17 income year. As the NCC cap is being reduced from 1 July 2017, making a maximum NCC for either Charlie or Cammie will enable them to maximize the combined value of NCCs that can be contributed for the period ended 30 June Any combination of contributions that doesn t utilize either the maximum $540,000 contribution limit for Charlie or Cammie will result in a lower combined NCC being contributed for the period ended 30 June As Charlie s balance was over $1.6m as at 30 June 2017, Charlie does not have a NCC cap in 2017/18. Therefore, any NCCs allocated to Charlie s account will be treated as excess NCCs and subject to the refunding rules which apply to excess NCCs. Note, from 1 July 2017, SIS sub-regulation 7.04(3) will be removed meaning trustees will no longer be in breach of the contribution rules by accepting a NCC in excess of the fund-capped

7 contribution limit. Trustees will still need to comply with any excess release authorities they receive but they will not be penalised for accepting NCCs in excess of the fund-capped contribution limit. 3. Yes it would be possible for Charlie to make a further NCC in this situation. The proportional indexation rule which prevents additional retirement income streams being commence if the client has previously used up 100% of their transfer balance cap, does not apply to NCC contributions. As long as Charlie s total super balance is less than the general transfer balance cap at 30 June prior, and all other contribution eligibility rules are satisfied, he will be permitted to make an NCC. Commencing Pensions Charlie and Cammie abandoned their plans to make further contributions in 2017/18 and on 1 November 2016 they decide to commence transition to retirement income streams (TRIS) from their SMSF. Cammie was still working at that time and Charlie is semi-retired working 2 days a week in his old accounting firm. Details of member balances and fund investments for the Clarence House SMSF are as follows: Member balances Opening Balance 1/7/2016 Contributions for the 2016/17 financial year Balance 30/6/ 2017 Charlie $1,200, ,000 $1,559,984 Cammie $300, ,000 $779,992 Total $750,000 Billy $350,000 $332,500 Katie $350,000 $332,500 $ Total $1,500,000 $1,450,000 3,004,976 Investments Original Cost ($) No. Cost ($) Market Value of Share Current Value ($)

8 How to post budget strategies Graeme Colley ($) APA Group , , , ,560 NAB Term Deposit 435, ,000 Macquarie CMT 105, ,000 Origin Energy , , , ,543 Qube Holdings Limited ,223 53, , ,278 Santos Limited , , , ,640 Telstra , , , ,975 Wesfarmers , , , , Collins Street Pty Limited ,998 59, ,998 41,596 Colgate Palmolive , , ,300 Castle Hill property 600,000 $600,000 Total Investments 3,004,976* *Rounded Workshop Exercise 2 1. Should Charlie and Cammie claim CGT relief and if so for which fund investments? 2. What actions are required by Charlie and Cammie and the trustees in order to be eligible for CGT relief? 3. Was the decision to segregate the assets a good one from a CGT relief perspective? 4. Can they reset the value of all fund investments and can their fund remain segregated in 2017/18? Suggested Answers 1. As a general rule it is worthwhile to re-set the cost base for CGT purposes on assets that are showing a notional capital gain as at 30 June. There are a number of exceptions to this which would include assets which have a notional capital loss and those which are to be sold within 12 months of the intended re-set as the fund will not be able to access the 1/3 rd CGT discount. Other exceptions include where the future performance of the asset is

9 expected to be unfavourable or where the fund is expected to move entirely into the pension phase at some point in the future. Claiming CGT relief in these situations may result in the fund having to pay tax on the future sale of the asset which would have otherwise be tax exempt. 2. As the assets supporting Charlie and Cammie s TRIS were segregated current pension assets as at 9 November 2016, they will be eligible for CGT relief as long as they cease being segregated current pension assets on or before 30 June 2017 (presumably this means they will need to make a resolution that the fund s ceases to be a segregated fund on or before 30 June 2017), the assets are held by the fund during the pre-commencement period and the trustees choose for relief to apply to the asset (in the manner discussed in paragraphs of LCG 2016/D8). 3. It would appear so. Charlie and Cammie would be entitled to reset the cost base for all the segregated current pension assets supporting their pension and there would be no need capital gain realised on the deemed sale of their assets. In contrast, if the fund was unsegregated, the fund s exempt proportion would give rise to at least some taxable capital gain on the deemed sale of the fund s assets. Furthermore, the need to include the value of Billy and Katie s business premise owned by the fund in the calculation of the fund s average value of super liabilities would give rise to a lower ECPI amount than would otherwise be the case. The inability to reset the cost base for Billy and Katie s business premise owned by the fund does not appear to be an issue given it was only acquired by the fund 8 months earlier. 4. CGT relief can only be claimed for CGT assets that support value being transferred by a member to the accumulation phase because of the transfer balance cap or TRIS reforms commencing. The fund would be permitted to remain segregated for tax purposes in 2017/18 as long as no member in the fund has a total super balance exceeding $1.6m as at 30 June 2017 and they were recipients of retirement phase benefits (excluding TRISs) as at 30 June It s Time to Retire Concerned about the prospect of their fund having to pay tax on the earnings derived from the assets supporting their TRISs, both Charlie and Cammie decide to retire on 1 July 2017 and convert their TRISs to account based pensions with a nil cashing restriction. Charlie commenced his TRIS with a balance of $1.5 million and the balance of the TRIS as at 30 June 2017 was $1,559,984. The minimum pension payment from his TRIS for the 2016/17 income year was $41,201 and the earnings on the balance for the 2016/17 income year is $82,679.

10 How to post budget strategies Graeme Colley Cammie commenced her TRIS with a balance of $750,000 and the balance of her TRIS as at 30 June 2017 is $779,992. The minimum pension payment from her TRIS for the 2016/17 income year is $20,600 and the earnings on the balance for the 2016/17 income year was $41,340. Workshop Exercise 3 1. What strategies could Charlie and Cammie employ to reduce the amount measured against their transfer balance cap? 2. Will Cammie still have an excess transfer balance tax liability if she fixes the problem within 6 months? 3. What should Cammie do if she requires more than the annual minimum pension amount? 4. Can their SMSF remain segregated? Suggested Answers 1. Charlie and Cammie could increase their TRIS pension payments (up to the 10% maximum) in 2016/ Yes, an excess transfer balance tax liability still applies. The 6 months rule only applies to transfer balance cap breaches of less than $100,000 that occur on 30 June Cammie should either make a lump sum withdrawal from her accumulation account or make a partial commutation from her account based pension. A partial commutation from her pension will result in her transfer balance account being debited with the partial commutation amount. 4. Yes. No member in the fund was in recipient of a retirement phase benefit as at 30 June Re-contribution strategy or not? It s now July 2020 and Charlie and Cammie are in the process of preparing the 2019/20 financial accounts for their SMSF. Their accountant notices 40% of Cammie s account based pension comprises a taxable component. Their accountant explains the tax implications of that should Cammie die after Charlie and recommends that Cammie withdraw $300,000 and re-contribute that amount back to her super as a NCC and then commence a new account based pension for $300,000. As at 30 June 2020, Cammie s account based pension was valued at $700,000 and her accumulation interest was valued at $85,000. Her defined benefit pension has just been increased with CPI indexation to $60,709 per annum. Impressed by Harry s new mature outlook on life, Billy decides to sell a portion of his shareholding in his construction company to Harry. After the relevant CGT discounts, Billy expects to have a taxable capital gain in the vicinity of $40,000 in 2020/21. As at 30 June 2020, Billy s super balance was $430,000 and his SG contributions are normally around $11,000 per annum.

11 Workshop Exercise 4 1. Is a re-contribution strategy possible for Cammie? If it is possible, how should such a strategy be implemented? Could Cammie start a new pension for $300,000 as recommended by their accountant? 2. What contribution strategies could be implemented for Billy to reduce his personal income tax in 2020/21? Suggested Answers 1. Cammie s total super balance as at 30 June 2020 is equal to $1,665,930 (i.e. $1,600,000 - $779,992 + $60,922 + $700,000 + $85,000). As Cammie s total super balance as at 30 June 2020 exceeded $1.6m, her NCC cap for 2020/21 is zero. She could make the $300,000 withdrawal in 2020/21 and assuming her total super balance as at 30 June 2021 was less than $1.4m she could recontribute the $300,000 in 2021/22. The $300,000 partial commutation would result in a $300,000 debit to her transfer value account. She would then have room under her transfer balance cap to start a new pension for $300, Billy could make a $40,000 catch-up concessional contribution in 2020/21 and claim this amount as a tax deduction. Worse news! (this just isn t a good workshop case study) Charlie and Billy went wild boar hunting in Africa in January 2021 and were attacked by a very angry and hungry pride of lions. No evidence was left, however, it has been accepted they are in the bellies of the lions. Charlie s superannuation is to be paid to Cammie as a reversionary income stream with the proceeds of his superannuation. Billy s superannuation will be paid in equal proportions to Kate and his children, Charlotte and Georgie as child pensions. Workshop Exercise 5 1. Can a reversionary pension be paid to Cammie? What options are available to Cammie to ensure she does not breach the transfer balance cap? 2. Assuming the transfer balance cap at the time of Billy s death is $1.7m, what are Charlotte and Georgie s modified transfer value caps? How would your answer change if Billy, at the time of his death, had a retirement phase interest equal to $600,000?

12 How to post budget strategies Graeme Colley 3. Katie has a frosty relationship with her mother-in-law, Cammie. Do the new rules which apply to rolled over death benefits offer any opportunities? Suggested Answers 1. Yes, it is possible to have Charlie s death benefit paid to Cammie as a reversionary pension but it would result in Cammie exceeding her transfer balance cap. Cammie could instead choose to take Charlie s benefit as a lump sum super death benefit or transfer her own account based pension back to the accumulation phase. The latter would free up space under her transfer balance cap so she could then receive a portion of Charlie s benefit as a pension with the balance above her transfer balance cap paid to her as a lump sum super death benefit. Cammie would have 12 months to decide what to do. If Cammie decides to commute her account based pension, her transfer balance account will be debited with the value of the commutation amount. If the value of Cammie s account based pension had declined since the pension was commenced, it would result in a debit amount to her account which would be less than the original credit amount. As a result, the amount of Charlie s death benefit that could revert to her under the transfer balance cap would be less. 2. Charlotte and Georgie s modified transfer value caps would be calculated as follows: Charlotte Georgie $1.7m x 0.33 = $561,000 $1.7m x 0.33 = $561,000 If Billy at the time of his death had a retirement phase interest equal to $600,000, the modified transfer value caps for Charlotte and Georgie would be calculated as follows: Charlotte Georgie $600,000 x 0.33 = $198,000 $600,000 x 0.33 = $198, Assuming the draft regulations are implemented as per the Exposure Draft Explanatory Statement, Katie will be able to roll over her reversionary pension and the child pensions to another fund and preserve the preferential tax treatment of the pensions (i.e. the tax offset equal to 15% of the taxable component).

13 About the Workshop Presenter Graeme is a well-known figure in the SMSF community with a long-standing reputation as an accomplished SMSF educator, technical expert and advocate for the sector. Graeme has held senior roles in the Australian Tax Office and as an Assistant Commissioner of the Insurance and Superannuation Commission. Most recently, Graeme was Director, Technical and Professional Standards at the SMSF Association. What you need to know This paper may contain advice. Any advice is of a general nature only and may contain advice that is not based on your clients personal objectives, their financial situation or needs. Accordingly you should consider how appropriate the advice is to your clients personal objectives, financial situation or needs. Any advice in this paper is provided by Australian Securities Administration Limited (ASAL), ACN , AFSL No which is part of the AMP group of companies. AMP companies receive fees and charges in relation to their financial products as set out in the product disclosure statement. AMP employees and directors receive salaries, bonuses and other benefits from the AMP group.

14 How to post budget strategies Graeme Colley