There are major changes to superannuation effective from 1 July 2017. The ATO have issued a number of “Law Companion Guidelines” (LCG) (LCG 2016/8 to LCG 2016/12) which provide guidance around the implementation of changes for those who are affected. The ATO allows trustees to rely on guidelines contained within the LCG without fear of having to pay any underpaid tax, penalties or interest should the LCG not correctly state how a relevant provisions apply to your superfund.
The ATO have issued the following LCG’s in relation to upcoming superannuation reforms
• LCG 2016/8: Superannuation reform: transfer balance cap and transition-to-retirement reforms: transitional CGT relief for superannuation funds.
• LCG 2016/9: Superannuation reform: transfer balance cap.
• LCG 2016/10: Superannuation reform: capped defined benefit income streams – non commutable, lifetime pensions and lifetime annuities.
• LCG 2016/11: Superannuation reform: Concessional contributions – defined benefit interests and constitutionally protected funds.
• LCG 2016/12: Superannuation reform: total superannuation balance.
We have summarised each of the LCG’s which have been issued by the ATO.
What is the LCG about and who does it apply to?
This LCG provides guidance on capital gains tax (CGT) relief for those affected from 1 July 2017 by the $1.6m transfer balance cap and those members with transition to retirement income streams.
Currently earnings within superannuation are generally tax free for members of superannuation funds which are in pension phase, Changes from 1 July 2017 mean where a member’s pension balance is above $1.6m, the earnings relating to the balance above $1.6m are to be taxed within the fund at 15%. Similarly, earnings on transition to retirement income streams are to be taxed at 15% from 1 July 2017 regardless of the size of the TRIS.
As an income tax exemption applies to pensions entered into prior to 30 June 2017, the LCG preserves the income tax exemption by providing CGT relief on unrealised gains of assets which are in pension phase.
The CGT relief applies to CGT assets in pension phase held by a fund throughout the pre-commencements period. The pre commencement period is from 9 November 2016 (day the Bill was implemented for transfer balance cap and TRIS changes) to 30 June 2017.
How does this work?
Trustees of a fund may elect to reset the cost base of the CGT asset to their market value as at 30 June 2017 or at the time the asset ceases being a segregated current pension asset.
Under this election trustees are deemed to have sold the asset and then immediately repurchase the asset. The effect of this is the would mean capital gains would be partly disregarded for funds under the proportionate method and may be deferred until later. Capital losses on unsegregated assets are recognised in accordance with current rules.
Capital gains or losses under the segregated assets approach would be disregarded.
The trustee can use this election on an asset by asset basis.
Some practical applications
Segregated assets: Where the fund previously segregated its assets, a trustee can choose to apply the CGT relief for assets that are reallocated to accumulation phase as a result of assets being in excess of the transfer balance cap on 1 July 2017.
Where assets are unable to be continued to be segregated as a result of specific assets not being under the $1.6m transfer balance cap, then the fund will need to use the proportionate approach. This would mean trustees could elect to have CGT relief applied to all assets as at 1 July 2017.
Some things you need to be aware of
As the CGT relief deems you to have sold and repurchased an asset, this will result in the purchase date resetting to the date the asset was revalued. This is important from a CGT perspective as the asset would need to be held for greater than 12 months to access the CGT discount.
Once a trustee has elected to use CGT relief, the choice is irrevocable and cannot be unwound.
LCG 2016/9: Superannuation reform: transfer balance cap
What is the LCG about and who does it apply to?
This LCG provides guidance on how the transfer balance cap ($1.6m cap for 2017-18FY) operates for account-based superannuation income stream products.
From 1 July 2017 all superannuation members will have a transfer balance cap.
How does this work?
A transfer balance cap tracks how much superannuation you can allocate to pension phase during your lifetime.
When you enter into a superannuation income stream, the balance of assets to support the income stream is allocated to your transfer balance cap.
Your transfer balance cap will be reduced in the following situations (there are others situations but these are the most common):
• A commutation of a superannuation income stream in the retirement phase
• Divorce or relationship breakdown
• A superannuation income stream failing to comply with the pension or annuity standard under which it is provided.
In the event the transfer cap balance is breached, the superfund will be liable for additional tax. The additional tax will be charged at 15% of the notional earnings of the excess transfer cap amount for the first offence. The rate will increase to 30% for the second and subsequent breaches.
Some things you need to be aware of
Any increase or decrease in earnings do not count towards your transfer balance cap.
Pension drawdowns do not decrease your transfer balance cap.
Commutations decrease the balance that has been allocated to your transfer balance cap.
Amounts received from death benefits and reversionary beneficiaries count towards your transfer balance cap.
The transfer balance cap is subject to indexation but indexation only applies to the proportion of the unused transfer balance cap and not the dollar amount used.
What is the LCG about and who does it apply to?
This LCG provides guidance for capped defined benefit income streams or lifetime annuities that cannot be commuted in full or in part.
Recipients of non commutable lifetime pensions or annuities will have an amount allocated to their transfer balance cap.
How does this work?
The amount recipients of non commutable life time pensions or annuities include in their transfer balance cap is calculated by multiplying the “annual entitlement” by 16.
The annual entitlement is calculated by working out the annualised payment from the first pension payment due after 1 July 2017. The first payment includes all components of the pension payment i.e. tax free, taxable and untaxed.
An example, assume a member receives monthly a life pension with the monthly payment being $10,000 after 1 July 2017.
The annual entitlement is calculated by multiply the monthly payment by 12. In this case $120,000.
To calculate the amount allocated to the transfer balance cap, you multiply the annual entitlement by 16. In this case the amount to be allocated to the transfer balance cap is $1,920,000.
Where you have other pension accounts which can be commuted (eg. account based pensions), these balances can be commuted to reduce the transfer balance cap to below $1.6m. If you only have a capped defined benefit income stream or annuity remaining after commutation, the Commissioner will determine you to not have an excess transfer balance.
In addition to having amounts applied to your transfer balance cap, pension amounts received from defined benefit income streams may be taxable where the income stream exceeds the defined benefit cap of $100,000 in 2017 -18 (general transfer balance cap divided by 16).
In summary any amounts received above the defined benefit cap may need to be included in your personal tax return. The amount to be included in your tax return is 50% of the excess of the tax free and taxable components. The tax free and taxable components do not subject to receiving tax offsets. For untaxed elements which are received and pension payments beings greater than the defined benefit cap, the tax offset will be reduced from the usual 10% by the proportion of the pension payment which is over the defined benefit cap.
Some things you need to be aware of
Recipients need to be aware of the transfer balance cap as well as the defined benefit cap. Both caps operate independently of one another and would need to be dealt with separately.
The revised taxation of defined benefit income stream become increasing complex and would depend on an individual’s circumstances. You should consult your financial planner or superannuation advisor to discuss this further.
What is the LCG about and who does it apply to?
This LCG provides guidance to members of defined benefit funds and constitutionally protected funds and how contributions caps and excess contributions tax applies from 1 July 2017.
How does this work?
This is a specialised topic and we refer you to read the applicable LCG.
We suggest you consult your financial planner or superannuation advisor to discuss this further.
Some things you need to be aware of
The concessional contributions cap will be lowered to $25,000 per annum from 1 July 2017.
We suggest you consult your financial planner or superannuation advisor to discuss this further.
LCG 2016/12: Superannuation reform: total superannuation balance
What is the LCG about and who does it apply to?
This LCG provides further guidance amount total superannuation balances and how they apply to contribution caps, eligibility for unused concessional contributions for superannuation balances less than $500,000, eligibility for co contribution and tax offset for spouse contributions.
The LCG goes into further detail about calculating transfer balance caps.
How does this work?
Different calculations and thresholds applying the various caps and offsets. The LCG goes through the application of thresholds, caps and offsets in further detail.
Some things you need to be aware of
Different thresholds apply to different caps and offsets and how they are calculated may differ from one offset to the next.
If you would like to discuss how the upcoming superannuation changes may impact you, we have an accountant in North Sydney waiting to here from you.
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