Superannuation changes: Transfer Balance Caps

Transfer Balance Caps

https://www.ato.gov.au/individuals/super/super-changes/New-transfer-balance-cap-for-retirement-phase-accounts/

What is the transfer balance cap?

The Transfer Balance Cap (TBC) limits the total amount that a member can transfer from your accumulation super account(s) to tax-free ‘retirement phase’ accounts to receive your pension income.

The transfer balance cap will start at $1.6m, and will be indexed in line with the consumer price index (CPI), rounded down to the nearest $100,000. The amount of indexation that you are entitled is calculated proportionally based on your available cap space and only the amount of remaining cap space is indexed.

Any retirement phase income streams commenced before 1 July 2017 will be counted towards the transfer balance cap on 1 July 2017. Any new pension accounts (commenced from 1 July 2017) are counted towards the transfer balance cap when they commence.

If the total amount in your pension account(s) grows over time through investment earnings to more than $1.6m, you will not exceed your cap. If the amount in your pension account(s) goes down over time, you cannot ‘top it up’ if you have already used your cap. If you exceed your transfer balance cap, you may have to remove the excess from one or more retirement phase income streams, and pay tax on the notional earnings related to that excess.

Credits to a Transfer Balance Account (TBA):

·         If in receipt of a pension at 30 June 2017, or start a new pension after 30 June 2017

·         If in receipt of a reversionary pension at 30 June 2017, or start to receive a reversionary pension after 30 June 2017

·         Notional earnings that accrue on amounts above the TBC

Debits to a TBA:

·         If you commute a pension to a lump sum – value of the lump sum is debited from the TBA

·         If you make contribution under structured settlement or orders for personal injury rules

·         If a loss to pension capital occurs that is a result of fraud or dishonestly and an individual has been convicted

·         If there is a payment split that reduced pension capital

·         Clawback of certain contributions under bankruptcy

The following are not debits:

·        Pension payments

·        Investment losses

For Example:

·        Alice has a TRIS on 1 July 2017 paid from an SNSF - $1m

·        On 1 August 2017 Alice retires and the TRIS converts to an ABP - $950,000 on 1 August 2017

·        On 1 February 2018, Alice’s ABP (by this stage $600,000) is subject to a payment split

·        What does this mean for Alice’s TBA?

o   On 1 July 2017

o   On 1 August 2017 + 950,000 (CR)

o   On 1 February 2018 – 500,000 (DR)

o   On 1 May 2018 – 600,000 (DR)

·        So Alice’s TBA is now negative $150,000

·        This means Alice can commence a pension with $1.75m without exceeding his transfer balance cap

Superannuation changes: Non-concessional contributions

Non-concessional Contributions

https://www.ato.gov.au/Individuals/Super/Super-changes/Change-to-non-concessional-contributions-cap/

One of the changes to the Australian superannuation system that commenced on 1 July 2017 was the modification of non-concessional contribution caps.

What are non-concessional contributions?

Non-concessional contributions are generally contributions made into your SMSF that are not included in the SMSF’s assessable income. The most common type is personal contributions made by the member for which no income tax deduction is claimed.

NCCs also include excess concessional contributions for the financial year. They do not include super co-contributions, structured settlements and orders for personal injury or capital gains tax (CGT) related payments that the member has validly elected to exclude from their non-concessional contributions.

If you have more than one super fund, all non-concessional contributions made to all of your funds are added together and counted towards the non-concessional contributions cap.

How has the non-concessional contributions cap changed?

From 1 July 2017, the annual non-concessional contribution cap reduced from $180.000 to $100,000 per year and this remains available to those aged between 65 and 74 years old if they meet the ‘work test’. (This test requires you to be gainfully employed, working at least 40 hours during a consecutive 30 day period each financial year in which the contributions are made.)

The non-concessional contributions cap is set at four times the concessional contributions cap ($25,000 for 2017-18) and will increase in line with the indexation of this.

Effective 1 July 2017, your non-concessional cap is nil for a financial year if you have a total superannuation balance greater than or equal to the general transfer balance cap ($1.6m in 2017-18) at the end of 30 June of the previous financial year. Total superannuation balance is made up of the balance of all your super and retirement saving accounts.  As a result, if you make non-concessional contributions in that year, they are excess non-concessional contributions.

What is the ‘bring forward’ arrangement?

If under the age of 65, you may make non-concessional contributions of up to three times the annual non-concessional contributions cap in a single year by bringing forward your non-concessional contributions cap for a two or three year period. That is, when you make contributions greater than the annual cap, you automatically gain access to future year caps.

From 1 July 2017, the non-concessional contributions cap amount that you are able to bring forward will depend on your total superannuation balance at the end of 30 June of the previous financial year. To access the non-concessional bring-forward arrangement, you must be under 65 years of age for one day during the triggering year (the first year) and you must have a total superannuation balance of less than $1.5m at the end of 30 June 2017.

2017-18 bring forward period:

Total superannuation balance on 30 June 2017	Non-concessional contributions cap for the first year	Bring forward period
Less than $1.4 million	$300,000	3 years
$1.4 million to less than $1.5 million	$200,000	2 years
$1.5 million to less than $1.6 million	$100,000	No bring forward period, general non-concessional cap applies
$1.6 million or more	Nil	N/A

Superannuation Changes: Concessional Contribution Caps

Concessional Contribution Caps

https://www.ato.gov.au/Individuals/Super/Super-changes/Change-to-concessional-contributions-cap/

One of the many changes to the Australian superannuation system that commenced on 1 July 2017 was the modification of concessional contribution caps.

What is a concessional contribution?

Concessional Contributions are contributions made into your self-managed super fund (SMSF) that are included in that SMSF’s assessable income. Such contributions are taxed in your SMSF at a ‘concessional’ rate of 15%, often referred to as ‘contributions tax’. The most common types of concessional contributions are employer contributions, such as super guarantee and salary sacrifice contributions. They may also include personal contributions made by the member for which the member claims an income tax deduction.

What is a contribution cap?

Contribution caps limit the amount that can be contributed for a member each financial year. Caps are indexed annually and a member whose total contributions in a year exceed the contribution caps may be liable for additional tax on the excess contributions.

What are the changes?

As of 1 July 2017, the 10% maximum earnings condition for personal super contributions deductions no longer applies for the 2017-18 and future financial years.

The concessional contributions cap was previously $35,000 for people 49 years and older at the end of the previous financial year and $30,000 for everyone else. Effective 1 July 2017, the concessional contributions cap is $25,000 for everyone, regardless of age. This new cap will be indexed in line with average weekly ordinary time earnings (AWOTE), and rounded down to the nearest $2,500.

Furthermore, from 1 July 2018, you are able to ‘carry-forward’ any unused amount of your concessional contributions cap. This gives you the ability to access unused concessional contributions on a rolling basis for five years, however amounts carried forward that are not used after five years will expire. 2019-20 is the first year that you can access unused concessional contributions. There is also a provision that you can only carry-forward your unused concessional contribution cap if your total superannuation balance is less than $500,000 at the end of 30 June of the previous financial year. 

Superannuation changes: Safe Harbour Guidelines for LRBAs

Safe Harbour Guidelines for Related Party Borrowings

https://www.ato.gov.au/law/view.htm?DocID=COG/PCG20165/NAT/ATO/00001

The ATO has released a practical compliance guideline (PCG) for 2016/15 relating to the ‘safe harbour’ terms on which SMSF trustees may structure their Limited Recourse Borrowing Arrangements (LRBAs). For income tax compliance purposes the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply purely because of the terms of the borrowing arrangement.

Safe Harbour 1: The asset acquired is real property

Safe Harbour 1 applies when an SMSF uses an LRBA to acquire real property or to refinance a borrowing used to acquire real property, whether that property is residential or commercial premises (including property used for primary production activities).

The ATO accepts that an LRBA used to acquire real property, or to refinance a borrowing used to acquire real property is consistent with an arm’s length dealing if the terms of the borrowing are established and maintained throughout the LRBA as set out below.

Interest Rate	RBA Indicator Rates for banks providing standard variable housing loans for investors (5.80% for the 2017-2018 year)
Fixed/Variable	Interest rate may be variable or fixed ·        Variable – uses the applicable rate (above) for each year of the LRBA ·        Fixed – trustees may choose to fix the rate at the commencement of the arrangement for a specified period, up to a maximum of 5 years The 2017-18 rate of 5.80% may be used for LRBAs in existence on publication of these guidelines, if the total period for which the interest rate is fixed does not exceed 5 years. For the 2017-18 and later years, the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year).
Term of loan	Variable interest rate loan (original) – 15 year maximum loan term (for both residential and commercial) Variable interest rate loan (re-financing) – maximum loan term is 15 years less the duration(s) of any previous loan(s) relating to the asset (for both residential and commercial) Fixed interest rate loan – a new LRBA commencing after publication of these guidelines may involve a loan with a fixed interest rate set at the beginning of the arrangement. The rate may be fixed for a maximum period of 5 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years. For an LRBA in existence on publication of these guidelines may involve a loan with a fixed interest rate set at the beginning of the arrangement. The rate may be fixed for a maximum period of 5 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years. For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 5.75% as their fixed rate, provided that the total fixed-rate period does not exceed 5 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan cannot exceed 15 years.
Loan to Market Value Ratio	Maximum 70% LVR for both commercial and residential property If more than one loan is taken out to acquire (or refinance) the asset, the total amount of all those loans must not exceed 70% LVR. The market value of the asset is to be established when the loan (original or re-financing) is entered into. For an LRBA in existence on publication of these guidelines, the trustees may use the market value of the asset at 1 July 2015.
Security	A registered mortgage over the property is required
Personal guarantee	Not required
Nature & frequency of repayments	Each repayment is of both principal and interest Repayments are monthly
Loan agreement	A written and executed loan agreement is required

Safe Harbour 2: The asset acquired is a collection of stock exchange listed shares or units

Safe Harbour 2 applies when an SMSF uses an LRBA to acquire a collection of shares in a stock exchange listed company or to acquire units in a stock exchange listed unit trust. Safe Harbour 2 also applies when an SMSF uses an LRBA to refinance a borrowing used to acquire such a collection.

The ATO accepts that an LRBA used to acquire or to refinance a borrowing used to acquire stock exchange listed shares or stock exchange listed units in a unit trust is consistent with an arm’s length dealing if the terms of the borrowing are established and maintained throughout the LRBA, as set out below.

Interest Rate	Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors plus 2%. (2017-18 year = 5.80% + 2% = 7.80%)
Fixed / variable	Interest rate may be variable or fixed ·        Variable – uses the applicable rate (as set out above) for each year of the LRBA ·        Fixed – trustees may choose to fix the rate at the commencement of the arrangement for a specified period, up to a maximum of 3 years. The fixed rate is the rate for May plus 2% (the rate for the May before the relevant financial year) The 2017-18 rate of 7.80% may be used for LRBAs in existence on publication of these guidelines, if the total period for which the interest rate is fixed does not exceed 3 years.
Term of loan	Variable interest rate loan (original) – 7 year maximum loan term Variable interest rate loan (re-financing0 – maximum loan term is 7 years less the duration(s) of any previous loan(s) relating to the collection of assets Fixed interest rate loan – a new LRBA commencing after publication of these guidelines may involve a loan that has a fixed interest rate set at the beginning of the arrangement. The rate may be fixed up to for a maximum of 3 years, and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 7 years. For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 7.75% as their fixed rate, provided that the total period of the fixed rate does not exceed 3 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan cannot exceed 7 years.
LVR	Maximum 50% LVR If more than one loan is taken out to acquire (or refinance) the collection of assets, the total amount of all those loans must not exceed 50% LVR. The market value of the collection of assets is to be established when the loan (original or re-financing) is entered into. For an LRBA in existence on publication of these guidelines, the trustees may use the market value of the asset at 1 July 2015.
Security	A registered charge/mortgage or similar security (that provides security for loans for such assets)
Personal guarantee	Not required
Nature & frequency of repayments	Each repayment is of both principal and interest Repayments are monthly
Loan agreement	A written and executed loan agreement is required

ATO’s compliance approach for LRBAs established before 30 June 2016

The ATO recognises the effects of the NALI provisions and the importance of preserving assets held by an SMSF. Given this, they will not select an SMSF for an income tax review for the 2014-15 year or earlier years purely because the SMSF has entered into an LRBA. However, this is conditional on the SMSF trustee ensuring that any LRBA that their fund has is on terms consistent with an arm’s length dealing by 31 January 2017 or, alternatively, is brought to an end by 31 January 2017.

In addition, payments of principal and interest must be made under LRBA terms consistent with an arm’s length dealing. SMSF trustees who are concerned about their ability to make the required payments on commercial terms before 31 January 2017 can contact the ATO to discuss their particular circumstances.

For whom Debelle tolls?

www.moivepostershop.com

Every now and then something jumps out from the noise of the 24 hour media cycle. This month, we had one of those moments.

Dr Guy Debelle is Assistant Governor (financial markets) of the Reserve Bank of Australia. Essentially, his speech on Wednesday 14 October, presaged a "violent" sell-off in the markets. "Violent" because liquidity is less than is commonly thought. He indicated that people think "they can get out in time" and observed "History tells us that this is generally not a successful strategy. The exits tend to get jammed unexpectedly and rapidly" and "one should never underestimate the role of mechanical rules or mandates" in driving market behaviour. 

Debelle said traders appear to be underpricing risks around Middle East and Eastern European tensions, potential changes in US interest rates, policy uncertainty in Europe and Japan and rising concerns about China's economic health. Why did he make this speech? What is the market data telling us?

The Australian stock market has had a dip, but is recovering (S&P/ASX200: from 5658 on 2 September to 5155 on 10 October, and back up to around 5,450 on 29 October). The US S&P500 has been in a similar pattern during October: down 148 points since 18 September and rebounding 6.6%,  now back to where the index started the month. The VIX (Chicago Board Options Exchange SPX Volatility Index): hit 26.25 in mid-October, its highest point all year up from 10.32 at the start of July. (However, note significantly lower than Aug 2011 when it was at a level of around 43). US 10 year bond yield dropped below 2 on 15 October, falling the most since 2009 and Treasury trading volume reached the highest on record. Bloomberg reports this is being interpreted that traders are dropping bets that the Federal Reserve will raise interest rates in 2015.  Is it due to the weakness in data, geopolitical risk, a turn in consumer sentiment and consumption which is leading to increased volatility? Is it the reawakening of the European debt crisis as Greece, Portugal, Ireland and Italy experience surges in their 10 year bond yields?  Will Mario Draghi and ECB do "whatever it takes"? We can't be certain.  

Alan Kohler wrote on Business Spectator, 15 October about Debelle's speech.

...for five years Europe has been lurching from crisis to despair, but markets have been untroubled beyond annual, short-lived corrections (apart from last year) because of what the Fed was doing. America’s vigour trumped Europe’s pathos.
But now Europe is slipping back into recession and investors are beginning to price in the prospect of long-term stagnation and deflation. That’s what last week’s action was about.
If the ECB doesn’t respond to this by launching QE, and Germany continues to force fiscal austerity on the rest of the Europe, markets will eventually tank and Guy Debelle will be proved right. 

To return to Debelle:

One should always be careful of looking for too much rationality in trying to understand market dynamics.

On the flip side, Ian Narev, CEO of the Commonwealth Bank of Australia,on 15 October gave a list of positives, including:

living in an economy with 22 years of consecutive growth (even though that can foster complacency), the fact Australia still has GDP growth, household savings rates having strengthened, business balance sheets looking good, business credit quality looking good and a government that understands the risks of excessive borrowing. 

We also have state and federal governments committed to spending on infrastructure and a central bank that manages monetary policy "exceptionally well", he says. 

Better than exepected company earnings and signs of a recovering economy in the US have led to good consumer confidence numbers at the end of this month.  Globally, however, signs of economic slowdown and low growth abound.  Sage Advisers continues to keep a close eye on all market indicators and we continually and actively keep clients' risk profiles in mind when advising on their exposures and investment allocations.

SG changes - on the never never?

Fairfax, 4 September 2014

The government has announced it will defer the proposed increases in the compulsory superannuation guarantee amounts to be paid in Australia.

What are the changes?

	Rate under new deal (%)	Previous law (%)
2014/2015	9.5	9.5
2015/2016	9.5	10.0
2016/2017	9.5	10.5
2017/2018	9.5	11.0
2018/2019	9.5	11.5
2019/2020	9.5	12.0
2020/2021	9.5	12.0
2021/2022	10.0	12.0
2022/2023	10.5	12.0
2023/2024	11.0	12.0
2024/2025	11.5	12.0
2025/2026	12.0	12.0

Until yesterday, compulsory contributions to superannuation were due to increase from July next year; under the new deal, they will remain steady until 2021.

This will improve the budget position over the coming decade, but in future may lead to lower super balances on retirement for individuals, which in turn may put pressure on the public purse to fund aged pensions. Keating calls it "wilful sabotage of the nation's savings" but PM Abbott says the policy change means "keeping more money in workers' pockets".

The Low Income Superannuation Contribution (LISC) will now be retained until 2017. 

It is to be hoped that the Murray Financial System Inquiry will recommend ways in which efficiencies can be introduced into the current system (such as lower fees for industry funds) that would mean less of members' funds being eaten up by fees and charges.

There has been no change mooted to date with specific reference to SMSFs but it is possible that tax concessions for higher income earners (who more frequently use SMSFs) may become a target for the government to make budget savings coming into the next election. Discourse on this topic started prior to the last election but was quelled by ALP senior figures such as Bill Kelty see here and Nick Sherry here.  

It will be interesting to see the Government's interpretation of its 2013 election promise:

To help Australians have confidence again in superannuation we pledge not to make any unexpected detrimental changes to superannuation.