Craig Day, head of technical services for Colonial First State, said in a recent technical webinar for the SMSF Association that the proposed tax will be reliant on the difference between a fund’s total super balance at the end of the year and the beginning of the year, so there is a need to put in place controls for things that will distort that earnings outcome.
“That firstly, is contributions. They will increase your end-of-year total super balance and make your earnings larger than they should otherwise be. Alternatively, withdrawals will make them look lower than otherwise should be as they obviously will reduce total superannuation balance at the end of the year,” Day said.
Day added that when thinking about contributions, many advisers and SMSF members may automatically think of non-concessional contributions, but he said this may not always be the case.
“We’re dealing with people with balances up and around $3 million and remember the non-concessional contribution cap for a person with a total super balance over $2 million from 1 July this year will be nil, so we’re not looking at non-concessional contributions for these people,” he said.
“We’re looking at things like downsizer contributions, concessional contributions, small business CGT contributions, and therefore we need to adjust for all of those things.”
He continued that it is also important to think about death benefits and insurance.
“If a member’s spouse passes away and their death benefit reverts to the survivor, then that reverted pension will start counting towards the survivor’s total superannuation balance,” he said.
“That death benefit pension will be treated as a contribution for Division 296 purposes, and the total super balance value of that pension will be stripped back out of the calculation.”
He added that spousal transfers will also be treated as both contributions and withdrawals for the relevant party.
“If I’m doing spouse contribution splitting, or if I’ve got a client that’s gone through a relationship breakdown and they’re splitting part of their superannuation benefits off to their ex-spouse, those amounts will be treated as withdrawals for the member transferring money out of their account and contributions for the member receiving the transfer.”
In relation to insurance proceeds, Day said if a client suffers an incapacity and has a superannuation total permanent disability insurance policy sitting inside their fund that triggers a payout, it will also increase the TSB and look like earnings.
“These rules will treat those insurance proceeds as a contribution. Other amounts such as reserve allocations that count towards the concessional cap will also be treated as a concessional contribution,” he said.
“We expect that this part of the bill will be updated given the recent changes to the tax regulations to instead count certain reserve allocations against the non-concessional cap instead of the concessional cap. If you have a reserve allocation that doesn’t count towards the concession or non-concessional cap, in that situation, those amounts won’t be treated as contributions and will not be deducted back out.”
“Where this becomes very important is where you have clients with legacy pensions who may have decided they are going to commute their complying lifetime pension under these new rules. All the reserves backing that pension will be allowed to be allocated back to the member that was receiving that original income stream, and won’t count towards any caps.
“The problem is, if that is done after the 1 July this year, and if these rules aren’t deferred, the amount of the reserve allocation will be included in the earnings calculation as it’s a reserve allocation that doesn’t count towards any cap and therefore will not be treated as a contribution for the earnings calculation and deducted back out.”
