Super reforms: TRIS, ECPI and segregation Melanie Dunn, FIAA - - PowerPoint PPT Presentation
Super reforms: TRIS, ECPI and segregation Melanie Dunn, FIAA Technical Services Manager www.accurium.com.au P | 1800 203 123 Agenda Transition to retirement income streams ECPI and segregation from 2017-18 Platform integration Actuarial
www.accurium.com.au P | 1800 203 123
Melanie Dunn, FIAA Technical Services Manager
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Transition to retirement income streams ECPI and segregation from 2017-18 Platform integration Actuarial certificate case studies Getting help
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TRIS lost tax exempt status at 1 July 2017 A ‘non-retirement phase’ TRIS – Will not count towards claiming ECPI, earnings taxed at maximum of 15% – Will not raise a TBA credit at 1 July 2017 or upon commencement nor other TBAR events – Still an income stream = must make minimum pension payments TRIS will commence being in tax free ‘retirement phase’ – Automatically upon attaining age 65 – Once trustee is notified pensioner has satisfied a condition of release with nil cashing restriction – Account balance credit for member’s TBA, and will need to lodge TBAR – Eligible to count towards claiming ECPI, tax free earnings
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Pension is still a TRIS not an ABP – ATO view is law does not facilitate ‘auto conversion’ of TRIS to an ABP ATO view that law does provide that once nil cashing restriction condition of release met – Limitation of 10% max payment no longer applies – Commutation restrictions no longer apply – Can make lump sums (would need to report for TBAR and won’t count towards mins) If return to work under age 65 existing TRIS remains in retirement phase Be aware of rules written into Fund documentation – E.g. deed or pension documentation might limit payments to 10% Be aware of implications if cease TRIS and re-start as ABP e.g. might impact tax components
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Non-reversionary TRIS – Paid as death benefit income stream = retirement phase ABP – TBA credit of account balance at time death benefit income stream commences Reversionary TRIS – Paid as a retirement phase TRIS to beneficiary – TBA credit of account balance at date of death in 12 months time – Current rules: beneficiary can accept reversionary income stream only if have met condition of release, if not need to cease and take as death benefit income stream/lump sum
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Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 – Beneficiary can accept reversionary income stream even if have not met a condition of release – Will apply retrospectively from 1 July 2017 – Currently with Senate who next sit 13 August TBAR of reversionary TRIS where beneficiary has not met condition of release – ATO aware of current ‘gap’ between how a fund would need to administrate and report a reversionary TRIS upon death of primary pensioner – Need to apply law as currently stands but would review on case by case basis – Will not be applying compliance resources to review funds with reversionary TRIS
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Characteristic TRIS pre 1 July 2017 TRIS non-retirement phase TRIS retirement phase Eligible to claim ECPI YES NO YES 10% maximum payment limit YES YES NO Minimum pension payments required YES YES YES Commutation restrictions YES YES NO Subject to TBC and TBAR NO NO YES Can elect for pension payments to be lump sums for tax purposes YES NO NO Tax components fixed at commencement YES YES YES
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Claim ECPI under section 295.385 of ITAA 1997 – Don’t need an actuarial certificate – Income on segregated assets is exempt current pension income – Capital gains/losses disregarded Segregated pension assets are those solely supporting retirement phase liabilities Two types: – Elected segregation – Deemed segregation
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Electing for an asset or pool of assets to support a retirement phase income stream – Cannot segregate part of an asset – May need notional sub-accounts where asset earns income to maintain segregation – Claim ECPI on earnings using segregated method Document in Fund’s investment strategy have segregated for tax purposes – Implications for member risk profiles – Liquidity considerations to meet minimum pension standards Can employ segregation for investment purposes only – Assets will not be segregated pension assets for tax purposes – Still document in Fund investment strategy – Allocate income & expenses relating to a particular asset to a member/account
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Elected segregation of a property valued at $800,000 & new bank account SMSF assets except for the property, mostly defensive assets SMSF assets: balanced investment mix
M1 ABP $850,000 M2 Accumulation $150,000
Defensive risk profile Growth risk profile
M1 ABP $850,000 M2 Accumulation $150,000
Balanced risk profile Balanced risk profile
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SMSF assets except for the property, mostly defensive assets M1 pays minimum pension payment of $42,500… M1 now only has $7,500 in assets that are not assets elected as segregated… could face liquidity issues
Elected segregation of a property valued at $800,000 & new bank account
M1 ABP $807,500 M2 Accumulation $150,000
SMSF assets except for the property Elected segregation of a property valued at $800,000 & new bank account
M1 ABP $850,000 M2 Accumulation $150,000
SMSF assets except for the property, mostly defensive assets
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M1 takes payment of $15,000… Segregated asset value exceeds account to which attributed – does not meet requirement of elected segregation, asset no longer segregated SMSF assets except for the property, mostly defensive assets Elected segregation of a property valued at $800,000 & new bank account
M1 ABP $792,500 M2 Accumulation $150,000
SMSF assets: balanced investment mix SMSF assets except for the property, mostly defensive assets Elected segregation of a property valued at $800,000 & new bank account
M1 ABP $807,500 M2 Accumulation $150,000
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If SMSF solely supporting retirement phase accounts at a time in the year then must use the segregated method to claim ECPI in those periods – Can have multiple deemed segregation periods in a financial year Prior to 1 July 2017 – ATO will not review calculations of ECPI where used proportionate method over entire year even if had periods where fund was solely in pension during the year No choice from 2017/18 – Must use segregated method in periods where fund solely in retirement phase – Must use proportionate method where had assets which were not segregated
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Non retirement phase TRIS Account based pension Turn 65 and TRIS moves to retirement phase
Deemed segregated pension assets
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Sometimes a Fund can have a momentary accumulation balance in the year: – Commenced a pension on 1 July with entire accumulation balance – Received a contribution and immediately commenced a pension – Completed a partial commutation and immediately withdrew the amount from accumulation ATO view: a matter of documentation as to whether fund requires actuarial certificate for the time the fund had the accumulation balance – If no income earned whilst fund had the accumulation balance no actuarial certificate required, can use deemed segregated method for entire year’s income Example: a minute that ABP commenced immediately upon receipt of contribution, with entire balance of the contribution = evidence no income was earned when fund had accumulation balance
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Claim ECPI under section 295.390 of ITAA 1997 – Actuarial certificate required if want to claim ECPI (optional) – Certificate is for a full income year and excludes segregated pension assets – Exempt income proportion applies to assessable income and net capital gains earned on assets which were not segregated assets Assets are not segregated – On any day assets support retirement phase and non-retirement phase – Where a fund is solely in accumulation phase – Over the entire financial year if a fund has disregarded small fund assets
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New annual assessment each 30 June for how must claim ECPI in the next year – Also applies in first year of the SMSF SMSF will have disregarded small fund assets for the next financial year if: – At 30 June a member was in retirement phase and had at least $1.6m TSB – In next financial year the SMSF has a member in retirement phase at any time Cannot have elected or deemed segregation for tax purposes Can still segregate for investment purposes
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Applies to 2017-18 financial years onwards Implementing this new administration requirement: – Do you know all of your client’s superannuation assets? – Where an SMSF only has retirement phase income streams but TSB of a member grows above $1.6m will need an actuarial certificate to claim ECPI
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Expenses incurred when solely in retirement phase cannot be used to reduce assessable income – Applies to specific deductions incurred at a specific time e.g. interest expense Expenses incurred while the fund had a non-retirement phase interest must be apportioned – Deductible to extent expense incurred on assets producing assessable income Have sought clarification from ATO on treatment of expenses where fund has deemed segregation – 1 – actuarial exempt income proportion – TR 93/17… is the methodology still correct?
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If the fund does not want to claim ECPI on income earned on unsegregated assets – Low or no income Where fund is all in non-retirement phase, and moves to all in retirement phase during a year – E.g. a fund with only a non-retirement phase TRIS moves to retirement phase in the year – E.g. a fund in accumulation phase, moves to fully in retirement phase – Income in non-retirement period fully taxable, income in retirement phase period tax free using the segregated method The fund had only non-retirement phase accounts over the year – TRIS in non-retirement phase, accumulation accounts – Income fully taxable
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All previous certificates obtained remain accessible in your membership dashboard No change to pricing The Form will be backwards compatible for 2016-17 and previous financial years Certificates for 2017-18 onwards will take account of ‘deemed segregation’ rules
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Accurium released new certificate form 2 July 2018 Platforms have updated their systems to allow for 2017-18 ECPI changes – BGL 360, Class, SuperMate BGL SimpleFund Desktop ready September/October until then if need certificate – For 2017-18 year where fund is not eligible to use segregated method, and for all prior years, process for actuarial certificates remains as is – For 2017-18 financial year certificates where fund is eligible to use segregated method will be provided a zip file to upload on our website – If have elected segregation of fund assets will need to add those assets and related transactions back onto the application form on our website as won’t be prefilled
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Accurium worked closely with platforms to ensure seamless transition to new ECPI framework for 2017-18 actuarial certificates Software will do most of the work for you – All data pre-filled to Accurium’s form – Exempt income proportion and dates of deemed periods sent back to platform New information you will notice pre-filled on the form – Data on segregated pension assets – Non-retirement phase and retirement phase transition to retirement income streams – Balances at the end of periods of deemed segregation
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Data feeds rely on user having correctly entered all fund transactions and events in the software prior to obtaining the actuarial certificate Review fund liabilities chart to check periods of deemed segregation align with your expectation of when the fund was solely in retirement phase – Important to put all transactions on their actual dates Can enter additional comments if your fund has unusual circumstances or to provide detail of elected segregation of fund assets
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Actuaries need to know if fund is eligible use the segregated method – Relates to whether the fund has disregarded small fund assets – Is not asking if the fund did have segregation… is asking whether eligible to use segregation – If you are eligible but have no deemed periods or elected segregation, will just use unsegregated Using platforms (except BGL desktop) the answer will be pre-filled based on information you provided in their system
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In ‘contribution caps’ module for each member can specify TSB and this will drive answer to whether fund can use segregated method
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When you request an actuarial certificate a module pops up asking for confirmation
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A TRIS account in Class will refer to a non retirement phase TRIS until a condition of release has been met – Commutation restrictions and 10% payment limit – Taxable income Will automatically move to retirement phase once the system recognises condition of release has been attained – Commutation restrictions and payment limits removed – Tax free income May be asked to confirm retirement phase status and run balances for TBAR purposes
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BGL 360 has two types of TRIS: – TRIS – TRIS (Retirement Phase) To convert a TRIS to retirement phase select ‘Convert to TRIS (Retirement Phase) next to the relevant TRIS member – You may be required to create entries – Can produce a TRIS conversion letter/minutes – Will impact a member’s TBC In BGL Desktop – TRIS (non-retirement) are treated as though in accumulation phase – TRIS (retirement) are treated as though are in pension phase
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Single member Peter: – Had a super account in a retail fund valued at $123,000 at 30 June 2017 – 1 Jul 17 SMSF balance: $952,000 all in an account based pension – 1 Aug 17: non-concessional contribution of $100,000 – 19 Oct 17: lump sum payment from ABP of $30,000 – 15 Feb 18: pension payment of $38,080 – 1 Jun 18: commenced a new ABP with accumulation balance of $108,000 1. Does the fund have disregarded small fund assets?
No - Peter’s total superannuation balance at 30 June 2017 was below $1.6m
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New ABP commenced 1 June with accumulation balance of $108,000. Amount left over in accumulation account after pension commenced is $0.
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Closing balance does not impact the actuarial calculation but will show up on the report. As you need the actuarial certificate to finalise the Fund’s tax return you will not know the final closing balance. So we ask for the closing balance before income tax.
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Periods of deemed segregation
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Segregated method 1 - 31 July and 1 - 30 June Unsegregated method 1 August - 31 May – Three sets of accounts – ECPI = income on segregated pension assets + (exempt income proportion x income earned on assets not segregated) 1 2 3
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We will ask for ‘starting balances’ at each new unsegregated period:
account balance
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Market value including earnings of ABP at start of day on 1 August 2017 before NCC contribution is received. BGL: determines balances at end of deemed periods for you Class: asks you to complete trial balances prior to applying Don’t need balances at end of second deemed period in this case as there is no period following this where fund is not segregated.
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Review step shows you the unsegregated periods of the year to which the exempt income proportion will apply Actuarial percentage and deemed periods returned to Class to help you complete tax return
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To show pension commencements, commutations and TRIS conversions to retirement phase, reversionary income streams and death benefit income streams – Internal transfers will pre-populate when coming via platform – If you have elected segregation show detail of assets which started, or ceased, being segregated Internal transfers TRIS example: We track a TRIS (non-retirement) account and a TRIS (retirement) account in order to calculate the exempt income proportion based on when the income stream was in retirement phase. The TRIS will count towards claiming exempt income from 12 Oct 2017.
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Two members Renee age 64 and John aged 69 at 1 July 2017 – Renee: TRIS $628,468 (not age 65 or reported condition of release) – John: ABP $1,600,000 and accumulation $103,248 John made pension payments of $10,000 on 15th of each month Renee made a pension payment of $8,000 on 1 Sept, 1 Dec, 1 Feb and 1 Jun Renee received concessional contributions of $2,874 on 14th of each month Renee turned 65 on 12th October 2017 Closing fund balance at 30 June 2018 estimated before tax at $2,740,978
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Renee had a TRIS John had a total super balance at 30 June > $1.6m and had a retirement phase
fund assets in 2017-18. Cannot use the segregated method.
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Renee’s TRIS is ‘non-retirement’
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Renee’s TRIS converted to retirement phase on 12 October when she turned 65
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From: Member 1 (TRIS non-retirement) To: Member 1 (TRIS retirement) The TRIS has not stopped and re-started, it will be the same income stream in the SMSF accounts, but on our form we track as two separate accounts in order to calculate the exempt income proportion based on when the account was in retirement phase. The TRIS will count towards claiming exempt income from 12 Oct 2017. The Fund’s internal transfers will be pre-populated by Class.
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Renee’s concessional contributions
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Renee’s pension payments whilst TRIS was ‘non-retirement phase’ John’s ABP pension payments
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Renee’s pension payments whilst TRIS was ‘retirement phase’
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We expect a high exempt income proportion because of the large amount of ‘grey space’ which is the unsegregated retirement phase liabilities (ABP and TRIS retirement phase). There are no segregated assets (would be shown in dark blue) because the Fund cannot use the segregated method.
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Don’t need to complete the segregated section
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Exempt income proportion will apply to income earned over the entire financial year.
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An application via a platform where there was > 4 members currently shows an error – We will be notified of the scenario and call you to assist with ordering the certificate Where a lump sum is paid from an income stream – Use the ‘lump sum’ option under the income stream account which assumes the amount is paid
– Show a partial commutation, which moves the amount from the income stream to accumulation, and then an accumulation account withdrawal equal to the same amount Where a pension payment or lump sum is paid from an income stream and it draws the account to zero please note this in the comments section
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Section help Tooltips Definitions Call the Accurium team on 1800 203 123
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https://www.accurium.com.au/form-changes – Flow chart: Is an actuarial certificate required? FY18 – Blog: Is an actuarial certificate required to claim ECPI? – Tech article: What is segregation? – Webinar slides and recordings
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TRIS are now non-retirement phase or retirement phase, understand the implications for your clients We now request information about all fund assets on the actuarial certificate form and will highlight any periods of deemed segregation Platforms are fully integrated – All required data is pre-populated on Accurium’s form – Exempt income proportion and deemed periods will feed back to platform Utilise the help on the form or give us a call if you have questions
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QUESTIONS?
The information in this presentation has been prepared by Accurium Pty Ltd ABN 13 009 492 219 (Accurium). It is general information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided and Accurium is not liable for any loss arising from reliance on this information. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial