ATO addresses common queries with the super reforms

The Australian Taxation Office (ATO) has sought to provide certainty and clear advice and guidance on the Commissioner’s interpretation of the law.

To help clarify the requirements of trustees and address common queries, we have already released a number of resources.

We would like to highlight the areas we believe will be of particular interest to SMSF members and trustees, but please remember you can always visit our website for more information on the super changes.

Common queries include:

Super members needed to take action to ensure they didn’t exceed the transfer balance cap by 1 July by commuting some or all of their income streams. However, what if you don’t know the value of the income stream or streams you are receiving from your SMSF and what can you do?

Members who are over their cap on 1 July 2017 by $100,000 or less can get transitional relief if they remove the excess within six months by 31 December 2017.

Getting the relief means you will not have to pay excess transfer balance tax. You should note that this only applies to super income streams existing on or before 30 June 2017.

Practical concerns about the commutation of death benefit income streams leading up to 1 July

The ATO has recently issued PCG 2017/6 which outlines our compliance approach. It advises that the ATO will not review whether an SMSF has satisfied the requirement to cash out a death benefit where the rollover happened before 1 July 2017. This means the ATO will not review instances under the existing law where:

• An income stream has been commuted by a surviving spouse and placed back into accumulation phase, provided that at the time this occurred the income stream had ceased to be a death benefit income stream; and
• The super lump sum from the commutation is a member benefit for income tax purposes.

Please note this approach by the ATO ceased on 1 July, when the new law came into effect.

Under the provisions, it is clear that a death benefit income stream cannot be commuted and placed back into an accumulation phase interest. It means that death benefits are not intended to be, and cannot be retained, in the superannuation system. They are required to be paid out to eligible dependant beneficiaries under the new law either as an income stream or a lump sum.

Media attention on the new reporting requirements for SMSFs going forward and the shift to what has been called ‘event-based reporting’

Most SMSFs will not need to report anything additional beyond the current SMSF annual return reporting requirements until 1 July 2018. There are some specific events impacting on a person’s transfer balance account that are required by law to be reported within a particular time frame. For example, a fund must report its compliance with a commutation authority to the commissioner within 60 days.

The ATO intends to introduce an events-based reporting model for SMSFs. SMSFs will be supported to transition to events-based reporting for transfer balance cap purposes in 2018-19.

In addition (recognising the practicalities around SMSF asset valuations etc.), an administrative concession will be allowed for SMSFs to report the commencement value of an income stream (pension) 28 days after the end of the relevant quarter. This will be an ongoing concession in 2018-19 and beyond.

Media suggestions that you may not need to obtain an actuarial certificate to claim ECPI using the proportionate (unsegregated) method if you are only using this method for a short amount of time.

I want to stress that actuarial certificates are required to claim ECPI for income tax purposes for any period that the SMSF uses the proportionate method.

With an increasing number of SMSFs likely to be switching to the proportionate method in order to comply with the super changes, this topic has been of high interest.

Many of these funds will only be using this method for a very short period of time during the 2016-17 financial year. This requirement for an actuarial certificate remains irrespective of this short duration.

Based on this, we suggest trustees should determine if the fund has any income in the relevant period and if it does, you should consider whether the cost of obtaining a certificate outweighs the benefit of exempting part of that period’s income.

A trustee may decide not to claim ECPI on that income, in which case they will not be required to obtain an actuarial certificate. 

However, I can confirm that the ATO will not allocate compliance resources to review actuarial calculations where an actuarial certificate obtained by an SMSF is for the full 2016-17 year, instead of the shorter period within the year that the SMSF is using the proportionate method.

Provided that the actuarial certificate includes the period of the year the SMSF is unsegregated, the trustee can rely on the actuarial certificate.

The importance of SMSFs having accurate valuations of each member’s total superannuation balance.

This is an important step in determining members’ ability to make contributions and if the SMSF has to use the proportionate method to calculate ECPI.

The ATO is now processing requests from funds for their members’ total superannuation balances, but calculations on the amount are based on the data obtained from super funds reporting to us. What this means is that this information may not be up-to-date, as funds may not have reported to us since their last lodgement. For the most current information, funds will need to be contacted directly.

It is important for SMSF to remember the requirements for accessing transitional CGT relief

SMSFs are required to make an election to use transitional CGT relief before the fund is required to lodge their 2016-17 tax return. However, this does not remove the requirement that the relief will only apply to events that happened before 1 July 2017.

The relief is available to prepare for the new $1.6 million transfer balance cap or the removal of the tax exemption for transition to retirement income streams from 1 July 2017.

You can rely on the valuation guidelines for self-managed superannuation funds available on our website. Ensure your valuations are consistent between those used for transfer balance cap and for CGT relief purposes.

Finally, you might have seen it suggested that you can get around the new restriction on using the segregated method to calculate an SMSF’s exempt current pension income by setting up a second SMSF

If you are considering strategies such as this, we strongly encourage you to seek independent professional advice and/or approach the ATO for advice beforehand.

While the establishment of a second SMSF by itself does not give rise to compliance issues, we will further examine the circumstances of those cases where it appears that the establishment of a second SMSF has been a precursor to subsequent behaviour intended to manipulate tax outcomes. Such behaviour could include, for example, switching each of the respective funds between accumulation and retirement phase.

For more information, visit ato.gov.au

We recommend individuals look at the products available on our website which are designed to provide support and help clarify the changes. This information includes our range of guidance notes, webinars, law companion guidelines along with frequently asked questions.

James O'Halloran, deputy commissioner superannuation, ATO