Transfer balance cap. Phil Broderick Principal Sladen Legal. SISFA Webinar 24 May 2017

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1 Transfer balance cap Phil Broderick Principal Sladen Legal SISFA Webinar 24 May 2017

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3 Phil Broderick Principal Sladen Legal au.linkedin.com/in/philipbroderick

4 Overview Latest issues Measuring the transfer balance account How the cap works for market linked pensions and defined benefit pensions Planning tips

5 Latest issues Death benefit pensions payable to spouses can be commuted back into accumulation prior to 1 July 2017 PCG 2017/6 Actuarial certificates for commutations at 30 June 2017 Multiple fund strategy Part IVA Section 66 of the SIS Act

6 Latest issues Proposed event based reporting regime Debits and credits to be reported within 10 business days of the end of the month One exception pensions may be reported within 28 days of the end of the quarter Transitional rule Debits and credits for the 2018 year don t have to be reported until the SMSF lodges its 2017 annual return Change of practices required for: Advisors more regular preparation of interim accounts Clients have to see their advisors more often Timing has to be done in advance not in retrospect

7 Transfer balance cap Overview New $1.6 million cap on amounts held in pension accounts Existing pensions exceeding that amount must be commuted by 30 June 2017 No change in taxation of benefits (other than for market linked pensions and defined benefit pensions) Changes how the super fund will be taxed Ie forces part of the fund into accumulation phase (taxed at 15% or 10% for complying capital gains) Cost base reset available

8 Measuring the cap credits and debits Two concepts: Transfer balance cap ($1.6 million) Transfer balance account (net value of credits and debits) Your transfer balance account is measured against your transfer balance cap

9 Measuring the cap credits and debits Credits Counts towards your account/reduces your cap available Includes Existing super pensions at 1 July 2017 New pensions commenced after that date Death benefit or reversionary pensions after that date

10 Measuring the cap credits and debits Debits Reduces the amount in your account/increases your cap available Includes Amounts commuted as lump sums (not pension amounts and not investment losses) Structured personal injury settlements Bankruptcy claw backs Family law payment splits Amounts lost to fraud

11 Transfer balance cap amount and proportionate indexation Cap is $1.6 million at 1 July 2017 Not affected by investment returns up or down Eg 1 your pension grows from $1.6 million to $3 million due to investment earnings you can retain your pension (ie you don t have to commute back to $1.6 million) Eg 2 your pension account (initially $1.6 million) is reduced to nil due to pension payments and bad returns you don t have any more in your transfer balance cap so you can t start new pensions to replace the one you lost Indexed by CPI in $100K increments

12 Transfer balance cap amount and proportionate indexation If you start a pension future increases are only to proportion that have left in the cap Eg : you have used 60% of the cap so only have 40% left the general cap increases by $100K from $1.6 million to $1.7 million your cap only increases by 40% ($40K) to $1.64 million

13 Exceeding the transfer balance cap Excess pension amounts Trigger excess transfer balance tax Excess is subject to notional earnings known as excess transfer balance earnings Notional earnings are subject to excess transfer balance tax first offence 15% subsequent offences 30% Excess subject to commutation authority Excess and earnings must be commuted out of pension phase Failure to commute will mean the whole pension will not be in pension phase for the entire financial year

14 Cost base reset under the transfer balance cap Helps elevate the retrospective nature of the measure post 30 June 2017 Preconditions to access the cost base reset 1. The fund must be in pension phase In part or in full Includes funds that have TRISs Eg cannot access if funds only in accumulation phase 2. Asset must have been held prior to 9 November The fund trustee must make an election to choose the relief

15 Cost base reset under the transfer balance cap How does the cost base reset work? Election works on an asset by asset basis Can elect to reset all assets of the fund, some assets of the fund or no assets of the fund Elected asset is deemed to be sold on 30 June 2017 for market value and reacquired at that price Effectively resets the cost base of the asset to market value 12 month holding period for the 1/3 CGT discount starts again

16 Cost base reset under the transfer balance cap Segregated method vs proportionate method The cost base reset operates differently depending on whether the fund is using the segregated or proportionate method Note that the segregation method can t be used from 1 July 2017 if: one member has a balance greater than $1.6M; and the fund is paying a pension

17 Cost base reset under the transfer balance cap Segregated method cost base reset In order for the cost base reset to apply to an asset, that asset must cease to be segregated before 1 July 2017 Eg partially commuting a pension to $1.6 million with the balance going to an accumulation account Is problematic for funds 100% in pension phase but where no member has more than $1.6 million in benefits ATO view cannot access cost base reset

18 Cost base reset under the transfer balance cap Segregated method cont. SMSF trustee can elect that all assets be reset, no assets be reset or some but not all assets be reset 100% tax free on any capital gain arising from cost base reset

19 Cost base reset under the transfer balance cap Proportionate method No additional steps required under this method to access cost base reset SMSF trustee can elect that all assets be reset, no assets be reset or some but not all assets be reset Any capital gain arising from cost base reset is tax free to the proportion of the fund in pension phase Cost base reset lost if you move into segregated method between 9 November 2016 and 30 June 2017 Eg accumulation member becomes a pension member

20 Cost base reset under the transfer balance cap Proportionate method cont. However, capital gain is triggered for the proportion in accumulation phase 2 options for dealing with payment of a capital gain: Pay the tax in the 2016/17 year Defer notional tax on assets until they are later sold

21 Cost base reset under the transfer balance cap When would you consider not to elect to use the cost base reset? Election would result in capital loss Where SMSF using proportionate method and second member to shortly come into pension phase

22 Cost base reset under the transfer balance cap Part IVA Both the Explanatory Memorandum to the new legislation and the ATO note that Part IVA may apply to schemes that are deliberately designed to maximise the cost base reset Example In order to bring asset out of segregated method a $1 contribution or commutation was made into an accumulation account

23 Transfer balance cap post-1 July 2017 Pension payments post 1 July 2017 Ensure that only minimum pension payments are made from the pension Any additional funds are to be taken from accumulation account or as a partial commutation of the pension

24 Market linked pensions and defined benefit pensions Special rules apply to market linked pensions and defined benefit pensions This is because these pensions cannot be commuted to comply with the transfer balance cap The measures apply in two ways to such pensions They are counted for the transfer balance cap They are potentially taxed under the defined benefit income stream cap

25 Market linked pensions and defined benefit pensions Counting for the transfer balance cap The test has 3 parts Calculate the pension entitlement for the year Multiply the pension entitlement by the remaining term (for MLPs) or 16 (for other DB pensions) Count that figure against the transfer balance cap (initially $1.6 million). Is measured each year

26 Market linked pensions and defined benefit pensions For example Say a member has an MLP entitlement of $110K for a year Say that member has a remaining term of 18 years multiply $110K by 18 Which equals $1,980,000 As this amount is greater than the transfer balance cap (of $1.6 million), no further pensions could be held by the member.

27 Market linked pensions and defined benefit pensions Defined benefit income stream cap taxing measure for defined benefit pensions. DBs and MLPs cannot be commuted and therefore the assets will stay in pension phase the measure instead subjects the member to taxation on their pension benefits. broadly, the measure works by including half of the pension payments above the cap in the assessable income of the member

28 Market linked pensions and defined benefit pensions Calculating the defined benefit income stream cap Work out the defined benefit income stream cap - being the transfer balance cap divided by 16 - for 2017/18 it will be $100K (ie $1.6 million divided by 16) Work out the pension entitlement for the year Any excess pension income over the cap is taxed by adding 50% of the excess to the member s assessable income where it is taxed at marginal tax rates There are no rebates payable on these amounts and they apply on both the taxable and tax free component

29 Market linked pensions and defined benefit pensions Calculating the defined benefit income stream cap So to continue the above example, the tax treatment for 2017/18 would be: The defined benefit income stream cap for 2017/18 is $100K The pension entitlements for the year payments equal $110K The excess pension income over the cap is $10K 50% of that excess (ie $5K) is included in the member s assessable income and taxed at their marginal tax rate - assuming a marginal tax rate of 47% the tax payable is $1,175

30 Planning tips Make sure the commutation resolution is made prior to 1 July 2017 Bring forward income Push out deductions Consider losses Carried forward losses and the cost base reset Not resetting losses Consider existing death benefits at 30 June 2017

31 Thank You Questions?