STRICTLY CONFIDENTIAL Stocktake on key SMSF tax & regulatory developments David Shirlow November 2013

STRICTLY CONFIDENTIAL

Stocktake on key SMSF tax & regulatory developments

David Shirlow

November 2013


Contents01 Contributions

02 Pensions

03Borrowing & other important non-developments

04 Insurance


01Contributions update

PAGE 5

Super Guarantee increased contribution rates & age limit removed

Superannuation Guarantee (Administration) Amendment Bill 2011

– 2013/14: update employer SG payments, review salary sacrifice levels

– Coalition deferral

Government co-contribution reductions

Tax and Superannuation Laws Amendment (2013 Measures No. 2) Bill 2013

– 2012/13 onwards, late legislation: maximum now $500

Low Income Government Super Contribution (‘LISC’) – minor changes

Tax and Superannuation Laws Amendment (Increased Concessional

Contributions Cap & Other Measures) Bill 2013

– Coalition Government position

Contributions update

LAW

LAW

LAW

PAGE 6

Higher CC cap based on age

Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap & Other Measures) Bill 2013

Increases CC cap to $35,000

— applies from 2013/14 for those age 60 or more

— applies from 2014/15 for those age 50 or more

LAW


PAGE 7

Higher CC cap based on age: Jasmine

Jasmine was 59 at 30 June 2013, salary sacrifices $32k this income year but dies in June 2014.

Q. Did she qualify for the higher, $35,000 CC cap in 2013/14?

A. Yes, her eligibility under the current rules was established at the start of the year.

The age-based limits which applied in past years were based on attaining a certain age by the end of the year.


PAGE 8

Higher CC cap based on age: Jasmine

Jasmine was 59 at 30 June 2013, salary sacrifices $32k this income year but dies in June 2014.

Q. The NCC cap is defined as a multiple of the CC cap. What is Jasmine’s annual NCC cap?

A. $150,000. This is 6 times the standard CC cap ($25,000), not the higher age-based cap.


PAGE 9

Excess CC tax reforms

Superannuation (Excess Concessional Contributions Charge) Bill 2013;

Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Bill 2013

Applies from 2013/14 income year – previous constraints apply for excess CCs in earlier years

Excess CCs:

1. may be refunded (irrespective of amount or previous year refunds)

2. effectively taxed at marginal rates (rather than top rate) plus an interest charge

3. 15% tax is levied on the fund and the balance is levied on the individual – 2 taxpayers

LAW


PAGE 10

Excess CC tax reforms: Arborio

In 2013/14 Arborio is age 50 and on the 34% marginal tax rate (including medicare levy).

$45,000 CCs are made for him, exceeding the CC cap by $20,000.

His fund pays 15% tax on the $20,000 excess CCs = $3,000.

Q. Ignoring the interest charge, what is Arborio’s own tax liability in respect of the excess CCs?

A. $20k included in Arborio’s assessable income

tax at 34%, not the top rate $6,800 -

tax offset for fund tax paid 3,000

tax liability = $3,800

10


PAGE 11


Arborio doesn’t need to get a refund of his excess CCs to pay for his immediate needs (e.g. tax).

Q. Is the any other reason why he should seek a refund?

A. Depends. Some considerations:

Either way:

— Same tax treatment of excess CC

— Same amount counted for income tests (family tax benefits, spouse/personal cont concessions)

but

If retain in fund then remains in super tax environment

Although it adds to taxable component :

– issue if ultimate benefit is taxed (eg pre-age 60, death to non-dependant)

$20k excess CCs will count towards NCC cap if none refunded

– issue if NCC cap could be breached11


PAGE 12


Arborio doesn’t need to get a refund of his excess CCs to pay for his immediate needs (e.g. tax).

Q. Arborio can elect to refund any amount of his $20k excess CCs up to the amount remaining after fund tax, which is $17k. Should he elect for the maximum refund then re-contribute that $17k as a NCC?

A. Depends. Here is the comparison…

12


PAGE 13


* After fund tax, personal tax funded from other sources.

13

Refund, re-contribute $42.5k *

NCC Cap

Original contribution

Nil

Re-contribution $17k - in a later year

Total $17k - in that later year


PAGE 14



** After fund tax.

14

Refund, re-contribute $17k * Retain $20k in fund **

NCC Cap


Nil $20k - in original year

Re-contribution $17k - in a later year N/A

Total $17k - in that later year $20k - in original year


PAGE 15



** After fund tax.

15

Refund, re-contribute $17k * Retain $20k in fund **

NCC Cap


Nil $20k – in original year

Re-contribution $17k in a later year N/A

Total $17k in that later year $20k – in original year

Tax components $17k TFC $17k TC


PAGE 16

Additional tax on CCs for high income earners

Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Bill 2013; Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap & Other Measures) Bill 2013

Applies from 2012/13 year – late passage in June 2013

Imposes additional 15% tax on certain CCs for individuals with income above $300k

LAW


PAGE 17

Calculation of liability for higher CC tax: Asahi

In 2013/14 Asahi is age 52. He has no defined benefit super interests.

CCs of $40k have been made for him. His total remuneration / earnings are:

non-excess CC = $25k

excess CC = $15k

other taxable income = $290k

Q. How much of his CCs are subject to the higher CC tax?


PAGE 18

Calculation of liability for higher CC tax: Asahi

A. Step 1. Determine excess income above $300k threshold (XS)

XS = non-excess CC + ISP - RSC - $300k

RSC = reportable super contributions

ISP = income for surcharge purposes

includes RSC, taxable income (& has various other components)

includes excess CCs (as taxable income) from 2013/14

= $25k (non-excess CCs) + $15k (excess CCs) + $290k (other taxable income) - $300k

= $30k

Step 2. Determine Higher Tax Contributions (HTC)

HTC = XS ($30k) or non-excess CC ($25k), whichever is less

= $25k


PAGE 19

Transfer of assets between SMSFs and related parties: Saffron

During 2013/14 Saffron makes a contribution to her SMSF by way of an off-market transfer of 5,000 BHP shares.

Provisions in Tax and Superannuation Laws Amendment (2013 Measures No. 1) Bill 2013 were drafted to restrict acquisition and disposal of certain assets between SMSFs and related parties.

Q. Has Saffron breached the law?

A. No. The provisions were to have applied from 1 July 2013 but were removed from the Bill before it was enacted.

Coalition Government predisposition not to proceed with this measure - to be confirmed in December 2013 MYEFO statement?


PAGE 20


02Pensions update

PAGE 22

Previous government policy: 5 April 2013 announcements

Tax exemption for earnings on income streams capped at $100k, with 15% tax applying thereafter

Extending concessional tax treatment to deferred lifetime annuities

review of product regulatory barriers, minimum payment rules

Social security income test: deeming rules extended to account-based pensions

to apply from 1 January 2015, grandfathering of pre-2015 pensions

DISCONTIN

UED

DISCONTIN

UE?

BILL TABLED!

Pensions update

PAGE 23

ATO TR 2013/5

Released July 2013, generally effective 1 July 2007

Deals with when an account-based pension starts and ends

When does an account-based pension start? Calrose

On 10 June 2014 Calrose is advised that it would be better for her to be in pension phase.

Next day, in accordance with the trust deed, she enters a written agreement with the trustee on the terms of her account-based pension.

They agree that the pension will have been commenced on 1 July 2013 and that an annual payment will be made before the end of June 2014.

Q. Is that OK?

A. No. TR 2013/5:

when a pension starts is determined by reference to the terms agreed, fund rules & SIS

it may occur before first payment date, but not before member’s request to start pension: paragraph 12

Pensions update

PAGE 24

ATO TR 2013/5 & ATO website

When does pension cease? SIS min payment rules not met: Risotto

Risotto has a fully preserved transition to retirement pension. He usually receives quarterly minimum pension payments. However, in June 2013 there was insufficient cash in the fund so he thought he could just accrue the liability in the fund’s financial statements and no 4 th payment was made.

Q. When did his pension cease and what are the potential tax implications?

Pensions update

PAGE 25

ATO TR 2013/5 & ATO website

When does pension cease? SIS min payment rules not met: Risotto

A. ATO: pension ceases at the start of the 2012/13 year

Implications:

1. fund tax exemption may not apply, from the start of the relevant income year

2. tax components – earnings all taxable component, blend components with other accounts?

3. first three benefit payments unauthorised under SIS as preserved benefit so fully assessable at Risotto’s marginal rate under Div 304

» NB: would be at 45% rate from 2013/14 but bill has lapsed: Income Tax Rates Amendment (Unlawful Payments from Regulated Super’n Funds) Bill 2012

— ATO website guidance & examples on exercise general admin powers to treat pension as having continued if conditions met, including:

— honest mistake causing underpayment of no more than 12 th annual minimum

Pensions update

DISCONTIN

UE?

PAGE 26

ATO TR 2013/5 & SMSFD 2013/2

What is the effect of a partial commutation: Samba

Samba is 58, retired and has started an account-based pension with unrestricted non-preserved benefits.

The minimum drawdown requirement in 2013/14 is $30,000 .

Samba has received $10,000 in regular pension payments this year and is contemplating making a partial commutation and withdrawing a further $20,000 in one lump.

Q. Will he fail the SIS minimum drawdown requirement and will the pension be deemed to have ceased from the start of the year?

A. No.

the commuted amount counts towards the minimum drawdown requirement (SMSFD 2013/2) so he will not breach the SIS rules and not cause the pension to cease (TR 2013/5)

Pensions update

PAGE 27

ATO TR 2013/5 & SMSFD 2013/2

Tax treatment of standard account-based pension withdrawals: Samba

Samba is 58, retired and has started an account-based pension with unrestricted non-preserved benefits. The minimum drawdown in 2013/14 is $30,000. Samba has received $10,000 in regular pension payments this year and is contemplating making a partial commutation and withdrawing a further $20,000 in one lump.

Q. Can Samba elect for the $20,000 to be treated as a lump sum benefit for tax purposes?

A. Yes, provided Samba makes the election before the payment is made: reg 995-1.03 ITAR97

This may be useful for clients aged 55-59 & below the $180k low tax cap for lump sum benefits.

Pensions update

PAGE 28

ATO TR 2013/5 & SMSFD 2013/2

Tax treatment of TTR pension withdrawals: Samba, Take 2

Assume instead that Samba was still working and had established a TTR pension with fully preserved benefits. Under SIS he is not permitted to partially commute the pension, but under the rules he is allowed to receive the $20,000 as a single payment nevertheless.

Q. Could he elect to receive a $20,000 payment as a lump sum benefit so as to make use of his $180k low tax cap for lump sum benefits?

A. ATO position unclear.

Pensions update

PAGE 29

ATO TR 2013/5 & ITAA (Superannuation Measures No. 1) Regulation 2013

Cessation of a pension on death: Amaroo & Lido

In 2007 Amaroo started a non-reversionary account-based pension with 100% tax free component. He died in December 2011.

After his death $20k investment income was earned on the account and the assets backing the account were sold to pay a cash lump sum benefit, realising $300k notional capital gains.

The benefit was paid to Amaroo’s daughter, Lido, who was 45 yrs old and financially independent.

ATO TR 2013/5 states that an account-based pension ceases immediately upon death unless the pension automatically transfers to another beneficiary.

Q. What are the potential tax implications in relation to the post-death fund earnings and gains?

Pensions update

PAGE 30


Cessation of a pension on death: Amaroo & Lido

A. Potential tax implications if pension ceases on death:

no tax exemption on earnings post-death, including potential for CGT on asset sales

tax component calculations change: post-death earnings all treated as taxable component

Ruling applies from 1 July 2007 BUT

ATO won’t take compliance action using ruling views re pre-1 July 2012 death

— but if asked to state a formal view, will do so consistent with ruling views

Pensions update

PAGE 31


Cessation of pension on death: Amaroo & Lido, Take 2

Assume instead that Amaroo dies in December 2013. All facts about post-death fund income are the same and the benefit was paid as soon as practicable.

Q. As the ATO considers the pension ceased on death, will the fund pay tax on the notional capital gains?

A. No: from 1 July 2012 the new tax regulations ensure fund earnings exemption continues post-death in standard cases.

So key tax problems for typical non-reversionary pensions solved.

Pensions update

PAGE 32


Cessation of pension on death: Amaroo & Lido, Take 2

Q. Will Lido pay tax on the post-death fund earnings component of the benefit, on the basis that the pension has ceased and therefore the earnings add to the taxable component?

A. No, Lido will not pay any benefits tax. From 4 June 2012 the new tax regulations ensure that the original fixed tax component percentage (100% TFC) applies to post-death earnings .

Q. Would your answer change if an anti-detriment amount or insurance proceeds were added to the benefit post-death?

A. The anti-detriment or insurance proceeds portion of the benefit would be taxable component, the rest of the benefit would be tax free.

NB. If other amounts were added (e.g. from another interest) or the payment was late then the tax regs relief wouldn’t apply.

Pensions update

PAGE 33

ATO draft determination on segregated pension assets – TD 2013/D3: Wild Rice SMSF

Sticky and Padi Boy are trustee directors of the Wild Rice SMSF. Each has an account-based pension account. Padi Boy also has an accumulation account. They are considering segregating pension assets for the purpose of claiming tax exemption on the earnings of those assets.

Q. Can the fund do this with only one bank account?

A. No. TD 2013/D3: they need at least one for the pensions, one for the accumulation account

Sole purpose of an asset must be to discharge pension liabilities, whole bank account is asset

So separate pension bank account from account used for accumulation or general purposes

Temporary exception tolerated re sole purpose use:

— where receipts & outgoings require apportionment (between pension & accumulation phase assets) then can be paid from a single bank account provided trustee transfers portion between fund’s accounts within 28 days

Don’t need bank account for each pension account

TD 2013/D3 is a draft, subject to industry consultation, proposed to apply from 1 July 2014

Pensions update


03Borrowing and other

(non)-developments

PAGE 35

Regulatory controls on limited recourse borrowing arrangements (LRBAs)

Q. What regulatory developments have NOT occurred yet in relation to SMSF LRBA arrangements?

A.1. Stronger Super review of borrowing in super – proposed for December 2012, overdue

2. Stronger Super consumer protection policy: licensing rules for advice and product offers

— Two sets of draft regulations on in past 2-3 years, no further progress

— ASIC: jurisdiction under current law over recommendations to purchase real property through SMSF (e.g. Report 337 on SMSF advice, April 2013 – paragraph 173)

3. Legislative amendments constraining zero or low interest LRBAs

4. Tax “look through” proposals re holding trusts

Borrowing update

DISCONTIN

UE?

PAGE 36

Administrative directions and penalties for breaches relating to SMSFs:

Superannuation Legislation Amendment (Reducing Illegal Early Release & Other Measures) Bill 2012

— Bill lapsed

Stronger Super SMSF measures relating to:

— Verification processes re amounts transferred / rolled to SMSFs

CGT exemption for insurance proceeds paid to super fund trustees

Other potential non-developments

DISCONTIN

UE?

DISCONTIN

UE?

DISCONTIN

UE?



David Shirlow

November 2013


04Insurance update

PAGE 39

Constraints on insurance and self insurance: Roma

The trustee of the SMSF of which Roma is a member is aware of a new SIS requirement to consider, as part of its obligations to formulate and review the fund’s investment strategy, whether it should hold “insurance cover for one or more members” .

Accordingly, the trustee is considering whether to effect an “own occupation” total & permanent disablement (‘TPD’) insurance cover to enhance Roma’s benefit entitlements in the event he becomes TPD’d.

Q. What SIS and tax issues need to be considered?

Insurance update

PAGE 40

Constraints on insurance and self insurance

A. Considerations include:

SIS: Superannuation Legislation Amendment Regulation 2013 (No 1):

– new insurance must be aligned with SIS payment rules from 1 July 2014

problem with trauma, own occupation TPD, certain disability income cover

– insurance in place for a member prior to 1 July 2014 grandfathered

premiums, cover level may be varied, but

mis-match of insurance policy and SIS “perm incapacity” release condition

Tax efficiency: typically only around 67% premium tax deductible

Resist pre July 2014 “closing down sale” mentality?

Consider either:

1. Where super tax treatment appeals: split ownership of cover so that: SIS-aligned permanent incapacity portion of cover held inside super and the balance of cover is held directly by the client outside SMSF

2. Where it doesn’t: holding whole policy outside of super

Refer paper for tax analysis

Insurance update



David Shirlow

November 2013

Documents

STRICTLY CONFIDENTIAL Stocktake on key SMSF tax & regulatory developments David Shirlow November 2013