The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.
The Australian Life Tables (ALTs) 2010-2012 have recently been released by the Australian Government Actuary in December 2014. These are updated every five years, with the next update due for release in 2019.
According to the ALTs 2010-2012, Australians born today are expected to live longer (on average) than those born five years earlier.
A commonly used measure for longevity is life expectancy. This measures the average number of years that would be lived by a representative group of individuals of the same age if they experienced mortality at given rates.
Based on the ALTs, if a child is born today, a female’s life expectancy is 84.3 years (an increase of 0.6 years compared to 2005-2007), and a male’s life expectancy is 80.1 years (an increase of 1.1 years compared to 2005-2007).
According to the 2010-2012 ALTs, a 65 year old man has a life expectancy of around 19.2 years to age 84.2 (an increase of 0.7 years compared to 2005-2007). A female of the same age has a life expectancy of 22.1 years to age 87.1 (an increase of 0.4 years compared to 2005-2007). However, there can be problems with using these tables to determine your life expectancy. The data is a snapshot in time and they do not take into account the fact that we are living longer due to improvements in mortality.
The mortality rates in the ALTs 2010-2012 are an estimate of those actually experienced over the 3 year period that the data covers. Life expectancies generated from these tables do not make any allowance for expected improvements in mortality rates over a person's lifetime.
Census data over the last century has shown a continuing trend of increasing longevity, for example we might expect a current 30 year old to live to an older age, on average, than someone who is aged 65 now. To allow for these expected future improvements in mortality the Government Actuary also publishes tables of mortality improvement factors based on the increases in longevity experienced in the population over the last 25 years.
Allowing for future improvements, the life expectancies are considerably longer, as presented in the table below:
Life expectancies ALTs 2005-2007 ALTs 2010-2012 ALTs 2010-2012 withallowance for future improvements Male Female Male Female Male Female From birth 79.0 83.7 80.1 84.3 90.5 92.2 From age 65 83.5 86.6 84.2 87.1 86.6 89.0
Increased longevity has significant implications for both individuals, trying to estimate the resources needed for retirement and the government, dealing with rising pension, health and aged care obligations.
For further detailed calculations please refer to Accurium’s updated Survivorship calculator located in the technical hub which provides the option of using the ALTs 2000-2002, 2005-2007 and the recent 2010-2012 mortality tables projected forward assuming future improvements in line with those experienced in the 25 years leading up to the relevant Census.
Draft Tax Determination 2013/D7 released on 7 August 2013 provided much awaited guidance from the ATO on the circumstances in which an asset of a super fund would be considered a segregated pension asset. Unfortunately, the tax office withdrew TD 2013/D7 noting that after receiving a number of submissions during consultation it became clear that the approaches to segregation varied materially across the industry.
Why was the Determination withdrawn?
This consultation process perhaps brought to the Commissioner’s attention the increasingly complex segregation strategies being applied across the industry and the wide range of approaches used to implement them. In particular, the draft determination wasn’t clear on how ‘hybrid’ segregation (where some assets in the self-managed superannuation fund (SMSF) are segregated and some are not) should be treated or on the approach to be taken where a fund moves in and out of segregation multiple times during a financial year.
The issue of separate bank accounts was evidently also a key topic of many submissions as the ATO has subsequently released a Tax Determination dealing specifically with the issue of bank accounts (TD 2014/7).
The tax office notes that they will further consider and consult on segregation. However, the form and timing of this further consideration is not specified.
In our submission on the Draft Tax Determination we identified several areas which could be further clarified, including the use of separate bank accounts. We were hopeful that a finalised Determination would provide certainty for the industry on how the ATO expected segregation to be implemented in practice. However, it appears that the ATO are only now appreciating how segregation is actually being implemented in practice, and perhaps current practice is more complex than what they expected.
So what does this mean going forward?
Now that the Draft Tax Determination has been withdrawn it can no longer be taken as a guide to the ATO’s view on segregation. It does leave some uncertainty and begs the question of whether the ATO has lost touch a little with how SMSFs are utilising segregation.
We have a number of articles on segregation available which we continue to believe are useful interpretations of how to implement segregation in practice in line with previous ATO guidance and tax law.
The notice of withdrawal is: TD 2013/D7W – Withdrawal.
Author: Melanie Dunn
During end of year planning for self-managed superannuation funds (SMSF) one way to provide distinct value for your SMSF clients is to ensure that they do not become liable to pay any unnecessary tax.
Some SMSF trustees may be eligible to claim exempt current pension income (ECPI) based on some or all of their assets being in the pension phase.
Account-based and transition to retirement pensions are required to meet minimum pension standards each year. This involves making a pension payment in form and effect based on the age of the pensioner and the pension account balance at 1 July prior to 30 June.
Where the pension commenced during the financial year the minimum pension payment required will be based on the account balance at commencement and the minimum payment will be pro-rated based on the number of days remaining in the financial year. In addition, if the pension commenced in June no pension payment is required in that year to meet the pension standards.
The minimum pension payments required by the SIS Regulations are:
Remember a pension payment must be physically paid out of the fund – a journal entry is not sufficient.
Under the minimum pension standards a transition to retirement pension has a further restriction to ensure that the payment made does not exceed 10% of the 1 July (or commencement if started during the year) account balance.
If the minimum pension standards are not met, the ATO may disallow the tax exempt status of the pension. This means SMSF trustees could potentially pay tax on all income, as opposed to none.
Each year as 30 June approaches is the time to review client pensions and ensure that your trustees do not miss out on their valuable tax exemption. Assisting in meeting pension compliance requirements will provide value to your clients’ continued annual service.
How can Accurium help?
Accurium has tools that can assist you and your trustees as they move into retirement. Our pension payment report provides a letter which outlines the pension payment requirements that the fund must meet in order to be eligible to claim ECPI in a financial year.
This report is based on calculations completed by our actuarial model of the pension standards for market linked, account-based and transition to retirement pensions.
The report provides you and the trustee with peace of mind that you have the precise information needed to ensure appropriate pension payments are made so that each pension meets the pension standards and your trustees remain eligible to receive the tax benefits to which they are entitled.
Author: Melanie Dunn
Over the past few years the ATO has indicated its intention to focus on the exempt current pension income (ECPI) deduction claimed in the self-managed superannuation fund (SMSF) annual return and this continues again in 2014. The ECPI deduction is the largest deduction claimed by SMSFs and therefore it is important to get the calculation correct to avoid scrutiny by the ATO.
The reporting of ECPI in the SMSF annual return for 2012/13 changed from previous years to gather more information about the claim of ECPI.
Section 10: exempt current pension income
This section of the SMSF annual return asks whether the fund intends to claim a tax exemption for current pension income in the 2013/14 financial year. If the fund paid a pension to any of its members during the financial year, and if the minimum pension standards were met for those pensions, then the fund will be eligible to claim an exemption from income tax at Section 10.
Ordinary income and statutory income that a complying SMSF earns from assets held to provide for superannuation income stream benefits can be exempt from income tax. However, any non-arm’s length income or assessable contributions are excluded.
Income that is exempt is referred to as ECPI. This exemption is claimed under the Income Tax Assessment Act 1997. The legislation sets out the two methods for working out the amount of ECPI you can claim:
- segregated assets method – Section 295.385
- unsegregated assets method – Section 295.390
Completing the tax return
- If the SMSF paid an income stream to one or more members during the year, and the minimum pension standards were met on these pensions, print X in the ‘Yes’ box. Otherwise, print X in the No box.
- If you selected ‘Yes’, then at item A enter the total amount of ECPI being claimed. Under the segregated method this will be the income earned on segregated pension assets during the 2012/13 year. Under the unsegregated method this will be the fund’s ordinary income multiplied by the tax exempt percentage provided by an actuary.
- You must then print ‘X’ in the appropriate box (B or C) selecting the method used to calculate ECPI. B for the segregated assets method or C for the unsegregated assets method. If the SMSF is in full pension phase (with no defined benefit pensions) for the entire financial year, and there were no non-arm’s length income, then select the ‘segregated assets method’. The ATO have made it clear that where a SMSF is in full pension phase it considers all the fund’s assets to be segregated pension assets and hence the segregated method (Item B) should be used. The fund is not required to identify individual assets as being allocated to particular superannuation income stream benefits for this to be the case. In order to claim ECPI under the unsegregated method an actuarial certificate is required to certify the fund’s tax exemption. Print ‘X’ in the ‘Yes’ box at item D to indicate that an actuarial certificate has been obtained by the fund.
- If the fund had any other assessable income then print ‘X’ in ‘Yes’ at item E. Funds that are not fully in pension phase, or have non-arm’s length income will need to select ‘Yes’. If the fund has no assessable income print X in ‘No’ at item E.
What if the fund has hybrid segregation?
An interesting question arises for funds which use hybrid or partial segregation. This partial segregation occurs where some of the funds’ assets use the segregated method and some use the unsegregated method. What will the trustee need to enter at items B and C?
We believe that in this instance it would be appropriate to select both options. The fund is claiming ECPI under the segregated assets methods for income earned on segregated current pension assets, and under the unsegregated method for income earned on pension assets that are part of a wider unsegregated asset pool. Note that an actuarial certificate will be required to certify the tax exempt proportion for the income earned on the unsegregated assets.
If you are unsure whether you require an actuarial certificate please contact Accurium on 1800 203 123 for further assistance.
Author: Melanie Dunn
Tax concessions for retirees
Policymakers and commentators would do well to keep in mind that superannuation is only one of a wide range of investment options open to retirees. Indeed, for retirees with SMSFs in particular, their superannuation is often only a part of their investment portfolio.
The tax exemption on earnings on assets supporting pensions is often put forward as a compelling reason to keep money invested in super in retirement. However, tax concessions such as the Seniors and Pensioners Tax Offset mean that many retirees would not pay income tax even if they held their savings outside the super environment. Any changes to the taxation of superannuation should be mindful of this.
Proposals for a tax on pensions
In its submission to Treasury ahead of the 2014/15 Budget in May, another actuarial firm proposed a tax on earnings on assets in the pension phase. It was suggested that the Government could circumvent its promise not to make any detrimental changes to superannuation by simultaneously reducing the rate of tax on earnings on accumulation assets and setting both rates at a level such that the current tax take is not increased. They estimated that setting a tax on all super earnings at 10.5% would raise the same revenue as the current 15% tax on accumulation earnings.
The kicker is that over the longer term, with our ageing population, the proportion of assets in pension phase will increase therefore increasing the tax take overall. On the face of it, this sounds fairly sensible. It would simplify the administration of super and increase the tax take in the longer term by taking money from wealthier retirees to help pay for the ever-expanding age pension bill.
However, our analysis suggests that such a measure alone would most likely have completely the opposite effect; it would drastically reduce the total amount of superannuation savings in Australia and the tax accrued from those savings.
Simply put, if retirees behave rationally in response to this policy, then most would remove much or all of their superannuation in favour of better tax sheltered investments. In fact, if the tax rate in the accumulation phase is reduced, the ATO should expect to see a significant reduction in the total tax take from superannuation and at the same time we may see a reduction in Australians’ retirement incomes.
To consider this further, let’s look at how this proposed policy might impact someone who is about to retire and deciding how to manage their retirement savings.
A fairly typical couple retiring at age 65, who own their own home and have $400,000 in superannuation savings between them as well as limited other savings, need to decide where to invest their savings to provide an income in retirement.
Under the current regime, if they choose to keep their savings in the super environment and commence account-based pensions, then earnings on those assets are exempt from tax. They have a wide range of tax efficient investments to choose from, as they would outside super, but mainly for reasons of familiarity and consistency they leave their superannuation within the same system that has looked after their savings for their working life.
Introduce a tax on earnings in the pension phase and our couple must think twice about leaving their savings in super. If they withdraw their savings and invest them outside super then the income earned would form part of their assessable income for tax purposes.
A reasonably balanced investment strategy in retirement might yield around 5% p.a. on average over the long term – say $20,000 in income on their current $400,000 in savings. When we allow for the Seniors and Pensioners Tax Offset this is below the threshold at which they would start paying income tax, even taking into account their age pension entitlements. From a tax perspective they would be better off investing their money outside super.
In fact, we estimate that our couple would need retirement savings of over $1.5 million between them, well beyond the average Australian, in order for it to be tax efficient to leave their savings in a taxed super fund compared to outside. This is again based on achieving a 5% p.a. return both inside and outside super.
Clearly, this is going to have an impact on the amount of money retirees choose to keep invested in super funds. The proposed policy assumes retirees keep pumping their retirement savings into super pensions at the current rates despite the fact they will be worse off tax-wise. We don’t believe that this is likely, particularly for well advised SMSF trustees, and therefore that the proposed policy will not raise the expected levels of tax. Given that the proposal also reduces the tax rate on super assets in accumulation, we would anticipate that this policy would actually reduce the overall tax-take from earnings on super assets.
We would go further and suggest that incentivising people to take their savings out of the super environment may also be detrimental to their retirement outcomes. For the less financially literate, choosing your own investments outside the regulated super environment may lead to less appropriate investment, perhaps resulting in too much money sitting in cash rather than being invested. Also, removing the self-imposed discipline of setting up a pension to provide a regular income could lead to retirees spending their savings more quickly and falling back on the age pension sooner.
Author: Doug McBirnie