Update on New Regulations and Legislation as at 1st July 2013 As a result of the midyear economic update in June there are a number of policy announcements and Legislation that was intended to be implemented by 1st July last which did not get enacted into legislation. In this month s edition of the Super Brief we summarise some of the legislative changes that are now in force as from 1 July and those that were intended to commence that were not implemented. Higher contribution caps For the 2013/14 financial year, persons aged 59 over as at 30 June 2013 will have their concessional contribution caps increased from $25,000 per annum to $35,000pa; The higher limit of $35,000 will apply to those aged 49 or over on the 30 June the previous year for later financial years; there is no change to the current non-concessional contribution cap limit of $150,000 per annum Excess contributions the present excess contribution tax regime has been repealed and as from 1 July 2013 a new excess contribution cap regime is in place; all excess contributions will be included in an individual s assessable income and taxed at their marginal tax rate; a client can elect to have 85% of their excess contribution released and recorded as a superfund benefit paid by the fund; there is now an excess concessional contribution Charge based on the increased tax liability attributable to the excess concessional contribution. Further there is also is referred to as a shortfall interest charge (SIC) payable on the shortfall between the amount originally paid on the amended amount Additional tax on high income earners as announced in the May 2012 budget, the government stated that it would increase the 15% tax on concessional contributions for high income earners to 30%-now referred to as a division 293 tax ; the new announcements have been legislated and now apply to contributions made from 1 July 2013 for income earners receiving taxable income of $300,000 or higher; the Income assessed includes taxable income, concessional contributions adjusted fringe benefits, total net investment loss but less child-support. Page 1
Tax on Pension earnings the government had earlier proposed (5 April last) introducing a tax of 15% on pension earnings in excess of $100,000 per annum-currently totally exempt from any taxation; It was indicated that the new tax would be introduced as from 1 July 2013; however the government has now proposed that this tax would apply from 1 July 2014 based on earnings from assets supporting a pension exceeding a $100,000 threshold, indexed to CPI based on a per annum per individual basis; Draft legislation has not been submitted to parliament beyond the 5 April announcement and it remains to be seen whether such legislation would ever be introduced particularly with a change of government. Present indications are that the coalition would not support such tax being imposed. Related Party Transactions Prior to June 30 last the government had draft proposed legislation banning off market SMSF transfers of listed securities and restricting property transactions to and from an SMSF without a qualified independent valuation. The bill proposing such amendments never became enacted and remains uncertain whether such bills would ever become law given the impending Federal election; Similarly the new SMSF trustee penalty regime which was scheduled to commence on 1 July 2013 and draft legislation for proposed new tougher penalties for illegal early release never became enacted. New rulings on the Tax of Superannuation Death Benefits What is all the fuss about? In June and July new legislation had been passed through parliament (1) and new ATO rulings (2) were released concerning the issues surrounding the taxation of superannuation death benefits paid from a non-reversionary pension. The issues concerning the taxation of superannuation benefit upon the death of an individual arose when the government introduced draft taxation ruling TR 2011/D3 in November 2011. We discussed this ruling in some detail in our June 2011 and January 2012 Super Brief editions. In summary, industry concern was expressed when the ATO took the view that if an individual member of a superfund who was in receipt of a superannuation pension at the point of their death and by their death benefit nomination, left that pension to a surviving spouse in circumstances where that pension was not made reversionary, it was said by the ATO that the pension ceased on the death of the individual and any income in the financial year of the death of the individual would be taxed at 15% despite the fact that the surviving spouse might elect to start a new pension. advice for for every part part of of your your life life Page 2
Many saw this draft ruling by the ATO is an opportunity to tax a deceased person s superannuation death benefit in circumstances when it would normally be transferred to a surviving spouse who would be entitled to take that benefit in the form of a new pension income stream. Since the draft tax ruling there has been much discussion and controversy within tax and superannuation circles and a long awaited delay in the in the ATO finalising its ruling. The final ruling concerning when a pension is deemed to commence and cease was handed down on the 31st July last. However, the government enacted new legislation (1) which came into force on 3rd June last, (effective from 1 July 2012) which it foreshadowed in the May budget. Interestingly, the legislation conflicts with the ATO s views and in this month s edition of the Super Brief we intend to discuss some of the key issues that need to be considered when reviewing both the ruling and the legislation as well is some significant estate planning opportunities. When does an income stream cease? The issue of when an income stream ceases and commences and its importance (described below) relates to the taxation treatment of that superannuation interest. The ATO s current view is that a superannuation income stream ceases in any of the following circumstances:- (a) (b) (c) (d) (e) (f) when a member ceases to be entitled; when the assets supporting the pension cease; when there is a failure to comply with the pension rules of the fund; when a member fully commutes their entitlements from a pension income stream to a lump sum (partial commutation does not cease the pension income stream); as soon as a member in receipt of an income stream dies unless a dependent beneficiary of the deceased member is automatically entitled under the governing rules of the fund to receive an income stream on the death of the member (i.e. a reversionary pension); and if the member does not meet the pension payment standards contained in the SIS Act regulations. The Importance of the Trust Deed- Perils Exist! At Hill legal we often see out dated trust deeds, particularly those that predate the new accounts based pension payment standards that were enacted in the simpler super reforms that came into operation on 1 July 2007. The new ruling now highlights the perils of an outdated trust deed. advice advice for every for every part of part your of your life life Page 3 3
Many accounting practitioners adopt the view that providing the superannuation pensioner receives the minimum or within the maximum (in the case of a transition to retirement pension) pension from their SMSF they will meet the pension payment standards set out in the SIS act regulations in order to attract the tax exemption on assets supporting the pension income stream However, the new ruling states that the superannuation income stream must not only be paid in the manner which meets the requirements of the pension payments standards (3) but also in accordance with the rules of the fund (ie trust deed). The ATO have highlighted that the pension payment standards state in themselves that for the pension to meet the relevant pension payment standards the pension must be provided for under the rules of the superannuation fund, that in themselves meets the requirements of the relevant subregulation (4). The rules of the superannuation fund meet the relevant standards if the rules ensure that the payment is made at least annually and ensure that the other requirements as outlined in the subregulation are met. The ATO stated that as the rules of the superannuation fund must ensure that the standards are met is not enough for the rules of the superfund to simply include reference to or reproduce the terms of those standards. Rather the rules (standards) must be met or given effect to in practice. and if a purported superannuation income stream fails to meet these requirements in a financial year, the superannuation income stream will be taken to have ceased at the start of that income year for income tax purposes. (5) Tax relief on the Death of a Superannuation Pensioner As indicated, the tax ruling would appear to affirm the earlier views expressed by the ATO that a superannuation income stream would cease on the death of a pensioner if it is not expressed to be reversionary. This would mean that in the absence of the recent new legislation, the pension would revert back into accumulation mode immediately upon the death of the pensioner and be subject to tax in the financial year of death at a rate of 15% on all income and capital gains. However, the new legislation is has now largely cured this position with some interesting and potentially extravagant outcomes which we will described below. Page 4
The new legislation effectively creates a bridge linking the pension income from the deceased s pension to the new recipient in circumstances where the pension income does not automatically revert to that recipient. This avoids the cessation of the pension income stream after the death of the pensioner. This bridge is achieved in two ways:- (a) Where the pension income stream is paid out as a lump sum, it is deemed to hold its tax-free status until it is practicable to pay the superannuation lump sum ( i.e. is deemed to have been paid as at the date of death); and (b) If a new pension income stream is paid ( as opposed to a lump sum payout) that new pension income stream is deemed to have commenced as at the date of death even though it was not commenced until a later point in time. There is no definition in the new legislation of what is meant as soon as practicable. However it is clear that the new legislation is designed to benefit beneficiaries of a deceased member who was in receipt of a non-reversionary income stream by allowing superannuation fund trustees to dispose of pension assets on a tax-free basis in order to pay superannuation death benefits. CGT relief to Adult Child beneficiaries The operation of the new legislation and its benefits from the point of view of capital gains tax as it applies to assets within the SMSF can be viewed from the following case scenario: 1. Maryanne is aged 84 and the surviving member of the Smith SMSF- her husband Robert passed away three years ago; 2. The Smith SMSF has as its principal asset factory premises that was operated by Robert. The factory was purchased in 1998 for $600,000 and is now worth $2.1 million. There is therefore an unrealised capital gain of $1,500,000; 3. Maryanne passed away on 1 August last leaving two adult children who are nominated to receive Maryanne s superannuation death benefits equally; 4. the trust deed for the SMSF allows for in specie asset transfers; 5. Prior to the new legislation, the fund would have had a CGT liability tax liability on the transfer or sale of the factory out of the SMSF. This would be on top of the death benefits tax paid by the fund. Page 5
6. Under the new legislation the adult children inherit the property effectively at its market value as the new legislation maintains the tax-free status of the pension right up until the payment or transfer of the property as an in species lump sum paymentproviding it is done so as soon as practicable. There is therefore a tax saving of $150,000. 7. Further, if the children decided to sell the factory, the tax that would be paid would be the difference between the market value of the property as at the date of transfer and its sale valuepotentially a zero tax liability if the property was sold immediately after its transfer out of the fund; 8. Interestingly, if the factory was held out side of the SMSF and transferred under the Estate of Maryanne by her Will, the capital gain would be taxed either at the marginal tax rate of the estate or at the marginal tax rate of the adult children. If Maryanne and the children were paying tax on the highest marginal tax rate, the tax potentially liability would be approx. $348,000! If you are interested to explore how use the new legislation to best plan your affairs please do not hesitate to contact our office. Notes: (1) Income Tax Assessment Amendment regulation (Superannuation Measures No.1) regulation 2013 (2) TR 2013/5 and SMSFD 2013/2 (3) SIS Act Regulations 1994, subregulation 1.06 (4) SIS Act Regulations 1994, subregulation 1.06(9A) (5) See para 99 & 100 of TR 2013/5 The new legislation underscores the value and importance of considering as a strategy whether to transfer assets into or outside of an SMSF from the point of view of death benefit planning and the tax on assets after death. Page 6