April 2015

<< Back to newsletters

SMSF Minimum Pension Withdrawal Reminder

A quick reminder for our SMSF trustees about the importance of withdrawing the minimum pension amount from your superannuation fund before Tuesday 30th June 2015.  You can find each member’s minimum pension withdrawal amounts for 2015 in the covering letter we included with your 2014 financial statements.  If you have any questions to do with your minimum pension requirements please call our office to discuss with one of our accountants.

Income Protection Insurance and Workers Compensation – The Differences Explained

Many people believe that being covered at work through workers compensation insurance is enough and feel there is no need to extend their coverage beyond this.  However workers compensation insurance coverage is limited to the workplace and not all injuries that occur in the workplace are automatically eligible for compensation.  There are certain factors that influence as to whether a claim will be paid and if so the amount that will be paid out.  These include: proving the negligence of the employer; the injury has to be a direct result of some kind of negligence on the employer’s part.  If this cannot be proved then usually the claim is denied.  Also the injury sustained must be while the employee is at their workplace.

If the injury incurred does qualify for workers compensation then the amount paid will vary.  Compensation will depend on the type of injury caused, its severity and the time the employee is likely to not be able to return to work.  Therefor the actual compensation amount is very difficult to determine if an employee gets seriously injured at work.  Currently there is no uniformity in regards to benefit periods and amounts paid across all states and territories.  So overall there is a risk of workers compensation not being received or when it is does qualify, not being adequate enough to cover the injury sustained.

Income Protection insurance has a much broader application than workers compensation and as there is a reasonable risk of accidents or injuries occurring outside work from home and recreational activities, it should be considered by most working people.

Income Protection insurance can give you cover until you are fully recovered to return to work or in some cases to the age of 65.  Under Income Protection cover you have a choice as to the type of cover you want and how you will be paid, it will depend on the amount of cover and terms you are willing to pay for.  Each insurance provider will have different coverage and terms as to when a claim can be made.  When comparing policies, it is essential to read the product disclosure statements to understand the different terms and options available that can be taken.  Consider getting professional financial advice to help you pick the correct policy and terms for your circumstances.

Taxing of Minimum Pension Drawdowns Age 55-59

There are some quirky aspects of the application of the minimum drawdown and related tax rules for account-based pensions which have caused uncertainty, particularly for those aged from 55 to 59 inclusive. However, recent Australian Taxation Office (ATO) statements appear to remove all but a few of the remaining mysteries. This article examines some interesting tax implications that can arise for account-based pensioners under the age of 60 depending on the manner in which they make their drawdowns.

Importance of meeting the minimum drawdown requirement

As a starting point, it is worth emphasising the importance of holders of an account-based pension (ABP) receiving total annual payments necessary to meet the Superannuation Industry (Supervision) Act 1993 (SIS) minimum drawdown requirement. As the ATO has made clear in Tax Ruling TR 2013/5, if this requirement has not been met then it considers that an ABP will have ceased at the start of the relevant income year (or not started at all, if it was to have been the first year). The tax consequences for that year are typically unfavourable and include no fund earnings tax exemption and potentially higher tax on benefits paid. The ATO can only exercise discretion to overlook failure to meet the minimum drawdown in very limited cases. How the minimum drawdown requirement is met for an ABP holder varies depending on the preservation status of their super benefits; that is, typically, the extent to which their benefits are classified as unrestricted non-preserved, restricted non-preserved or preserved. For people aged 55 to 59 this often turns on whether or not they have retired for the purposes of SIS.

Retired ABP owner

Assume David is 58 years old, retired for the purposes of SIS and started an ABP in his SMSF in 2014/15 with unrestricted non-preserved benefits, all taxable component. His minimum drawdown requirement for this year is $30,000 and he has already drawn $10,000 by way of regular income payments. He is contemplating making a partial commutation and cashing a further $20,000 in one lump. Note that, prior to any partial commutation, the cashings during the income year must have been at least equal to a pro rata amount of the minimum, based on the number of days the ABP was payable in the financial year up to the commutation date. Alternatively, after a partial commutation the remaining ABP balance must be enough to pay any outstanding minimum requirement. Assume David meets these requirements.

Can a partial commutation count towards meeting the minimum?

While SIS makes a distinction between partial commutations and other payments for various purposes, cashings arising from partial commutations count towards the minimum drawdown requirements in the same way that regular income payments do. The ATO has acknowledged this in its Self-Managed Superannuation Fund Determination SMSFD 2013/2.

Can the partial commutation be taxed as a lump sum benefit?

If taken as a lump sum benefit, the taxable component is taxed on David’s personal income tax return at 0% up to the low rate cap.  Once the low rate cap has been exceeded, it will be taxed at 15% plus the Medicare levy.  If taken as an income stream, the taxable component is taxed at his marginal tax rate plus the Medicare levy but he is also entitled to a 15% tax offset.

David’s regular pension payments will be taxed as superannuation income stream benefits by default. While he will be entitled to a tax offset of 15%, assume his marginal tax rate is higher than that so the payments will give rise to a tax liability. However, if he makes a written election in advance of the payment, the $20,000 partial commutation can be treated as a superannuation lump sum benefit for tax purposes. The low rate cap referred to in the table above is an indexed lifetime limit ($185,000 in 2014/15) that is reduced by the taxable component of any lump sums David has already received in a previous financial year on or after reaching preservation age (age 55 for someone born before 1 July 1960, such as David). Assuming David has not previously cashed a lump sum benefit, if he makes an election for the payment to be a lump sum benefit the $20,000 partial commutation will fall within his low rate cap and no tax will apply to that payment. Note that David’s fund was liable to make a series of periodic income stream benefit payments which it made prior to his decision to take the lump sum benefit. Had that not been the case it is possible that the ATO may have taken the view that there was no pension under SIS nor was the fund entitled to a tax exemption (refer to Tax Ruling TR 2013/5 and Division 295 of the Income Tax Assessment Act 1997).

The transitioning ABP owner

Assume Ann’s circumstances are similar to David’s except that she has not retired and her ABP is a “transition to retirement” (TTR) pension. She started the pension this income year and it comprised of preserved benefits except for around $30,000 of unrestricted non-preserved benefits (URNP) (which were sourced from a benefit rolled over from an employer-sponsored fund upon resignation many years ago). The ATO’s view is that SIS requires payments from a TTR pension to be paid first from URNP benefits, then from restricted non-preserved benefits (but there are none here) and then from the preserved benefits. Ann has received $10,000 in regular pension payments and is contemplating making a partial commutation of the remaining $20,000 of URNP benefits. For TTR pensions, SIS allows URNP benefits to be commuted (but not restricted non-preserved or preserved benefits).

Can a partial commutation count towards meeting the minimum?

The ATO has recently issued SMSF Determination SMSFD 2014/1 which confirms that, on the one hand, the partial commutation cashing does not count toward the maximum drawdown constraint for a TTR pension but, on the other hand, it does count towards the minimum. So, while SMSFD 2013/2 indicates otherwise, SMSFD 2014/1 clearly indicates that the ATO would now accept that Ann will have met the minimum once the $20,000 partial commutation is cashed.

Can the partial commutation be taxed as a lump sum benefit? 

It should follow that Ann can make a written election in advance of payment that the $20,000 partial commutation is to be taxed as a superannuation lump sum benefit and to take advantage of the fact that the amount falls within her $185,000 low tax cap.

What if a TTR pension is fully preserved? 

Assume instead that Ann’s TTR account comprises only preserved benefits. In this case SIS generally does not permit a partial commutation cashing. However, under the governing rules of Ann’s fund, the terms of her TTR pension permit irregular pension payments so Ann arguably would be able to cash a $20,000 payment from the fund without it being classified as a partial commutation for the purposes of SIS.

Would she be able to elect for such a payment to be treated as a superannuation lump sum benefit for tax purposes? 

There does not appear to be anything which expressly prevents her from doing this under the relevant provisions of the Income Tax Assessment Act 1997, but perhaps the fact that the payment could not be recognised as a partial commutation under SIS prevents this in some way. We await the ATO’s view on this remaining mystery.

People about to start a TTR pension: 

For SMSF members about to commence a TTR pension with part of their super savings, the ATO website currently suggests that they can choose which classes of benefits they allocate to their TTR pension account for preservation purposes. For those who have URNP benefits, some thought needs to be given to whether or not the URNP benefits should be transferred to the pension account. On the one hand, if they intend only to draw the minimum required each year, there may be some appeal in transferring URNP benefits into the pension account, as it may provide clear scope for some of the cashings to attract lump sum tax treatment. On the other hand, the fact that any URNP benefits in a pension account must be drawn from that account before any other benefit may limit the scope to take them as lump sum benefits. In particular, members who are likely to need to draw more than the minimum and who are keeping some of their super in accumulation phase may gain extra flexibility by keeping the URNP benefits out of a pension account since these will not be forced out of the fund but are available for cashing at any time. Of course, some members will transfer all their super savings into the TTR pension for tax and other reasons, in which case any URNP benefits will be allocated to the TTR account and be paid out first.

In many cases people with ABPs aged 55 to 59 who are cashing only the minimum necessary to satisfy the SIS rules will have the scope for part of the cashings to be treated as a lump sum benefit for tax purposes. Recent ATO statements indicate that this may extend to TTR pensioners, although it is unclear whether that treatment is limited only to their URNP benefits.  If you would like further information please contact our office.

Tax Planning for 2015

With the end of the financial year fast approaching it’s a good time to start thinking about tax planning ideas to minimise your tax liability. Some strategies, including setting up more tax effective business structures such as a company or trust, negative gearing property or salary sacrificing, are more complex but well worth discussing with your accountant, particularly for higher income earners.

A tax strategy you can use straight away is to bring forward any tax deductions you may have prior to 30 June.  By maximising your tax deductions this financial year you can reduce your taxable income which will reduce the amount of tax you need to pay.

The following are some examples:

  • Paying rental property expenses including repairs and maintenance
  • Giving gifts and donations to registered charitable organisations
  • Paying subscriptions to professional journals
  • Paying memberships to professional associations
  • Prepaying for business travel, seminars and conferences
  • Prepaying insurance premiums or rent on business premises
  • Purchasing office supplies and stationery
  • Business owners can pay employee’s super contributions into a complying fund by 30 June
  • If you intend to claim work related Motor Vehicle expenses remember to prepare a log book to document your private and business kilometres travelled for a continuous 12 week period as well as your motor vehicle expenses
  • Higher income earners could get private health insurance to avoid the Medicare levy surcharge.

These ideas require spending money sooner rather than later in order to save money.  If your cash flow prevents this or does not relate to your circumstances at the very least it’s a good idea to plan just by making sure you have all your necessary tax documents together sooner rather than later.  Not only will you then not miss claiming items you should have but it will mean you can have your tax prepared in a timely fashion so you don’t get hit with late lodgement fees and if you do have a tax liability you can then budget for it.

Rules for Collectible and Personal Use Assets in SMSFs

From 1st July 2016, the transitional rules for collectibles and personal use assets held in SMSFs will have expired.  Collectibles and personal use assets include items such as:

  • Artwork – including paintings, sculptures, drawings, engravings & photographs
  • Coins, medallions or bank notes – where their value exceeds their face value
  • Antiques
  • Postage stamps or first-day covers
  • Memorabilia
  • Wine or spirits
  • Memberships of sporting or social clubs
  • Bullion coins are collectables if their value exceeds their face value & they are traded at a price above the spot price of their metal content
  • Jewellery
  • Artefacts
  • Rare folios, manuscripts or books
  • Motor vehicles & motorcycles
  • Recreational boats

The new rules took effect for purchases made from 1st July 2011 and from 1st July 2016 they apply to all collectable and personal use assets.  The rules prevent these types of assets:

  • being leased to, or part of, a lease arrangement with a related party
  • being used by a related party
  • being stored or displayed in the private residence of a related party.

This excludes agreements where art is displayed at the business premises of a related party where it is visible to employees and clients.  However you are allowed to store collectibles and personal use assets in purpose-built storage facilities that are owned by a related party provided the premises are not a part of their private residence and the assets are not on display.

Artwork can be leased to an art gallery provided the lease is an arm’s length arrangement and the gallery is not owned by a related party.  The SMSF must have an insurance policy in its name over the artwork, regardless of the insurance policies held by the gallery.

Investments in classic motor vehicles, as well as restrictions on display and storage, also prevent related parties from driving them, even for restoration or maintenance reasons.

As well as storage and use restrictions:

  • the investment must comply with all other investment restrictions, including the sole purpose test
  • documentation, such as meeting minutes, must be kept for 10 years on storage decisions
  • insurance must be in place within 7 days of acquisition and the policy must be held by the SMSF
  • if the item is sold to a related party, it must be sold at market value as determined by an independent valuer.