It was with some interest last week that a single paragraph within the explanatory memorandum for the Transfer Balance Cap rules sparked controversy around the future of actuarial tax certificates for self-managed super funds.
Paragraph 3.337 of the explanatory memorandum for the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 outlined:
A regulation will be made for the purposes of subsection 295‑390(7) to determine liabilities in respect of account based income stream benefits for the proportionate method. This means that superannuation funds who use the proportionate method but whose only superannuation income stream benefit liabilities arise from account based superannuation income stream products will also not be required to obtain an actuary’s certificate for the purpose of determining their exempt current pension income.
Some initial thoughts of this paragraph within the SMSF industry prompted a suggestion that the Government may actually being doing away with actuarial certificates for Account Based Pensions. Such a decision, if true, would obviously have a significant impact of the way in which many SMSFs calculate the exempt current pension income (ECPI) tax deduction each year.
I don’t actually see this as being the case… The decision by Treasury to prepare a regulation for the purposes of subsection 295-390(7) will be to amend certain anomalies that will exist which would now require an actuary certificate when it otherwise doesn’t require one. This change will impact:
- segregated current pension assets (with respect to the CGT relief arrangements) – paragraph 3.337; and
- the introduction of section 295-387, disregarded small fund assets, which effectively prohibits applying the segregated method for calculating a fund’s tax exemption each year where a member’s total superannuation balance exceeds $1.6 million – paragraph 10.56.
Let’s take a look at some of these circumstances below.
CGT relief arrangements
Members with existing superannuation balances in excess of $1.6m will be required to either transfer back amounts to accumulation phase or withdraw these excess amounts as lump sums prior to 30 June 2017 as part of moving income streams into retirement phase from 1 July 2017.
The ability for a fund to claim earnings tax exemption under section 295-385 as part of the restructuring of income streams will be dependent upon the current investments and whether the assets are used solely to enable a fund to discharge all or part of its liabilities (contingent or not) in respect of super income stream benefits that are payable by the fund at that time.
Where assets such as a property within a fund is not able to be reallocated to the segregated non-current assets pool, for example because it only has a single large value asset that must support both retirement and accumulation interests, the fund can then only use the proportionate method of determining tax exemption.
Segregation prohibition for large SMSFs
Amounts known as disregarded small fund assets cannot have current pension assets segregated for the purposes of section 295-385 of the ITAA 1997. As a result, the fund must calculate its earnings tax exemption under section 295-390 would require an actuarial tax certificate, regardless of the level of tax exemption (including 100%). In circumstances where the fund is required to use the proportionate method, but whose only super income stream liabilities arise from account based pensions will not be required to obtain an actuary’s certificate for the purposes of determining their exempt current pension income.
To understand this further, consider the following example:
John and Jane are trustees and members of a SMSF. Both are in currently in receipt of account based pensions with the following values at 30 June 2017:
- John – $1,400,000;
- Jane – $600,000
With no other assets within the fund, these amounts are transferred to retirement phase on 1 July 2017. The fund is eligible to its earnings tax exemption under the segregated method (section 295-385).
In the following income year, John’s super income stream value has increased to $1,610,000 due to investment performance. As a result of this increase, the fund is now no longer eligible to claim tax exemption under the segregated method having been caught under section 295-387, disregarded small fund assets.
Even though the fund is 100% tax exemption, the current law would require the trustees to obtain an actuarial tax certificate to claim 100% tax exemption. The new regulation to be made for the purposes of section 295-390(7) will mean that the fund will not require an actuarial tax certificate as all of the fund’s current super income stream liabilities continue to arise from solely from account based pensions.
Whilst we await further regulations relating the application of section 295-390(7), I suspect further anomalies may arise in which these regulations will hope to resolve for actuarial tax exemption purposes.