SISFA Webinar 1 - Planning for 30 June May 2017

Transcription

1 SISFA Webinar 1 - Planning for 30 June May 2017

2 Everything we do embodies the passion and entrepreneurial spirit of our clients.

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

4 Outline Commuting pensions by 30 June 2017 how and when Cost base reset under the transfer balance cap regime What to do with transition to retirement income streams (TRISs) post-1 July 2017 Making non-concessional contributions pre and post-1 July 2017

5 Commuting pensions by 30 June 2017 how and when For members who will exceed the $1.6 million transfer balance cap on 1 July must commute their pensions back to $1.6 million by 1 July 2017 Initially was a concern that would need to prepare accurate financial statements at 30 June 2017

6 Commuting pensions by 30 June 2017 how and when Industry sought more practical view ATO has released PCG 2017/5 not necessary for SMSFs to exactly know a member s account balance at the time the pension is commuted (eg at 30 June 2017) rather a pension can be commuted back to $1.6 million with the balance of the pension being commuted as a lump sum into an accumulation account balance would be determined later in accordance with the financial statements of the SMSF

7 Commuting pensions by 30 June 2017 how and when PCG 2017/5 requirements for documents effecting the commutation It must be in writing and made before 1 July 2017 It must specify a methodology that allows the precise quantum of the amount commuted (such amount may be ascertained at a later point in time) It must specify which pension(s) is to be commuted It must not contain any discretion to the trustee as to the amount to be commuted or which pension will be commuted

8 Commuting pensions by 30 June 2017 how and when PCG 2017/5 requirements for documents effecting the commutation cont. It cannot be conditional on other actions occurring It must not be revoked It can apply with references to benefits in multiple superannuation funds (if drafted correctly)

9 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

10 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

11 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 > $1.6M; and the fund is paying a pension

12 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 Can be problematic for funds 100% in pension phase but where no member has more than $1.6 million in benefits Eg no assets taken out of segregation unless a contribution is made or a pension is partially commuted

13 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

14 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 Reset is lost if move from proportionate method to segregated method between 9 November 2016 and 30 June 2017 Therefore should keep an accumulation account

15 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

16 Proportionate method cont. Example 1 pay the tax in the 2016/17 year An SMSF has $3M in assets, of which $2M (2/3) of those assets are in pension phase. The cost base of assets are $600K and all assets have been held for 12 months or more. SMSF trustee elects that all of the assets are to receive the CGT relief. On 30 June 2017, the SMSF is deemed to make a capital gain of $800K (1/3 of the value of the asset ($1M) less 1/3 of the cost base of the assets ($200K)). The SMSF pays $80K of tax for the 2016/17 year and holds assets with a cost base of $3M.

17 Proportionate method cont. Example 2 defer notional tax on assets until they are sold An SMSF has $3M in assets, of which $2M (2/3) of those assets are in pension phase. The SMSF trustee elects that all of the assets are to receive the CGT relief. This includes a real estate asset worth $2.1M. The cost base of the real estate asset is $600K. On 30 June 2017, the SMSF is deemed to make a notional capital gain of $500K on the real estate (ie. 1/3 of the $2.1M ($700K) less 1/3 of $600K cost base ($200K)).

18 Proportionate method cont. Example 2 cont. If the SMSF sells the real estate 5 years later for $4.1M when it is 50% in pension phase, it makes a taxable capital gain of $1M ($4.1M less $2.1M x 50% in accumulation phase). In addition it must bring to account the notional capital gain triggered on 30 June 2017 of $500K. Therefore resulting in total capital gains tax payable of $150K (ie $1M gain + $500K deferred gain x 10%).

19 Making the election Election must be made to utilise the cost base reset not automatic Can choose the election asset by asset or for all assets of the fund Election must be made by the time the fund is due to lodge its 2017 tax return Likely to be in the capital gains schedule of the tax return

20 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

21 Issues with cost base reset for units and shares Cost base reset will only apply to the units/shares and not the underlying asset held by the unit trust or company Problematic if underlying asset is later sold rather than the units/shares Not necessarily an issue if will keep the property and transfer out the units as a death benefit can wind up the unit trust when the asset is sold (eg a one asset unit trust)

22 Issues with cost base reset for units and shares cont. Example SMSF holds units with a cost base of $500K and a market value of $2.5M Unit trust owns property with a cost base of $500K and a market value of $2.5M SMSF elects to receive a cost base reset for its units so that cost base of units are now $2.5M Unit trust later sells property for $3.5M and makes capital gain of $3M ($3.5M less $500K) If SMSF is 50% in pension phase, will pay capital gains tax of $150K ($3M x 50% accumulation phase x 10% SMSF capital gains tax rate) Unit trust later wound up and SMSF receives capital loss of $2.5M

23 Issues with cost base reset for units and shares cont. Consider restructuring prior to 30 June factor potential duty Can the unit trust be wound up in the same year the asset is sold

24 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 Second fund strategy?

25 Dealing with transition to retirement income streams post-1 July 2017 TRISs will not be abolished from 1 July 2017, however will no longer qualify for pension phase ( retirement phase under the new terminology) Assets supporting TRISs will be taxed at 15% on income and 10% capital gains (for assets held for at least 12 months) Only reason to have a TRIS in place going forward is to access benefits before meeting a full condition of release

26 Dealing with transition to retirement income streams post-1 July 2017 Eligible TRISs could be converted to account based pensions if member has met a full condition of release Can a TRIS auto convert into an account based pension? If documentation permits Legislative fix?

27 Making non-concessional contributions - pre-1 July 2017 Last chance for those members with total superannuation balance greater than $1.6M to make non-concessional contributions prior to 1 July 2017 Such members only be able to make future non concessional contributions if balance drops below the limit at the previous 30 June Last chance to take advantage of the current caps $180K per year $540K under bring forward How to take advantage of making non-concessional contributions pre-1 July 2017: Cash contributions Transfer of real estate from individuals/trusts to SMSFs

28 Making non-concessional contributions - post-1 July 2017 Non-concessional contribution caps will reduce post-1 July: $100K per year $300K under bring forward Modification of the bring forward rule for those members who have a superannuation balance between $1.4M and < $1.6M 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 cap applies $1.6 million or more Nil N/A

29 Reduction of the concessional contributions cap Last chance to make $35K or $30K concessional contributions From 1 July 2017 cap is reduced to $25K

30 Thank You Questions?