pensions and estate planning considerations · tax of super death benefit payments death benefit...
TRANSCRIPT
Pensions and estate planning considerations
The information in this presentation has been prepared by Accurium Pty Ltd ABN 13 009 492 219 (Accurium). It is general information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided and Accurium is not liable for any loss arising from reliance on this information. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial decisions. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.
Estate planning considerations for pensions at three stages of retirement
1. When deciding to start a pension
2. While running a pension
3. When the member passes away
TBC and TBAR
Reversionary vs non-reversionary
Death benefit lump sums vs pensions
Pension payment requirements and ECPI
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Agenda
Considerations when starting a pension
Account-based pension (ABP)
- Commenced from monies in an accumulation interest in the SMSF
- Eligible if member has attained age 65 or met a condition of release
- Minimum annual pension requirement under Schedule 7 of SISR
Market linked pension (MLP)
- Can only commence with proceeds from commutation of another complying income stream
- Minimum annual pension requirement under Schedule 6 and 7 of SISR
Both are retirement phase income streams eligible for ECPI
Purchase price counts towards member’s transfer balance cap (TBC) at commencement
Types of pensions available in an SMSF
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Transition to retirement income stream (TRIS)
- Available when have met preservation age but not yet attained age 65 or met a condition of release
- Maximum drawdown of 10% of opening account balance each income year
- Non-retirement phase income stream, not eligible for ECPI
- Annual minimum pension requirement under Schedule 7 of SISR
TRIS converts to retirement phase once report condition of release or attain age 65
- Income stream does not cease, it remains the same TRIS but commutation restrictions fall away and acts like an ABP
- Retirement phase income stream eligible for ECPI
- Balance at date attain age 65 or condition of release reported will count towards member’s TBC
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Types of pensions available in an SMSF
A member can move up to $1.6million into retirement phase = their transfer balance cap
- Once commence a retirement phase income stream a member will commence to have a transfer balance account (TBA) that the ATO will use to track the member’s compliance against their TBC
- Can have more than one income stream
- Credit = account balance at commencement for any new income stream in an SMSF post 1 July 2017
- Balances can increase/decrease with changes in market value, pension payments and earnings without affecting the member’s TBA
- A death benefit income stream that will also count towards a member’s TBA
- Lump sum payments will reduce a member’s TBA
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Transfer balance cap
If a member already has a TBA then consider how much ‘space’ they have left in their TBC when thinking about starting a new income stream to avoid exceeding the cap
- Member’s with balances > $1.6mill will not be able to commence an income stream with their entire balance
- Members can be retired and have both a pension interest and an accumulation interest in an SMSF, these need to be kept track of separately in the fund accounts
- Minimum pension requirements will be based only on the value of the pension interest each year
- Tax components of the pension interest will be set at commencement but tax components of the accumulation interest will change over time e.g. with earnings
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Transfer balance cap
Understand who can receive a superannuation death benefit and how they can receive it
Death of a member is a compulsory cashing event
Death benefits need to be cashed as soon as practicable
- If payments made to the Estate can only be paid as lump sums
- Eligible SIS dependent’s may be eligible to receive death benefit as a lump sum, a retirement phase income stream, or combination of both
- Death benefits cannot be paid to a beneficiary’s accumulation interest
- Death benefit income streams cannot be combined with other super benefits that are not death benefit income streams or rolled back to accumulation phase
Tax treatment depends on whether beneficiary is a death benefits dependant or not at the time of death
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Selecting beneficiaries
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Death benefit payment option summary
SIS dependent Death benefits dependent
Lump sum
Retirement phase income stream
Spouse (including same-sex and de facto) Yes Yes Yes
Child under 18 (including an ex-nuptial, adopted or step-child of the person and a child of
the person’s spouse)
Yes Yes Yes
Child over age 18 and financially independent No Yes No
Child over age 18 and under 25, financially dependent Yes Yes Yes
Disabled1 child (no age restriction) Yes Yes Yes
Person with whom an interdependent relationship2 existed Yes Yes Yes
Financially dependent person at the time of death Yes Yes Yes
1 - Disability Services Act 1986 (Cth) s8(1) (Austl).
2 - An interdependent relationship, according to the SIS Act, is defined as two people whom: a) have a close personal relationsh ip, and b) live together, and c) one or each of them provides the other with financial support, and d) one or each of them provides the other with domestic support and personal care.
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Tax of super death benefit payments
Death benefit beneficiary
Lump sum Income stream1
Death benefits dependant
Payment tax free Tax free if deceased or beneficiary aged 60 or over. Any untaxed amount is taxed at marginal rates3 with rebate of 10%.If beneficiary and deceased both under age 60 at death pay no tax on tax-free amounts, marginal rates3 with rebate of 15% on taxed amounts, and marginal rates3 on untaxed amounts.
Other beneficiaries2 No tax payable on tax-free component. Up to 15% on taxable element and 30% on any untaxed element, plus Medicare levy. If paid to the Estate, Medicare levy not payable.
Not applicable
1 - where children under age 25 start receiving a death benefit income stream after 1 July 2007, they must stop the income stream and take the remaining benefit as a lump sum on or before the date they turn 25 with the lump sum tax free
2 - in the situation where a member of the Australian Defence Force or police force dies in the line of duty, the lump sum super death benefit is also tax free for someone who is not a death benefits dependant
3 – marginal tax rates including Medicare levy
Tax components are important when
- Making pension payments or lump sum payments under age 60
- Paying death benefits to persons who will not be death benefit dependants e.g. adult children
- When a benefit is paid it will have tax-free and taxable components in the same proportion as the pension interest1
Tax components are set at commencement and do not change
If beneficiaries likely to pay tax on death benefits consider strategies to maximise tax-free component prior to commencing pension
- Re-contribution strategies e.g. utilising non-concessional contribution caps
- Downsizer contribution
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Calculate tax components for the new pension interest
1 - proportioning rule is modified for disability lump sum benefits and super lump sum benefits that contain an untaxed element
Just prior to commencement calculate the tax components of the accumulation interest
Tax-free component is sum of
- Contributions segment: all contributions made after 30 June 2007 where no tax deduction has been claimed e.g. non-concessional contributions and downsizer contributions
- Crystallised segment: was typically worked out at 1 July 2007, the ATO have a calculator on their website
Taxable component = total value of the interest - tax-free component
- Would include an untaxed amount where have not paid any tax on contributions or earnings: generally in public sector and constitutionally protected funds
Tax-free proportion = tax-free component / total value of interest
Taxable proportion = taxable component / total value of interest
- Do not round down decimals, legislation does not provide for a rounding rule
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Calculate tax components for the new pension interest
Can set terms of a new income stream so that it will automatically continue to be paid to a SIS dependent upon death of the member
When member passes away income stream will not cease but will continue to the beneficiary:
- Beneficiary could choose to commute the income stream to a lump sum if would prefer a lump sum payment (except for a MLP where initial term was set based on reversionary beneficiary’s life expectancy)
- Have 12 months until balance at date of death is assessed against beneficiary’s TBC, providing time to deal with TBC issues
- Insurance pay-out received into pension interest after death will not be assessed against reversionary beneficiary’s TBC
- If income stream is ‘grandfathered’ for social security purposes, will retain that assessment for as long as beneficiary is also eligible for social security benefits
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Reversionary income streams
Example
Insurance payout
Meredith and Derek each have $700,000 in their SMSF in account-based pensions
- Derek has life insurance policy with $500,000 sum insured
Derek passes away and balance of their income streams are $600,000 each at this time
- Meredith wants to take death benefit as income stream
Automatically reversionary income streams can help ensure life insurance proceeds are not counted towards the TBC
Grey’s SMSF
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Example
Insurance payout
If Derek’s ABP was not reversionary
- ABP worth $600,000 plus $500,000 insurance proceeds total $1.1m to be paid as a death benefit
- Meredith’s remaining TBC is only $900,000
- As soon as practicable Meredith commutes $200,000 from her ABP to accumulation and takes a death benefit income stream with $1.1million
- $200,000 in accumulation, $1.5m in ABPs, $0 remaining in TBC
If Derek’s ABP was automatically reversionary
- ABP worth $600,000 plus $500,000 insurance proceeds total $1.1m to be paid as a death benefit
- Meredith’s remaining TBC is $900,000
- ABP balance at date of death of $600,000 will apply as a TBA credit to Meredith in 12 months
- Insurance proceeds are paid into reversionary income stream soon after date of death bringing balance to $1.1m
- $0 accumulation, $1.7m in ABPs, $300,000 remaining in her TBC
Grey’s SMSF
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An income stream will be non-reversionary if there is not an automatic reversion
- In the absence of appropriate documentation stating a dependent beneficiary is automaticallyentitled to receive the income stream on death of the member, it will generally not be considered reversionary
When member passes away a non-reversionary income stream will cease
- Beneficiary may be able to take the death benefit as an income stream if they are a SIS dependent
Death benefit income stream will be a new account-based pension for the beneficiary
- Balance at commencement will apply against beneficiary’s TBC from that date
- Any insurance payment received will form part of the death benefits payable and if taken as part of a death benefit income stream will count towards the beneficiary’s TBC
- Income stream will be deemed for social security purposes
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Non-reversionary income streams
Considerations whilst running a pension
Minimum pension payment must be cashed to meet pension standards and be eligible for ECPI
- A MLP commenced after 20 Sept 2007 needs to make a payment that meets both the ABP minimum pension standards and the MLP minimum payment
- Cannot be a journal entry, must cash the payment to the member
- ATO commissioner’s GPA concession could assist if is a small underpayment or honest mistake in a year
- Could be made as one payment or multiple payments based on terms of income stream
Do not complete a transfer balance account report (TBAR) for a pension payment
Each income stream must make a pension payment that meets the pension standards
- It is not sufficient for total payments made to meet the total minimum requirements
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Pension payment requirements
If member desires more from super than the prescribed minimum payment think strategically
If have non-retirement phase TRIS
- Commutation restrictions impose a limit of 10% of opening balance on annual pension payments
- Lump sum payments can only be made out of any unrestricted non-preserved benefits
- No TBAR requirements
If have accumulation interest consider taking lump sums from accumulation instead of pensions
- Common where members retired but have pension and accumulation due to the TBC, or are not yet fully retired
- Taking lump sums from unrestricted non-preserved monies in accumulation vs pension will maximise ECPI
- Taking payments towards the start of the income year will also maximise ECPI in the fund
- Conserve pension balances with higher tax-free components for future death benefits paid to non-dependents
- No TBAR requirements20
Pension payments vs lump sums
If taking additional payments from an income stream consider taking as lump sums
- Remember lump sums don’t count towards minimum pension standards
- Take as late in the year as possible to maximise ECPI
- Require a TBAR which will reduce a member’s TBA
Benefits of taking additional pension drawings as lump sums
- Creates more ‘space’ to accept future death benefits as an income stream
- If under age 60 may be able to reduce tax payable on taxable component of payment subject to low rate cap ($210,000 in 2019-20)
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Pension payments vs lump sums
If circumstances change don’t forget to review and update SMSF death benefit documentation
- Think about member’s capacity now and in future to make decisions, and whether powers of attorney may be required
- Review any binding or non-binding nominations
- Terms of each income stream will specify if pension is automatically reversionary and to whom will be paid
- If wish to change may need to commute and recommence a new income stream on new terms
- Each new income stream will require tax-components to be re-calculated
Obtaining assistance from a superannuation lawyer can help safeguard against problems down the track and ensure each member’s benefits will be distributed in line with their wishes
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Keeping beneficiary’s up to date
When the member passes away
Pension interest does not cease but continues to be paid to reversionary beneficiary
- Retains existing social security treatment
Pension remains eligible for ECPI in year of death as long as minimum pension paid
- Minimum payment is not re-calculated on death
- Payments made prior to death count towards minimum requirement
- Reversionary beneficiary needs to make sure minimum payment is made in year of death prior to year end
If minimum payments not met
- Income stream will not be treated as an income stream that year and not be eligible for ECPI
- Any payments made will be treated as lump sums
- Beneficiary will need to recommence new death benefit income stream at start of following year – ATO have confirmed this continues to meet the cashing requirements
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Reversionary income stream on death
No TBAR required for deceased member
- A person ceases to have a TBA on death
- Reversionary beneficiary will complete TBAR for balance at date of death and credit will apply in 12months
If income stream was a non-retirement phase TRIS it converts to retirement phase on death
If income stream is a MLP
- If term was based on beneficiary’s life expectancy then must continue as a MLP until end of the term or reversionary beneficiary passes away
- If term was based on original pensioner’s life expectancy then beneficiary can choose to continue MLP or commute to lump sum or new income stream
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Reversionary income stream on death
Pension interest continues to be eligible for ECPI until death benefit is paid
- As long as paid as soon as possible, typically 6 months
- Will not fail pension standards if minimum pension requirements not met in year of death
No TBAR required for deceased member
- A person ceases to have a TBA on death
If income stream is ‘account-based’ can be paid out as a death benefit
- ABP, MLP or TRIS
- Lump sums or/and income streams depending on whether beneficiaries are death benefit dependents
If income stream was an existing complying lifetime or life expectancy pension remaining assets move to an unallocated reserve and do not form part of the death benefit
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Non-reversionary income stream on death
If an eligible beneficiary takes death benefit as an income stream
- A new deemed account-based pension
- Cannot commute to accumulation phase, nor combine benefit with non-death benefit income streams
- Can commute in order to roll over to new death benefit income stream e.g. if wanted to close SMSF
- TBAR required based on date new income stream commenced and balance at commencement, balance will apply immediately to the beneficiary’s TBA
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Paying a death benefit income stream
Value counted towards beneficiary’s TBA
- Balance of a reversionary pension on date of death – credit applied in 12 months
- Balance of death benefit income stream at commencement – credit will apply at that time
If credit is likely to cause an excess transfer balance
- Commute other retirement phase income streams to accumulation phase to open up space in TBA
- If still is not enough space to accept desired death benefit income stream some of the benefit may need to be commuted to a lump sum
- If need to sell assets to pay out lump sums then look for opportunity to sell assets whilst fund is solely in pension phase (where does not have disregarded small fund assets)
To avoid an excess transfer balance
- For a reversionary pension have 12 months to act
- For a death benefit pension need to act prior to commencing the new income stream
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TBC issues
Example
Transfer Balance Cap
Jo and Alex are the sole members of their SMSF at 1 July 2019
- Alex aged 70 had an ABP with an automatic reversion to Jo and an accumulation account due to the introduction of the TBC at 1 July 2017
- Jo aged 63 had an accumulation account and was still working
- The SMSF is a quarterly reporter for TBAR
On 3 April 2020 Alex passed away
- The value of his income stream was $1,545,000 and it transferred to Jo automatically
- Alex’s accumulation interest valued at $175,000 also formed part of the death benefit to be paid to Jo
- On 14 May Jo decided to take $55,000 as a death benefit income stream and the remaining $120,000 was to be paid out as a death benefit lump sum to ensure she would not exceed her TBC of $1,600,000
Chief SMSF
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Example
Transfer Balance Cap
Jo will need to report the following TBAR events:
- A credit of $1,545,000 by 28 July 2020 for the reversionary income stream (the credit will not be applied to her TBA until 3 April 2021)
- A credit of $55,000 by 28 October 2020 for the death benefit income stream
- No TBAR is required for the $120,000 paid out as a death benefit lump sum
Chief SMSF
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Example
Selling assets
Owen and Amelia are members of their SMSF at 1 July 2019
- Owen aged 67 had an ABP valued at $910,000 reversionary to his wife Amelia and another ABP valued at $554,000 payable on death to his adult son Leo
- Amelia aged 64 had an ABP valued at $780,000 reversionary to Owen
On 18 February 2020 Owen passed away
- The income stream payable to Amelia was worth $895,000 which she wished to take as a death benefit income stream
- Owen’s other pension valued at $505,000 was to be paid out as a lump sum to Leo
Amelia’s TBA on 17 February was $810,000
Surgeons SMSF
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Example
Selling assets
Receiving the reversionary income stream will tip Amelia over her $1.6m TBC
- Current TBA = $810,000
- Death benefit income stream credit = $895,000
- Excess = $1,705,000 - $1,600,000 = $105,000
Actions Amelia decided to take
- Commute $105,000 from existing ABP to accumulation and take $895,000 as death benefit income stream
- Pay $505,000 death benefit as lump sum payment to Leo as soon as possible
Amelia needs to sell an asset in the fund in order to pay out lump sum
- Significant capital gain will be realised when sell asset
Surgeons SMSF
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Example
Selling assets
If sell asset before partial commutation then incurred in deemed segregated period and gain 100% tax free
If sell asset after partial commutation then gain incurred in unsegregated period and has actuarial exempt income proportion apply (< 100% tax free)
Surgeons SMSF
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Commute $105,000 from
Amelia’s ABP to accumulation
on 15 May 2020
Owen passes away 18 February
Sell asset
for gain
Sell asset
for gain
Waiting as long as possible to commute existing income streams will maximise ECPI
If have received a reversionary MLP with balance in excess of $1.6m
- Even if commute other income streams, will not be able to avoid an excess transfer balance
- Important to think carefully about setting term of income stream based on reversionary beneficiary’s life expectancy, a non-reversionary income stream could provide more flexibility
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TBC issues – reversionary pensions
Example
Maximising ECPI
At 1 Jul 2019
- Richard age 62, $970,000 in ABP and TBA of $950,000
- Catherine age 67, $1,620,000 in ABP and TBA of $1,600,000
- Fund has disregarded small fund assets
- Fund reporting quarterly for TBAR
Catherine passed away 1 Nov 2019 with balance $1,640,000
- Minimum pensions will be paid 28 June 2020
- Catherine’s pension was automatically reversionary
Prior to 28 Jan 2020 submitted Richard’s TBAR for credit of $1.64mill for reversionary ABP
Catherine’s reversionary pension
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Example
Maximising ECPI
Richard decided just prior to 1 Nov 2020 he will complete the following
- Full commutation of existing ABP (let’s assume $970,000) to accumulation
- Lump sum payment from reversionary ABP to avoid excess transfer balance ($20,000)
- Richard’s TBA = 950,000 – 970,000 - 20,000 = -40,000
- Report TBA debits straight away so ATO don’t issue excess transfer balance
At 1 Nov 2020 credit of $1.64mill applied to Richard’s TBA
- Richard’s TBA = -40,000 + 1,640,000 = 1,600,000
- If didn’t report debits prior to 1 Nov TBA = 950,000 + 1,640,000 = 2,590,000
SMSF remains solely in retirement phase in 2019-20
- Exempt income proportion = 100% (still need actuarial certificate)
- Maximises ECPI in 2020-21 by keeping all pensions running as long as possible
Catherine’s reversionary pension
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A few FAQs
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FAQs – Estate planning and pensions
Member A passed away in March 2020 and their reversionary pension valued at $500,000 was transferred to Member B.
When calculating the total super balance (TSB) for Member B at 30 June 2020 do we include the $500,000 in the calculation?
Yes.
A reversionary pension will be an interest for the beneficiary from the date of death. In this case, Member B will be receiving the reversionary income stream from March 2020 and it will form part of their TSB at 30 June 2020.
?
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FAQs – Estate planning and pensions
?Consider a member with a $1.6 million TBA who receives a reversionary pensionin Nov 2019.
If the member completes a commutation to stay under the $1.6 mill TBC on the day before the reversionary pension is credited to their TBA in Nov 2019, but the commutation is not yet due to be reported until say January 2020, would the ATO say the member has exceeded their TBC?
It is likely that the ATO would determine the member to have exceeded their TBC if the commutation event is not reported prior to the value of the reversionary income stream being credited to their TBA, which is already at $1.6million.
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FAQs – Estate planning and pensions
?If have a reversionary pension the balance is rolled out of the SMSF to a new death benefit pension in a retail fund what are the TBAR requirements?
A reversionary income stream will have the balance at the date of death apply to the beneficiary as a TBA credit 12 months from the date of death.
If the member commutes that income stream and rolls it out to another fund then the commutation of the income stream in the SMSF and the pension commencement in the new fund will both be TBAR events. The SMSF will need to report the credit of the market value of the reversionary pension as well as the debit of the commutation value. These values are likely to be different due to earnings or/and payments made between the date of death and commutation.
When starting a pension think about
- Who might ultimately be the recipient of the benefit and complete appropriate documentation to support that
- Maximising tax components prior to starting a pension can reduce tax on death benefits paid to adult children
- Reversionary pensions can provide benefits with respect to the TBC (except for large MLPs)
Meeting minimum pension payments is important throughout the life of a pension
- If fail to meet standards might need to recommence pension with new tax components
- Beneficiaries receiving a reversionary pension need make sure pension standards are met in year of death
When paying death benefits
- Determine if beneficiary is a death benefit dependent = how they can take death benefit and tax implications
- Consider TBC implications for recipients of income streams
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Conclusions
Contact us
The information in this presentation has been prepared by Accurium Pty Ltd ABN 13 009 492 219 (Accurium). It is general information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided and Accurium is not liable for any loss arising from reliance on this information. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial decisions. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.
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