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  • Superannuation heading towards July 2017

    James O’Halloran, Deputy Commissioner, Superannuation
    Speech to the Certified Practising Accountants (CPA) Australia
    NSW Public Practice Conference, Sydney, 11 May 2017

    (Check against delivery)

    Introduction

    Good afternoon and thank you for the invitation to speak at this conference.

    Throughout recent months, the CPAA has greatly assisted the ATO to consider the implementation of the new measures and has been part of detailed technical and administrative engagements arising from the 2016 Budget superannuation measures.

    We do recognise that it is only by working together with you that we can achieve a shared success for the superannuation system and your clients. This is even more important given that this is a significant year in the evolution of superannuation policy in Australia and therefore for you and your clients.

    Clearly, it has been and will continue to be a year of transition as most of the legislated changes from the 2016 Federal Budget come into effect on 1 July 2017 and will strongly influence important decisions from then onwards.

    With respect to Tuesday’s announcements on this year’s 2017 Federal Budget measures for superannuation, I can advise that from the ATO’s perspective, as the policy details are settled, these changes will be developed in consultation with the CPA Australia and industry more broadly. At this stage I can but refer you to the policy and media announcements from the government which can be located on the Treasury website.

    Returning to the 2016 Budget measures, the superannuation legislation was passed on 23 November 2016. Since then, the ATO has been working across industry and with superannuation specialists to prepare for the practical administration and reporting obligations that arise for fund members, superannuants, advisers, tax agents and individuals.

    I will speak more specifically on details of the ATO approach to give you certainty and guidance a little later. However, the key to a successful transition for your clients is of course identifying which of them will be impacted, as well as recognising what action needs to be taken to comply with the new requirements.

    Our aim is to provide certainty around the key changes and the impacts. As always with superannuation, the ATO does not seek to direct decisions other than in the application of the law, as an individual’s final decision for their future involves many other considerations.

    Now fundamentally there are two new important aspects to be aware of: the transfer balance cap and the total superannuation balance, both of which commence on 1 July this year.

    They might appear similar, but they are calculated differently and those thresholds are used for different purposes.

    The transfer balance cap is a cap on the amount an individual can transfer into what we now call the retirement phase to start an income stream. It also picks up income streams that they may start to receive, such as death benefits. This, in turn, limits the amount of super income stream earnings that are exempt from tax.

    The total superannuation balance is the sum of the individual’s accumulation phase and retirement phase interests (less structured settlement contributions). I would emphasise how pivotal the total superannuation balance is because it affects people’s eligibility for various parts of the super law. It also affects their ability to make non-concessional contributions, including being able to access the bring-forward rules and it determines whether they can make extra unused concessional contributions after 1 July 2019, by carrying forward their unused concessional contributions cap.

    Additionally, the total superannuation balance is important for claiming the tax offset for spouse contributions and receiving co-contributions. And for clients with an SMSF, the balance may also affect the fund’s eligibility to use the segregated method to determine its exempt current pension income.

    Our approach to transition and compliance

    I would like to explain our approach to compliance with the super changes.

    We accept that there is a lot of great work being done across the industry and your members are working hard to help clients prepare and transition.

    Today, I’m pleased to let you know that with the CPA Australia we have released a video on superannuation changes, after I sat down with CPA Australia’s Head of Policy, Paul Drum, for a chat to discuss top tips on the changes and ways you can help your clients prepare for the changes.

     

     

    This video adds another practical resource to support you through the changes. My thanks go to Paul and of course the CPA Australia for collaborating with us on this video.

    We are of course also working across industry on the remaining issues, with a focus on what could be described as 1 July issues.

    From the time the legislation was passed, we sought to provide as much certainty as we could on the Commissioner’s approach to administering the new law. Any commentary or guidance has been built on extensive and detailed industry consultation.

    To that end, we used a relatively new form of public advice in the form of ATO law companion guidelines or LCGs. These are in effect public rulings and were developed to provide an insight into the practical implication or details of recently enacted law in ways that go beyond the mere interpretation of the law. They seek to advise you early on the Commissioner's approach to these matters. We believe they assist to give early certainty for you and entities that rely on the LCGs in good faith on how the ATO will administer the new law. We have issued seven final LCGs on the super changes.

    Additionally, where the ATO has been advised of widespread administrative issues arising from the transitional implementation of these reforms, and we have had the scope to make compliance concessions, we have worked with industry to develop and release practical compliance guidelines or PCGs to provide a further level of clarity on how the ATO will respond to some legitimately difficult transitional or implementation issues.

    We have issued two PCG as finals and are preparing a third that sets out our practical administrative approach to the super changes. This provides certainty for entities that rely on the PCGs in good faith that the ATO will administer the law in accordance with the approach outlined.

    For example, there is uncertainty about an issue and a practice that had evolved over time where death benefits income streams have been commuted back into the accumulation phase.

    We recognise that individuals and funds did what they believed was a valid option to prepare for the changes, and we are looking to provide a PCG clarifying that we will not undertake compliance action where someone has rolled a death benefit income stream to accumulation phase under the current law.

    So as we move to 1 July and beyond we have announced these matters:

    • Today I announced a lodgment extension to 30 June for 2015–2016 SMSF annual returns.

    This recognises that your members and the broader industry have put a lot of time and effort into advising their clients on the super changes and helping clients prepare for 1 July. This has impacted their ability to meet their usual lodgment commitments for 2015–16.

    • We have issued a PCG that sets out that the ATO will not apply compliance resources to review commutations made before 1 July 2017 to avoid exceeding the transfer balance cap.

    This is in circumstances where a SMSF trustee makes a declaration that they are commuting a member’s amount over $1.6 million even where they do not yet know the member’s account balance.

    • We have issued a PCG to support the implementation of the changes to the taxation of transition to retirement income streams for certain APRA funds.
    • We have issued seven LCGs providing comprehensive guidance on the Super changes:
      • To prepare for the transfer balance cap, LCG 2016/9 details our interpretation of the application of the core transfer balance cap provisions.
      • LCG 2016/8 provides insight into the application of the transitional CGT relief for funds.
      • To prepare for the total superannuation balance, LCG 2017/12 provides guidance on how this is calculated.
      • If you have clients who have defined benefit interests, LCG 2016/10 and LCG 2017/1 give guidance on how these interests interact with the transfer balance cap. Additionally, LCG 2016/11 has information about the changes to the way concessional contributions are handled for some defined benefit funds.
       
    • Lastly, this week we’ve released the final version of LCG 2017/3, which gives guidance on how the transfer balance cap interacts with death benefits.

    This work is complimented by a range of other guidance material we have available online to help your members and their clients understand and prepare for the changes. I will be discussing some of our other material later.

    Concessional contributions cap

    I would just like to confirm a few aspects on changes to superannuation caps.

    I will assume that you are well aware that there are two main changes for concessional contributions, with the concessional contribution cap moving down to $25,000 for everyone. This is especially important for clients with salary sacrifice arrangements as we move towards 1 July 2017 and beyond.

    The second change is the introduction of a new way to help people save for retirement, namely the ‘carry-forward’ concessional contributions. From 1 July 2018, any unused concessional cap space can be carried forward if their total superannuation balance is under $500,000.

    From 1 July 2019, they can take advantage of this cap to make larger concessional contributions. In going forward as a result of these cap changes, you should be looking at clients who:

    • are approaching retirement
    • take time out of the workforce or work part time, or
    • have variable income from one year to the next, or
    • have changed financial circumstances and are therefore in a position to increase their super contributions.

    As importantly of course, is that in the remaining period prior to 1 July 2017, there are some limited potential opportunities for clients who want to take advantage of the current higher existing caps for this final year.

    If any of your clients want to take advantage of this, they need to ensure that they don’t exceed their cap this year and that the amounts are received by their fund before 1 July 2017.

    Non-concessional contributions cap

    Similarly, from 1 July 2017, the annual non-concessional contributions cap will be reduced from $180,000 to $100,000 per year and will be indexed in line with the concessional contributions cap.

    Importantly, this cap will remain available to individuals aged between 65 and 74 if they meet the work test. However, it should be noted that this amount is based on a person’s total superannuation balance (ie their sum) at the end of 30 June before the financial year that they want to make the contributions.

    If their total superannuation balance is:

    • over the general transfer balance cap (ie over $1.6 million) they won’t be able to make any further non-concessional contributions in the financial year; and,
    • if it is under the general transfer balance cap (ie under $1.6 million) they can make after-tax contributions, but their total super balance will determine how much they can contribute.

    For agents with clients who want to make additional non-concessional payments before 1 July 2017, you should note that the existing bring-forward rules for non-concessional contributions continue to apply for this financial year.

    In summary, if individuals have not triggered the bring-forward rules in the last two years, they are still entitled to contribute up to $540,000 by 30 June 2017. However, they will not be able to make any more contributions until 1 July 2019 without triggering excess contributions.

    Conversely, individuals who have triggered the bring-forward rules in 2014–15 or 2015–16 still have $540,000 as their total cap from that arrangement and they can contribute any unused remainder amount by 30 June 2017. So make sure any contributions are received by their fund before 30 June 2017.

    Individuals who have triggered the three-year bring-forward since 1 July 2015 and who do not contribute the full $540,000 by 30 June 2017 will be subject to transitional provisions from 1 July 2017. So their total bring-forward cap will reduce in line with the lower annual cap.

    Personal super contributions deductions

    Another key change is that individual clients also have new opportunities to make concessional contributions to their super with the changes to how personal superannuation contributions deductions (PSCD) operates. These changes come into effect for the 2017–18 income year.

    Importantly, more people are now eligible to claim a deduction for personal contributions they make to their super after the removal of the 10 per cent maximum earning condition.

    Your clients will no longer need to have less than 10 per cent of their income from salary and wages; however, the other eligibility criteria to claim this deduction remain unchanged.

    This is particularly helpful for individuals who are partially self-employed and partially wage and salary earners, for example contractors and individuals whose employers do not offer salary sacrifice arrangements.

    Individuals can also make an after tax contribution to their super, and if they meet the eligibility criteria, can claim a tax deduction for that amount.

    If an individual wants to claim a deduction, they need to ensure they send a valid Notice of Intent to their fund, and that the fund sends a written acknowledgment back to them, within the required timeframe.

    Transfer balance cap

    The consequences for exceeding the cap will depend on the type of income stream that takes your client over the cap.

    So to prepare for the transfer balance cap, individuals with more than $1.6 million in retirement phase need to consider shifting excess back before 1 July 2017.

    If someone is in excess after 1 July 2017 and has account-based pensions and annuities, they will need to remove the excess capital, plus notional earnings, and pay excess transfer balance tax.

    Some people may exceed their cap because of income streams that cannot generally be commuted. These are known as capped defined benefit income streams, and instead of being required to remove an excess, taxation of their income stream will change once they are 60.

    So there is a defined benefit income cap of $100,000 in 2017–2018 and if individuals exceed it, they may have to lodge a return, pay tax on the payments and funds may need to withhold PAYG.

    Recognising some practical compliance matters in a year of transition for SMSFs, you can rely on the PCG 2017/5 I mentioned earlier to assist members of an SMSF who need to take action before 1 July 2017 to commute amounts to avoid exceeding the $1.6 million transfer balance cap. This was in recognition of the fact that on 30 June 2017, the member may not be in a position to know the value of the super interest that supports their super income stream.

    This guideline is only for members who make a valid request to commute amount(s) and the ATO has committed to not apply compliance resources to review this if certain conditions are met. We also give guidance in the PCG about the details of what information needs to be recorded, which includes the methodology of how the amount being commuted will be calculated.

    It is important to note that this PCG only relates to commutation requests that are made before 1 July 2017, and the ATO would expect that there is some sort of documentation, like a file note, which was made on the day the conversation occurred (or soon after).

    Transitional capital gains tax (CGT) relief

    An important measure to be thinking about now is transitional capital gains tax relief, or CGT relief.

    I’ve mentioned the transfer balance cap, and I’ll be talking about the changes to treatment of transition to retirement income schemes (TRISs) shortly. Now for funds, these changes mean they may have assets that would have been partially or fully exempt from CGT if they had been sold before the changes, but may now be subject to CGT.

    The purpose of CGT relief is to ensure that the capital growth on these assets while they were exempt is not now taxed.

    To achieve this, the relief effectively allows the fund to reset the cost base of the asset to its market value at the time relief is applied. The market value would be determined in line with the ATO valuation guidelines, which are also available on our website.

    The relief applies differently depending on whether the fund uses the segregated or proportionate method to calculate its exempt current pension income (or ECPI).

    This also affects the timing of the relief:

    • If a fund uses the segregated method, and moves an asset out of its pension asset pool, relief applies on the date the asset is moved.
    • If a fund was using the segregated method on 9 November 2016, and switches to the proportionate method on or before 30 June 2017, the relief applies on the date they switch.
    • Finally, if a fund uses the proportionate method the entire time, relief applies on 30 June 2017. Also, in these cases there may also be a taxable capital gain that can be deferred until the asset is sold.

    You should note that this relief can only apply to assets held throughout the period from 9 November 2016 to 30 June 2017 and the relief can only be applied where the fund is affected by the changes.

    That is, they must have a member that commutes amounts out of retirement phase to prepare for the transfer balance cap, or have a member with a TRIS who will be affected by the changes to those.

    Be careful to note that the relief is not automatic and the fund will need to make an election to access the CGT relief in the CGT Schedule to the 2016–17 SMSF annual return. Also, how the CGT discount will apply as the dates when you begin to hold the assets will change. .

    Of course a fund will need to keep appropriate records for assets subject to the relief in line with the record keeping requirements of the CGT regime. This includes the exempt proportion of any deferred capital gains.

    Transition to retirement income streams (TRISs)

    Another key point for SMSFs to be aware of are the changes in respect to transition to retirement income streams (TRISs).

    As I am sure you are all aware, the major change in respect of TRISs is that from the start of the 2017–18 income period, which for most funds will be 1 July 2017, the earnings from assets supporting a TRIS will no longer be tax-free, instead they will be taxed at 15%. CGT relief may be available for funds affected by this change, as I’ve just discussed.

    The way this occurs in law is that the concept of retirement phase has been introduced and if an income stream is in the retirement phase, it is eligible for the earnings tax exemption.

    The definition of retirement phase also includes what is not in the retirement phase and that includes a TRIS.

    The ATO view is that a TRIS will continue until it is stopped and does not convert into a retirement phase income stream when the recipient member meets a nil condition of release.

    As a part of the industry consultation where we confirmed our view, we heard a lot of industry feedback about the administrative impact of requiring people to cease a TRIS and commence a new retirement phase income stream; especially where the practical effect for the member is that there is no change to how a payment is made or to the payment amount.

    Based on feedback to the ATO from industry of the administrative burden this would impose on funds and members, working with Treasury we have since been advised that the government will amend the law to ensure that a TRIS can be in the retirement phase if the member has turned 65 years of age or permanently retired.

    Remember that for a fund that has members receiving a TRIS, the only change is in relation to the tax treatment at the fund level.

    There are no new conditions for members and their funds who want to commence a TRIS after 1 July 2017. As is the case now, a fund can commence a TRIS where the member has reached preservation age.

    Interestingly, we have seen recent publications that seemed to suggest the changes impact the tax paid by the individual who received a TRIS payment. This is not the case.

    I want to confirm that there has been no change to the tax treatment of a TRIS benefit paid to an individual member.

    As mentioned earlier, the ATO has issued PCG 2017/3 to support the implementation of the TRIS changes for certain APRA-regulated funds, pooled superannuation trusts and life insurance companies.

    It provides an alternative for calculating the funds’ tax liability with some comfort and clarity around how the ATO will respond to particular issues during the interim period.

    The PCG, which arose from working with APRA funds, only applies for the transition year of 2017–18 and outlines the ATO’s compliance approach to funds facing practical difficulties in complying with recent legislative amendments in respect of TRIS.

    Your clients with SMSFs

    I would like to finish this section by summarising some key points that SMSF trustees and their tax agents need to be aware of, and some issues we are considering.

    We have heard that trustees are concerned about being required to obtain an actuarial certificate for a part of the year when they switch from using the segregated method to the proportionate method in preparation for the changes. This is especially significant where they are only using the proportionate method for a short period – perhaps only for one day.

    I want to make it clear that a SMSF trustee does not have a regulatory obligation to get an actuarial certificate. They do need the actuarial certificate to support their claim for exempt current pension income (ECPI) for that period for income tax purposes.

    So if the SMSF claims ECPI under the segregated method for the entire year apart from one day, the trustee should determine whether the cost of obtaining a certificate outweighs the benefit of exempting part of that remaining day’s income.

    While on the topic of ECPI, I mentioned earlier that a fund’s eligibility to use the segregated method to calculate its ECPI from 2017–18 onwards will be determined by its members’ total superannuation balances.

    So funds may have to switch to the proportionate method next year if a member has a total superannuation balance over $1.6 million and certain conditions are met. However, remember that this alone is not enough to be eligible for CGT relief.

    If the fund does not have members making changes because of the transfer balance cap, or members with TRIS who are affected by those changes, CGT relief will not be available.

    Finally, it is important to note a fund’s SMSF annual return lodgment date if the previous year’s return has not been lodged.

    If a SMSF does not lodge its 2015–16 return, or lodges late, then the SMSF’s lodgment date is brought forward to 31 October irrespective of whether they are lodging themselves or through an agent.

    This is important if the SMSF wants to claim the CGT relief, as CGT relief can only be claimed in the CGT schedule to the return and it must be lodged by the due date.

    Our data indicates that over 16,000 funds have not lodged for the past two years or longer in NSW alone.

    Remember again that we have extended the lodgment date for 2015–16 to 30 June, so it is important that your clients who have not lodged for 2015–16 do so, to avoid having their next lodgment date brought forward.

    Some caution

    However, we are also aware of some other interesting approaches and strategies to superannuation compliance that have been suggested in the marketplace.

    A lot of the super changes hinge on having accurate and up-to-date valuations for a fund’s assets.

    I confirm that you can rely on the valuation guidelines for SMSFs available on our website.

    We will be looking closely at situations where it appears that circumstances have been engineered to achieve a particular total super balance, transfer balance, or to gain access to CGT relief.

    Some of the things that are likely to attract our attention include the use of reserves, starting pensions for several days and then ceasing them, and setting up additional SMSFs where there does not appear to be a legitimate reason to do so.

    If you have a client who is contemplating such arrangements, let me be very clear that they are not acceptable.

    Myths and misconceptions about the super changes

    Now let me clarify some misconceptions regarding this suite of superannuation changes.

    1. Firstly, SMSFs don’t have to report anything to us on 1 July.

    There is a myth that SMSFs will have to report their member account balances to the ATO on 1 July 2017. This is not the case.

    The ATO does not require SMSFs to report their members account balances and values of any income streams on commencement of the super changes on 1 July 2017.

    More broadly, the super changes do require certain events to be reported to the ATO. We are working with the SMSF sector to put in place transitional reporting arrangements in 2017–2018 to assist the sector to move to more timely events-based reporting for transfer balance cap purposes for the 2018–19 year and beyond.

    Transitional reporting arrangements in 2017–18 may mean that many SMSFs will not need to report anything further to the ATO for the purposes of the super changes until they are required to lodge their 2016 - 2017 SMSF annual return.

    1. Another myth is that there will be changes to the three-year bring forward.

    This is not the case. There are actually no changes to the three-year bring forward for 2016–17. I have already explained how the bring-forward arrangements will be affected by the reduced non-concessional cap and new total superannuation balance.

    1. Another myth is that there will be changes to the tax-free status of a pension.

    The change is a new limit on the amount of super you can transfer and hold in a tax-free retirement phase account, where the investment returns are tax-free.

    There is actually no change to the pay as you go (PAYG) withholding status of ordinary account-based pensions.

    For most people over the age of 60, pension payments will continue to be tax-free and not subject to PAYG withholdings.

    However, if they receive non-commutable capped defined benefit pensions and annuities, and exceed the cap, then they may be subject to PAYG withholdings.

    1. Another myth is that the new transfer balance cap can be shared between couples.

    This is not the case.

    The transfer balance cap of $1.6 million cap applies for each member of a couple (with modifications for death benefit recipients), and cannot be shared or aggregated between a couple.

    For example, one member of the couple cannot have $3 million in retirement phase and the other member have $200,000.

    1. Yet another myth is that the transfer balance credit amount of an existing term allocated pension (TAP) will be determined by the TAP’s account balance.

    This is not the case. The TAP is a capped defined benefit income stream and different rules are used to determine how the TAP counts towards an individual’s transfer balance cap.

    Instead, the credit amount is determined as the annual entitlement from the TAP multiplied by the rounded up remaining term, and this will always exceed the actual account balance.

    However, if your TAP commences after 30 June 2017, the transfer balance credit value will be equal to the value of the account balance.

    How we are supporting you through the changes

    The ATO has done a lot of work to help support everyone to be ready for the changes coming into place on 1 July.

    The LCGs we have prepared on the new superannuation legislation provide the support you need to ensure that you are correctly interpreting and applying the new law.

    Furthermore, the ATO has a well-established consultation framework that aims to build and strengthen our relationships with our partners, improve client outcomes, and now, facilitate the implementation of the recent super changes.

    The CPAA is represented in the Superannuation Industry Stewardship Group (SISG), which has held strategic discussions on the super changes, focussing on industry preparation for implementation, and supporting industry and others impacted by the changes.

    We have had detailed and targeted consultation with representatives of the SMSF and APRA funds on the administrative impacts of the changes, covering specific issues with each industry group.

    Starting on Monday (15 May), we will be sending letters and other communications to individuals advising them that they may be affected by the super changes, including people who are definitely affected by this change. Tax agents will be copied into these communications.

    We have also created new products which are known as ATO guidance notes; all of which are available on the ATO website and some as downloadable PDFs. The aim of these guidance notes is to help you support your individual clients through the changes.

    The guidance notes are single issue documents and focus on what people need to do to comply with the changes.

    We have been working with key industry groups preparing the guidance notes and they have been providing invaluable comments and suggestions to improve these products.

    To date we have released eight final guidance notes on our website which explain to individuals in simple terms some of the specific changes and what they mean for them. There are eight draft guidance notes to follow and they will release shortly as final.

    We have also been doing a series of webinars, which drill down into more detailed information on specific topics.

    All the past webinars have been recorded and are available on atoTV if you have missed any. I encourage you to sign up for any of the upcoming webinars.

    You can also find general information about all the super changes I’ve talked about today at ato.gov.au/superchanges and from there you can link to more detailed information about each of the super changes.

    I therefore recommend you subscribe to the ‘Super changes’ page on our website, and select ‘Individual super’ in the subscription choices to receive an email or RSS feed alert whenever the page is updated.

    Conclusion

    I would like to thank you all for listening to me today.

    I hope it goes some way to explaining the super reforms and how they impact you and your clients.

    Change of this magnitude can only be successfully implemented if we all work together in a spirit of cooperation and collaboration.

    I acknowledge it will not all be finished on 1 July and we will then move into more emerging situations and decisions. All I can say is that the ATO will remain focussed on finding practical solutions where we can.

    We recognise that the changes are significant and people will make mistakes; we can only encourage trustees and professionals to get good guidance, seek advice from us when in doubt and engage with us openly and early when problems arise.

    The ATO appreciates your vital role in helping your clients navigate the tax and super system. As I said earlier, we are partners in the system and we all have a mutual interest in ensuring a robust and effective tax and super system that will benefit all of us in the decades to come.

    Thank you.

      Last modified: 12 May 2017QC 52051