NetActuary

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

 

 

Three QROPS Admin Tasks

Recently it has been observed that to carry out the management of an SMSF one needs to know more about the client.  The Total Super Balance and its ramifications for non-concessional contributions is one such example.  In a similar vein – and with even more importance – the same applies if the client has (or previously had) UK pension monies.  There are three examples where extra information is highly desirable.

Previously Exempt Fund Earnings

Where a client rolls monies over from one overseas superannuation fund to another, the applicable fund earnings is calculated.  However, these earnings are not taken into account, nor tax paid, until they are eventually transferred into Australia.  They are “previously exempt fund earnings”.  The start date is also reset for the overseas fund.  This information should be noted on the client file.  It can become vastly more complex where there are multiple or partial rollovers.  A new form has been added to the NetActuary website front page to request assistance with this aspect.

 
Tidy Up Outstanding Monies

Many clients with QROPS monies in their SMSF were forced by Australian non-concessional superannuation caps to leave monies in the UK.  This is a drip feed (or staggered) strategy.  A more powerful option may now be available.  The abolishment of the fund cap for a single transaction from 01/07/2017 and the refund of excess non-concessional contributions may open up a new strategy.  From a UK perspective, any amount can be a UK QROPS transfer.  I have seen an HMRC letter that confirms a member older than 55 is permitted, under extended flexibility rules, to take as much of their benefit as they wish without that amount counting as an unauthorized payment under UK tax rules.  This applies irrespective of how long they have been a non-resident.  They still need to report the payment in the normal way on form APSS253.

From an Australian perspective, the applicable fund earnings don’t count towards either contribution cap and can be of any size.  The excess non-concessional contribution can be withdrawn.  There is a small notional earnings deemed upon these excess contributions upon which tax is paid.  The excess non-concessional could be recontributed subject to the normal requirements at a later date – or to a spouse.

 
25% Tax Charge on QROPS Transfers

From QROPS transfers requested on or after 09/03/2017 a 25% tax charge applies unless one of certain exempt conditions are met.  These are: 

1. Resident in the same country in which the QROPS receiving the transfer is established.
   
2. Resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the
   EEA.
   
3. The QROPS is set up by an international organization for the purpose of providing benefits for or in respect of past service as an employee of that international organization.
   
4. The QROPS is an overseas public service pension scheme and the client is an employee of an employer that participates in the scheme.
   
5. The QROPS is an occupational pension scheme and the client is an employee of a sponsoring employer under the scheme.

The sting in the tail is that if the client’s circumstances change so that one of the above exemptions ceases to apply to them within 5 complete tax years from the date of transfer, they may be liable for the tax charges.  It would be worthwhile to note this date on the client file.

Admin continues to become more technical and complex.  NetActuary is actively assisting to ensure good tax outcomes for ECPI, but is willing to assist in other areas.  We can fund this assistance if your firm uses NetActuary for its actuarial certificates from 1^st July this year.

 

Brian Bendzulla

Time to Throw in the Towel?

In a recent blog I showed how a small procedural implementation difference could result in greatly different tax outcomes for the client.  At the same time, I wondered how automated actuarial certificate systems would solve this dilemma appropriately.  The answer (upon additional research) is worse than I expected – it will not.  The systems will simply pick up whatever has been input by the administrator. 

Think about the climate we are in at the moment with duty of care to clients.  Consider the banking Royal Commission and the emphasis on the need to act in the client’s best interest.  This is not the time to throw in the towel on administration – but it certainly is the time to review whether your services and approach are up to scratch from a proactive stance.

NetActuary can help.  In past years we lead the innovation to reduce costs and turn around times on actuarial ECPI certificates.  NetActuary now very clearly states that that cycle has come to an end and what is needed now involves more judgement.  Bankers are going to have to assess whether they should be lending the client money.  SMSF administrators are going to have to consider whether there are items they need to draw to a client’s attention. 

NetActuary’s different approach entails getting involved before the end of the financial year.  I thank those firms – both small and large – that have been sending past certificates and accounts to us for review.  We are working through them and dividing them into three groups: those (especially legacy pensions) that need remedial attention immediately; those that have factors on an optimisation watch list; and those that look straight forward. 

The issues are becoming clearer by the day.  The format of the report can be for the whole year with identified segregated assets left out.    There is a need to have knowledge (for admin purposes) of a client’s super outside the SMSF.  The allocation of earnings to segregated and non-segregated is problematic.  It looks like cash receipt allocation in accrual accounts. 

The approach needed to accommodate the new ATO view has more clarity. 

Please give me a call on (03) 6224 1145 if you have not yet tackled the new requirements.

 

Brian Bendzulla

Delinquent Legacy Pensions

NetActuary has a particular interest in legacy pensions. While SMSFs have not been able to directly issue defined pensions since 01/01/2006, quite a few of this type of pension still exist. We have (in the past few weeks) been assisting administrators get ready for a new level of support on actuarial certificates from 01/07/2018. What is emerging with legacy pensions is quite disturbing! Let me share with you one of many types of problems we are seeing. This example is cropping up too often.

A surprising number of both complying and flexi lifetime pensions have a reversion to an adult child or children. The Superannuation Industry (Supervision) Regulations 1994 now require a superannuation death benefit to be paid as a lump sum to a non-dependent. I wonder what the ATO’s view might be on claiming Exempt Current Pension Income on a benefit that can’t be paid. Even if the defined pension is a Section 1.06(6) flexi life, a problem exists. In an actual example today (rounded for confidentiality reasons) the actuarial certificate values (for tax exemption purposes) the reversionary pension as $3.9m. However, the maximum commuted value is $1.8m.

In a grey area like this, I don’t know how far the boundaries can be pushed. However, I strongly recommend taking the simple, sound alternative route of fundamentally fixing the issue. In many cases the Transfer Balance Cap forces one on that path anyway.

Please, look at your legacy pension clients! This (and other) legacy pension issues need to be addressed now – NOT at 30th June.

For more information, please call Brian on (03) 6224 1145 or email me the last legacy pension actuarial certificate to brian@netactuary.com.au and I will review them for no cost other than the opportunity to undertake the year end adequacy/tax exempt percentage task.

Brian Bendzulla

New SMSF Property Investment Calculator

Every time the government changes the rules, there is a last minute rush by people to enjoy the grandfathered option.  Already there are signs this is happening with the Limited Recourse Borrowing Arrangements (LRBA) changes from 1^st July, 2018.  To be ready for this, NetActuary has a new enhanced SMSF Potential Property Investment Analysis Calculator.  It can also be used to evaluate existing direct property investments.

The calculator projects the likely level of cashflow support that will be needed.  This takes increased importance as the new rules may reduce or eliminate non-concessional contributions.  In many instances, this may not be a major factor if the loan is small and SG contributions will cover any shortfall.

The calculator is useful to work out rates of return to various possible sale points.  The yield will increase as a larger amortization of purchase/sale costs occur.  The “years to pension mode” is also relevant.

The analysis covers many other aspects – including whether gearing is positive or negative.  For principle and interest loans, the level of gearing reduces as the outstanding debt runs down.  A sensitivity analysis is also highly desirable.

Whilst the numbers are useful, there is still a considerable judgement about whether it fits into the diversification, liquidity and risk tolerance aspects of a well constructed portfolio.

A copy of the calculator can be downloaded at www.netactuary.com.au/Toolkits/Property/PropertyOrder.aspx for a cost of only $132 inclusive of GST.

We can also save you time and effort by preparing a SMSF property analysis para-plan for $440 inclusive of GST.

 

Brian Bendzulla