SMSF advisers – are you prepared for major changes to the taxation of superannuation?

Peter Slegers, CTA, and Nicole Santinon, ATI

1 July 2017 will see the biggest changes to the taxation of superannuation in
a decade come into effect. 

The Treasury
Laws Amendment (Fair and Sustainable Superannuation) Act 2016
was passed in
late 2016. Subsequent regulations have
been introduced to support the introduction of the Government’s reforms and the
ATO has finalised various compliance and law companion guidelines on the tax
and superannuation reforms.

Peter Slegers, CTA, and Nicole Santinon, ATI, of Cowell Clarke are the authors of The Tax Institute’s new book title, SMSF Income Stream Guide. We spoke with Peter and Nicole about how
the changes will impact practitioners.

In relation to the changes, can you summarise some of the key areas that practitioners need to be aware of?

Clearly, a significant area for practitioners
to be aware of is the requirement for pension members and their advisers to
ensure that appropriate steps have been taken to plan for the commencement of
the transfer balance cap measures.

Whilst, from a compliance perspective, this will involve at the least commuting pension account balances in excess of
$1.6 million, in our experience there are significant planning opportunities
that should be considered. This will allow
members to ensure they are in the best position possible despite the
changes. There is also a need to ensure outcomes are maximised across family members in an SMSF and that members avail
themselves of the advantages still available under the current rules.

The  SMSF Income Stream Guide  deals
extensively with the transfer balance cap measures, including issues related to
reversionary income streams, non-commutable income streams and transitional CGT
relief in Chapter 11.  Chapter 12 then goes on to
address a number of strategies and planning tips and traps for dealing with the
new measures, both before 1 July 2017 and thereafter. It is hoped that this practical information
will assist advisers in achieving the best possible outcomes for clients in
light of the changes.

How will the transfer balance cap measures and transitional CGT relief
affect advisers and their clients?

The transitional CGT relief
available is a great impetus for advisers to be planning early. With less than a
month before the end of the 'pre-commencement period', advisers should be
working with their clients to understand the impact of the changes on clients
and how the transitional relief may mitigate some of the impact of the new

In effect, the relief aims to preserve
the taxation benefits that would have been achieved by pension members up to
the commencement date for the transfer balance cap measures.  This is achieved by allowing the trustee to
choose to reset the cost base of funds’ eligible assets to market-value. 

Advisers will need to consider the assets of their clients’ funds and how the relief may best
benefit (if at all) their clients. Steps
may need to be taken to ascertain relevant valuations of assets while considering
any asset allocation strategies that may be available to members to maximise
pension balances post 1 July 2017.

The inclusion of death benefit pensions as part of the reversionary
beneficiary’s transfer balance cap will have a significant impact on the
succession plans of fund members with collectively more than $1.6 million in
superannuation with their spouse. What do advisers need to look for here?

On the basis that reversionary
income streams automatically become payable to a reversionary beneficiary upon
the death of the primary beneficiary, there is some additional flexibility
available to reversionary beneficiaries to manage their affairs before a
transfer balance cap issue arises.

particular, a credit will not arise to a reversionary beneficiary’s transfer
balance account in respect of the reversionary pension until 12 months after
the death of the primary beneficiary. This is in contrast to death benefits income streams paid at the
discretion of the trustee, in respect of which the credit will arise to the
recipient’s transfer balance account upon the income stream first becoming
payable to them.

In light of this difference,
advisers need to ensure that pensions that might be understood to be
reversionary are truly reversionary. For
this to be the case, the trustee of the fund must have no discretion as to
whether to pay the pension to the intended beneficiary. Careful review of the pension terms and
related documentation will be critical in this regard. Failure to properly document pensions as
reversionary may expose members to the risk of unwittingly exceeding their
transfer balance cap.

There are also
significant planning opportunities related to the receipt of reversionary
income streams 
 for example, choosing whether to internally commute an existing
pension or to externally commute all or part of a reversionary pension, which
may depend on the tax characteristics of the various pension balances.

What kind of general strategic issues are there around the commencement
of a
ccount-based pensions and transition to retirement income streams (TRIS)?

TRIS will not credit to a
member’s transfer balance account as these pensions will not be 'retirement
phase' income streams from 1 July 2017. That
said, funds will no longer be able to claim exempt current pension income in
respect of member account balances supporting the payment of a TRIS. Whilst it is possible to maintain a TRIS, earnings
in respect of the TRIS balance will effectively be taxed at 15%. The taxation implications of receiving TRIS payments
will not change.

One particular issue to be aware
of is the conversion of a TRIS to an account-based pension, which will credit
to a member’s transfer balance account once the TRIS member has satisfied a
subsequent condition of release with a nil cashing restriction. Where the balance of the TRIS is in excess
of the transfer balance cap, the credit to the member’s transfer balance
account on the TRIS becoming an unrestricted account-based pension would
inadvertently create an excess transfer balance for that member.

If members plan to
maintain their TRIS, advisers and members should be mindful of this issue and
put in place measures to ensure that a transfer balance cap issue does not
arise on the member subsequently retiring or attaining age 65.

SMSF income streams also interact with other areas, such as estate
planning laws and asset protection. What are some of the key issues covered in
the Guide that advisers need to be aware of?

Death benefit and succession
planning generally, as well as the implications of superannuation income
streams in a number of broader succession planning contexts, are covered
extensively in Chapters 9 and 10 of the Guide.

There are a number of key issues for
advisers to be aware of, including:
  • the impact of death on superannuation income
    streams, and planning for the optimal succession of a member’s superannuation
    death benefits to intended recipients
  • succession planning in the context of risk
    management where there are blended families involved and the potential for
    inheritance claims
  • appropriate death benefit planning measures such
    as BDBNs and how they may be used in the context of a member being in receipt
    an income stream, as well as the role of a member’s Will in facilitating
    intended payments of death benefits
  • the use of testamentary trusts and
    superannuation proceeds trusts in members’ estate planning
  • the impact of bankruptcy on superannuation and
    income streams
  • the impact of family law and relationship
    breakdowns on superannuation income streams.

Can you tell us a bit about the experience of writing SMSF Income Stream Guide, how you came to find yourself writing it, your process, and how you hope it will benefit practitioners?

The idea for the Guide originated
out of some discussions we had internally at Cowell Clarke among our
practitioners working in the superannuation field. 
Whilst there are general texts dealing with
SMSFs from a broader perspective, the nuances of planning for and managing superannuation
income streams was not covered in sufficient detail. 

Given our significant experience in advising
on a multitude of issues relating to SMSF income streams, and the gap in the
material available, we thought the Guide would bring something practical,
useful and relevant to the market. It is
hoped that the Guide will be a valuable resource for professionals dealing with
SMSF income streams, helping to add value for clients and achieve the clients’
desired outcomes.

Peter Slegers, CTA, heads Cowell
Clarke’s Tax & Revenue Group. 
Nicole Santinon, ATI, is a Senior
Associate in Cowell Clarke’s Tax & Revenue Group.
 They are the authors of SMSF Income Stream Guide - available now from The Tax Institute. 


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