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 measures.

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.

In 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 account-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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