NetActuary

TTR Strategies Can Be Valuable

I have heard people express the view that transition to retirement strategies are finished. For certain situations, that is not the case.

Consider the person on $90,000 salary in the example below. The gain is $3,334. That is good as a percentage of the $150,000 account balance.

The NetActuary TTR calculator can be found under the new “Technical” tab on our website. It incorporates all the LMITO and LITO aspects of the new tax system.

 

 

Whilst it is true that there is no gain from investment income (no longer tax exempt), a tax free TTR pension income is better than paying marginal tax rates for many people. Another big difference to older TTR strategies is that it works better for people with lower account balances. This is because the minimum 4% drawings uses less of the currently low non-concessional contribution cap available.

If you would like to be proactive with creating a better outcome for your clients, we offer a computation bureau service. The member statement is all that is needed. A multi-year projection is also available. A fee schedule of $0 for those with less than a $2,000 p.a. gain and $33 inclusive of GST for gains above $2,000 would be acceptable.

Please contact brian@netactuary.com.au for more details.

The NetActuary Team

Pre-Christmas Sale!

We have really enjoyed helping administrators and trustees with defined pension actuarial reports this year.  We have our systems and procedures fine tuned and have decided to pass that efficiency on in the form of a permanent reduction of the fee to $275 (inclusive of GST) per report.  However, there is one final period up to the Centrelink end of year cut off to finish any remaining outstanding adequacy and tax-exempt percentage reports for these legacy pensions.  Until the end of December 2018 we offer what we believe is the lowest fee for this service in Australia - $220 inclusive of GST!

There are a number of additional advantages in our service.  In the actuarial report return email we have been commenting upon issues that the client could consider which could enhance the structure and appropriateness of their retirement arrangements.  We need no data forms filled in – simply email us the previous actuarial report and the accounts trial balance.  If you would like to take up this offer, email them through and we will get the reports back to you quickly.

If you would like to discuss any aspect of this, please ‘phone Brian on (03) 6224 1145.

Legacy Pension Spring Clean Sale!!

One of the most worthwhile aspects of issuing the actuarial tax certificates again is not the primary task – but rather being able to highlight areas that are in the client’s best interest to consider.  This is particularly true of legacy pensions.  A significant proportion of these pensions could: achieve a better tax outcome; redirect resources towards producing retirement income not adequacy reserves; plan ahead for neglected reserves; consider updating reserves for new life expectancies etc.  The covering notes to our actuarial reports comment on these broader issue items.

NetActuary would like to be the SMSF legacy pension specialist.  To that aim, we would like to facilitate a “Spring Clean” of legacy pensions with a Springtime sale.  All legacy pension
report requests received before 9^th September, 2018 will enjoy a 50% fee reduction!  Instead of our usual $396 (inclusive of GST), the fee will only be $198 (inclusive of GST).

Instead of filling in the request form, simply forward the most recent actuarial report together with this year’s draft accounts to brian@netactuary.com.au.  If there are any major non-uniform transactions, that would also be useful information.

If you would like to discuss any aspect, please feel most welcome to ‘phone Brian on (03) 6224 1145 for a chat.

The NetActuary Team

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

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 

 

 

 

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