Regulation Round ups

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Regulation Round-up: Quarter I, 2016

Debate on taxation of TRIS payments

ATO private binding ruling

Income payments from superannuation pensions are taxable if paid to a recipient under age 60 (or paid from an unfunded scheme). This is regardless of whether the low-rate cap amount for lump sum withdrawals has been used or not.

Interest in strategies to reduce tax on these payments has recently arisen after reports of a private binding ruling that allowed a client to elect to receive payments from a transition-to-retirement income stream (TRIS) as a lump sum instead of pension income under regulation 995-1.03 of the Income Tax Assessment Regulations 1997. In so doing, the client could receive the amount tax-free within the low-rate cap amount.

This position contradicts a previous ATO opinion given in a 2009 Tax Liaison Committee meeting and industry practice. The ATO has also since stated treating a TRIS payment as a super lump sum for income tax purposes may affect the fund’s ability to claim exempt current pension income.

Clients who are interested in pursuing this avenue should seek their own private binding ruling. It should also be kept in mind the ATO could issue a tax ruling to provide clarification on this matter and avoid being inundated with private ruling requests.

Updates for nil-interest LRBAs

ATO Interpretative Decision (ID) 2015/27 and ATO ID 2015/28

Two ATO IDs issued in 2014 (ATO IDs 2014/39 and 2014/40) have been withdrawn due to legislative changes arising from Tax and Superannuation Laws Amendment (2015 Measures No 2) Act 2015. However, replacement decisions in ATO IDs 2015/27 and 2015/28 have confirmed the same position.

ATO ID 2015/23 focused on a case where the corporate acting as trustee of the SMSF was also the trustee of a discretionary trust. The directors of the company were the only SMSF members and also beneficiaries of the trust. The SMSF trustee borrowed several million dollars from the discretionary trust to buy listed shares. No interest was charged and loan repayments were not required until maturity. ATO ID 2015/24 considered a similar situation, but the individual members acted as the lender and the loan was used to buy a property. Again, no interest was charged, but periodic loan repayments were required.

In both cases the parties were determined to not be operating on an arm’s-length basis. As a result, the income derived was treated as non-arm’s-length income and taxed at penalty tax rates.

Clarity on actuarial certificates

Standard industry practice has been to obtain an actuarial certificate if an SMSF changed from full accumulation phase to full pension phase during a financial year.

But Taxation Determination (TD) 2014/7 has been updated to provide clarity on the need for an SMSF to obtain an actuarial certificate when converting to pension phase.

This TD clarifies if all members of an SMSF switch from accumulation to pension phase in a tax year the SMSF does not need to obtain an actuarial certificate, but only if:

  • no further contributions or rollovers are made,
  • no reserves are held within the fund,
  • only account-based or market-linked pensions are provided.

In addition, if the trustee does not plan to claim exempt current pension income (ECPI) in the SMSF annual return, an actuarial certificate is not required. This is a change in ATO position as previously the view was it was not optional to claim ECPI.

This approach is welcomed as it may reduce compliance requirements and reduce operational costs.

Do clients seek advice on switching?

A survey recently conducted by Roy Morgan (Single Source) showed more than $35 billion in superannuation assets switched funds during the three years to November 2015.

Of those surveyed, 75 per cent who switched to an SMSF said they sought professional advice from an accountant or financial planner, but 31 per cent of all those who switched did not seek any advice. The average balance of those seeking advice was more than double the balance of those not seeking advice, with average balances of $233,000 and $109,000 respectively.

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