What’s changed, what’s about to change and what’s still to comePeter BurgessGeneral Manager, Technical Services & Education, SuperConcepts

Session overview

1. Contributions

2. SMSF integrity measures

3. LRBAs

4. Pensions

5. UK pension transfers

6. The year ahead.

Refunding excess NCCs

4. Excess amount + 85% of associated earnings released

ATO

Super provider

3. Release authority

issued

Member

1. Excess determination issued

2. Member elects to refund

Refunding rules

• Funds can only be released if ATO release authority process followed

• ATO SMSF News Alert, November 2015 – Release authorities.

Excess CCs Excess NCCs

Excess CCs to be paid to the ATO within 7 days of the authority letter issue date and return the completed release authority statement to the ATO.

Excess NCCs to be paid to the member within 21 days of the authority letter issue date and the completed release authority statement returned to the ATO.

Tax componentry

Explanatory memorandum, paragraph 1.59

“The proportioning rule (which requires superannuation benefits to be treated as made from particular components of a superannuation interest in proportion to the overall composition of the interest) does not apply to release amounts.”

NCC

contributionTax free component Taxable component

Excess NCC

NCC

Tax componentry

Deliberate overfunding strategies • SIRN technical issues meeting, 10 November 2015

• ATO says “its open to the Commissioner to consider the anti-avoidance provisions to this arrangement”

• ECT policy intent – encourage taxpayers to save and contribute smaller sums over the course of their working life

• Previously issued guidance materials on re-contribution strategies not relevant

• ATO likely to take a more aggressive stance on deliberate overfunding strategies – where a tax benefit can be identified

• ATO will review and consider appropriate updates to existing web guidance material relevant to this matter

• Plenary session 5.

Transferring a life estate interest • An interest in real property that entitles the life estate owner (the life tenant) to the right to occupy

the property and receive all income and profits from the life estate interest

• Entitlement and life estate interest ceases on the death of the life tenant

• Transfer of a life estate interest in BRP to an SMSF by in-specie contribution – why?

• Value of life estate interest determined by Government life Tables or an actuary – value significantly less then market value

• Income received from the property taxed at concessional rates

• Avoid contribution cap issues and CGT, GST & stamp duty levied on a significantly lower value

• Novel but risky:• Income received v purchase price – NALI?

• Sole purpose test?

Buy/sell agreements – ATOID 2015/10

Spouse’s inherited share of the company

Company co owners

Brother 1 Brother 2

Spouse

Death benefit

Life insurance

• Insured amount not based on the future needs of the member’s spouse• Agreement influenced the decision of the trustees – would not have been purchased otherwise • Not a death benefit, just compensation for an expected inheritance• Non-member brother receives a personal benefit which is not incidental.

= Breach of the sole purpose test

Buy/sell agreements – ATOID 2015/10

• Views expressed in ATOID 2015/10 rest on the particular facts of the case

• Pure presence of a buy/sell agreement would not automatically lead to a breach of the sole purpose test – ATO web guidance material to be updated

• The decision to purchase life insurance must not be a condition and consequence of a buy/sell agreement

• The existence of a buy/sell agreement must not influence the trustee’s decision to favour one course of action over another

• Buy/sell agreement a mere incidental benefit

• Insured amount based on the future needs of beneficiaries?

Buy/sell agreements – ATOID 2015/10

Dividend stripping – TA 2015/1

NCC

contributionIndividual shareholder or a

trustee of a family trust

Shares owned byPrivate

company

Contribution or sale of shares

Franked dividends flow to the SMSF

Alert issued on 30 April 2015, updated alert issued on 29 October 2015

Cash + franking credits (Reg 13.22C)

SMSF

Dividend stripping & LRBAs

• Dividend stripping + LRBA = shares not held at risk for required 45 days

• Franking credits disallowed

• Remaining assets of the private company (cash + franking credits) + LRBA means diminished risk of loss and opportunity for gain (delta < 0.3)

• Distinction drawn between LRBAs used to acquire private versus public company shares.

Dividend stripping – key messages • Self-amend or voluntary disclosure offer until 15/2/2016 (recently extended to 31/3/2016) – no admin

penalties levied but interest charges may still apply

• Essence of the arrangement all important

• If its to direct dividend income and attached franking credits from a private company to an SMSF instead of another entity, expect ATO scrutiny.

• An ATO public guidance product likely to be issued to explain how tax and super laws apply to arrangements with features similar to those in TA 2015/1

• Concurrent session 9B.

ASIC SMSF advice info sheet 205 & 206

The impact on insurance

Disclosure of SMSF risks Disclosure of SMSF costs

Corporate v individual trustee

Lack of statutory compensation

Trustee obligations & assessment of knowledge

Obligations to develop an investment strategy

Need to consider an exit strategy

Cost effectiveness of an SMSF

Costs of all phases of an SMSF lifecycle

Continued suitability of an SMSF

*ATO approved on-line SMSF trustee courses

LRBAs Government’s response to the FSI recommendation

Noted anecdotal concerns about LRBAs but considers, at this time, there is insufficient data to justify policy intervention.

The Council of Financial Regulators and the ATO will be asked to monitor leverage risk and report back in 3 years.

Will provide sufficient time for improved ATO data collection to take effect.

Safe harbour – work in progress Division 7A? (2014/15 = 5.95%, 2015/16 = 5.45%)

70%?

15 years?

Yes/No

At least annually?

Benchmark interest rate

Maximum LVR

Term of loan

Personal guarantee

Frequency of repayments

Security A registered mortgage

LRBA fix-ups - Workshop

Pensions• Addendum to TD 2014/7 – no actuarial certificate required in the first year of segregated pension

• ATO reminders:

• Discretion may still be granted even if pension underpayment exceeds 1/12th of the minimum – but must be an honest mistake

• Correct apportionment of income and expenses if unsegregated

• Income tax losses must be offset by the amount of net ECPI – Payne decision

• Income tax loss that can be claimed = current year + carried forward tax losses – net ECPI

• Unsegregated funds with income tax losses – strategic advice

• Concurrent sessions 3C & 8B.

TRIS – private ruling • Elect to have TRIS payment not treated as a super income stream benefit for the purposes of the ITAA

1997

• If under age 60, entitled to a tax offset – 0% on the amount within the low rate cap, versus being taxed as a super income stream benefit

• 2009 NTLG minutes (initial ATO view), revised in TR 2011/D3 but only in context of partial commutations

• ATO SMSF article (11/1/2016) in line with private ruling but added:

• Must satisfy 10% TRIS annual payment limit

• Payment must not be paid by an in-specie transfer

• May effect the amount of the fund’s ECPI.

UK pension transfers • UK Government has amended the pension release requirement for overseas funds

• From 6 April 2015, with a limited exception for ill-health benefits, funds must not allow a member who is under age 55 to withdraw their UK pension transfer amount

• Funds required to satisfy this new pension release requirement in order to obtain or retain QROPS status

• Substantial payment penalty incurred (up to 55% of the transfer amount) if UK pension funds transferred to a fund which does not have QROPS status

• Despite attempts to comply with the new requirements all Australian super funds, except one, were removed from the QROPS list issued on 1 July 2015

• Just restricting payment until age 55 or ill-health not sufficient.

Over 55 solution • In mid August 2015, HMRC commenced issuing QROPS numbers again to Australian super funds who

restrict membership to those age 55 and above.

QROPS 55+ Deed of Amendment of Governing Rules

The benefits payable to a member of the Fund, to the extent that they consist of the member’s relevant transfer fund, are payable no earlier than they would be if pension rule 1 in section 165 of the Finance Act 2004 applied. To ensure this can never happen, no member of this Fund can below the age of 55.

The trustee shall make all necessary checks and request sight of all necessary documents to satisfy itself as to the age of any applicant for membership of the Fund and must refuse to admit to membership any applicant below that age.

Source: DirectDocs.

Caution: Providing this clause to a client for use in an amending deed constitutes providing a legal service.

UK pension transfers – key messages • Pre- 6 April 2015 transfers not impacted but fund now referred to as a “former QROPS” – same

reporting and investment obligations apply

• UK pension transfers from 6 April 2015 – need to ensure fund rules restrict membership to those age 55 or above

• UK pension transfers received after 6 April 2015 for members under age 55 – transfer maybe an unauthorised payment (some large funds preparing relief applications rather then waiting for an unauthorised payment tax bill from HMRC)

• Except in clear cases, prudent not to provide advice about relief without full knowledge and proper analysis of all the facts

• Concurrent session 9A.

The year ahead

Collectables & personal use assets • Definition of a collectables & personal use asset (SIS Regulation 13.18AA):

• Wine & spirits but not pre-mixed drinks

• Bullion coins if value exceeds face value but not Gold bars

• Jewellery yes but not gemstones

• Not stored in a private residence – includes the land on which the private residence is situated and all other buildings on that land, such as garages or sheds

• No leases to related parties – includes “lease arrangements”

• No use by related parties – over rides incidental use concession in SMSFR 2008/2

• Insurance required if fund owns the asset.

Removal of the accountants’ exemption • No extensions to the 1 July 2016 deadline

• From 1 July 2016, must be appropriately licensed under the AFS licensing framework to provide a recommendation to establish or wind up an SMSF

• Small business owners & high net worth clients - SMSFs one component of a broader wealth and asset protection strategy

• How will not being able to provide a recommendation to establish or wind up an SMSF effect your business?

• Plenary sessions 4 & 8.

ATO SMSF guidance materials • Expect further public guidance products:

• Deliberated overfunding strategies

• TRIS lump sum withdrawal strategy

• Buy/sell agreements & dividend stripping arrangements with similar features

• Related party loans and safe harbour

• RNN for funds with no assets at 30 June – expect clarification and some concessions where funds are able to provide evidence (eg bank statement) showing the fund now has assets.

Tax white paper

• Greater contribution cap flexibility for individuals with broken working patterns

• TRISs?

• Taxation treatment of concessional contributions – MTR + tax rebate approach, lowering Div 293 tax threshold?

Reinventing the ATO – 4 year plan

Identify where physical signatures are required

Review forms that are currently required in paper

Co-design needs for prefilled information in admin and

reporting

Create functionality to allow tracking of activities &

expected resolution times

Work with Govt agencies to expand “tell us once”

SMSF future experience workshop – 1 day, 19 externals, 35 ATO staff, 300+ ideas.

Leverage digital platforms to allow wider access to

information

Plenary session 4. Provide guidance on technical issues through the SIRN

Remove irritants with fund establishment & wind up

process

What you need to know

This presentation may contain advice. Any advice is of a general nature only and may contain advice that is not based on your clients’ personal objectives, their financial situation or needs. Accordingly you should consider how appropriate the advice is to your clients’ personal objectives, financial situation or needs.

Any advice in this presentation is provided by Australian Securities Administration Limited (ASAL), ACN 002 905 197, AFSL No. 233182 which is part of the AMP group of companies. AMP companies receive fees and charges in relation to their financial products as set out in the product disclosure statement. AMP employees and directors receive salaries, bonuses and other benefits from the AMP group.