Stocktake on key SMSF tax &
regulatory developments
David Shirlow
November 2013
STRICTLY CONFIDENTIAL
Contents
01 Contributions
02 Pensions
03 Borrowing & other important non-developments
04 Insurance
STRICTLY CONFIDENTIAL
01
Contributions update
STRICTLY CONFIDENTIAL
Contributions update
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
PAGE 5
Contributions update
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
PAGE 6
Contributions update
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 7
Contributions update
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 8
Contributions update
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
PAGE 9
Contributions update
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 10
Contributions update
Excess CC tax reforms: Arborio
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 breached
11
PAGE 11
Contributions update
Excess CC tax reforms: Arborio
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 12
Contributions update
Excess CC tax reforms: Arborio
Refund, re-contribute $42.5k *
NCC Cap
*
Original
contribution
Nil
Re-contribution
$17k - in a later year
Total
$17k - in that later year
After fund tax, personal tax funded from other sources.
13
PAGE 13
Contributions update
Excess CC tax reforms: Arborio
Refund, re-contribute $17k *
Retain $20k in fund **
Original
contribution
Nil
$20k - in original year
Re-contribution
$17k - in a later year
N/A
Total
$17k - in that later year
$20k - in original year
NCC Cap
*
After fund tax, personal tax funded from other sources.
** After fund tax.
14
PAGE 14
Contributions update
Excess CC tax reforms: Arborio
Refund, re-contribute $17k *
Retain $20k in fund **
Original
contribution
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
NCC Cap
*
After fund tax, personal tax funded from other sources.
** After fund tax.
15
PAGE 15
Contributions update
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
PAGE 16
Contributions update
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 17
Contributions update
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 18
Contributions update
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 19
PAGE 20
02
Pensions update
STRICTLY CONFIDENTIAL
Pensions update
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
PAGE 22
Pensions update
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
PAGE 23
Pensions update
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 4th payment was made.
Q. When did his pension cease and what are the potential tax implications?
PAGE 24
Pensions update
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 12th annual minimum
PAGE 25
Pensions update
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)
PAGE 26
Pensions update
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.
PAGE 27
Pensions update
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.
PAGE 28
Pensions update
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?
PAGE 29
Pensions update
ATO TR 2013/5 & ITAA (Superannuation Measures No. 1) Regulation 2013
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
PAGE 30
Pensions update
ATO TR 2013/5 & ITAA (Superannuation Measures No. 1) Regulation 2013
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 postdeath in standard cases.
So key tax problems for typical non-reversionary pensions solved.
PAGE 31
Pensions update
ATO TR 2013/5 & ITAA (Superannuation Measures No. 1) Regulation 2013
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.
PAGE 32
Pensions update
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
PAGE 33
03
Borrowing and other
(non)-developments
STRICTLY CONFIDENTIAL
Borrowing update
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
PAGE 35
Other potential non-developments
Administrative directions and penalties for breaches relating to SMSFs:

Superannuation Legislation Amendment (Reducing Illegal Early Release &
Other Measures) Bill 2012
—

Stronger Super SMSF measures relating to:
—

Bill lapsed
Verification processes re amounts transferred / rolled to SMSFs
CGT exemption for insurance proceeds paid to super fund trustees
PAGE 36
Stocktake on key SMSF tax &
regulatory developments
David Shirlow
November 2013
STRICTLY CONFIDENTIAL
04
Insurance update
STRICTLY CONFIDENTIAL
Insurance update
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?
PAGE 39
Insurance update
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.
2.
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
Where it doesn’t: holding whole policy outside of super
Refer paper for tax analysis
PAGE 40
Stocktake on key SMSF tax &
regulatory developments
David Shirlow
November 2013
STRICTLY CONFIDENTIAL