NetActuary

The Importance of Ten Dollars

Due to limited parliamentary sittings in 2020 as a result of Covid-19, the Assistant Treasurer has announced that exempt current pension income changes will have a revised start date of 01/07/2021 i.e. a year later than expected.

Before 01/07/2017 industry practice was to use an unsegregated approach for ECPI actuarial certificates if at any time during the year there was an accumulation balance in addition to ABP.  The ATO’s view from that date was segregation applies for parts of financial years if during any period the assets were backing solely retirement phase income streams.  Deemed segregation pushes up complexity and administration costs by requiring multiple sets of accounts.

The legislation intent is to reduce this red tape to the previous approach.  The fund will be able to choose the ECPI method to apply for a full financial year.  Until this legislation is operational, the issue can be avoided by leaving $10 in accumulation stage at all times.

An amendment is also required to amend the disregarded small fund asset rules needing an actuarial certificate where a 100% tax exemption applies.

NetActuary also reduces red tape in certificate requests without losing the value of human review and judgement.  The majority of our certificate requests arrive with no filled in data-form.  Simply a draft financial statement, operating statement, general ledger and trustee details provides all that is needed.

The cost of an ECPI actuarial certificate is a modest $77 inclusive of GST.

Please don’t hesitate to ‘phone Brian on (03) 9028 5002 if you would like to discuss any SMSF matter.

Complex SMSF Annual Returns

The ATO reported yesterday that with the 30 June lodgement deadline now having passed, nearly a quarter of SMSFs still had not lodged their SMSF annual return for the 2018/19 financial year.

It has been our experience that these late lodgement cases often have a complexity.  This may be due to less unusual transactions such as divorce splits, deaths, numerous payments needing allocation to pension/accumulation accounts etc.   It is important to tidy up these funds soon because the most recent financial year is going to bring its’ own challenges.  I am particularly concerned that legacy pension accounts need to be completed significantly in advance of last year’s schedule.  Finalisation close to the 31 December, 2020 Centrelink deadline is not going to leave enough time for considering asset test exemption loss.

NetActuary can help!  We have calculators that (for example) allow us to allocate any type of end of year allocations.  How much does this support cost?  Zero!  It is part of the service where a firm uses NetActuary to provide its’ ECPI and legacy pension actuarial reports.  Give Brian a call on (03) 9028 5002 for a chat.

Brian Bendzulla

Merry Xmas and it's not too late for Actuarial Reports

 

NetActuary wishes everyone a Merry Christmas and a wonderful 2020. We will be working normal business hours during the Festive Season.  So if you are facing a Centrelink legacy pension adequacy or ECPI percentage tax agent lodgment deadline for the end of December - we are here to help.

Many of our clients don't fill in forms.  They simply provide an email with attachments  of a trail balance, general ledger dump and the previous report.  That is sufficient for our work.  Fees are massive competitive at $220 inclusive of gst for adequacy reports and $55 for ECPI reports.  Call Brian on 03-9028 5002 if you would like to discuss.

It's a beautiful time of the year.  I hope you and yours have a peaceful and tranquil Festive Season and may 2020 be a year where the world sees a greater emergence of goodwill, tolerance and support to all it's people.

Brian Bendzulla

 

 

 

Transfer Balance Cap Fixups

Since 01/07/2017 there has been a limit on the total amount of superannuation assets that can be transferred into retirement phase – the transfer balance cap.  Until indexed, this cap is $1.6 million.  A transfer balance account is maintained by the ATO to record events that count towards an individual’s transfer balance cap.  A transfer into retirement phase is a credit and certain transfers out (such as commutations) are debits.

If one had retirement phase assets of more than $1.6 million at 01/07/2017, the excess would normally be rolled back into an accumulation account or withdrawn.  However, things are more complex with legacy defined benefit pensions that can’t be commuted except to start new equivalent income streams.  These “capped defined benefit income streams” have additional tax liabilities instead of retirement phase asset removal.  For example, a lifetime income stream over $100,000 p.a. has 50% of the annual income stream over $100,000 taxed at the person’s marginal tax rate.  PAYG withholding and summary obligations apply to the fund trustees.

For reasons that are hard to understand, a pre-existing market-linked pension (TAP) at 01/07/2017 was classified as a capped defined benefit income stream.  Its’ TBC debit is the annual next pension amount multiplied by the remaining term of the pension in whole years.  This debit is more than the account balance.  Any market linked pension started after 1 July is not a capped defined benefit income stream and has a TBC credit based on the purchase price.  However, the legislation was deficient resulting in a double count for TBC purposes on a market linked pension rollover.  As a stop gap measure via CRT Alert 066/2018 the ATO announced they would not take compliance action if the fund does not report the transfer balance account events of the commutation or the commencement of the new market linked pension.  The permanent fix will be via legislation and it will have a retrospective 01/07/2017 effective date.

Based on lapsed draft legislation before the Federal election, the following is how the new legislation is likely to operate.  The transfer balance account debit will be the debit value of the superannuation interest that supported the superannuation income stream just before the commutation takes place.  This is:

• The original transfer credit; less
  
  
• The amount of any transfer balance debits that have arisen in respect of the pension; less
  
  
• The total amount of superannuation income stream benefits the person was entitled to receive before the start of the financial year in which the commutation takes place; less
  
  
• The greater of the superannuation income received in the financial year in which the commutation takes place or the minimum amount required to be paid to them under the regulations.

For a partial commutation, the transfer account debit is the lesser of the full commutation debit value or the amount of the superannuation lump sum that results from the partial commutation.

Caution is still needed as it may not be possible to commence a new market linked pension without causing an excess transfer balance which can’t be removed due to the non-commutable nature of market linked pensions.

As we did last year with actuarial exempt pension income percentage and adequacy end of year certificates, we will keep an eye open for situations where a better client outcome exists.  NetActuary is keen to be the legacy pension specialist.

Brian Bendzulla

Family Law Factors Need Updating

Recently there have been public comments about how items such as the Centrelink deeming rates need to be updated for current economic conditions.  The same applies to the prescribed Family Law factors used to calculate the present value of defined benefit superannuation entitlements for matrimonial property pool purposes.  These factors have not been updated since formulated in 2002.  A clear example is provided by the closed NSW State Super Scheme.  If you compare the Family Law value on the legislated special methods and factors, it often can be 20% less than the immediate cash benefit available.

It may not simply be the economic factors that need updating.  The present value of entitlements with a pension component has mortality and economic assumptions.  If one was putting aside a lump sum to fund a series of payments, the mortality assumption sets the number of expected payments.  The payments would be met from capital and associated investment earnings.  The lower the expected investment earning, the more the capital is required.  In other words, the present value of future payments is higher for lower discount rates.  The current mortality and economic assumptions can (for a single life aged 65) produce a 12-13 factor.  It’s too low for current conditions.

Whilst the methods and factors are being updated, the issue of invalidity payments can be clarified.  His Honour, Justice Kent’s decision in Burge & Burge [2015] FamCA 178 raises the issue about whether an invalidity pension is a superannuation interest – even though it is included by Trustees in Form 6 responses as such a benefit.

As a general comment – and not just restricted to family law legislation – regulation that involves an economic factor component is not reviewed sufficiently frequently by the regulators!

 

Brian Bendzulla

 

Looming 15th May

15^th May, 2019 is the last date for lodging a superannuation fund return via an accountant or tax agent without a penalty. As you can imagine, many of the ECPI and adequacy actuarial certificates at this stage are not straight forward. This blog provides background information on how the ECPI percentage will vary if one partner has passed away in the financial year.

The Federal Government’s $1.6 million transfer balance cap (TBC) limiting the amount of exempt current pension income (ECPI) applied from 01/07/2017.  It did not increase in 2018/19 financial year and so remains at $1.6m. 

The Transfer Balance Account (TBA) has credits when a retirement phase pension is started and a debit upon commutations.  The credits are created at the transaction date and not subsequently adjusted.  This means that subsequent net earnings and growth are ignored.  A reversionary pension paid to a surviving spouse or a retirement phase pension commenced with a death benefit paid to the surviving spouse will impact on their TBC amount.  This may create an excess problem because the deceased member’s TBC does not carry over to a surviving spouse.

Amounts over the TBC will be held in an accumulation account and have tax at 15% paid on assessable income.  Benefits paid out of the accumulation accounts will be tax free for persons over age 60 – this is different aspect to tax on investment earnings.  The future year exempt current pension income (ECPI) will be maximized by drawing amounts over the pension minimum from accumulation accounts.

There is special timing on death benefit transactions.  When a person automatically receives a reversionary pension, the TBA credit will not occurs until 12 months after the deceased’s death.  This provides a period of time for the surviving spouse to adjust their superannuation matters.  There is no 12-month period where a new or fresh pension is created with non-reversionary monies.  The credit occurs immediately when the new pension is started. 

The time span for reporting the TBA is determined by the total superannuation balances of an SMSF’s members.  If any member has a total superannuation balance of more than $1m, the event must be reported within 28 days after the end of the quarter in which the event occurs.  There are other rules for reporting commutation sooner or for some reporting with the date of lodging the SMSF annual return.  However, it is best to report early – basically straight away – as penalties could apply to late reporting.

From an ECPI point of view, the actuarial calculated percentage will be higher and less tax paid by getting the daily weighted average optimal.  It is not just commencing a pension from accumulation accounts soon, or utilizing the reversionary period of grace, but making pension payments late in the year.  Accumulation account payments can be taken early in the year.

The NetActuary special deal of $55 for tax exempt percentage actuarial certificates and $165 for legacy pension actuarial reports applies irrespective of how complex the case. This includes GST and applies until 30/06/2019. Please contact Brian on (03) 9028 5002 or email brian@netactuary.com.au if we can help.

Brian Bendzulla

 

 

Better ECPI Outcomes for Legacy Pensions

Mark Ellem’s presentation at the 2018 SMSF Professional Day is an excellent overview of how the tax-exempt percentage can be increased with payment timing.  NetActuary has an interest in assisting legacy pension funds.  So, here are some comments about how the ECPI percentage can vary.

With a legacy pension such as a section 1.06(2) lifetime pension, the lower the best estimate earnings rate assumed by the actuary, the higher will be the exempt proportion.  In addition, the calculations should have a deduction for investment expenses and an allowance for admin costs.  These two factors also increase the tax-exempt percentage.

It is important that these returns are not left static from past investment times.  At NetActuary, we have had a thorough review of the returns from different investment options and the margin to be set for the adequacy certification.  We have concluded that the new June 2018 Government MoneySmart assumptions are appropriate.  These are the standard rates that NetActuary will be using in 2018/19:

Investment Option	Investment Portfolio	Assumed Investment Return	Allowance for Investment Fees	Investment Adequacy Margin
Cash	100% in Deposits	2.70%	0.05%	0.05%
Conservative	Around 30% in shares & property. Rest in cash and fixed interest	3.80%	0.30%	0.125%
Moderate	Around 50% in shares & property. Rest in cash or fixed interest	4.40%	0.40%	0.25%
Balanced	Around 70% in shares & property. Rest in cash or fixed interest	4.80%	0.50%	0.375%
Growth	Around 85% in shares & property. Rest in cash or fixed interest	5.00%	0.60%	0.50%
High Growth	100% in shares & property	5.30%	0.70%	0.75%

 

A lower earnings rate could cause a problem with sufficient assets for the adequacy certification.  Fortunately, with lower current investment returns, the margin of average to lower quartile returns has narrowed.  The margin in the table is from an analysis of some 340 funds for the past decade.

Of course, while the formal report will need to be reviewed for appropriateness and signed by NetActuary, we have developed a calculator that show what the above assumptions would produce as a result.  This is a sample screen:

If you would like a copy of this Microsoft Exel pension liability calculator, please email Brian Bendzulla at brian@netactuary.com.au or call on (03) 6224 1145.

 

The NetActuary Team

Planned Retirement Income Reforms

From 01/07/2019 new Age Pension means testing rules will be introduced for pooled lifetime income streams.  The rules will assess a fixed 60% of all pooled lifetime product payments as income and 60% of the purchase price of the product as assets until age 84 – or a minimum of 5 years – and then 30% for the rest of the person’s life.  Since Treasury has made provision for a cost over the forward estimates for this change, it raises the question about how this can be used to your client’s advantage.

We need to get the tools and analysis prepared before then to handle enhanced retirement income streams, deferred annuities and the “retirement income covenant” requiring superannuation trustees to offer “Comprehensive Income Products for Retirement” (CIPRs).  NetActuary has commenced work with a financial planning firm to start work on this issue.  The challenge is that there are many different options – purchase dates, commencement dates for (say) a deferred lifetime pension, guaranteed or fluctuating payments etc.  It is a classic actuarial issue because at the heart of the objective is the desire to increase the certainty of the retirement income – but at what cost?

As usual, the grandfathering under current rules for lifetime income streams purchased prior to 01/07/2019 will lead to a rush later this financial year where the old rules are better for some clients.  The programming is messy.  The asset test actually is also subject to three tests:  the 60/30% of purchase; the value of any current or future surrender value; and the value of any current or future death benefit.  The grandfathering is also messy with (for example) a pension reverting to a spouse.  The grandfathering depends on Age Pension receipt at time of death.

Similar to the actuarial ECPI calculations, the days of straight forward financial planning analysis is over.  One needs both more sophisticated modelling tools and a depth of understanding about how to use/modify them.  If you would like to join this area being developed, please drop me an email to brian@netactuary.com.au

 

Brian Bendzulla

ECPI and Death of a Member

You will notice that the NetActuary ECPI data-form identifies situations that need careful consideration.  One of these is when a member has died.  This blog provides some background information about how ECPI will be calculated in that eventuality.

If the account-based pension is reversionary, the ECPI entitlement continues on the assessable income from the assets backing that pension in the same way that the pension continues.  In other cases where the amount for the death benefit (lump sum or new pension commenced) is only the account balance, the ECPI continues until it is “as soon as practical to pay the benefit”.  This provision was introduced in an amended definition introduced by the Income Tax Amendment (Superannuation Measures) No 1 Regulation 2013 to apply to the 2012/13 (and subsequent) income years.

We don’t need to consider anti-detriment amounts, but insurance proceeds don’t have this concession.  Income from these proceeds are not tax free in the period to payment.  No minimum pension payment is required for the period up to death.  If the pension is auto-reversionary, then the minimum payment is required by the end of financial year. 

The phrase “as soon as was practical” is not defined by law, however the ATO appears to accept a period not exceeding 6 months from the date of death as acceptable.

With legacy pensions, careful consideration is needed.  One of the instances envisaged in TR2013/5 was a superannuation income stream will cease if a provision in the governing rules provides for it to cease.  Consequently, with a section 1.06(2) lifetime pension it is likely that the pension and the ECPI will cease when the pensioner passes away if there is no reversion.  The assets backing the lifetime pension are released to reserves.  Use of those reserves would be under contribution/reserve allocation provisions, not death benefits.  On the other hand, a section 1.06(7) Life Expectancy pension has the residual benefit of remaining payments outstanding and has an arguable case for continuing ECPI.

The above shows why it would not be prudent to process actuarial certificates merely from a filled in date of death.

I am impressed with the number of trustees/advisers who took up the NetActuary $11 special.  Yes, it did cover earlier financial years.  Please give me a day or two to catch up and also launch the NetActuary property analysis toolkit and we will run another special on actuarial certificates.

Brian Bendzulla

COME CELEBRATE WITH NETACTUARY

NetActuary is back in the SMSF Actuarial certificate business! Yes, this has been a long wait!! That is even more reason for a celebration you too can share.

A number of initiatives are planned for the coming months. As an opening special all account-based pension actuarial certificates submitted in the first week of July will be processed for a fee of only $11 inclusive of gst.

The 2017-18 actuarial certificates need a different approach to previous years. It is no longer adequate to mechanically process them. Many fund circumstances have alternative possible approaches and strategies that need to be evaluated to determine which is in the client’s best interest. While NetActuary will use extensive production system support, this will be combined with a careful actuarial judgement. All calculations will be undertaken personally by the qualified actuary who signs the certificate. The turnaround will be prompt, but always subject to what needs to be done.

Will this cost more. No!! Our account-based pension actuarial certificate maximum price will be $132 inclusive of gst. There will be a guarantee of no fee increases in the next two years. Lodgement is simple – on NetActuary.com.au is a data form or simply send us the general ledger download from any of the SMSF accounting systems.

We also have a profound interest in helping with all types of legacy pension aspects including actuarial adequacy and tax exemption reports. For more information see the website or phone Brian Bendzulla on 03-6224 1145.