MYEFO provides relief on CGT and death benefits

Whilst much of the focus of the Mid-Year Economic and Fiscal Outlook (MYEFO) has been on the need to find dollars ensure the Labor Government delivers a surplus, the report has delivered some much-awaited news for the superannuation sector the final outcomes of the Commissioner’s views regarding TR 2011/D3, in particular when a pension ceases in the event of death.  It was the Commissioner’s view within the draft ruling that the pension would cease upon death of the member unless an automatic reversionary beneficiary existed.  This could only be achieved by having a reversionary beneficiary nominated at the commencement of the income stream or where it’s included within a valid binding death benefit nomination.

The superannuation industry was quite critical of the ATO view’s expressed within the draft ruling since it was issued in July 2011 and have been working closely with the ATO and Treasury to formulate an acceptable outcome… and here we are!!

In the MYEFO, the Government has stated that it will amend the law to allow the tax exemption for earnings on assets supporting superannuation pensions to continue following the death of a fund member in the pension phase until the deceased member’s benefits have been paid out of the fund.  It will continue to require the fund to pay the member’s benefits as soon as practicable as already outlined within superannuation law.  In addition, the announcement states that it will also avoid the need for funds to rework tax calculations following the death of members in the pension phase.  This appears to provide certainty that where a member has more than one superannuation interest, (i.e. running multiple pensions) the benefits will not revert back to a single interest.  This ensures that much of the tax & estate planning benefits of running multi-pension strategies remain extremely valuable.

Lets take a look at the following example to understand the impact of this announcement:


John (74) is the sole remaining member in his SMSF.  He has two SIS dependant beneficiaries, his adult children, Heath & Jill.  John’s account based is $1,000,000 and he is drawing an account based pension.  His fund receives tax exemption on the income from fund assets supporting the pension.  The current unrealised capital gain on the fund assets is $300,000.  John dies and his benefits are paid equally to his two children.  The payment occurs 2 months after John passed away, with all fund assets crystallised to cash.  According to draft ruling, TR 2011/D3, the pension would have ceased at the date of John’s death, with the subject disposal of fund assets being subject to capital gains tax within the fund at 10% (assuming a one-third discount applied having been held for more than 12 months).  The announcement in the MYEFO now outlines, that the fund’s tax exemption will continue beyond John’s death providing the disposal of fund assets to be exempt from tax.

These changes are to apply to the 2012-13 financial year and onwards.

This news is a great outcome for the superannuation industry!!

Reflecting on SMSFs in 2011

As the 2011 year comes to a close, it’s a time to ponder where the SMSF industry has come from in the last 12 months and also where it is heading…

This time last year, we had just seen the Government’s response to the Cooper Review, with many of these reforms now only 6 months away (although there does appear for some work still be done on FoFA and the Approved Auditor registration reforms).

In reflection, here’s some of the interesting things impacting SMSFs from 2011:

  • Total SMSFs grew by 7%*  to 450,498
  • Total assets grew by 3.4% to more than $397 billion; predominantly driven by an increase in cash held by SMSFs.  Property also grew in asset value for the year, however shares on the other hand, were the asset class hard hit due to the continued global financial problems.
  • Excess Contributions Tax continued to grow as a key industry issue, with an increased number of assessments by the ATO… and to think that the most recent published statistics showed that the ATO had only just started on the 2009-10 financial year, where the Labor Government halved the concessional contribution cap!!
  • We did however see some sort of olive branch by the Government, with a proposed ‘once-off’ refund of Excess Contributions Tax.  This was not retrospective though, taking effect for the 2011/12 financial years and onwards.
  • We continue to await details of the proposed concessional contribution cap extension for those 50 years of age and over with account balances of less the $500,000.  A budget commitment in 2010 and re-affirmed in 2011, we currently appear no closer to an outcome from Government to this administrative nightmare!!
  • The year also saw two important rulings issued, although the industry responses to these could not have been any further apart.  The views expressed by the Commissioner on key concepts of limited recourse borrowing arrangements were embraced by many who were pleased in the practical approach taken to the single acquirable asset definition and also the ability to make improvements to an asset using the SMSFs own resources.  The more controversial ruling issued in July 2011 was when a pension commenced and ceased.  Many of the views expressed by the Commissioner, whilst not necessarily having changed since a previous interpretation in 2004, were broadly criticised with their interpretation and also of the unintended consequences.  With all responses to the ruling also in the hands of Treasury to review, it is quite obvious that further action will be taken here ensure there is no ‘revenue leakage’ if the industry is found to be correct.
  • The year also saw the introduction of section 62A and SISR 13.18AA relating to collectables and personal use assets acquired from 1 July 2011.  These new rules implemented from the Stronger Super reforms intend to address the legitimacy of SMSFs acquiring these assets for investment purposes, rather than gaining a current day benefit (e.g. hanging a painting on your wall at home).
  • Streamlined TPD insurance tax deductions have also been introduced, distinguishing the level of deductibility based upon whether an insurance policy is classified as ‘any occupation’ or ‘own occupation’.
  • A range of ATO interpretive decisions impacting pension payments, death benefits with stepchildren, and assets acquired where a charge already exists.
* these figures were using Sept-10 to Sept-11 ATO statistics as these are the most recently published by the Regulator.
In my view, 2011 has been more talk than action…  I’m not suggesting that it’s necessarily been a bad thing; however it has been a year where the Future of Financial Advice and Stronger Super reforms have been heavily debated, with most of these reforms expected (but not yet assured) to take effect from 1 July 2012.  Add to these reforms, unresolved discussion papers on extended contribution caps, refund of excess contributions, amongst other things that reiterate my views on the year.
Many people in the financial services industry are already “reformed out” from 2011, however the real challenge lies ahead in 2012.


Can you establish a reversionary pension after a pension has commenced?

The impact of  ATO draft tax ruling, TR 2011/D3 has sparked a significant amount of interest in how income streams are structured for SMSF members, in particular with those who have not originally included a tax dependant reversionary beneficiary in the original terms & conditions of the pension.  The draft ruling states that a pension will cease upon the death of the member unless a:

  • reversionary beneficiary has been included within the original terms & conditions of the pension; or
  • valid Binding Death Benefit Nomination (BDBN) existed.

There is some debate within the industry as to which take precedent? A reversionary pension or a valid binding death benefit nomination (BDBN)?  Industry views vary based on some of the following arguments:

  • The is a view that reversionary pension documentation is not actually binding on the trustee?  If the reversion is not binding, the argument is that the BDBN is therefore more likely to bind the trustee and take precedence over the reversionary pension;
  • A valid reversionary pension will override the BDBN because the act of reversion automatically transfers the pension to the reversionary beneficiary.  A BDBN cannot apply because no death benefit arises; and
  • A BDBN will not be effective where making the pension reversionary (i.e., because it represents a fundamental change to the terms & conditions of the pension).

According to the Australian Taxation Office, as outlined within the minutes of the March 2010 NTLG Superannuation Technical Sub-group:

“There are no SIS Act or SISR provisions that are relevant to determining which nomination an SMSF trustee is to give precedence where a deceased pension member had both a valid reversionary nomination and a valid BDBN in existence at the same time of the member’s death.  

While section 59 of the SIS Act and Regulation 6.17A of the SISR place restrictions on superannuation entity trustees accepting BDBNs from a member, as explained in SMSF Determination SMSFD 2008/3, the Commissioner is of the view that those provisions do not have any application to SMSFs. It must also be remembered that section 59 of the SIS Act and regulation 6.17A of the SISR are necessary because of the general trust law principle that beneficiaries cannot direct trustees in the performance of their trust. 

 “If the governing rules of a SMSF authorise a death benefit nomination, the trustee must follow the fund’s rules and the general trust law and any other legislation which may be relevant.

 Notwithstanding those observations, the ATO’s view is that a pension that is a genuine reversionary pension, that is, one which under the terms and conditions established at the commencement of the pension reverts to a nominated (or determinable) beneficiary must be paid to the reversioner. It is only where a trustee may exercise its discretion as which beneficiary is paid the deceased member’s benefits and/or the form in which the benefits are payable that a death benefit nomination is relevant.”

Comments made within these ATO NTLG Super Sub-group technical minutes as outlined above state that a reversionary beneficiary must be nominated at the commencement of the income stream.  It is a requirement for a reversionary beneficiary to be specifically identified at the time the pension commences.   Currently we have no further guidance (nor law) from the Commissioner on this issue.  There are a range of pensions-related matters including exempt current pension income (ECPI) that the ATO is currently considering to provide further guidance on.

I’ve setup a pension with no reversionary beneficiary, how can I change this?

I see many SMSF pensions established without a reversionary beneficiary.  Much of this has to do with either:

  • the legacy of the RBL system whereby the majority of pensions had no reversionary – this was predominantly due to lower deductible amounts (the tax deduction was lower as the deductible amount was calculated on the longer life expectancy, typically the wife); or
  • a lack of understanding around pension-related matters (competency).

You cannot simply add to or amend the original pension documentation to include a reversionary beneficiary.  It is my belief that the pension must cease (rollback / full commutation) and then a new income stream be commenced.  

If the fund is running multiple pensions for a member, you do need to consider the timing of when to rollback these pensions.  Remember that a SMSF member when in accumulation can only have one superannuation interest (i.e. the components of the multiple pensions will amalgamate back into one), so you do not want to ‘contaminate’ any high tax-free proportion income streams.

If you want to rely on a binding death benefit nomination for the pension to revert, you must meet some very strict requirements in the form and substance with which this nomination form must take…  In my view, making amendments to an existing income stream seems like a simpler way to go.

Find out more about this topic in the SMSF Pensions Webinar – last chance to register

(C) The SMSF Academy 2012
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