IOOF TechConnect
Technical bulletin: Winter 2014
Employment termination payments: taking the complexity out of the equation 1
Deeming and account based pensions
5
Self-managed superannuation fund exit strategies
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Legislation update – June 2014
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Employment termination payments:
taking the complexity out of the equation
By Meg Rennie, Technical Services Manager
Employment termination payments (ETPs) can be a complicated area of advice. Providing prompt
and accurate advice to clients during a time of uncertainty is critical. At this significant life event,
it’s essential to review the client’s retirement planning and take the complexity out of the equation.
This article will focus on employment termination payments
which can be classed as either life benefit payments
(payments to a living person) or death benefit payments
(payments on behalf of a deceased employee). It is uncommon
for clients to receive an ETP which is a death benefit payment;
consequently, this article focuses on life benefit ETPs only.
What is included within an ETP?
The following payments do not constitute an ETP and will
be taxed differently:
• Unused long service and annual leave.
• Capital payments of compensation for personal injury.
• Payments for restraint of trade.
• Superannuation benefits.
• Foreign termination payments.
The following payments constitute an ETP:
• Salary for work already completed.
• Gratuity or golden handshake.
What is a genuine redundancy?
• Payments for unused sick leave or unused rostered days off.
• Severance payments.
• Compensation payments for wrongful dismissal.
• Payments in lieu of notice.
According to s.83-175 of the Income Tax Assessment Act 1997
(ITAA), a genuine redundancy payment is the amount of
the ETP that exceeds the amount the individual might be
expected to receive if they terminated employment voluntarily.
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IOOF | TechConnect: Technical bulletin Winter 2014
In order for the ETP to be classified as a genuine redundancy,
all of the following conditions must be satisfied:
• The individual must have been dismissed before age 65,
or if employment would have terminated upon reaching a
particular age (eg normal retirement age 65) or completing
a period of service – before that day.
• Payment must be no more than what would have been
paid in an arms-length situation
• There is no arrangement entered into between the
employer and the employee or the employer and another
entity to employ the dismissed employee after the
termination.
• The payment is not in lieu of superannuation benefits.
What part of the ETP is taxable?
First, calculate the tax-free portion of the ETP. This could result
from any combination of the following:
• Genuine redundancy calculation based on $4,758 for each
completed year of service plus $9,514 (based on 2014/15
financial year figures).
• Invalidity segment1 of ETP.
• Pre-July 1983 segment2 of ETP.
The rules distinguish between ‘excluded ETPs’ and
‘non-excluded ETPs’. Excluded ETPs continue to have
pre-July 2012 taxation treatment and apply to life benefit
payments made on:
• genuine redundancy (or those that would be but for
the individual’s age)
• invalidity
• compensation due to harassment, discrimination
or unfair dismissal.
Excluded ETPs are taxed on the taxable component
according to the table below (for 2014/15 financial year):
Recipient’s age
Taxable portion
of ETP
Tax rate
Under preservation age
(currently age 55) on
last day of financial year
Under $185,000
Up to 32%3
Balance
49% 4
Under $185,000
Up to 17%3
Balance
49% 4
At preservation age
or over on last day of
financial year
The tax treatment of non-excluded payments is summarised
in the following chart:
The remaining portion of the ETP is the taxable component.
What are the rules from 1 July 2012?
Before 1 July 2012, a tax offset was available to reduce the
tax payable on certain ETPs. The offset reduces tax payable
on ETPs to 17 per cent3 or 32 per cent3 depending on the
age of the recipient. This offset applies to amounts up to the
ETP cap which is $185,000 in the 2014/15 financial year and
is indexed annually.
The Government considered that this offset provided more
benefits to high income earners who received large ETPs
and were less likely to experience hardship. To address this,
the Government has limited the availability of the offset by
introducing an additional whole-of-income cap for ETPs.
The $180,000 (non-indexed) whole-of-income cap applies
to the total income. Total income is defined as the sum of:
• the individual’s taxable income (but not less than zero)
in the year they receive the ETP, and
• the ETP.
This whole-of-income cap works in conjunction with the ETP
cap. For the 2014/15 financial year, the ETP cap will be $185,000.
$180,000
Taxable part
of ETP
Taxed at 49%3
Use remaining whole-of-income cap
Salary
The whole-of-income cap applies only to non-excluded
payments. Where the whole-of-income cap applies to the ETP,
the cap applicable will be the lesser of:
• the ETP cap ($185,000), or
• the amount worked out under the whole-of-income cap.
For clients with total income greater than $180,000 (including
the ETP), the amount of the ETP above $180,000 will be
taxed at 49 per cent4. That part of the ETP that is less than
the $180,000 level may be taxed concessionally depending
on the individual’s remaining whole-of-income cap.
Tip: In most cases, this means that the whole-of-income
cap will always be lower than the ETP cap because
$180,000 is less than $185,000. However, if the ETP cap
has been partially used in a previous year with the same
employer then the ETP cap may be lower.
1 s.82-150 of ITAA 1997
2 s.82-155 of ITAA 1997
3 Including the 2% Medicare levy
4 Including the 2% Temporary Budget repair levy and 2% Medicare levy
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More information on the ETP cap
The ETP cap is reduced by:
• the amount of any earlier life benefit termination payment
received in the same financial year
• any ETP received in an earlier year in relation to the same
termination.
Clients may have separate ETP caps for each employer,
assuming the termination payments are received in different
financial years and are not related to the same termination.
Tips:
• The ETP cap is a separate cap from the low rate cap
which is used for lump sum superannuation benefits.
(For example, clients who are aged between 55 to
59, and who make a lump sum withdrawal from
superannuation upon retirement are using up their low
rate cap). Both caps are indexed in the same manner
on an annual basis.
• The whole-of-income cap is refreshed each year.
This means it can be used twice or more if necessary.
Case study: Adam receives multiple
payments from the same employer
Adam, age 60, ceases his employment due to retirement in
December 2014. His taxable income is $100,000 for the 2014/15
financial year and his employer provides an ex-gratia payment
of $100,000. The ex-gratia payment is a taxable ETP and it is
paid in two instalments:
Adam’s ETP was a non-excluded ETP, so the lesser of the two
caps applies as follows:
• His whole-of-income cap is reduced from $180,000
to $80,000 because Adam had earned $100,000 in that
income year.
• Adam’s calculated whole-of-income cap of $80,000 is less
than his ETP cap of $185,000 (for the 2014/15 financial year)
so the calculated whole of income cap is applied to his ETP.
The taxation treatment of the instalments is outlined
as follows:
• The first instalment of $40,000 is less than his calculated
whole-of-income cap of $80,000. This instalment of the
taxable ETP will be taxed at the concessional tax rate of
17 per cent (since Adam has reached his preservation age).
• The first $40,000 of the second instalment brings the total
taxable amounts up to $180,000 being the whole-of-income
cap. Therefore, this $40,000 is taxed at 17 per cent.
The balance of the second instalment above the whole
of income cap is then taxed at 49 per cent.
Case study: Linda negatively gears an
investment property
Linda (age 58) retires on 1 July 2014 with an ex-gratia payment
of $220,000. She has negative income of $10,000 for the
2014/15 financial year due to her investment properties. Since
she retired on 1 July 2014, she will not receive any employment
income for the 2014/15 financial year.
Questions
• $40,000 paid in December 2014
a Is the above payment an excluded ETP or a
non-excluded ETP?
• $60,000 paid in June 2015.
b How much is the taxable portion?
Questions
c How is the taxable portion taxed?
a Is the above payment an excluded ETP or a
non-excluded ETP?
Solutions
b How much is the taxable portion?
c How is the taxable portion taxed?
b The whole payment of $220,000 represents taxable
component.
Solutions
a This payment relates to retirement and is therefore classed
as a non-excluded payment.
b The total payment of $100,000 represents the taxable
component.
c These payments are taxed as outlined in the below:
$200,000
$180,000
$100,000
$20,000 taxed at 49% from the second instalment
Amount within remaining whole-of-income cap of
$40,000 from the second instalment: 17% tax rate3
Amount within remaining whole-of-income cap of
$40,000 from the first instalment: 17% tax rate3
4
$60,000 ETP
$40,000 ETP
a This payment relates to an ex-gratia payment and is
therefore classed as a non-excluded ETP.
c This payment is taxed according to the chart below:
Linda’s total income calculation has interesting twist.
The $10,000 loss is taken to be zero income and will not
reduce the amount of non-excluded ETP.
$220,000
Taxed at 49% 4
$180,000
Part of ETP
up to cap
Taxed at 17%3
The remaining
whole-of-income cap applies
Salary
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Since Linda’s ETP was a non-excluded ETP, the lesser of the two
caps applies as follows:
• Her whole-of-income cap remains at $180,000 because
the $10,000 loss is taken to be zero income.
• Linda’s calculated whole-of-income cap of $180,000 is less
than her ETP cap of $185,000; therefore, the calculated
whole-of-income cap is applied to her ETP.
As Linda is over preservation age, the first $180,000 of the
non-excluded ETP is within the $180,000 whole of income
cap. This will ensure that the $180,000 is concessionally taxed
at 17.0 per cent3. The balance of the payment is above the
$180,000 whole of income cap and is taxed at 49 per cent4.
Case study: Glen receives a mixture
of payments including a genuine
redundancy
Glen (age 66), is made genuinely redundant in June 2014
and receives an immediate termination gratuity of $50,000.
This was a set amount that he would have received under
his contract when he left his job for any reason (including
voluntary resignation).
In July 2014, Glen receives a further amount of $150,000
which represents the genuine redundancy portion of his total
termination package.
Glen’s income for the 2013/14 financial year is $140,000.
Glen is not planning on working during the 2014/15 financial
year, as he will be travelling.
Questions
a Are the above payments an excluded ETP or a
non-excluded ETP?
b The $50,000 non-excluded payment represents the taxable
component for the 2013/14 financial year.
The non-excluded payment is taxed as outlined in the
chart below:
$10,000 taxed at 49% 4
$180,000
$140,000
$50,000 ETP
Remaining whole of income cap applies: 17%3
Salary
The lesser of the two caps applies to the gratuity as follows:
• Glen’s whole of income cap was reduced from $180,000
to $40,000 because he had earned $140,000 in the
2013/14 financial year. As Glen’s calculated whole-ofincome cap of $40,000 was less than his ETP cap of
$185,000 (for 2014/15 financial year), the remaining
amount of his whole-of-income cap is applied to his ETP.
• Since Glen’s first $40,000 is within his calculated
whole-of-income cap of $40,000, this amount will
be taxed at the concessional tax rate of 17 per cent
(including Medicare levy).
The $10,000 balance is taxed at 49 per cent4 as it represents
the amount above the $180,000 whole of income cap.
c The $150,000 is paid in the 2014/15 financial year and is
taxed as an excluded ETP.
Even though Glen has received a payment for genuine
redundancy, he is not entitled to a tax-free portion as he
is not under age 65. The excluded payment is not subject
to the whole-of-income cap. It is taxed as follows:
Step 1: Work out the remaining ETP cap first:
b How much is the taxable portion in each payment?
c How is the taxable portion taxed in each payment?
Solutions
a There is both an excluded ETP and a non-excluded ETP
component. The payments can be summarised as follows:
Payment
date
Financial
year
Amount
Type of ETP
June 2014
2013/14
$50,000
Non-excluded
July 2014
2014/15
$150,000
Excluded
As $10,000 of Glen’s gratuity (paid in 2013/14) used up his
ETP cap, his new ETP cap for the 2014/15 year is reduced
from $185,000 to $175,000.
Step 2: Determine what tax applies:
As the excluded ETP is within the unused ETP cap, the
$150,000 is taxed at 17 per cent3.
Important: whilst an individual may benefit from
indexation of the ETP cap, the amount previously used
up to the ETP cap is not required to be indexed.
A genuine redundancy payment is so much of the ETP
that exceeds the amount the client might be expected
to receive if they terminated employment voluntarily.
As Glen would have received the $50,000 if he had resigned
voluntarily, that amount cannot be a genuine redundancy
payment and cannot be an excluded ETP.
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Strategy considerations for
non-excluded ETPs
Reduce taxable income
In the charts above, salary has been used as a proxy
for all other taxable income. Therefore, if you can reduce
a client’s taxable income for the year using some suggested
options below, the client could then reduce tax on their
non-excluded ETPs:
• The definition of the whole-of-income cap does not add
back any salary sacrifice to super. By ceasing employment
at the beginning of a financial year where other taxable
income for the new financial year is not expected to be
significant, the client’s taxable income may be reduced.
• Consider making personal deductible contributions to
super to reduce the client’s taxable income (if applicable).
• Ensure unused annual leave and long service leave
is received in a different year from the main ETP.
• Consider a negative gearing strategy. However a client
cannot create a financial loss to reduce their taxable income
to below zero. This was demonstrated within the case
study of Linda.
Receiving an ETP in the new financial year
Where possible, receiving a non-excluded ETP in a new
financial year allows the client to benefit from a refreshed
$185,000 ETP cap and indexation on the ETP cap.
Receiving an ETP in the year of turning 55
This applies to clients who are turning age 55 during
an income year. Where possible and for situations where
the ETP cap is considered, clients should opt to receive the
ETP in the financial year when they will turn age 55, instead
of receiving it in an earlier year. This is because the ETP cap
begins to be available to individuals who are age 55 on
30 June of the year of payment.
Conclusion
Employment termination payments are complex and can have
wide impacts on a client’s financial affairs. Although you may
not deal with clients who receive an ETP on a regular basis,
when you do, it’s essential to provide prompt and accurate
advice to clients during this time of uncertainty.
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IOOF | TechConnect: Technical bulletin Winter 2014
Deeming and account based pensions
By Meg Rennie, Technical Services Manager
We have received many questions about this topic and, following a detailed explanation of the rules,
we will attempt to address all your questions. If you have a question that isn’t covered by this list,
please forward it our IOOF TechConnect team for consideration.
Deeming on account based pensions will come into effect on
1 January 2015. To be subject to the old rules a person must:
• have commenced an account based pension prior
to 1 January 2015; and
• be in receipt of an income support payment prior to
1 January 2015.
Section 23(1) of the Social Security Act 1991 (Cth) defines
an income support payment as one of:
a a social security benefit including any of the following:
• widow allowance
• youth allowance
• austudy payment
• newstart allowance
• sickness allowance
• special benefit
• partner allowance
• a mature age allowance under Part 2.12B
• benefit PP (partnered)
• parenting allowance (other than non-benefit allowance)
b a job search allowance
c a social security pension including any of the following:
• an age pension
• a disability support pension
• a wife pension
• a carer payment
• a pension PP (single)
• a sole parent pension
• a bereavement allowance
• a widow B pension
• a mature age partner allowance
• a special needs pension
A person on a carer allowance does not qualify.
Note that DVA War widow, DVA disability, rent assistance and
a holder of a Centrelink/DVA concessional cards doesn’t qualify
as in being in receipt of income support. This is because a
service pension is restricted to the following under section 23(1):
a an age service pension under Part III of the Veterans’
Entitlements Act, or
b an invalidity service pension under Part III of the Veterans’
Entitlements Act, or
c a partner service pension under Part III of the Veterans’
Entitlements Act, or
d a carer service pension under Part III of the Veterans’
Entitlements Act.
Your questions answered
Q1 If my client is on the Carer Payment, is that going
to satisfy the rules come 1/1/2015 (providing that they are
in receipt of an account based pension on 1/1/2015)?
A1 Yes
Q2 If my client is on Newstart Allowance, is that going
to satisfy the rules come 1/1/2015?
A2 Yes
Q3 If I have a client receiving a transition to retirement
pension (as of 1/1/2015) and on an income support payment
pre 1/1/15 does this satisfy the requirements?
A3 Yes, this would satisfy the grandfathering requirements.
Q4 Once a TTR pension reverts to an account based pension
(when a condition of release is met), is that still considered the
same income stream, for purpose of the grandfathering rules?
A4 Yes, it’s still the same income stream. So, if the client
was on a benefit pre 1/1/15 and they move from the TTR
to the account based pension they would still have the
grandfathered rules apply.
d a youth training allowance
e a service pension
f income support supplement.
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Q5 I was employing a dual income strategy of an account
based pension and an annuity before to ensure that clients
had certainty of income in the long term but extra income
in the short term. Will this strategy still remain relevant for
new clients?
A5 Yes and no. The income longevity issue is still addressed
with the use of the annuity. Annuities (other than allocated
annuities are not captured by deeming under the new rule)
However, under the new rules the account based pension
will be deemed if commenced after 1/1/2015. The more
money that is in the account based pension, the bigger
the problem gets.
For instance, in an account based pension of $700,000
for a 65 year old woman (who is a member of a couple) the
deeming is $23,3391 whereas the assessable income under
the old rules would be $2,6232. This is a difference of $20,716
(ie $23,339 – $2,623). The income test results in $479.99 per
fortnight under the deeming rules but $635.30 per fortnight
under the grandfathered rules3 (even though it is the assets
test that currently applies and overrides the incomes test
in both of these instances).
Q6 Are there any circumstances where the deeming will
actually improve a client’s circumstances? It would seem that
if a client is drawing significantly more than the Centrelink
deductible amount could actually be better off.
A6 You are correct. In certain circumstances, if the client
is drawing more than the Centrelink deductible amount
being deemed may actually work in their favour – unless
they were to treat the withdrawal as a drawdown on
capital rather than income (with future implications as the
deductible amount is reduced).
Q7 When are the benefits of the old regime the best?
A7 When there is an income test problem. This might
be when one person already has a defined benefit pension
or an overseas pension.
Q8 If I have a client receiving a defined benefit pension and
on a benefit pre 1/1/2015 does this satisfy the requirements?
A8 The new rules only apply to account based pensions
not defined pensions. They will continue to be treated the
same as before.
Q9 If my husband has an account based pension on 1/1/2015,
for which I (being the wife) am the reversionary spouse, will
the account based pension be deemed if he dies and reverts
to me? My husband was on a benefit as at 1/1/2015 and the
account based pension was grandfathered at the time. What
if I’m not on a benefit on 1/1/2015?
A9 The reversionary pensioner need not be on a benefit
as at 1/1/2015. They only need to be on a benefit from the
date of death.
Q10 How will the deeming work?
A10 The deeming will work in exactly the same way
as it has before. For a single person, the first $46,600
will be deemed to be earning 2.0 per cent and the financial
investments above that will be deemed at 3.5 per cent.
For a couple, the first $77,400 is deemed to be earning
2.0 per cent and financial investments above that will be
deemed to be earning 3.5 per cent.
Q11 How will account based pensions started after 1/1/2015
be treated for people who are on other benefits like a disability
support pension or a carer’s payment after 1/1/2015? (that is,
if they started their account based pension after then)?
A11 All account based pensions will be deemed if they
have commenced after 1/1/2015 regardless of what sort
of benefit that they are on. However, if someone starts
an account-based pension prior to 1/1/2015 and is
on either disability support pension or a carer’s payment,
then their account based pension will be grandfathered.
Q12 What do I do if I want my client to have his/her account
based pension deemed?
A12 For a client who may benefit from the new rules,
the client would have to commute their existing pension
and commence another account based pension. The client
cannot request that an account based pension be treated
under the new rules.
Q13 Are annuities included in the new deeming rules?
A13 Yes, long term superannuation annuities (ie allocated
annuities) will be captured and will be counted as financial
investments under the new rules. However, long term
ordinary money and superannuation based annuities
(such as lifetime and term annuities) are still captured under
the old rules which means a deductible amount applies
to reduce the income/pension payments.
Q14 Can I buy an annuity with ordinary money and have
the old rules apply?
A14 The old rules apply to long term ordinary money
annuities. They have a deductible amount. Short term
annuities are those which are five years or less where
as long term annuities must be those which are greater
than five years.
Q15 Can I buy an allocated annuity with superannuation
and have the new rules apply?
A15 The new rules will apply to allocated annuities.
Short term annuity treatment (as outlined in question 14)
doesn’t change – it will be deemed.
Q16 Is the Centrelink Schedule going to change in any way
as a result of this?
A16 This is currently being reviewed.
1 Based on deeming rates as at 31 March 2014.
2 $700,000 x 5% – $700,000 ÷ 21.62 = $2,623.
3Were deeming to apply in April 2014. These numbers are also based on the Centrelink pension rates applicable in April 2014.
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IOOF | TechConnect: Technical bulletin Winter 2014
Q17 If my client is receiving an account based pension and
has nominated his spouse to get a pension by way of binding
nomination (but it is not a reversionary pension) will this satisfy
the grandfathering rules if he dies?
A17 No
Q18 How long do they have to be on a benefit for assuming
my client has already commenced an income stream?
A18 There is no minimum length of time. If their benefit
was granted on 27 December 2014 for example, this
would mean that your client(s) will be in receipt of an
income support payment prior to 1 January 2015 and
qualify for grandfathering.
Q19 What will happen to my client who is on a disability
support pension who intends to go overseas for 10 weeks?
A19 They can only continue to receive DSP for four weeks
as announced in the recent Federal Budget to commenced
from 1 January 2015.
Q20 Does the six weeks that they are not paid their DSP mean
that the grandfathering stops?
A20 This can depend on whether or not their DSP is
cancelled or the recipient is granted a temporary extension.
If the DSP is cancelled then the account based pension
will not be grandfathered because a new application
will be required.
Decisions that have been applied to reduce a recipient's
payment and they return to Australia AFTER that reduction,
are governed by the 'favourable determination after
notification' provisions. This could be because the recipient
has been outside Australia for a period and add-ons
cease and/or they are proportionalised. In these cases,
the date of effect is the date of receipt of the advice,
or the date of the event, whichever is later. The situation
where a recipient's payment is cancelled CORRECTLY and
they return to Australia AFTER that cancellation requires
that the recipient lodge a new claim to regain qualification.
This could be, for example, because they have been outside
Australia for a period.
It is also possible that a recipient who has been cancelled
on account of their having a limited portability period,
had their circumstances been known, would have been
granted a discretionary extension. In such cases, the original
cancellation would be overturned and the new decision
(that portability be extended) applied. Discretionary
extensions can be granted in the following circumstances:
SSAct section 1218C:
• if the person or a family member of the person
(section 23(14)) is:
• involved in a serious accident,
• seriously ill,
• hospitalised, or
• the victim of a robbery or serious crime,
• if the person is:
• involved in custody proceedings,
• required to remain overseas in connection with criminal
proceedings, other than in respect of a crime alleged
to have been committed by the person,
• unable to return because of war, industrial action,
or social or political unrest in which the recipient
is not willingly participating, or
• unable to return because of natural disaster,
• if a family member dies.
Q21 Are the rules exactly the same for SMSFs as they are for
retail account based pensions?
A21 Yes, although there is one quirk. You can convert
a SMSF to a Small APRA Fund whilst an account based
pension is in place and it will retain the grandfathering.
That is, provided that the account based pension is not
commuted and restarted.
Q22 Does being on the Low Income Health Care Card or the
Seniors Health Care Card prior to 1 January 2015 in addition to
the account based pension later ensure grandfathering if one
later becomes eligible for the aged pension?
A22 No
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IOOF | TechConnect: Technical bulletin Winter 2014
Self-managed superannuation fund
exit strategies
By Julie Steed, Technical Services Manager
It is widely known that self-managed superannuation funds (SMSFs) are the fastest growing sector
of the superannuation industry. Over the last few years, an average of 30,000 new funds have been
established. Whilst the establishment of SMSFs receives much attention, little attention is paid to the
other end of the SMSF life cycle – when the SMSF is no longer appropriate.
In this article, we will review when clients may need an SMSF
exit strategy and what alternatives are available.
Why do clients need an exit strategy?
ASIC report on SMSF advice
The importance of an exit strategy is often related to the fund’s
investments. Does the fund have illiquid or indivisible assets
that may impact on the ability to make benefit payments?
In 2012, the Australian Securities and Investment Commission
(ASIC) set up an SMSF taskforce to look at risks in the SMSF
sector. In April 2013, ASIC handed down its Report 337 SMSFs:
Improving the quality of advice given to investors. The report
summarises the findings of ASIC’s review into over 100 pieces
of SMSF advice provided to investors and identifies a number
of practical tips that practitioners can use to improve the
quality of the SMSF advice they provide. Whilst ASIC found that
the majority of the advice given was adequate, they expressed
concern about pockets of poor advice. Some of their areas of
concern included SMSF advice with:
If one or more members dies or is unable to be a trustee,
it is important to consider the attitudes and abilities of
remaining members. Will the surviving members want to
continue the fund? Do they have the necessary skills and
interest levels? An SMSF is often a fun and interesting venture
when undertaken by a husband and wife but quickly turns
to a chore when left to only one.
Exit strategy alternatives
• low balances
There are three primary alternatives as an exit strategy
for an SMSF:
• undiversified portfolios
• Rollover to a public offer fund.
• property and borrowing arrangements
• Convert to a small APRA fund (SAF).
• no insurance recommendations
• Meet a condition of release.
• no replacement product disclosure
Each alternative has its place, depending upon what the
trigger event for the exit strategy is, what the fund assets are
and the attitudes of any remaining members.
• non-disclosure of the lack of access to statutory
compensation scheme for theft or fraud
• no exit strategies.
ASIC was particularly focused on the importance of an exit
strategy where a portfolio was undiversified.
ASIC also released consultation paper CP 216 – Advice on
self-managed superannuation funds: Specific disclosure
requirements and SMSF costs in September 2013 which
provided further guidance regarding ASIC’s views on best
practice advice.
Rollover to a public offer fund
Rolling over to a public offer fund is a capital gains tax (CGT)
event whilst in accumulation phase. Any gains will be realised
and tax will be payable. If capital losses exist, they will not
be able to be carried forward. A CGT event occurs regardless
of whether assets are sold down and cash is transferred to the
public offer fund or whether assets are transferred in-specie
(a common misunderstanding).
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The range of investment options that are available in a
public offer fund may also be of significance when choosing
an exit strategy. It will be important to compare the existing
investments in an SMSF with those available in a public offer
fund. If the SMSF has assets that are not able to be accepted,
how do the members feel about disposing of the assets?
This may be an issue if the SMSF has real property, collectables
or shares in private companies. If the SMSF has a residential
apartment on the Gold Coast, the SMSF members may
be perfectly comfortable in selling the property to facilitate
a move to a public offer fund. If, however, the property
is business real property that the SMSF members are running
the family business from, the sale of the property may
be highly undesirable.
Another barrier to rolling over to a retail fund may be if the
SMSF is paying complying pensions. Very few retail funds
will currently accept account-based term allocated pensions,
let alone complying lifetime or life expectancy pensions.
There may also be social security implications of rolling
over pension benefits from an SMSF. For clients who are
in receipt of a Centrelink income payment and have an
account-based pension prior to 1 January 2015, the new
deeming rules will not apply. However, if a member’s
SMSF pension account is rolled over to a retail fund, the
grandfathering will cease. The balance of the account-based
pension will then be treated as a financial asset and deemed
for the purpose of assessing Centrelink eligibility, which may
result in a reduction in age pension.
Convert to a small APRA fund
An alternative to a public offer fund is to convert the SMSF
to a SAF. A SAF is an SMSF with a professional licensed trustee.
The professional trustee company manages the fund for the
benefit of the members and is responsible for all compliance,
regulatory reporting and administration of the fund.
Nearly all of the legislative concessions that apply to SMSFs
are also available in SAFs, including the ability for members to
direct trustees in respect of death benefits and investments.
In addition to CGT issues, moving to a SAF may help
members who wish to retain particular investments such
as a unique shareholding, real property or collectables.
Different SAF trustees will have their own rules in respect
of allowable assets; however, a SAF will be far more likely
to accept a particular asset than a retail or industry fund.
Provided that the investments are relatively diversified, it is
common for SAFs to allow holdings of real property, private
companies and collectables.
In a SAF, the investment decisions are directed by each
member, the trustee does not generally make investment
decisions unless the members fall outside of their elected
investment strategy. Even then, the trustee will generally
require the members to rectify the situation; stepping in will
only be a last resort.
A SAF will also be able to continue any complying pension
that may exist, both account-based term allocated pensions
and complying lifetime or life expectancy pensions.
Converting an SMSF to a SAF will also not have any
implications for the grandfathering of Centrelink deeming
on account-based pensions.
Meet a condition of release
If the members have met a condition of release, it is possible
to simply pay the member benefits and wind up the SMSF.
Sufficient funds will need to be retained for wind-up costs
and taxes and a final return will be lodged.
Naturally, comparing the tax-effective environment of
superannuation with other forms of investments needs
to be considered, as does the client’s ability to return money
to superannuation. If clients are ineligible to contribute,
then their ability to invest in superannuation is lost. If clients
have a higher superannuation balance than they are able
to re-contribute then the time taken to return monies to
superannuation needs to be considered.
There may also be Centrelink implications of cashing benefits
from an SMSF.
The conversion from an SMSF to a SAF can entirely avoid the
imposition of CGT if clients retire as trustees of the fund and
appoint the professional licensed trustee. The fund (the tax
paying entity) continues uninterrupted and does not dispose
of any assets; there is simply a change in trustee. There is no
change of tax file number or Australian business number.
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When do clients need an exit strategy?
There are a number of trigger events that may lead to clients
needing to exit an SMSF including:
• disqualified persons
• non-residents
• loss of capacity
• lack of interest
• relationship breakdown of fund members
• death of a member
• special estate planning needs.
Disqualified persons
A disqualified person is an individual who:
• has been convicted of an offence involving dishonesty
• is an undischarged bankrupt
• has been disqualified by a Regulator of a civil penalty.
If an SMSF trustee becomes an undischarged bankrupt,
they are required to notify the ATO immediately. Alternative
arrangements must be made for their SMSF within six months
of declaring bankruptcy. If alternative arrangements are not
made within this time, the fund will fail the definition of an
SMSF and not be eligible for tax concessions.
A disqualified person is unable to be a trustee and is,
therefore, unable to be a member of an SMSF. There are,
however, no legal issues with disqualified persons being
members of a public offer fund or a SAF.
Residency
To be eligible for concessional tax treatment, a superannuation
fund must meet the definition of an Australian superannuation
fund. If a fund fails to meet the test at any time during an
income year, it does not meet the definition of an Australian
superannuation fund and is not entitled to tax concessions.
A superannuation fund is an Australian superannuation fund if:
• the fund was established in Australia, or any asset of the
fund is situated in Australia, and
• the central management and control of the fund is
ordinarily in Australia, and
• active members who are Australian residents hold at least
50 per cent of the fund value.
There is a two year grace period where the central
management and control test can be deemed to have
been met, even though the trustees are temporarily outside
Australia for a period of up to two years.
In a public offer fund or a SAF, the trustee will invariably be
a body corporate, incorporated in Australia, with the business
of the fund being managed from Australia. As a result, the
central management and control test is generally easily met.
Active members are members who contribute, or for whom
contributions are made, to a fund. For the purpose of the
residency test, contributions include rollovers to a fund.
In a public offer fund, although there may be a number
of non-resident members who contribute, it is rare that those
members would hold at least 50 per cent of the fund assets.
Accordingly, the active member test is usually not an issue
in a public offer fund.
In a SAF, however, given that membership is limited to
a maximum of four members, the active member test can
be an issue. A SAF can only meet the active member test if
non-resident members don’t contribute (or attempt to rollover
a balance into the SAF) or if contributory resident members
hold greater than 50 per cent of the fund’s assets.
Loss of capacity
Potential loss of capacity due to dementia or other illnesses
is also a source of concern for SMSF trustees. Dementia is
projected to increase over four-fold from 245,400 people in
2009 to around 1.13 million people by 20501 so these concerns
will continue to escalate.
If an SMSF trustee loses mental capacity they are unable to
continue in the role of trustee and they are, therefore, unable to
be a member of an SMSF. There are no legal issues with a person
who lacks mental capacity being a member of a public offer
fund or a SAF. However, there may be practical impediments to
their becoming a member of a public offer fund or a SAF if they
do not have an enduring power of attorney. Accordingly, having
an enduring power of attorney for SMSF trustees is an essential
part of the SMSF establishment process.
In addition to loss of capacity, loss of interest can be a driving
force behind the requirement for an SMSF exit strategy.
Many SMSF trustees are skilled and committed when they
commence their journey but may become less interested
and able as they age.
For SMSF trustees, the residency test is crucial. As the trustee
is responsible for the central management and control of
a fund, their physical location is particularly important. If an
SMSF trustee becomes a non-resident, the fund will generally
fail to meet the definition as the high level decisions relating
to the fund (the central management and control) will be
made wherever the trustees reside.
1Keeping dementia front of mind: incidence and prevalence 2009-2050 – Access Economics report – August 2009.
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Relationship breakdown
Special estate planning needs
In the event of a relationship breakdown between a couple
with an SMSF, it is desirable for each person to make their
own future superannuation arrangements. Whilst in some
relationship breakdowns the former couple maintain a cordial
relationship, this is not always the case. Running an SMSF with
trustees who are not on good terms is difficult at best.
There are a number of estate planning issues that may result
in an SMSF no longer being the best superannuation vehicle to
achieve a client’s goals. In an SMSF, the death of a trustee changes
the composition of the trustees and may provide potential for
disputes if there are family tensions. Family members who have
personality disorders or addictions may cause difficulties for the
SMSF trustees who are responsible for paying the death benefit.
The use of a SAF or a public offer fund for these circumstances
hands over the stress of dealing with particular family members
to the independent professional trustee. In an SMSF, it is possible
to build safeguards into the trust documentation. However, if one
of several feuding beneficiaries has the cheque book, it may take
the remaining beneficiaries considerable time and expense to
track down the person and the money.
In addition, if a family law split is being made, it is possible to
take advantage of the CGT exemptions when moving one of
the parties to a SAF or a new SMSF. However, this is generally
not available if the family law split is paid to a public offer fund.
Death
Death is a significant trigger event for a review of the viability
of the SMSF. Practitioners are well aware that SMSF trustees are
jointly and severally responsible for the running of the SMSF.
However in practice, there may be occasions where we find that
some trustees are more responsible than others. In the event
that a ‘more responsible’ trustee dies, the remaining trustee may
not be willing or able to continue in the role of trustee.
The payment of a death benefit is an important issue if indivisible
or illiquid assets are involved, or if there are assets such as
business real property that the family unit wishes to retain.
SAFs and public offer funds may also provide very tax-effective
death benefit pension payments for intellectually disabled
adult children. The impediment of the disabled person or their
legal personal representative needing to be a trustee of an
SMSF is not relevant in a SAF or public offer fund.
Conclusion
The issue of requiring an exit strategy for SMSF clients may
not be front of mind when they are considering establishing
their fund, however, there are a number of instances in which
one could be required. Taking steps to identify the potential
trigger events and various exit strategies that exist will enable
practitioners to assist clients in achieving their retirement
goals, even when things don’t go to plan.
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IOOF | TechConnect: Technical bulletin Winter 2014
Legislation update – June 2014
The following Bills have received Royal Assent:
Legislation
Purpose of Act
Assent date
Social Services and Other
Legislation Amendment Act 2014
The main features of the Act include the:
Received Royal
Assent in March 2014
• deeming of account-based pensions from 1 January 2015
• change in the length of working residence requirements for those going
overseas on a Centrelink age pension
• continuing the freeze on indexation of the child care rebate
• continuing the freeze on indexation of the upper income limits for family
tax benefits
• removal of late registration of the pension bonus scheme.
Tax and Superannuation Laws
Amendment (2014 Measures No.1)
Act 2014
This Act includes:
• the gradual phasing out of the Net Medical Expenses Tax Offset (NMETO)
• penalties for promoters of Early Release Schemes for superannuation
• increased powers for the ATO with respect to trustees of self-managed
Received Royal
Assent in March 2014
superannuation funds (SMSFs).
Tax Laws Amendment (Fairer
Taxation of Excess Concessional
Contributions) Act 2013
This Act replaces the penalty tax for excess concessional contributions
made from 1 July 2013 with tax to be paid at an individual’s marginal tax
rate plus an interest charge.
Received Royal
Assent in July 2013
Tax and Super Laws Amendment
(Increased Concessional
Contributions Cap and Other
Measures) Act 2013
This Act implements the following changes:
Received Royal
Assent in July 2013
• The concessional contribution cap to increase to $35,000 for clients aged
60 and over for 2013/14 and later years for those aged 50 and over
• Technical changes will be made to ensure the low income
superannuation contribution operates effectively.
• The tax concession for concessionally taxed superannuation
contributions of very high income earners to be reduced by 15 per cent.
Tax Laws Amendment
(2013 Measures No. 3) Act 2013
Moving financial planners who provide tax advice into the tax agents
licensing regime.
Received Royal
Assent in July 2013
Tax Laws Amendment
(2013 Measures No. 2) Act 2013
This Act:
Received Royal
Assent in July 2013
• removes the 50 per cent discount on capital gains tax for ‘taxable
Australian property’ accrued after 8 May 2012 by foreign and temporary
resident individuals
• requires certain large entities to pay PAYG instalments monthly rather
than quarterly or annually.
Social Security Amendment
(Supporting more Australians
into work) Act 2013
Increases the income free area from $62 per fortnight to $100 per fortnight
from 20 March 2014 for recipients of Newstart allowance, Widow allowance,
Partner allowance, Parenting payment (partnered) and Sickness allowance.
Received Royal
Assent in July 2013
The Bills currently before Parliament are listed below:
Legislation
Purpose of Act
Assent date
Social Security Amendment
(Caring for People on Newstart)
Bill 2014
The Bill proposes to:
Introduced to
the Senate on
6 March 2014
• increase Newstart and Youth Allowance by $50pw
• standardise the indexation arrangements for certain pensions and
allowances.
Social Services and Other
Legislation Amendment
(Seniors Health Card and Other
Measures) Bill 2014
The Bill proposes to annually index the thresholds for the Commonwealth
Seniors Health Care Card amongst other measures.
Introduced to
the House of
Representatives
on 27 March 2014
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IOOF | TechConnect: Technical Winter Autumn 2014
Legislation
Purpose of Act
Assent date
Superannuation (Departing
Australia Superannuation
Payments Tax) Amendment
(Temporary Budget Repair Levy)
Bill 2014
The Bill proposes to increase the tax on Departing Australia
Superannuation Payments from 35% to 38% for taxed funds and
to 47% for untaxed funds.
Passed the House
of Representatives
on 28 May 2014
Superannuation (Excess NonConcessional Contributions
Tax) Amendment (Temporary
Budget Repair Levy) Bill 2014
The Bill proposes to increase the tax on Excess Non-Concessional
Contributions by 2% by amending the Superannuation (Excess
Non-concessional Contributions Tax) Act 2007.
It seeks to limit the increase to 95%.
Introduced to
the House of
Representatives
on 13 May 2014
Tax Laws Amendment
(Temporary Budget Repair Levy)
Bill 2014
The Bill proposes to introduce the temporary Budget repair levy of 2%.
It also seeks to avoid the use of deductions to reduce the levy by ensuring
that offsets reduce the basic income tax liability first.
Passed the House
of Representatives
on 28 May 2014
Income Tax Rates Amendment
(Temporary Budget Repair Levy)
Bill 2014
The Bill proposes to:
Introduced to
the House of
Representatives
on 13 May 2014
• increase the 45% marginal tax rate to 47% by introducing a 2% levy
on all incomes over $180,000 per annum
• make the operational date 1 July 2014.
Superannuation (Excess
Untaxed Rollover Amounts
Tax) Amendment (Temporary
Budget Repair Levy) Bill 2014
Fringe Benefits Tax Amendment
(Temporary Budget Repair Levy)
Bill 2014
The Bill amends the Superannuation (Excess Untaxed Rollover Amounts
Tax) Act 2007 to increase to 49% the rate at which excess untaxed rollover
amounts tax is payable on an individual’s excess untaxed rollover amounts.
Introduced to
the House of
Representatives
on 13 May 2014
The Bill proposes:
Introduced to
the House of
Representatives
on 13 May 2014
• to increase the fringe benefits tax from 45% to 47%
• that operational dates would be 1 April 2015 to 1 March 2017
• that there will be specific exclusion for public and not-for-profit hospitals,
public ambulance services and certain other tax-exempt entities.
Income Tax [TFN Withholding
Tax (ESS)] Amendment
(Temporary Budget Repair Levy)
Bill 2014
The Bill proposes to increase the withholding tax where no TFN is
quoted to 47%. The full withholding tax will now be 49% (including
the Medicare levy.)
Introduced to
the House of
Representatives
on 13 May 2014
Superannuation (Excess
Non-concessional Contributions
Tax) Amendment (Temporary
Budget Repair Levy) Bill 2014
The Bill proposes to increase the tax on excess NCCs from 45% to 47% plus
the Medicare levy for a period of three years from 1 July 2014
Introduced to
the House of
Representatives
on 13 May 2014
The Bill proposes to:
Passed the House
of Representatives
on 4 June 2014
Tax and Superannuation Laws
Amendment (2014 Measures
No.2) Bill
• increase the Medicare levy low-income threshold amounts for families
and the dependent child-student component of the threshold from
the 2013/14 financial year
• limit the ability of taxpayers who obtain additional franking credits
as a result of ‘dividend washing’ to obtain a tax benefit.
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