THAN THE MINIMUM PENSION

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THAN THE MINIMUM PENSION

WEBINAR

October 2017

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Disclaimer

The SMSF Academy Pty Ltd & Licensing for Accountants (L4A) have taken reasonable care in producing the information found in this presentation and believes that the information is correct at the time of compilation but does not warrant the accuracy of that information.

Changes in circumstances may occur at any time and may impact on the accuracy, reliability or completeness of the information and we exclude liability for any decision taken on the basis of the information shown in or omitted from this presentation.

Save for statutory liability which cannot be excluded, The SMSF Academy and Licensing for Accountants disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, conclusion or recommendation in this presentation whether the loss or damage is caused by any fault or negligence on the part of presenter or otherwise.

© The SMSF Academy Pty Ltd 2017 ABN 53 146 136 521 and Licensing for Accountants Pty Ltd ABN 61 600 665 254.

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Dealing with ‘above’ minimum pension payments (ABP)

• What’s the issue?

• What are the options?

• Licensing

• When have you provided advice?

• What are you taking into account?

• Do we still have the benefit of ‘hindsight’ to allocate payments and document after the fact?

POLL

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Rationale

• Introduction of the transfer balance cap ($1.6m) means individuals need to consider the structure of how to take benefit payments from 1 July 2017, in particular where member is drawing greater than the minimum pension.

• Why is this important?

• Ensure minimum pension is withdrawn for ECPI purposes;

• Want to maximise a fund’s tax exemption each year; and

• Consider how to clawback a member’s TBC for estate planning purposes

• Provides a great lead in to advisory conversations

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Available guidance

• TR 2013/5 – when a pension commences and ceases

• Full and partial commutations of super income streams

• SMSFD 2013/2 – does a commutation count towards the minimum pension?

• Currently being reviewed by ATO as a result of changes from 1 July 2017

• PCG 2017/5 – Commutations to comply with the

introduction of the transfer balance cap (TBC)

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Prioritisation of benefit payments

Satisfy the minimum pension

This ensures that the fund is entitled to it’s earnings tax exemption for the income year as a superannuation income stream in the retirement phase.

1

Take lump sums from a member’s accumulation interest

This will ensure that the fund is maximising its ability to claim the earnings tax

exemption for the current and future years by increasing the level of retirement phase assets as a % of the fund’s total assets.

2

Undertake a partial commutation

This will provide a debit on the member’s transfer balance cap that

provides the opportunity for future amounts (including death benefits as a tax dependant) to be credited.

3

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Commutation learnings

PCG 2017/5 - Superannuation reform: commutation requests made before 1 July 2017 to avoid exceeding the $1.6 million transfer balance cap

PCG 2017/5 Annual Pension Review

Are both made in writing. The agreement by the trustee may be documented as a trustee resolution.

Made in writing, where requested by the member and subsequently accepted by the trustee (e.g. resolution) Are made before 1 July 2017 Is made prospectively (before benefit has been paid)

Specifies a methodology that allows the precise quantum of the amount commuted to be calculated (such amount may be ascertained at a later point in time)

Specifies a methodology to determine how the commutation is to be calculated (which can ascertained at a later point in time – i.e. when benefit is paid)

Specifies the superannuation income stream which will be subject to the commutation. Where the request may cover more than one superannuation income stream, the request and acceptance will need to specify the different

superannuation income streams that may be covered and the order of priority in which the commutations will occur, and

Specifies which income stream will be subject to any partial commutation, including if more than one an order or priority in which the commutations will occur; and

Do not conflict with a similar agreement to commute that the member has agreed to with a trustee of a different

superannuation fund

N/A

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Irrevocable decision

• PCG 2017/5 confirms that the agreement to commute cannot be subsequently revoked after the date of the agreement.

• Any discretion to commute of governing rules allowed for discretion for either the member of trustee to revoke the agreement, the ATO considers it questionable whether a valid commutation has been effected (before the benefit payment)

• Consequence – no transfer balance cap debit

• Result = treated as a pension payment

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Example 1

• Keith (69) and Jenny (68) are trustees and members of their SMSF

• Keith is drawing an ABP with a $1.6m value that was credited to his TBC on 1 July 2017

• To comply with the introduction of the TBC, Keith rolled back $100k to his accumulation phase

interest

• Jenny is drawing an ABP with a value of $400k that was credited to her TBC on 1 July 2017

• For the 2017-18 income year, their minimum

pension obligations are $80,000 and $20,000

respectively

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Example 1

Income needs

• For the year, Keith and Jenny have indicated that they intend on taking approx. $10k per

month, along with an additional ‘one-off’ amount of $80,000 in April 2018

• Total benefits to be paid for the 2017-18 income

year of $200,000

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Example 1

• Where documented correctly, the

approach would involve the following:

• Jenny:

• Minimum Pension = $20,000

• Keith:

• Lump Sum (accumulation) = $100,000

Aim / Outcome:

• Maximising the fund’s earnings tax

exemption for FY18 and future years

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The question:

What has the

client asked?

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Facts vs. general advice vs.

personal advice

1. Statement of opinion or recommendation? 2. Intended to influence to make a decision

(or a reasonable person would think so)

3. About a product or class of products

4. Considered 1 or more of their objectives, financial situation or needs (or a reasonable person might expect that you did)

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Each side has advantages &

disadvantages

No opinion - express or

implied

An opinion, with reasons why – and

documented in an SOA

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Advice - ask yourself why?

Why did you do that strategy (other than tax) - Would you do anything differently if:

- Family situation is different - Health is different

- Assets outside the fund are different

- Other ???

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Revisit Example 1

Information or Advice?

(Which side of the fence are you on?)

• There are options for the client

• Complexity of situation?

• Financial literacy of the client?

• Isolated issue, or part of a range of broader issues?

• Client’s desire to receive (& value) advice?

• Willingness to pay for advice?

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Example 2

• Same circumstances as Example 1, however Keith’s $1.6m is made up of:

• ABP#1 - $1.0m (15% tax-free proportion)

• ABP#2 - $600k (90% tax-free proportion)

• Keith has early onset dementia

• Impact on his life expectancy

• How would we contemplate taking

benefits in these circumstances?

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Example 2

Information or Advice?

(Which side of the fence are you on?)

• There are options for the client

• Complexity of situation?

• Financial literacy of the client?

• Isolated issue, or part of a range of broader issues?

• Client’s desire to receive (& value) advice?

• Willingness to pay for advice?

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Example 2

A suggested advice process

1. Provide FSG

2. Triage

• Broader review of income sources

• Broader review of estate planning

3. Collect additional information

• Confirm objective (income needs from super fund)

• No other super funds

• Estate planning objectives for super

• Health

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Example 2

Objective

• Take minimum pension to maximise the fund’s exemption; and

• Undertake commutation to provide future estate planning (TBC) tax benefit

Recommendation

• Jenny:

• Keith:

• Commutation (ABP#1) = $40,000 Why

• Maximising the fund’s earnings tax exemption for FY18 and future years

• Create a debit against Keith’s TBC for $40,000

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Example 2

Objective

• Income of $200k

• Take income in most tax effective way to meet needs now & estate planning needs

Recommendation

• Jenny:

• Keith:

• Commutation (ABP#1) = $40,000 Why (rephrase into meeting objectives)

• Meets their immediate income & longer term estate planning needs

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The keys to success – for all super advice

• Making a conscious decision regarding advice or information

• Processes & workflows for both advice and information

• Supporting templates / toolbox

• For advice - having a reason ‘why’ your recommendations are a good

idea

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Workflow - The Licensed Adviser

Information or Advice?

Provide a fact sheet

Client letter confirming execution only

Execute

Confirm scope (triage)

Confirm objectives, collect additional

info

Prepare SOA Execute

Confirm objectives, more detailed fact

find

Prepare SOA Execute

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Workflow - The Unlicensed Accountant

Information or Advice?

Provide a fact sheet

Client letter confirming execution only

Execute

Confirm scope (triage)

Confirm objectives, collect additional

info

Client letter, confirming tax

advice only

Execute

Refer

Licensed adviser prepares SOA

Execute

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Example 2

Execution of the tax & SIS considerations

• TR 2013/5 – a partial commutation occurs where the pensioner ‘consciously

exercises their right to exchange something less than their full entitlement to receive future pension payments for an entitlement to be paid a lump sum.’

• So, where no conscious decision has been prior to the withdrawal (including

documentation), the ATO could decide no partial commutation existed – therefore, deemed as pension payment

• Confirmed in PCG 2017/5 – TBC commutations before 30 June 2017

• Consider timing of TBAR reporting for transfer balance debit of commutation (post 1 July 2018)

• Could a similar argument be held for any lump sum from the accumulation phase interest?

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Execution workflow

Execute

Trustee Minute / Resolution of Annual

Pension Review

Irrevocable member request for above minimum pension, including prioritisation from

one or more in

Trustee acceptance and resolution for priority of paying benefits from one or

more income streams &

accumulation interest

Irrevocable & prospective arrangement for a valid commutation

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Execution workflow

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Summary

• Regulatory changes (licensing & TBC) mean:

• You need to decide if client is seeking advice or information?

• Client decision needs to be ‘prospective’

• Strategies summary point

• Contemplate withdrawing benefits from accumulation interests to improve the fund’s earnings tax exemption

• Opportunities to clawback part of a member’s TBC for estate planning purposes

• Process & workflows will assist in delivering this service to clients

POLL

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Want to find out more?

Attend a free Licensing Wrap Up

• Email [email protected] to register Need assistance with SOA templates or other supporting documentation?

• Call 1300 930 328

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to:

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Fund 360 and Class Super

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Questions?

A Q&A podcast from today will be recorded

answering all of the questions from today’s session.

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