18 June 2017
I have a CSS defined benefit superannuation pension of about $70,000 a year plus a self-managed super fund balance of about $800,000 and my wife has a defined benefit PSS pension of $40,000 and $1.2 million in the SMSF. The assets, shares and bank accounts, are “segregated” i.e. separately listed as assets in either my wife’s or my pension accounts. My wife and I will both be individually above the $1.6 million cap. On June 30, I was intending to partially commute both of our pension accounts and transfer some parcels of shares into an accumulation account so that we are under the $1.6 million cap. I will also open new bank accounts for the accumulation fund. I believe the pension account would continue to be tax free and tax would be payable in the accumulation account. I assume there would be no need for an actuary. Is this correct? M.G.
An SMSF will not be able to use the segregated assets method for determining “exempt current pension income” and MUST use the proportionate method for the full year, if the fund has at least one member of the fund with a total superannuation balance of more than $1.6 million as at June 30.
In other words, if you want to segregate the accounts within the fund for your own purposes e.g. so you and your wife can identify your own benefits, then you are welcome to do so but the fund’s tax returns, used to determine the level of tax exempt pension and the tax payable on the remaining assets, must be calculated using the proportionate method. In an April 23 AFR article, a spokesman said the ATO “would take a dim view” of people setting up a separate SMSF to house assets in the accumulation phase, though I cannot see why the ATO is against people running their affairs in a clear and transparent structure.
The transfer balance of your CSS pension will be around ($70,000 x 16=) $1.12 million, using the daily pension payable at the end of June 30 (and not the indexed value as of July 7) so your total superannuation balance will be some $1.92 million and your wife’s $1.76 million.
According to the Tax Office’s Law Companion Guide 2016/8, available on its website, your fund “might require an actuary’s certificate to support its use of the proportionate method, which would be a new compliance obligation for funds that previously only had segregated current pension assets.” You would do best to obtain a certificate.
Our Pensioner Concession Cards (PCC) were withdrawn January 1, 2017, because we had marginally failed the assets test. We understand that the government has plans to return these cards to people such as us. We wonder if you can explain the situation as it stands now? R.M.
People who lost their PCC as a result of that change in the assets test will have it returned from July 1. The Low Income Health Card that was one of two cards issued will be cancelled.
Two questions, please:
- What valuation date will be used in establishing the $1.6 million valuation for the superannuation cap?
- My daughter is understandably anxious about what appears to be a 17 per cent death duty in disguise that applies on the winding up of a self-managed super fund on the death of the members. She has heard that there are ways that this can be avoided or minimised. If she is right could you please enlighten me? G.R.Existing income streams will be valued at “the end of June 30” and the individual’s new “Transfer Balance Account” will be credited on July 1.
Your daughter is quite right in that the “taxable component’ in a super fund (stemming from deductible contributions and the fund’s earnings) is only untaxed in a death benefit lump sum if the money passes to “tax dependants”.
These are defined in the Income Tax Act as either [i] a current or former spouse or de facto or [ii] a child under 18, including adopted, step or ex-nuptial children or [iii] anyone financially dependent on the deceased or [iv] anyone in an “interdependency relationship” and this exists if they have a close personal relationship, live together and one or each of them provides the other with financial and domestic support and personal care, or have a close personal relationship but are not living together due to physical, intellectual or psychiatric disability.
If you, Dad, are entitled to withdraw benefits e.g. as non-preserved component or up to 10 per cent of a transition to retirement pension, and are eligible to make non-concessional contributions (or NCC), you can withdraw and contribute up to the NCC caps. Or, if the doctor gives you a time limit, remember that an over-60-year-old can withdraw all benefits without tax as long as you are still clinging to your perch!
My husband was with the Department of Defence when he died suddenly at a young age in 1981. Ever since then I have received a taxable, defined benefit, widow’s superannuation pension. I also have my own taxable defined benefit superannuation pension. So you can imagine what happens now that both pensions have to be multiplied by 16! Having been in receipt of my widow’s pension since 1981, it astounds me that the government sees fit to alter the rules. Moreover, both pensions are taxable so how is it that they are counted towards a capped tax-free amount? R.F.
Both pensions will count towards your $100,000 a year “defined benefit income cap” (which is multiplied by 16 when you have, say, an allocated pension as well and need to calculate a “total superannuation balance”). If your pension income exceeds $100,000, then 50 per cent of the excess will be added to your taxable income, but without a tax offset, otherwise available to people over 60.
The only part of a DFRDB pension paid to a person over 60 that is currently taxed is that portion derived from the Government’s tax revenue each year, known in the jargon as the “element untaxed” within the taxable component. The rest of the pension is currently not assessable in 2016-17 but can result in a reduced tax offset in 2017-18.
The ATO’s Law Companion Guide 2017/1, available on its website, gives an example (page 9) of a person with a $160,000 defined benefit pension, comprised of $60,000 tax free component and $100,000 “element untaxed”. The latter is currently assessable but provides a 10 per cent tax offset i.e. $10,000 comes off your tax.
In 2017-18, the $60,000 remains tax-free but, since the total amount of $160,000 exceeds the defined benefit income cap of $100,000, then the current tax offset is reduced by 10 per cent of the $60,000 excess or $6000 i.e. that person’s offset for the 2017-18 financial year drops to $4000.
The old saying is “The devil is in the detail”. The details are particularly devilish in these July 1 changes.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808; pensions, 13 23 00.
This story was found at: http://www.canberratimes.com.au/money/ask-an-expert/retirees-alarmed-by-devilish- details-as-they-prepare-for-super-reforms-20170615-gwrkn7.htm