1. Div 296 – should my clients be worried?

The draft legislation for the introduction of Division 296 in Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 is currently in the Senate. The current position is that:

• The Bills were listed for debate on 6 and 13 February but were withdrawn.
• It is unlikely that the bills will be debated prior to the Federal election given that the last sitting day of the parliament before the proposed sitting days commencing on 25 March.
• The outcome of the election will provide a guide on the policies of the new government and whether the Division 296 bills will be reintroduced into the parliament.

2. What do you think about “methodology will be used” to calculate Div 296 tax of the legislation goes ahead.

The process used to calculate Division 296 tax consists of three stages. These are the calculation of:

Stage 1: the member’s adjusted Total Superannuation Balance and determining ‘superannuation earnings’ which is the change in the adjusted balance during the relevant year of income,

Stage 2: the proportion of the member’s ‘superannuation earnings’ which is above $3 million, and

Stage 3: the tax liability which is 15% of the taxable ‘superannuation earnings.

The payment of the tax liability can be made by the member or if the member determines, the payment can be made by the superannuation fund.

3. Is a re-contribution strategy available for only 60 – 65-year-olds or up until age 75 ?

The short answer is that providing a person meets a condition of release of retirement which has a ‘nil’ cashing restriction they can withdraw their superannuation if they wish without any restriction. It is possible for them to make non-concessional contributions prior to meeting the age 75 conditions which should be limited to their non-concessional contributions cap. Non-concessional contributions can be made up to 28 days in the month after the person has reached age 75.

A re-contribution strategy can be implemented where a member:

• has a non-preserved benefit which can be paid from the fund as they have met a condition of release with a ‘nil’ cashing restriction, and
• part or all of the amount received is re-contributed to superannuation as a non-concessional contribution (NCC).

The main aim of the re-contribution strategy is to reduce the taxable proportion of the member’s superannuation benefit so that where the member’s death benefit is paid to a non-dependant for tax purposes the tax payable on the benefit is reduced or eliminated. A non-dependant for tax purposes is generally an adult child of the deceased.

A condition of release of retirement which has a ‘nil’ cashing restriction occurs in the following situations:

• the person has reached their preservation age (currently age 60) and has ceased any gainful employment in which they were engaged between age 60 and 65,
• the person has retired from all gainful employment between age 60 and 65,
• the person has reached age 65.

Once a person has reached preservation age the condition of release is met where they have ceased any gainful employment or self-employment. An example could include the person having a full- time job and works in a casual job on the weekends. If they cease either the full-time or casual job after reaching preservation age, they are considered retired for superannuation purposes. Once the condition of release, it is up to the member whether they wish to have their superannuation benefits paid as a lump sum, pension or a combination.

Whether a re-contribution strategy is worthwhile depends on a number of factors which depend on the taxable proportion of the member’s superannuation benefit. If the benefit consists of a
significant taxable proportion then it may be worthwhile to use the re-contribution strategy. However, where the member’s superannuation benefit consists of a significant tax-free component then the benefit of using the re-contribution strategy may be limited.

Case Study

Sophia ceases a job at age 65 with super of $1.2 million which has a taxable component of $880,000 (80%) and a tax-free component of $360,000 (20%).

She decides to withdraw a lump sum of $360,000 which will consist of a taxable component of $288,000 ($360,000 x 80%) and a tax-free component of $72,000 ($360,000 x 20%) as its tax-free
component. As Sophia is older than 60 the whole lump sum she receives is tax free.

In addition, Sophia decides to commence an account-based pension with the $880,000 balance that remains in the fund. The taxable proportion of that pension is 80% and the tax-free proportion is
20%. However, as Sophia is over 60 years old the pension she receives will be tax free.

Sophia uses the recontribution strategy with the lump sum she has withdrawn and makes a non- concessional contribution of $360,000 which is used to commence a 2 nd account-based pension
which will have a 100% tax free component

If Sophia was to die and non-dependants became entitled to her superannuation benefit at age 65 they would be liable for $144,000 income tax (excluding Medicare). The reason is that tax of 15% (subject to the recipient’s marginal tax rate) is payable on the taxable component of the benefit ($1.2 million x 80% x 15%)

If Sophia was to die after she commenced the 2 nd account-based pension then her non-dependants would be liable to pay $105,600 (excluding Medicare). The reason is that tax of 15% is payable on the taxable component of the 1 st account-based pension ($880,000 x 80% x 15%) and no tax is payable on the proceeds of the 2 nd account-based pension as it has a 100% tax free component.

4. Is better to have a reversionary pension or revert to a Death Benefit Nomination?

Whether it is better to have a reversionary pension or a death benefit nomination really depends on the person’s circumstances. Here are some of the reasons that it may be better to have a reversionary pension over a death benefit nomination and vice versa.

Automatic reversion nomination

• Trustee bound to pay pension to reversioner. The trustee has an obligation to pay the pension to the nominated beneficiary.
• No trustee discretion. The trustee has no alternative to the instruction to pay the reversionary pension to the beneficiary.
• Less paperwork. A binding death benefit nomination may require a certain format and words to ensure the benefit is paid as desired by the deceased.
• Pension of deceased continues to reversioner. The pension payable to the member will be paid automatically to the reversioner on their death.
• Transfer Balance Cap advantages in the first year after death. One benefit of a reversionary pension is that the Transfer Balance Cap of the reversioner does not take into account the
  value of the reversionary pension until 12 months after the death of the original pensioner.
• May have DVA/Centrelink implications.

Binding death benefit nomination

• Helpful if more than one beneficiary to be nominated. It is possible to nominate the surviving spouse and other dependants for superannuation purposes as part of the binding
  death benefit nomination.
• Flexibility for dependants on how the benefit will be received. The nomination may determine that lump sums be paid to some nominated beneficiaries and pensions to other
  nominated beneficiaries.
• May lead to dispute depending on wording of the nomination. The courts and tribunals are littered with disputes concerning the payment of superannuation benefits of a deceased
  member.
• Trust deed may have specific instructions on how the nomination is to be made.

5. Market linked pensions – a good idea to cash them in for an account-based pension?

On 7 December 2024 regulations were made that allow ‘defined benefit pensions’ including account- based pensions to be commuted (converted) to a member’s accumulation phase account within a 5- year amnesty period.

The amnesty requires:

• Defined benefit pensions including account-based pensions to be commuted in full. Partial commutation of the pensions is not available,
• The commutations take place within 5 years of the regulations being made,
• That the commuted pensions may pay a lump sum to the pensioner, commence an account- based pension or remain in the member’s accumulation account as they choose,
• Any amounts used to commence an account-based pension are required to be limited, along with any other of the member’s pensions to be restricted to the member’s Transfer Balance
  Cap.

It may be useful to commute a market linked pension where:

• It is no longer used to access DVA/Centrelink pension concessions
• The pension was commenced for RBL purposes
• The pensioner wishes to get greater access to payments from the pension which is available

with an account-based pension

• Access is required to the larger payments for estate planning purposes

There are a number of factors to be considered before the market linked pension is commuted:

• Age and health of the pensioner or reversionary pensioner
• Balance of market linked pension
• Rollover to a new market linked pension
• Remaining period of market linked pension
• Impact of the person’s Transfer Balance Cap
• Estate planning strategies

Case Study

George retired at age 60 in 2004 and commenced a market-linked income stream which is reversionary to his spouse and will be payable for another 10 years until 2035.

The current balance of the market linked income stream is $1 million and the pension factor is 8.32. erefore, the pension payable is $120,200 and is tax free because it is under the defined benefit
income cap of $118,250.

If George commutes his market linked income stream and uses all of it to commence an account- based pension it will be subject to his Transfer Balance Cap of $1.6 million less the amount of the
commuted market linked pension payments he has received since 1 July 2017.

If the total of the pension payments received totals $500,000 then the Transfer Balance Cap will be $1.6 million less $500,000 or $1.1 million.

The balance of George’s market linked income stream is $1 million at the time of commencing the account-based pension he will not be in excess of his adjusted Transfer Balance Cap.

The minimum account-based pension George can receive at age 80 is $ 1 million x 7% which is $70,000.

6. Treatment of prior year capital losses when pension phase funds commuted back into accumulation on the death of a member where no reversionary pension has been set up is it possible to set one up and if so how?

There are a number of issues which need to be considered with this question as they may not be possible under the superannuation and tax legislation. They are:

• It is not possible to commute a death benefit pension in to accumulation phase for a death benefit beneficiary unless it will be immediately paid out as a lump sum or rolled over to
  another superannuation fund to commence a death benefit pension or immediately paid out by the receiving fund as a lump sum.
• Once a person has died it is not possible to set up a reversionary pension retrospectively. The reason is that the pensioner’s nomination of the reversionary is an agreement made
  between the pensioner and trustee of the fund when the pensioner is alive and subject to the rules of the trust deed.
• If a person is in receipt of a non-reversionary pension and dies, the residual capital value of the pension will remain as part of the fund’s exempt current pension income until a decision is made about the distribution of the pension’s capital value.

7. How to speed up the 3 or more ATO / Regulatory SMSF set up checks, when they don’t work?

It is not possible to comment on this as the details of the various circumstances are not available. However, it the delay in the approval of a fund may be due to:

• Data in the Australian Business Number (ABN) Application will not verify
• The SMSF Name selected is not sufficiently unique
• The lodgement and payment of the person’s income and other taxes and related entities tax and other obligations are not up to date
• The establishment documents include clerical errors or are incomplete
• The establishment documents are not executed and dated correctly
• The ATO due diligence procedures concerning illegal access schemes being used bySMSFs

8. Any idea if the $1.6M disregarded small fund assets will be indexed to 1.9M to align with transfer balance cap?

The Explanatory Memorandum to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 clearly states that an individual’s transfer balance cap will be indexed in line with changes to the Consumer Price Index. However, the $1.6 million amount used for disregarded small fund assets will not be indexed.

Here is an extract from the relevant part of the Explanatory Memorandum:

3.17 An individual’s transfer balance cap is $1.6 million for the 2017-18 financial year and is subject to proportional indexation on an annual basis in $100,000 increments in line with the Consumer Price Index (CPI).

10.53 It will not be necessary for a person with an interest in the small fund to be receiving an income stream from that fund. A small fund will be excluded from using
the segregated assets method where a member of the fund, with a total superannuation balance that exceeds $1.6 million, is a retirement phase recipient of an income stream from another superannuation income stream provider. 

Plus, you only have 2 goes at paying the benefit….is there flexibility there?? (think this relates to death benefit)

9. You only have 2 goes at paying the benefit….is there flexibility there?? (think this relates to
death benefit)

The provisions of regulation 6.21 of the SIS Regulations is a compulsory cashing requirement that applies only where a death benefit is payable. The regulation says that ‘a member’s
benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies’ for each person to whom benefits are paid as:

• a single lump sum, or
• an interim lump sum and a final lump sum.

Where benefits are paid in other circumstances the legislation does not place restrictions on the number of lump sums that may be paid.

There are a number of situations on the death of a member, where it may be impossible to
comply with this requirement. An example would be when a death benefit is paid by the
transfer of shares. It is understood that each parcel of shares constitutes a lump sum and
may not meet the compulsory lump sum payment requirements of regulation 6.21.

In a scenario where the sole member of a SMSF (Corporate Trustee structure with deceased member and non-dependent adult child as directors) passes away and the death benefits are to be paid out to the deceased’s non-dependent adult child (age 60+), I assume we are meant to calculate the PAYG Withholding first before arranging for the death benefits to be paid out i.e. Gross Payment (Deceased member’s balance in SMSF) LESS PAYG Withholding = Net Amount to be paid out. However, how would the PAYG Withholding aspect of this scenario work if the beneficiary is opting to receive a portion of the death benefits as an in-specie transfer of listed shares ($100k market value) into their personal name?

If a SDB paid outside the 6 months.. mainly due to awaiting tax statements we won’ t be claiming ECPI subsequent to the DOD FY. any issues?

10. In a scenario where the sole member of a SMSF (Corporate Trustee structure with deceased member and non-dependent adult child as directors) passes away and the death benefits are to be paid out to the deceased’s non-dependent adult child (age 60+), I assume we are meant to calculate the PAYG Withholding first before arranging for the death benefits to be paid out i.e. Gross Payment (Deceased member's balance in SMSF) LESS PAYG Withholding = Net Amount to be paid out. However, how would the PAYG Withholding aspect of this scenario work if the beneficiary is opting to receive a portion of the death benefits as an in-specie transfer of listed shares ($100k market value) into their personal name?

In circumstances where tax is payable to a non-dependant child as a lump sum, PAYG is required to be deducted from the lump sum payable. The amount of tax payable is calculated on the taxable component of the death benefit lump sum. If the death benefit is made as an in-specie transfer of assets the value of the shares transferred in is included in the lump sum and subject to tax on the taxable component. The fund is required to pay PAYG based on the value of the assets transferred in specie and any cash included in the death benefit lump sum.

Any examples of when the super fund holds a large value of cryptocurrency and they have lost the wallet access details upon death of a member? how long could this take?

11. Any examples of when the super fund holds a large value of cryptocurrency and they have lost the wallet access details upon death of a member? how long could this take?

In some cases, this issue may never be solved. However, as the benefit is required to be paid as soon as practicable, locating the wallet may take a long time. Providing the trustees are
making reasonable attempts to locate the wallet then it may be regarded as falling within the ‘soon as practicable’ requirement.

Single member fund with property – takes 2 years to sell down all the assets – still ECPI until benefits paid to the estate?

12. Single member fund with property – takes 2 years to sell down all the assets – still ECPI until benefits paid to the estate?

Whether the assets and relevant income would come within the fund’s ECPI, depends on the circumstances of the case. There are a number of situations where it could occur, for example:

• where a reversionary pension is paid to a death benefits dependant,
• if a non-reversionary pension was paid to the deceased.

The residual amount of the non-reversionary pension will remain in the fund’s exempt pension assets until the beneficiary makes a decision whether they should receive a death benefit such as a lump sum or death benefit pension.

If the death benefit pension has been selected then the assets supporting the death benefit pension will remain as part of the fund’s exempt current pension income.

Information from Graeme Colley and Cloudoffis is general in nature. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided.