NetActuary

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

Ensuring Correct SMSF Tax Outcomes

While NetActuary will diligently work to ensure administrators achieve appropriate ECPI outcomes taking recent changes into account, this note will provide useful background information – especially with “deemed segregation” and “disregarded small fund assets”.  No comments will be included below on funds that include legacy defined pensions (a separate note will be prepared for those).

 

Elected or Deemed Segregation

Until the 2017/18 year it was common practice to issue an unsegregated actuarial certificate as long as there was an accumulation account at some stage in the financial year.  The ATO’s view – which they will now enforce from the 2017/18 and subsequent years – is that one can have segregation under sec 295.385 of the ITAA 1997, even if the period fully in retirement phase is for only part of a year.  Consequently, one can have both segregated and unsegregated components in the same financial year.  In fact, one can have a number of segregated periods, each having to be separately accounted for – including asset revaluations – but only one residual unsegregated actuarial certificate.  The extra administrative effort can be avoided (which may or may not be in the client’s best interest).

Elected segregation is the old fashioned, conscious decision to segregate and separately account for some of the assets.

We need to be careful about what is exempt and what is not.  A new term – “retirement phase liabilities” has been introduced.  So, we have:

Retirement phase liabilities being:

• Account based pensions
• Market-linked income streams
• Transitional retirement income streams (TRIS) in retirement phase; and

Non-Retirement phase liabilities being:

• Accumulation account
• A Reserve Account
• A TRIS not in retirement phase.

A TRIS is in retirement phase and counts towards tax free earnings after age 65 or once the trustee has been notified that a nil cashing restriction condition of release has been satisfied.  A Transfer Balance Account credit notification must be made.  The TRIS in retirement phase is still not an ABP, although some practitioners feel this should be fixed up.  The same applies to issues around death benefit income streams.

 

Disregarded Small Fund Assets

If at 30/06/2017 (and each subsequent period) a member was in retirement phase and had a Total Superannuation Balance (TSB) above $1.6m in any fund and there was a retirement phase benefit in the fund at any time in 2017/18, the SMSF is classified as having “Disregarded Small Fund Assets”.  In this situation the fund is not allowed to use the segregated method for ECPI.  One will note that is necessary to ask clients what their superannuation assets are in all their funds.  Unsegregated assets are covered in section s295.390 of ITAA 1997.  If the trustees want to claim ECPI they need to get an actuarial certificate.  The calculated ECPI proportion applies to assessable income and net capital gains earned on assets which were not segregated.  Where the value of pension assets has grown above $1.6m it is possible that an actuarial certificate is needed – even if solely in pensions i.e. 100% exempt.

 

Avoiding Deemed Assets

Having to account for and revalue assets for a number of periods within a year is more administration work.  This can be avoided if (say) $100 was kept in an accumulation account at all times during the year.

The issue is that – just like the elected segregation – one or other option may give a better tax outcome.  If there are non-uniform gains or losses e.g. a property sale, the extra administration may be worth it.  Even items such as dividends may not be uniform over the year.  This area is interesting but more of a strategic plan ahead issue rather than an actuarial certificate production issue.    There are many actions that optimize tax and TBC outcomes.  These can be as simple as making pension commencements and Lump Sum Accumulation withdrawals early in the year and contributions late in the year.  From a TBC perspective, it’s better to have amounts above minimum payment requirements as a commutation, not as a pension.

The unsegregated ECPI percentage is used also to claim an expense deduction.  It is important to observe we are talking about tax calculations and the trustees may adopt a different approach for member allocations.

 

Keeping It Simple

Most funds will not have the above issues.  An innovation on the NetActuary data-forms (and in evaluating the SMSF admin general ledgers submitted) is only to ask the usually required questions and have a “less usual” checklist advice.  These are also the areas we watch out for in that they may affect outcomes and require more information.

• Are there legacy defined pensions?                    
• Is there “deemed or elected segregation” in the year?     
• Are there “disregarded small fund assets”?      
• Did the fund commence or wind up in the year?               
• Does the fund have a reserve account?           
• Is there any non-arms length income?
• Did a member pass away during the year or have insurance proceeds been received?       

 

NetActuary is the renamed company in the previous Bendzulla group of companies that provided actuarial certificates.  In recommencing these services, we have the ambition to be the pre-eminent source of quality support for the area.  That includes funds with legacy defined pensions.

Please ‘phone Brian Bendzulla on (03) 6224 1145 if we can help.

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.

 

 

 

 

Centrelink Thresholds 2018-19

The 2018-19 allowable income and asset thresholds for a full Age Pension are now available.

From 1/7/2018 the allowable income threshold will increase for singles from $168.00 p.f. to $172.00 p.f.  For couples the increase is from $300.00 p.f. to $304.00 p.f.   Deeming lower limit has increased from $50,200 to $51,200 for singles and from $83,400 to $85,000 for couples.

With asset thresholds the Homeowner threshold has increased from $253,750 to $285,500 for singles and from $380,500 to $387,500 for couples.   The Non-Homeowner thresholds have increased from $456,750 to $465,500 for singles and from $583,500 to $594,500 for couples.    Funeral Investment exemption from the asset test has increased from $12,750 to $13,000.

The ATO has released SMSF News Alert 2018/3 confirming the unintended consequences of the current law with regards to the commutation of capped DB life expectancy and market-linked pensions.  These receive a nil debit on commutation.  The ATO will not take compliance action at this stage if a fund does not report the transfer balance cap events of the commutation or commencement of the new market-linked pension.   This still does not fix the problem of the lock in of a market-linked pensions that are larger than $1.6m.   There are a number of problematic areas of tax and superannuation with no clear guidance from the ATO, especially in the transfer of overseas pension monies area.

It is going to be a very interesting in a few weeks time to watch how administrators and trustees handle the new ATO interpretation for mixed segregated and unsegregated periods for exempt pension income with the 2017-18 financial year.   I have a considerable level of apprehensive about this.  If you would like to discuss issues to watch out for, please don't hesitate to call me on 03-6224 1145.

 

Brian Bendzulla 

 

 

 

Wouldn't it be “Loverly”

In a similar manner to superannuation funds needing to have an investment strategy, there will be a requirement to satisfy a “retirement income covenant”.  This basically codifies the requirements and obligations for trustees to help improve retirement outcomes.  The implementation date is likely to be 01/07/2020.  The funds will need to offer a Comprehensive
Income Product for Retirement (CIPR) that has three key objectives.  These are to maximise income; provide income for life; and flexibility to access capital.  It may (for example) be a product that is a combination of an ABP and a deferred annuity.  Now that we know the social security means test rules for new and existing pooled lifetime income products it will be
feasible to design such products.

Wouldn’t it be “loverly” if that was all that was needed to solve the retirement issues!  It is not going to be that simple – especially for financial planners who need to justify what they are suggesting is superior to the default option.  Actually, it’s default “options” as the fund can offer up to three CIPRs.

As usual, there are trade-offs that need client preferences to be taken into account.  An annuity may have certainty and handle longevity, inflation and investment risk – but those guarantees come at a considerable cost to maximizing income.  Flexibility, desire to leave an inheritance, health, organization, solvency, tax, Age Pension ramifications etc. are going to be relevant.  Luckily the methodology for assisting with these trade-offs are well developed.  NetActuary is willing to develop the analytic tools for those who are going to seize the opportunity.  First, however, we have an actuarial certificate area to relaunch in (hmmmm) … 23 days!

 

Brian Bendzulla

 

 

Deficit Legacy Pension Policy

The recent legislation changes have failed to adequately consider legacy pensions.  There are multiple issues where this is now becoming evident.  This blog details a few that practitioners need to watch.

Market-linked pensions (term allocated pensions) are treated as “capped defined benefit income streams” where they were in place before 01/07/2017.  As such, they are valued on a residual term basis.  A market-linked pension that starts after 01/07/2017 will fall under standard transfer balance cap provisions of having a value equal to the account balance.  I






understand that the ATO may have the view that there is no Transfer Balance Debit on the commutation of the original pre July 2017 pension.  This would be inequitable and be double counting of the same pension stream.  Also, a poor outcome results for market-linked pensions over $1.6m in locking them into the current provider and terms.  You can’t (for example) close the SMSF and move the market-linked pension to a public offer fund because the resultant excess TBC amount can’t be commuted.

A second troublesome area exists when (say) a sec 1.06(07) life expectancy pension expires and one wants to tidy up the reserves.  We know – and it is shown in PBR 1051303678768 dated 03/11/2017 – that we can allocate the unallocated reserves by grossed up contributions i.e. $21,250 p.a. or by adding up to 5% to the crediting rate - one can’t do both.  However, the ATO is reviewing its approach to reserves.  In the SMSF Regulator’s Bulletin one can see the ATO view that there are very limited legitimate circumstances for SMSFs to have reserves.  With the ATO powers under the sole purpose test (Section 62 of the SISA) and Part IV A of ITAA 1936 they can stop these transactions.  Of particular concern is if the 5% supplementation of the crediting rate to pension accounts is seen to be circumventing the Transfer Balance Cap intent.

Has anyone factors for Residual Capital Value commutations – in both life and term formats?  I have those for use in Transfer Value Cap purposes but not those for commutation limits.  If you have, please drop me a note.

For the above – and other legacy pension issues emerging – I see no other prudent way for clients and their advisers currently other than requesting a private binding ruling.  At least then, if the Commissioner keeps forming new views, they have some protection from penalties.

 

Brian Bendzulla

Good ♦ Cheap ♦ Fast Actuarial Certificates

Yesterday a person asked me what were “disregarded small funds assets” and their relevance to actuarial certificates for exempt current pension income.  In essence, where you have a complying SMSF with at least one superannuation interest in retirement phase AND just before the start of the year one person had a total superannuation balance that exceeded $1.6 million across all funds, then those assets in the SMSF are disregarded small fund assets.  Such a fund is not allowed to use the segregated approach. 

Actuarial certificates for 2017-18 are different to earlier years.  NetActuary will not be one of those certificate suppliers promising the return within minutes.  We will be returning the certificate in the time it takes to do the job properly.  That may be 2 minutes – or it may be 2 days if we see circumstances that warrant a discussion with the administrator. 

The NHS in the UK runs a strict time scale implementation.  An appointment is 10 minutes.  They are proud that a 9.22 minute average is achieved.  A person is only allowed to raise one condition per consultation.  What they don’t highlight is that one in six diagnoses are incorrect!  For many, that error is not major – but it is for the 750 NHS patients that die an avoidable death each month.  It may not even be cost efficient with malpractice settlements now exceeding £1.5 billion per year. 

NetActuary’s new actuarial certificate service – commencing at the end of next month –  will focus on achieving good quality outcomes.  We visualise working closely with users of our service.  We know that one can structure SMSFs in different ways that can result in different tax outcomes.  Leaving a small accumulation account would allow one (in some instances) to utilize an unsegregated only approach.  This may be better or worse than the alternative.  It worries me that this over emphasis on turnaround and cost will lead to fully automated processing and poor outcomes. 

It is ironic that I was instrumental in the big push to use digital processing to reduce costs and speed up processing, but now am taking a stance that more judgement and consideration is needed with the production of actuarial certificates.  The actual work and results of NetActuary’s actuarial certificates will be only undertaken by qualified signing actuaries – not junior processing staff. 

If you would like your actuarial certificates prepared on a “quality outcome” and not “time production” basis, please drop me an email and I will ensure you receive information on this topic.

 

Brian Bendzulla

Budget 2018 and SMSFs

An SMSF-friendly Budget is the good news coming out of the 2018-19 Federal Budget. With SMSF members still working through the wide-reaching and complex superannuation changes which took effect from 1 July 2017, this Federal Budget will provide much needed stability while looking to reduce costs for SMSFs and prove additional flexibility.

The key changes proposed for SMSFs and superannuation are:

Three‑yearly audit cycle for some self‑managed superannuation funds

The Government will change the annual SMSF audit requirement to a three yearly requirement for SMSFs with a history of good record keeping and compliance. The measure will start on 1 July 2019 for SMSF trustees that have a history of three consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner.

Expanding the SMSF member limit from four to six

As already announced, the Federal Government confirmed its decision to expand the number of members allowed in an SMSF from four to six. Expanding the definition of an SMSF to a fund with a maximum of six members will provide greater flexibility in how funds can be structured.

Work test exemption

The Government will provide more time for Australians aged 65 to 74 to boost their retirement savings, by introducing an exemption from the superannuation work test.

This exemption will apply where an individual’s total superannuation balance is below $300,000 and will permit voluntary superannuation contributions in the first year that they do not meet the work test requirements.

Life insurance cover in super to be opt-in for individuals under 25 years of age

The Government will legislate that life insurance cover in superannuation will be opt-in for those individuals under 25 years of age or with account balances under $6000 to ensure that unnecessary fees do not erode smaller balances. Life insurance cover will also cease where no contributions have been made for a period of 13 months

Older Australian package

The Government introduced the following measures to enhance the standard of living older Australians:

• Increase to the Pension Work Bonus from $250 to $300 per fortnight.
• Amendments to the pension means test rules to encourage the take up of lifetime retirement income products.
• Expansion of the Pensions Loan Scheme to allow more Australians to use the equity in their homes to increase their incomes.

Personal income tax bracket changes

The Government has provided personal income tax relief to lower and middle income earners. A Low and Middle Income Tax Offset will now be available for individuals with incomes of up to $125,333.

The $87,000 income threshold, above which a 37 per cent tax rate applies, will increase to $90,000.

Other changes

• A surplus of $2.2 billion is expected in 2019-20, one year ahead of schedule.
• The Government’s planned increase in the Medicare levy from 2 per cent to 2.5 per cent, to fund the National Disability Insurance Scheme, will now not go ahead due to increased tax revenues.

*        *        *        *        *        *        *

It is just as well that superannuation changes are modest because we still have considerable work to implement last year’s changes!

 

Brian Bendzulla

$200,000 More in Tax Exempt Assets

As the planning duration on lifetime legacy pensions in SMSFs reduces, the investment philosophy tends to become more conservative.  The SMSFs with legacy pensions we have been reviewing currently have quite high cash holdings.  It’s important not to overstate the investment philosophy.  Growth will have a better tax percentage than High Growth, Balanced better than Growth etc.  More conservative strategies with a lower anticipated return have the capital component needed for the funding relatively higher than when more income is expected. 

The second reason why the percentage can increase for 2017/18 is the need to recast anticipated returns to current investment market conditions.  The table below shows the expected returns for a 2016/17 large actuarial certificate supplier and the NetActuary basis for 2017/18

Investment Strategy	2016/17 Supplier	2017/18 NetActuary
Stable	5.5%	3.1%
Conservative	6.0%	4.2%
Balanced	7.0%	5.3%
Growth	7.5%	6.4%
High Growth	8.5%	7.5%

The Government’s MoneySmart calculators have assumed rate of return from 2.6% to 5.2% depending on the chosen investment strategy.  Ten year Federal and State Government yields are 2.5% to 3%.  Share returns as measured by the ASX200 Accumulation Index were 11.8% p.a. over 5 years, 3.6% p.a. over 10 years, 8.6% p.a. over 15 years and 8.2% over 20 years.  Inflation has been sufficiently stable not to have to adjust these nominal rates.  You can see that I have taken assumed best estimate rates of return in the above table on a blend of long term share returns and 10 year bond yields. 

Does this change material of the level of assets that enjoy exemption from assets backing (say) a lifetime pension?  Yes!  For example, a female with a $100,000 lifetime pension, balanced investment strategy, no reversion, 2.5% yearly increases would have a best estimate of assets enjoying income exemption of $1,248,808 on the old basis and $1,452,765 with the new.  That is more than $200,000 extra assets enjoying a tax exemption on income backing the pension. 

On a totally different topic, those funds that have a section 1.06(8) Market Linked Pension (TAP) can usually achieve a better tax outcome by refreshing the Transfer Balance Cap away from the “capped defined benefit income stream” basis that applied just before 01/07/2017 to the purchase price post 30/06/2017 basis.  In some cases, one has to watch out for an excess TBC without the means to commute back to the required $1.6m – but for the rest, the client can have a better tax outcome. 

Time is running out to do this as the factors can be moved adversely e.g. the remaining term reduces by one year as opposed to (with the rounding rule) remaining the same.  Please drop me an email if you haven’t completed fixing up this aspect because I would like to close off these reports in preparation for year end tasks.

 

Brian Bendzulla