Insights / June 16th, 2017

Questions answered from our live webinar "Transfer Balance Cap - What you need to know"

Is there a rule of thumb as to what asset classes should remain in pension phase?

From 1 July 2017, many funds which were previously applying the segregated assets approach will no longer be permitted to do so, needing to apply the proportionate approach from that time. Funds where at least one member has a total superannuation member balance in excess of $1.6m and is in receipt of a pension will no longer be able to apply the segregated assets approach to determining the fund’s exempt current pension income (“ECPI”).

In these circumstances, for tax purposes, no particular asset will be specifically held for the benefit of supporting the payment of a member’s pension.

However, it may be advisable for pension members to have assets “allocated” to their pension account and an appropriate investment strategy put in place in respect of the member where such arrangements are made. Although from a tax perspective the ECPI of the fund will be proportioned across all of the assets, the increase in capital value of the “allocated” assets held for the benefit of a pension member will increase the pension balance of that member. Such increase in value will not create a credit to the member’s transfer balance cap causing the member to exceed their personal transfer balance cap, but will only increase that member’s pension balance. Specific advice regarding this strategy is critical and should be obtained before implementation.

Should action be taken for CGT etc. if pension balance/accumulation balance for member is under $1.6m?

Although a pension member may not have $1.6m in their pension account balance, planning can still be undertaken (subject to the limitation on applying the CGT relief discussed below). Specifically, planning regarding pre 1 July contributions where the member has a total superannuation balance nearing $1.6m is of importance.

Given the decrease to the 3 year bring forward non-concessional contribution cap from $540,000 to $300,000, members who are able may consider maximising their balances where they won’t be entitled to make a large number of non-concessional contributions post 30 June.

The Commissioner’s guidance in LCG 2016/8 suggests that the CGT transitional relief may only be utilised by those pension members who need to comply with the transfer balance cap. Members who are only nearing the $1.6m transfer balance cap strictly speaking do not need to comply so would not be able to utilise the CGT relief.

Does Claudius need to fully commute his TRIS before 1 July and commence an ABP instead to ensure the pension exemption can apply from 1 July?

Claudius is actually 65 years of age and has satisfied a condition of release with a nil cashing restriction.

Claudius does not need to fully commute his TRIS before 1 July and commence an ABP as he has already satisfied a condition of release which lifts the restriction imposed on a TRIS.

At 1 July therefore, Claudius will have an ABP which will credit to his TBA and which therefore must have a value of $1.6m or less. His fund will therefore be able to claim the ECPI for the 2017/18 year using the proportionate approach.

If the Pension account earns extraordinary net profits of $300,000 in the 17/18 year, how does this affect the TBC if at all? Do the funds simply stay in the Pension account?

Credits do not arise to a transfer balance account for fluctuations owing to growth in investments. Accordingly, profit within the pension account derived from the assets of the fund will not affect the TBC and the increase in value attributable to the pension account will accrued to the pension account balance for the benefit of the pension member.

Do I need valuations to determine what my excess is?

Valuations will be important to enable a trustee to determine what the excess value in a member’s pension account is at 30 June of this year. For some assets this will be more difficult than for others. Specifically, real property assets and unlisted equities should be appropriately and independently valued for such purposes.

Can the trust income be diverted directly to the SMSF?

No, the diversion of trust income directly to the SMSF will likely trigger the non-arm’s length income (or NALI) provisions of the tax legislation. NALI is taxed at the highest marginal rate.

Can the fund apply carry forward losses to the notional gain?

Yes, carry forward losses can be applied to any crystallised deferred notional gain when the notional gain is ultimately recognised (i.e. losses cannot be applied to the deferred notional gain when choosing CGT relief in the pre-commencement period until the asset is realised). The CGT discount can however be applied at that time.

It is only when the notional gain is assessed when the asset is later realised that carried forward losses can be applied to reduce the notional gain.

We understand that if a member has $1.6m in super, then they cannot put in NCC. If they have $1.55m, can they contribute the full $100,000 or is this apportioned?

If a member has a total superannuation balance of $1.55m at 30 June 2017, the member is able to make non-concessional contributions to their fund up to the $100,000 annual limit. After this contribution is made, all things being equal, the member will not be able to make any more non-concessional contributions in the following income years.

Can't you just internally commute Orlando's reversionary pension?

No, a reversionary pension cannot be internally commuted.

While this view has been taken by the superannuation practice members at Cowell Clarke for some time, the ATO have recently confirmed the view in LCG 2017/3.

Is a reversionary pension still a good idea?

Yes, both from a succession planning and tax perspective.

First, a reversionary pension provides a high degree of certainty to the flow a member’s death benefits (as it generally takes precedence over a binding death benefit nomination).

Second, notwithstanding that a reversionary pension will count towards a member’s transfer balance cap, the member will have 12 months to rearrange their superannuation affairs before any credit arises in the member’s transfer balance account.

Thirdly, during the 12 month period, the reversionary pensioner may continue taking the pension and the reversionary pension balance will remain within the fund enabling the fund to claim the ECPI deduction in respect of that pension balance in addition to any other pension balances in the fund.

If you would like to know more, please contact Peter Slegers or anyone from our Tax & Revenue group.

Related Expertise