Australian Financial Review

4 January 2017

John Wasiliev

Do you have a self-managed superannuation fund (SMSF) paying a pension from an account with more than $1.6 million where the pension transfer rule will require you to make a choice by July 1 to either withdraw any surplus or roll it back to a taxable accumulation account?

Do you have a defined benefit pension caught by the new 16 times pension multiple rule as well as an SMSF paying you a tax-free pension that faces being wholly or partially wound back from July 1 to a taxable accumulation account, also as a result of the pension transfer rule?

Alternatively, rather than an SMSF, is your additional pension sourced from a retail super fund that will also require a pension restructure?

Do you have a transition to retirement (TTR) pension that faces losing the tax-exempt treatment of its investment earnings from July 1?

The CGT relief measure, says Peter Crump, has been introduced to discourage the mass selling of pension-supporting investments before June 30. David Mariuz

If any of these scenarios apply to you, one thing you may need to consider over the six months leading up to June 30 is whether an entitlement under new super rules to claim capital gains tax (CGT) relief on certain investments is worth pursuing.

CGT relief is a consideration in all of these circumstances because what they have in common is individual investments that are tax-free in the pension phase but face being partly taxable if a choice is made to roll them back to the accumulation phase.

Significant change

Now anyone with an SMSF that is paying them a pension knows that under current rules, there is no tax on the income and realised capital gains earned by the fund’s investments.

These tax concessions are an important entitlement, says investment adviser Tom Murphy of Escala Partners, that will experience a significant change from July when they will be restricted to super investments worth $1.6 million per member or less.

Where investments in a pension account exceed $1.6 million, any surplus must be either withdrawn as a benefit – a tax-free lump sum, for instance – or transferred into a super accumulation account where investment income like interest, dividends and rent are taxed at 15 per cent and net capital gains at 10 per cent.

Serious super savers will feel this change, he says, because a common and quite deliberate strategy is delaying the sale of investments with substantial capital gains until after a fund has shifted into pension mode. That is when you know all investment gains will be tax-free.

The introduction of a pension limit means that where funds have members with pension balances greater than $1.6 million – which could be as many as one in three of the 580,000 SMSFs – they will need to be restructured before July 1.

Relief decision

Part of this restructuring will be considering whether it is worth pursuing an entitlement to claim CGT relief on certain investments with sizeable capital gains.

Where SMSFs are involved, this relief is available under new super rules offered to those with pensions between now and when they are required to lodge their 2016-17 tax returns.

Now I have to admit that explaining the CGT relief entitlement is not a simple exercise. It’s a challenge because it introduces some serious complexity to what is currently a very basic concept: that the returns from all investments after you start a pension become free of tax.

This is something that will no longer be the case from July 1 for those with more than $1.6 million in a pension account. For some, this will come as a shock as they are likely to have enjoyed years of not having to worry about tax after they started a pension from their SMSF.

Possibly the best way of providing an explanation of CGT relief is through a worked example and for that I thank private client adviser Peter Crump of ipac South Australia.

But before that, let’s consider what CGT relief is all about and why it is available. Under current super rules, if you have both a pension account and an accumulation account they are taxed differently. There is no tax on the pension but there is tax on the accumulation account.

Worked example

To illustrate this, let’s assume you have a pension account in an SMSF with investments valued at $2 million. Under the new $1.6 million pension limit, $400,000 (or 20 per cent) must be either withdrawn or transferred into a taxable accumulation account.

Let’s say one of the investments in the pension happens to be 1000 shares in health products group Blackmores Ltd bought for $27.20 in June 2014, a cost base of $27,200. If the share price on June 30, 2017 equals a recent price for the shares of $105, it means the $105,000 market value of the shares will include an unrealised gain of $77,800 since they were bought.

Because a 20 per cent proportion of investments that make up the pension must either be withdrawn or transferred to a taxable accumulation account, if the transfer option is chosen some compensation must be allowed to deal with the fact that investments in accumulation accounts are taxable.

This compensation comes in the form of a CGT relief entitlement where if you choose the transfer option, you can elect to reset the price of the shares to their value on June 30.

Say this value happens to be $105 (equal to the recent share price), resetting the cost price will mean that future gains attributable to the 20 per cent of the pension that becomes part of an accumulation account will be based on this price and not the original $27.20.

If you didn’t reset the cost base and you sell the shares for $105 at a future date, then 20 per cent of the $77,800 capital gain (or $15,560) will be classified as a taxable gain attributed to the accumulation account, while $62,240 will be a tax-free gain under the pension rules.

As far as the taxable gain is concerned, the $15,560 is allowed a one-third discount under the super rules which reduces it to $10,373. This is added to the fund’s income for the financial year and taxed at 15 per cent. The bottom line is tax of $1556.

The CGT relief measure, says Crump, has been introduced to discourage the mass selling of pension-supporting investments prior to this date – in other words between now and June 30 – to avoid any retrospective CGT where they roll back investments into an accumulation account.

The Australian Financial Review

9 December 2016

John Wasiliev

The biggest changes in superannuation in nearly a decade affect all super savers – whether you’re just starting out or you’ve amassed big balances over time and are worried about the $1.6 million cap on tax-free pensions.

There is huge confusion about the impact of the super changes, First floated in the May Federal budget, they were finally passed by Parliament in late November. That means you’ve got until June 30 next year to get your super house in order.

The implications are huge. If you’ve got more than $1.6 million in pension phase, have you worked out which assets it’s smart to transfer back to accumulation phase? And if you’ve got a defined benefit scheme, do you know the calculations you’ll have to use to work out whether you’re close to the $1.6 million cap? What about after-tax contributions – do you know there is a limited time in which you can get more into super?

So many questions and a limited time in which you’ll need to answer them. We asked for your questions and have had an overwhelming response. For space reasons we can’t answer all of them but will address them in future articles.

Q: I understand that the cost base of equities will be reset to their market value on June 30, 2017. Does that mean that where the market value of the shares is less than the original cost, the unrealised loss will be wiped off?

A: Resetting the cost base of equities is not an automatic event that occurs on a particular date. It is only available where your super fund is in pension mode and you have more than $1.6 million that must be divided between a pension account and an accumulation account. Or you could be in a transition to retirement (TTR) pension.

You must also own any investments before the reset date – which could be June 30 but could also be an earlier date when you restructure your $1.6 million-plus pension account balance into pension and accumulation accounts. A stricter requirement is that the investment must have been owned between November 9 (when the super legislation was introduced) and June 30.

Resetting entitles you to CGT relief on individual investments. When assessing which investments to reset, you need to analyse their prospects for staging a recovery and the potential capital gain that you will pay tax on.

What about resetting an investment that has experienced a loss? The legislation, says Nerida Cole from Dixon Advisory, specifically states that the CGT relief provisions can only be applied to an investment the super fund has made a capital gain on.

Not being able to apply the reset to an investment with a market value less than its cost should not disadvantage a fund as it is not a particularly attractive strategy anyway. That’s because it would lock in a lower cost base for future capital gains on which tax must be paid.

There is one point worth highlighting if you do choose to access the CGT relief provisions, says lawyer Robert O’Donohue of HWL Ebsworth. That’s the 12-month period that assets are required to be held to access the discount that reduces the tax payable on capital gains from 15 to 10 per cent. Accordingly if you do choose the CGT you should also ensure the investments are held for at least another 12 months after the restructure to access the 10 per cent CGT. JW

Q: I expect that on June 30, 2017 I will have more than $1.6 million in superannuation. I wish to maximise my non-concessional contributions this financial year. I understand that if I haven’t yet triggered the “bring forward” rule, I can make a $540,000 contribution before June 30, 2017 under current rules. If I make after-tax contributions into a defined benefit superannuation scheme next financial year (either because such contributions are a condition of scheme membership or because employer contributions require matching employee contributions), how do I avoid a penalty for making excess non-concessional super contributions under the new rules?

A: First, you are correct in assuming that you may be eligible to contribute up to $540,000 into super as a non-concessional contribution if you have not made any non-concessional contributions this year or you have not previously triggered the bring-forward rules in the past two years by making contributions over $180,000.

If you make contributions and you have over $1.6 million in super, you will be issued with a notice of determination and you’ll be required to remove the excess contributions with interest from the fund. You will be required to do this within 60 days or the ATO will do it for you if you do not respond. A notional earnings rate of around 9 per cent will apply to excess funds and your marginal tax rate will apply to this amount to provide a disincentive to people exceeding the barrier.

The treatment of defined benefits will take a little education. If you have a lump sum defined benefit, the outcome will be fairly simple with respect to the computation and tax on excess super balances above $1.6 million. The situation is a little different for defined benefit income streams depending upon whether it’s from a taxed or untaxed source – although a multiple of 16 will be used to equate the total lump value. Excesses over the $1.6 million cap equivalent will be taxed differently depending on whether it’s from a taxed or untaxed source. It’s best to discuss your situation with your fund. SH

Q: I have an SMSF and also a Commonwealth Public Service (CSS) pension. I am 80. At present when I submit my tax return I include the CSS pension in my taxable income. If needed, I am eligible for a tax offset of 10 per cent of that pension. My SMSF is well in excess of $1.6 million. If I have to include 16 times my Commonwealth pension in my total super assets, this will lift these assets to well in excess of $1.6 million and hence have a big impact on the total tax I must pay. It seems most unfair that I must include my CSS pension in my taxable income and will also pay extra tax on any super in excess of $1.6 million. My wife is older than 75 so I cannot split my “excess” with her. What can I do?

A: Your question explains the headache that has been created for retirees in your situation by the super reforms, says financial planner Nerida Cole of Dixon Advisory. Under these reforms how much of your CSS pension gets tax-concessional treatment is determined by multiplying the annual pension amount by a factor of 16. So a gross annual pension of $40,000 will have a value of $640,000 assigned against your allowable $1.6 million pension balance. This leaves $960,000 able to be held in other retirement pension accounts, like the one from your SMSF which you describe as having well in excess of $1.6 million.

Unlike super pensions funded from personal savings (like an SMSF) which are tax-free for retirees 60 and over, pensions from a source like the CSS (which comes from government funding) are not tax- free. Instead, they are taxed from age 60 right throughout retirement at marginal tax rates with a 10 per cent tax offset. You mention you are eligible for this offset if it is needed which suggests it may not be required, especially if you are entitled to other tax breaks like the seniors Australian pensioners tax offset (SAPTO).

Your comment implies the tax on your CSS pension likely falls within your tax-free threshold entitlements, reducing your need for the 10 per cent tax offset. The offset is a right to reduce your tax by 10 per cent of your pension amount. A $40,000 pension, for instance, comes with a $4000 tax offset.

One point worth reminding holders of larger defined benefit pensions is that this offset will be capped at $10,000 from July 1, 2017.

So the July 1 reforms – which treat a tax-paying retirement pension like one from CSS and a tax-free retirement pension from an SMSF as having the same value – is creating some waves. It is doing so by reducing the amounts in SMSFs that pay tax-free pensions. The reduction means a greater proportion of SMSF savings is relegated to an accumulation account where the investment earnings are taxed.

This question also highlights a lost opportunity to share some of the SMSF savings with your wife. Because she is over 75. it is not possible to withdraw and re-contribute some of your money into her super. That said, what you have to settle for is that super in the SMSF in excess of the $1.6 million limit does not have to leave the super system. In the accumulation phase of super, income is taxed at 15 per cent and capital gains at 10 per cent where the investment is held for 12 months or more. This is still attractive compared to many marginal tax rates – particularly if calls to reduce SAPTO get further support. JW

Q: Is the $1.6 million cap a gross cap or after netting off any non-recourse debt?

A: The $1.6 million cap is based on net assets in pension phase. Net assets equals assets less liabilities including limited recourse borrowing arrangements (LRBAs). So if you have a property worth $2 million with debt of $500,000, then your net assets would be $1.5 million. That said, I’d hope you have some further diversity in your fund in the form of cash, shares or other liquid assets to meet your pension obligations and the requirements of your written investment strategy – hopefully you have one of those too! SH

Q: My SMSF, now in pension phase, holds a tax-free component. How is this treated under the new legislation?

A: Under the new legislation there won’t be any difference in the treatment of a tax-free component in a pension account. Your fund will still be required to record the taxable component of a pension account, which in turn will give you the tax-free component.

The different components are only relevant when any super passes from the pension phase to an adult beneficiary as it will determine the death benefits tax that is payable on the super. Keeping tabs on a fund’s taxable and tax-free components is not as relevant while you are in the pension phase as all payments are tax-free. JW

Q: Has the government made it easier to commute a TTR pension to an accumulation account now that the tax-free status of TTR income streams is to change?

A: A TTR pension can be put back into accumulation mode fairly simply. From July 1, 2017 TTRs will not receive tax-free earnings or capital gains status. Nor will they be classified as retirement income streams and thus the $1.6 million cap will not apply. Instead, TTRs will attract the same tax that superannuation in accumulation phase pays – losing much of its allure, but not all. TTRs can still be an effective strategy to reduce debt in the approach to retirement, rebalance partner accounts or simply to subsidise your income if you’re working part-time.

One of the “new” key benefits from having a TTR in place before June 30, 2017 (even if you set one up for just a few months) will be the ability to reset your cost base for CGT purposes on June 30, 2017. This significant opportunity is designed to utilise the opportunity that exists within TTRs and account-based pensions without encouraging people to churn assets or create a selling spree on assets between now and the end of the financial year. Essentially, the government recognises the CGT-free status of both pensions and will allow the CGT relief to occur. SH

Q: We are 75 and retired. We currently must withdraw 6 per cent of the value of our SMSF each year. Will such minimum withdrawals apply to both the $1.6 million cap and any accumulation account in the future?

A: The simple answer is that the minimum withdrawal requirement will only apply to the $1.6 million pension account balance. With accumulation accounts, there is no compulsion to withdraw any amounts. But withdrawing money from an accumulation account is available to you as you wish.

Because you’re 75, even though investment earnings on such accounts will be taxable, any withdrawals can be taken as tax-free lump sums.

According to Godfrey Pembroke financial planner Matthew Scholten, a strategy you may consider is withdrawing some of the capital from the accumulation account and investing this in shares, for instance, where you are entitled to dividend imputation tax credits that can result in a lower overall tax rate than the 15 per cent super tax. Given that super tax concessions are unlikely to be better in the future, people should be prepared to explore alternatives to super wherever they are identified. JW

Q: My spouse and I have two SMSFs. She is 57 and I am 60. We are both on TTR pensions from one SMSF with $2.5 million value. The other SMSF with $2 million value is in accumulation phase. Our pension interests on both SMSFs are almost equally divided. If we stay on TTR pensions from the first SMSF and start a new pension from the second SMSF this year, how will the $1.6 million limit on both SMSFs be determined? I understand once the pension starts on June 30, 2017, the balance stays regardless of the changes in pension asset value. Does this rule apply to TTR pensions? We might roll over assets from one SMSF to the other to segregate pension assets to make two lots of $1.6 million and leave the excess in accumulation phase. Would this strategy work?

A: There are always a number of combinations and permutations to suit different needs. TTRs are not included in the $1.6 million cap. The term “pension” refers only to retirement pensions for those who have attained a condition of release. If you are in this situation, you may be well served to change your TTR to a full account-based pension. If not, your $1.6 million cap will apply when you start a retirement income stream and not before. This may bring some people to retire earlier than expected. If you’re over 60, a condition of release also includes ceasing gainful employment so those people with two jobs may also benefit from resetting the CGT and playing around with the conditions of release that may be available to them – of course, advice is needed for this.

Here’s what I’d do if I were in your situation if you haven’t attained a full condition of release; first, I’d start a second TTR pension from the second SMSF before June 30, 2017 to allow me to reset the cost base for CGT purposes on that date. CGT relief is being offered to pensioners in both TTR phase and account-based pension phase. This may save you many thousands of dollars in CGT, if not tens of thousands – this applies to property too! You will also receive zero earnings tax and a CGT benefit for this financial year for having the TTR in place. SH

Q: Is a UK defined benefit pension caught in the new super rules?

A: No it isn’t. You needn’t think it will somehow be assessed under the new legislation. Because it is a foreign-sourced pension, it is not taxed like an Australian superannuation pension. Any UK pension income is added to your ordinary income and taxed at your personal tax rate. JW

Q: Is the $1.6 million limit on transfers into tax-free super pensions reset if the pension capital drops? Say I transfer $1.6 million into pension mode. Some years later the account balance drops to $1.2 million due to pension payments and a fall in equities value. Am I able to then contribute another $400,000 to bring it back to the $1.6 milion balance? It’s very important for people wanting to use the re-contribution strategy to get rid of the tax liability of super accounts on death.

A: The $1.6 million cap will not be able to be reset once it’s set. So any rises or falls in value will not effect the cap amount – although the government has left the opportunity to reassess pending any significant global upsets such as the financial crisis of 2008-9. There will always be potential government intervention and if there is one thing we can guarantee with superannuation, its change!

You may see this as a major disadvantage but the likelihood of a rise well above the $1.6 million is more probable given the average move on share and property prices is around 6-8 per cent a year over a 10- or 20-year period (despite the last two years being flatish on the ASX All Ords).

With respect to the recontributing strategy, I’d suggest you utilise the opportunity of the $540,000 or $1,080,000 non-concessional contribution caps for a couple before June 30 if you have the funds.

For the uninitiated, the re-contribution strategy allows you to pull money out of super in a proportional fashion between your taxable and non-taxable amounts (check your super statement or member statement in your SMSF returns for these amounts), assuming you’ve attained a condition of release and are thus eligible to withdraw money from super, and then re-contribute the funds as non- concessional contribution. This raises your non-tax taxable component within the fund to reduce or eliminate the 15 per cent tax when your super is inherited by your adult children or non-dependents. Dependents still receive the super tax-free.

There’s a free e-book download on my website at www.hendersonmaxwell.com.au on this re- contribution strategy if you’re interested. SH

Q: How will existing tax losses in an SMSF be treated in the future when the fund has assets greater than $1.6 million? Can all the tax losses be transferred to the taxable accumulation account or is it proportioned?

A: Essentially what happens to an SMSF’s investments where there are pensions and accumulation accounts is that all gains and losses are offset against one another. You then apply the percentage of the total net balance attributable to the pension which has been calculated by an actuary to determine how much of any net result will be exempt from tax.

Where a fund has losses, they are used up even if only part of the total investment pool is exempt from tax. You can’t pick and choose whether losses will be offset against taxable earnings only. It must all happen proportionally. JW

Q: Suppose you have two pension accounts, each with $1 million where one consists entirely of taxed funds and the other entirely of untaxed funds? From which fund would it be most advantageous to transfer the required $400,000 into an accumulation account?

A: For the benefit of other readers, some superannuants took advantage of making significant lump sum non-concessional contributions and quarantining those funds into a separate SMSF to take advantage of super laws that enabled those funds to forever remain tax-free. The key benefit was to avoid paying the so-called superannuation death tax when assets are passed on to non-dependent beneficiaries. This tax equates to 15 per cent (plus surcharges of all taxable components of your superannuation.

For practical estate planning purposes and to keep the non-taxable pension forever tax-free, I would not touch the non-taxable pension so it remains the basis of the $1.6 million cap. As your question sounds a little “theoretical”, I may even consider starting a new SMSF with the taxable portions and have a pension account up to the $1.6 million cap (ie, $600,000) and another accumulation account with the $400,000 balance.

Super laws have a habit of changing so I’d try to leave the non-taxable pension untouched forever – if nothing else, for simplicity and estate planning. So long as you’re over 60, the pension created from the taxable component of your super fund will still be tax-free so the benefits are really for your beneficiaries.

You may also have an opportunity to do a withdrawal and re-contribution of the $540,000 to create a higher tax-free amount in your superannuation before June 30 by utilising the higher non-concessional cap and creating an even higher tax-free amount for estate planning purposes.

Caution needs to be advised as to the use of partners with reversionary pensions as they have the potential to supersede existing account-based pensions when inherited. SH

Q: I started a TTR pension in 2015-16 as I am over 60 and still working part-time. My financial advisor suggested I deposit the TTR amount received back into my super account. I believe that the new rules make it no longer beneficial for this strategy. What should I do from July 2017? Can the TTR account be cancelled and rolled back into my super account?

A: Even though the investment earnings will be taxable from next July, a TTR pension can still be an effective way to access your super tax-free if you are working part-time and likely to need some money from your super, says financial planner Matthew Scholten. It is also very flexible and can be stopped and rolled back into an accumulation account.

As someone who is over 60 one thing to watch out for is that if you started your TTR pension because you quit a job, it is possible you may have retired under rules that entitle you to start a full pension from a super payout. In that case not only the pension payments will be tax-free but the investment earnings will also be exempt from tax. So your pension may not need to be a TTR.

Another thing to remember about taxable TTR pensions from next July, says Meg Heffron of Heffron SMSF Solutions, is that because they don’t count towards the $1.6 million cap there is no limit on the savings they can accumulate

Where someone is looking to accumulate a multi-million-dollar super balance and also needs some cash from their super fund, they could start the TTR pension. While their immediate thought might be that they could only withdraw up to 10 per cent of a $1.6 million account balance, that is actually not the case.

Although the $1.6 million cap will need to be considered when you start a full pension, there is no limit on how much super can be saved in a TTR account. You could have a $5 million TTR account from which you can withdraw $500,000 of income under the 10 per cent entitlement.

Of course the TTR’s investment earnings will be taxable. But at the 15 per cent super fund rate. Heffron says this could make some sense for someone over 60 looking to use super as a flexible investment account from which they could take money out. A TTR pension is the only way this is possible from super if you haven’t retired. JW

Q: I wish to know what type of assets (growth or high dividend) I should transfer into the accumulation account because I will exceed the $1.6 million cap but still prepared to cop the 15 per cent tax.

A: This is the $1.6 million question on the lips of everyone who exceeds the cap. Interestingly, if you’re already in pension phase and have an SMSF, you won’t get a chance to choose which assets can be split off from a tax perspective because your fund will be assessed on a proportional basis and will not be allowed to be assessed on a segregated basis for tax purposes. But you will get a choice for CGT purposes.

Strategically, if I had a material amount over the $1.6 million cap, I’d be setting up a second SMSF (or a retail or industry fund) before June 30, 2017 and rolling over the excess into that fund. I’d have my growth assets in the “tax-free $1.6 million cap fund” because they will be allowed to grow to any number once the cap has been set. And I’d have the fully franked “boring shares” like Telstra or cash in the accumulation account assuming you’re confident enough about your growth portfolio.

This will create a situation whereby your growth assets will be allowed to grow happily in a tax-free environment (with the $1.6 million cap having been set on July 1, 2017) and the accumulation assets will enjoy the benefits of franking credits. If we assume 100 per cent franking then you’ll not only pay no tax, but you’ll still receive a 15 per cent rebate (assuming a 30 per cent company tax rate on your shares).

You’ll still pay CGT but the cost base can be reset on June 30, 2017. And since you’re not really planning on selling these very often, CGT won’t be a huge issue. In any case, CGT is only 10 per cent in accumulation mode assuming you hold the assets for 12 months or more and receive the 33 per cent discount. You will need to hold the assets for at least 12 months after the CGT relief is enacted to receive the discount otherwise the original cost base will apply. As you can see, some serious planning and preparation may be required to establish these structures and planning should begin immediately. SH

Q: I am a public servant member of the Public Sector Super (PSS) hybrid taxed/untaxed defined benefit scheme and I also have a SMSF. I understand after July 1, 2017 I will no longer be able to salary-sacrifice concessional contributions into my SMSF. How will my PSS balance on June 30, 2017 be treated to determine whether I’ve exceeded the $1.6 million total super limit beyond which further non-concessional super contributions are not permitted? If I have more than $1.6 million in super, what is the mechanism I use to withdraw funds from my SMSF to offset excess non-concessional contributions made to the PSS scheme? If I am forced to reduce my after-tax PSS contributions to zero, I miss out on notional employer contributions amounting to 10 per cent of salary.

A: The point you make about missing out on potential employer contributions amounting to 10 per cent of salary is an important aspect of your question, says financial planner Nerida Cole.

It highlights that you should make every effort to continue member contributions to the PSS that will entitle you to the maximum annual accrual multiple despite the fact that it may result in you being penalised for making them.

Continuing to maximise PSS member contributions (which are considered non-concessional contributions) will be doubly important because changes to the concessional contributions regime will significantly reduce the ability of PSS members to salary-sacrifice contributions.

Higher earners may not be able to salary sacrifice at all, making it very difficult to build a supplementary pool of funds for retirement.

Without knowing more details of your situation, it is impossible to say if you will exceed the $1.6 million balance limit that will prevent you from making non-concessional contributions after July 1, 2017. But even where making contributions to the PSS results in an excess non-concessional contribution, it is one of the rare circumstances where it will be worthwhile incurring a penalty to do this.

This is because, as you note, for PSS members to stop their post-tax member contributions (generally 10 per cent), this will reduce the level of matching employer contributions and have significant detrimental consequences on the calculation of the final defined benefit payable at retirement.

So how might your PSS balance on June 30, 2017 be treated to determine whether you have exceeded the $1.6 million limit, beyond which further non-concessional super contributions are not permitted? The ATO is expected to perform this assessment role by counting the value of all accounts, including pension accounts, accumulation accounts and all types of defined benefit funds. For defined benefit accounts still in the accumulation (or contributory) phase, this will generally be the withdrawal value.

So what happens if you are assessed as breaching the excess contribution entitlement? You will receive a notice to this effect from the ATO asking you to rectify the excess contribution of, say, $20,000 plus a notional earnings figure over the year.

For someone with a defined benefit fund, like a PSS, fortunately the government has recognised you can’t take the $20,000 out of a defined scheme. What is acceptable is to make a rectification payment from another fund, say the SMSF, with the tax adjustment on punitive earnings going to the ATO. JW

Q: What are the tax implications and penalties if I contribute more than $25,000 (salary sacrifice + employer contributions) into my superannuation fund (not self-managed) from July 1, 2017? Are there any tax benefits in continuing to contribute over the allowed amount?

A: Concessional contribution limits drop from $35,000 a year for those over 50 and $30,000 a year for those under 50 to just $25,000 for everyone from July 1, 2017. Excess concessional contributions will be treated differently after July 1, 2017. Rather than be penalised at 49 per cent, they will attract concessional contribution charges of around 5 per cent (it can change each quarter but approximates to 5 per cent) as well as your normal marginal tax rate.

Overall, there may be some benefit in leaving the money in superannuation owning to the potentially lower earnings tax and CGT that is applied to super. But you may as well just make non-concessional contributions to avoid the 5 per cent penalty tax and avoid being behind the eight ball from the outset.

The Australian

7 December 2016

Janet Albrechtsen

While parliament rose with smiles last week, we were reminded of Otto von Bismarck’s observation that “Laws are like sausages, it is better not to see them being made.” On that measure, watching the 45th parliament was like poking your head into a black pudding factory. If it wasn’t Labor’s political blood on the red and green carpet, it was bloody-nosed new senators dazzling us with foolhardy performances.

Speaking of performance, it’s time to check key performance indicators and hand out grades to the Prime Minister, his ministers and the government. A year ago, it was a case of so far so good — a year later Malcolm Turnbull ends 2016 with a solid B+ performance. The plus is for his enduringly positive attitude, a reminder that his predecessor preferred to complain about a recalcitrant Senate rather than negotiate with crossbenchers.

In the black pudding factory, Turnbull has proven to be a transactional pragmatist, working with whomever he can to pass into law: budget savings (more work is needed with the budget deficit at $37 billion), superannuation changes, measures to protect volunteer firefighters and, most recently, a backpacker tax, the registered organisations bill and the re-establishment of the Australian Building and Construction Commission. All that from a government that scraped through the July election, bled votes in the Senate to independents and faced off against a Labor Party determined to win the end of year wrecking ball award.

For all the differences between Turnbull and Tony Abbott, Turnbull stuck to the party’s position on a same-sex marriage plebiscite, even though it’s not his preferred position. So far, and let’s hope he keeps to it in 2017, he has respected party policy on climate change, too, even though that may not warm his climate convictions.

The PM has also been a steadfast and determined defender of a strong border protection policy in the face of hysterical demands for the country to return to a policy that was responsible for the deaths of more than 1000 people at sea.

On national security, while he may dine with some dubious Muslim leaders at Kirribilli, Turnbull has ensured our security agencies have the powers and laws they need to fight terrorism here and abroad.

Yet, for all the sensible steps in 2016, there was often a sense of Turnbull bouncing uncomfortably from one issue to the next, from overreacting to the Don Dale Youth Detention Centre saga to being dragged reluctantly to an inquiry into section 18C of the Racial Discrimination Act. For a bloke who has hardly excited the base of the Liberal Party, Turnbull should undertake genuine reform of 18C to demonstrate a genuine commitment to the values of freedom of expression that underpin his party and his country.

Turnbull’s B+ is due, in no small part, to the star performers in his government. Employment Minister Michaelia Cash is a brilliant media performer, able to articulate the government’s position on industrial relations, politely, firmly and with smiles galore. She is also a rare reminder of a Howard-era political warrior and deserves an A+ for her handling not just of her portfolio but her ability to negotiate with a fractious Senate.

Finance Minister Mathias Cormann is the same: a conviction politician who understands the demands of the media cycle and knows how to negotiate an acceptable, if not pure, outcome. Immigration Minister Peter Dutton deserves full marks for delivering in a difficult portfolio, speaking plainly and honestly about past policy failures, including those by his own party under Malcolm Fraser, and understanding that successful immigration depends on support of the community. His use of facts and reason to stare down reckless activists and their ABC cheer squad makes him a worthy and influential advocate for mainstream Australians.

Nudging close to an A, Social Services Minister Christian Porter and Human Services Minister Alan Tudge are steadily leading the country to a more sensible discussion on welfare, a necessary first step to reform in 2017 given that our welfare bill sits at $160 billion a year, or 80 per cent of all personal income tax collected. And Environment and Energy Minister Josh Frydenberg has done a stellar job arguing for energy security in a country that has an abundance of energy but also an abundance of reckless state Labor governments sacrificing energy security on the altar of green energy.

The Foreign Minister earns an A+. The articulate and classy Julie Bishop makes her job look effortless. Scott Morrison earned a B-. As immigration minister, Morrison performed well with the safety of a policy running rail to follow. As Treasurer, his record is patchier. On the policy front, he is responsible for undermining the stability of our superannuation system.

On the political front, he could do with a refresher course in the art of effective retail politics going by his tendency to get narky so often, even with Sky News’s fair-minded David Speers. Morrison seems to resent wasting time speaking to the people via the media.

Plenty of newcomers to parliament deserve good marks. Julian Leeser delivered an A-grade maiden speech, drawing attention to the darkness that befalls a family when a family member commits suicide. James Paterson and Tim Wilson have earned top marks for being Liberals and liberals, articulating classical liberal values, from the moral dignity that comes from work to the virtues of responsibility and freedom.

On that score, new Victorian senator Jane Hume should rethink her curious position as the only Liberal backbencher in the Senate who didn’t support bolstering free speech in this country. With responsibility for reforming MP entitlements, Victorian Scott Ryan earns a plodder’s C for going dreadfully quiet on entitlement reform at the top end. And it’s hard to give marks to Christopher Pyne or Marise Payne this year (though the out-of-her-depth Payne is certainly being carried by the capable Pyne) because we still haven’t worked out exactly who is responsible for what in defence.

And then there’s Abbott. The former prime minister who left office promising there would be “no wrecking, no undermining, no sniping” hasn’t met his own KPIs. Instead, he has earned the title as the partyroom’s most annoying member. Encouraging friends to go into print or in front of a camera to demand a cabinet spot — or else — is political ransom that shouldn’t be paid. It’s easy standing up for free speech as an MP after you caved to minority pressure as leader. And defending your legacy is better left to life after politics when time and distance may offer a calmer, more objective assessment. Abbott’s nonsensical Green Army policy, for example, is no legacy at all.

Though Abbott believes he is the choice standard-bearer of conservative politics, others better deserve that accolade. Sadly, Cory Bernardi gets marked down for wasting time at the UN, a body he has (rightly) bagged. Michael Sukkar, Angus Taylor and Andrew Hastie deserve special commendations for reminding us how the Liberal Party differs from the other side of politics.

If, in 2017, the Turnbull government can master that differentiation in areas from budget repair and economics to espousing mainstream values and rejecting political correctness, it will prove its purpose and earn the support of more Australian voters.

janeta@bigpond.net.au

Australian Financial Review

7 December 2016

Larry Schlesinger

Charter Hall’s Direct Office Fund has raised almost $100 million from self- managed super fund investors and other high net worth investors to fund future acquisitions in a sign of strong appetite for real estate investment despite a tightening of super rules.

In addition, the value of the unlisted fund’s portfolio has reached $1 billion with the recent $140.5 million acquisition of a half-share in Coles’ Toorak Road headquarters to be transferred into DOF.

Charter Hall bought its half share in Coles’ Melbourne headquarters in September from the listed Investa Office Fund with speculation it would find a home in either the Prime Office Fund or the Direct Office Fund, which had recently launched a $250 million equity raising.

The Australian Financial Review reported recently that some SMSF investors were looking to reduce their property holdings because of new super rules that will impose new taxes on pension balances above $1.6 million from mid-next year.

“Following strong investor demand and Charter Hall’s continued access to a pipeline of high quality, well located Australian office property, the fund is targeting to grow the DOF property portfolio to $1.2 billion,” said Nick Kelly, Charter Hall’s head of direct property.

The Coles head office at 800 Toorak Road is fully-leased to the Wesfarmers-owned supermarket  group for an initial 15-year lease term expiring in March 2030.

The building comprises 39,399 square metres of net lettable office space, a five level central atrium, dining facilities, conference centre, laboratory and test kitchen facilities, gymnasium, Kmart Tyre and auto centre, data centre and parking for 1200 vehicles and an adjoining 1249 vehicle multi-deck carpark, constructed in 2015.

DOF currently comprises a portfolio of 10 fully leased office buildings in Sydney, Melbourne, Brisbane and Perth.

DOF fund manager, Steven Bennett, said the fund has been strategically weighted to the Sydney and Melbourne office markets, which will increase from 76 per cent to 80 per cent of the funds’ assets by value as a result of the Coles HQ acquisition.

“Despite the recent broader listed market volatility, unlisted investor demand for direct property remains robust due to the income yield and growth in distribution driven by long leases with fixed rental growth,” Mr Bennett said.

Australian Financial Review

5 December 2016

Debra Cleveland

Blended families are complicated enough in life. But things can get a whole lot more complex after death. That’s because there are different rules for superannuation that not even the most carefully documented will can cover.

Super does not form part of your estate and so cannot be provided for in your will. Under super law, when you die your death benefit can only be paid to your “dependents” – your spouse and children.

Consider this situation: Jim* moved in with Anna and her two young children nine months ago. He and his wife Susan separated three years ago but are not yet divorced, and they have two adult children.

When Jim dies, his “first” family assumes his substantial super balance will go to them.

But, explains Peter Bobbin, managing principal of Argyle Lawyers, it could go either way. “The definition of ‘spouse’ under the SIS Act includes a person who is married to the deceased at the date of death, however it also includes a person who is in a bona fide domestic relationship with the deceased as at the date of death,” Bobbin notes.

Super law does not require the usual two-year “de facto” time period for someone to be considered a spouse. “Conceptually, if a couple have fully committed to each other and are living together as a couple, one night is enough!” adds Bobbin.

“The definition of spouse under the SIS Act means that the de-facto spouse of nine months could receive the deceased’s death benefit rather than the deceased’s children.”

Lawyers call this the “blow in” problem and it’s just one of a series of ways your super may not end up in the hands of the people of your choice.

So how do you ensure your super benefits go to the right beneficiaries?

It’s vital, says Andrew Yee of HLB Mann Judd, to set up a binding death benefit nomination (BDBN) that specifies the beneficiaries of your super benefits when you die.

“On death, the trustee of your super fund must follow your BDBN instructions and cannot deviate and pay non-nominated beneficiaries such as stepchildren, or ex-partners,” explains Yee, director of superannuation at HLB Mann Judd.

Bobbin says don’t be fooled by “a mere nomination”. “For it to carry out your wishes, it must be binding – ie, binding on the trustee who must follow whatever the nomination may say.”

If a BDBN is not in place, Yee says, the super fund trustee has the discretion to pay the deceased super death benefits to whomever they please, provided that person is a death benefit dependant.

Two witnesses

“Interestingly the SIS Act that governs super fund trustees states that a person’s death benefits can only be paid to their ‘dependant’ on death, yet the definition of ‘dependant’ does not include an ex-spouse, but would include a stepchild,” he says.

So without a BDBN, the trustee could not pay the death benefit directly to an ex-spouse, but they could pay it to a stepchild provided the deceased’s current spouse is still alive.

Colin Lewis, senior manager of strategic advice at Perpetual Private, points out that even where you may think there’s a binding nomination in place, you’ve got to follow the rules strictly or it can be disregarded.

For a start, it must be signed and dated by you in front of two witnesses, both over the age of 18 and neither a nominated beneficiary. There also has to be a declaration (signed and dated) that the nomination was signed in front of two witnesses. And most (unless they are non-lapsing) are only valid for three years, so you’ll need to update regularly.

Further, Lewis says, you can only nominate a dependant, as defined by super law, or their legal or personal representative – generally the executor – as a beneficiary. Under super law, a dependant includes a spouse, whether legal or de facto, children whether under or over 18 (albeit tax may apply for kids over the age of 18), financial dependants and inter-dependents. A former spouse is not regarded to be a dependant.

If you’ve nominated a legal or personal representative, you’ll need to take a few extra steps to ensure this person is able to carry out your wishes. In the case of a self-managed super fund (SMSF), you need to ensure that the trust deed has a provision that includes this person as a trustee. “This incorporates them into the running of the fund rather than it being left to chance,” Lewis says.

Yee says a common problem is where SMSF trustees want their death benefits to go to, say, a second spouse as a reversionary pension for as long as they live, and then for a lump sum to be paid to their own children.

“A BDBN may not be effective in this scenario, as when the deceased’s benefits revert to the surviving spouse, the death benefit becomes an asset of the surviving spouse and they could potentially decide who receives the end benefit upon their death,” Yee says.

A better option, he suggests, is to arrange to have the SMSF converted to a small APRA fund on death. That way an independent trustee would be appointed to administer the fund and enforce the death benefit wishes.

“Or they may arrange to ‘hard wire’ the SMSF trust deed with a specific clause that prevents their death benefits passing to unintended parties. This scenario is definitely one for the lawyers,” Yee says.

Bobbin says with SMSFs, even where there is a binding death nomination, caution should be taken in terms of trustees. As he says, “he, or she, who controls the bank account holds one of the keys to death benefit power”.

“If the deceased’s new partner becomes the trustee of the SMSF, or becomes in control of the trustee company of the SMSF, perhaps because they are the remaining director of the trustee company, then he or she may have the ultimate discretion to pay the death benefit to themselves and not the children of the deceased,” Bobbin says.

*Example provided by Argyle Lawyers.