Regulatory Roundup – December 2019

Super strategies will soon need to factor in new transfer balance caps

When the legislation to limit the amount that can be transferred into a pension account took effect on 1 January 2017, there was always written into those rules a requirement for the transfer balance cap (TBC) to eventually be indexed.

The legislation, the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016, provides that the general TBC is to be indexed in increments of $100,000 if the indexation rate reaches a prescribed figure (and this is calculated using a formula set out in the legislation).

The ATO has only recently made firm announcements that indexation of the TBC is a looming reality, but essentially depends on the December 2019 indexation rate. If the “All groups CPI weighted average of eight capital cities” reaches or surpasses 116.9 index points, then indexation of the TBC will occur at the next 1 July. (At 30 September 2019 the CPI was at 115.4 — see quarter ending rates for CPI here.) Therefore, the earliest this may occur is next July, however it may be delayed until 1 July 2021, depending on the December CPI.

Note that the ATO has already announced that its web content referring to the TBC has been updated to highlight how individuals will be affected by this future indexation.

The general TBC may not apply
The general TBC is currently $1.6 million, but after indexation there may not be a single cap that applies across the board. Every individual will have their own cap, which should be between $1.6 million and $1.7 million, depending on circumstances.

If you had a transfer balance account before indexation occurs, your personal transfer balance cap will be:

– $1.6 million if, any at time between 1 July 2017 and indexation occurring, the balance of that account was $1.6 million or more

– between $1.6 and $1.7 million in all other cases, based on the highest ever balance of your transfer balance account.

If you starts a retirement phase income stream for the first time after indexation occurs, you will have a personal transfer balance cap of $1.7 million.

It is worth pointing out that indexation of the general transfer balance cap may also change other caps and limits that may apply, especially if you:

– make non-concessional contributions to super

– make a non-concessional contribution to super and may be eligible for a co-contribution

– make a concessional contribution to super on behalf of a spouse and you intend to claim a tax offset for that contribution.

Summary of changes that may affect clients

If… Then…
You starts your first retirement phase income stream on or after indexation. Your personal transfer balance cap will be $1.7 million.
You commenced a retirement phase income stream before indexation. Your personal transfer balance cap may increase by a small amount, unless at any time between 1 July 2017 and indexation, the balance in your transfer balance account was $1.6 million or more. See: Transfer balance cap changes
You were a child death benefit beneficiary before indexation. If you only receive a child death benefit income stream your child death benefit transfer balance cap increment will not change. If you also receive another retirement phase income stream your personal transfer balance cap may increase by a small amount. See: Changes affecting child death benefit income streams
You will be receiving income from a capped defined benefit income stream and: you are 60 years or over, or the income stream is a death benefit income stream and the member was over 60 at the time of death. The amount of money the fund withholds from your income stream may change. The defined benefit income cap will increase to $106,250 for most people and you may need to review the amount of income from these income streams that you include in your income tax return. The maximum amount of the 10% pension tax offset you may be able to claim will increase. See: Changes affecting capped defined benefit income streams
You makes a non-concessional contribution to your super on or after 1 July 2017 and you have a total superannuation balance of $1.7 million or more on 30 June just before indexation. You will exceed your non-concessional contributions cap. See: Non-concessional contributions cap changes
You want to receive a government co-contribution after making a contribution to the fund on or after indexation and you have a total superannuation balance of less than $1.7 million on 30 June just before indexation. You will be able to do so if you meet all the other requirements because the limit to receive a co-contribution will increase from $1.6 million to $1.7 million. See: Co-contribution changes
You want to claim the spouse tax offset for super contributions and your spouse has a total superannuation balance of less than $1.7 million on 30 June just before indexation. You will be able to do so if you meet all the other requirements because the spouse total superannuation balance limit will increase from $1.6 to $1.7 million. See: Spouse tax offset changes

Concession for testamentary trusts to be wound back

In the Federal Budget last April, the Government announced it would make changes to the tax treatment of testamentary trusts, and an exposure draft of amendments was released by Treasury at the start of the current quarter.

The assessable income of a minor from a distribution from a testamentary trust is taxed at ordinary rates, rather than the highest marginal tax rate like other passive income received by minors. This has led some taxpayers to inject unrelated assets into one of these trusts to take advantage of the concession that is available to minor beneficiaries of these trusts.

This change (which is still in draft form) will ensure that this tax concession available to minors in these trusts only applies in respect of income generated from assets of a deceased estate that are transferred to the testamentary trust under a will, or the proceeds of the disposal or investment of those assets.

The amending legislation does this by clarifying that the excepted trust income of the testamentary trust must be derived from assets transferred to the testamentary trust from the deceased estate or from the accumulation of such income.

This amendment, when it becomes law, will apply to assets transferred to the trust on or after 1 July 2019.

EXAMPLE 1 – injected asset
On 1 July 2019, testamentary trust ABC is established under a will of which a minor is a beneficiary. Pursuant to the will, $100,000 is transferred to the trustee from the estate of the deceased. Shortly after the testamentary trust is established, a related family trust makes a capital distribution of $1 million to the testamentary trust. The resulting $1,100,000 is invested in ASX listed shares on the same day. Dividend income of $110,000 is derived for the 2019-20 income year. The net income of the trust is $110,000 and the minor is presently entitled to 50% of the amount of net income.

The minor’s share of the net income of the trust is $55,000. $50,000 is attributable to assets unrelated to the deceased estate and not excepted trust income. $5,000 is excepted trust income on the basis that it is assessable income of the trust estate that resulted from a testamentary trust, derived from property transferred from the deceased estate.

EXAMPLE 2 – income from retained excepted trust income
Following on from example 1, the minor’s share of the net income of the trust (being $55,000, comprising $5,000 excepted trust income and $50,000 not excepted trust income) is not paid to the minor by the trustee but is invested for their benefit in ASX listed shares shortly after the commencement of the 2020-21 income year. For the 2020-21 income year, that investment derives income of $5,500, and the minor is presently entitled to the entire amount.

$5,000 is attributable to assets unrelated to the deceased estate and not excepted trust income. $500 is excepted trust income on the basis that it is assessable income of the trust estate that resulted from a testamentary trust, derived from income that was previously excepted trust income.

Better small business access to compensation for ‘defective’ administration of tax matters

Part of a range of measures announced in the 2018-19 Mid-year Economic and Fiscal Outlook was a “small business package” that was designed to make it easier for small businesses to operate. A part of this package was an undertaking by the government to review the ATO’s Compensation for Detriment caused by Defective Administration (CDDA) scheme.

The CDDA scheme provides a discretionary mechanism to award compensation if an individual or a small business has suffered detriment because of a government agency’s defective administration.

The review has now been completed, and it concluded that the scheme does indeed need some work. In all, a dozen recommendations were made, all of which the government has accepted in full, in part or in principle. The Minister for Finance Mathias Cormann says the government will work to implement them from 30 November 2019.

The key actions it has committed to include:

– The government will ensure fair handling of CDDA claims by ensuring claims are investigated and decided by officers who are not from a part of the ATO that was involved in the tax matters which may have led to the claim. The most sensitive or complex matters can now be referred to independent reviewers outside the ATO.

– For more serious cases, the investigation of a claim will be separated from the decision-making. These cases will also be escalated to senior levels for decision, with the Tax Commissioner himself deciding the outcomes where an independent reviewer is involved.

– For the most serious matters, there will be an opportunity for a complainant to comment on an investigator’s preliminary views before a final decision is made and an opportunity to request a review of a decision.

– Plausibility will be adopted as the standard of proof in CDDA tax matters, to establish whether defective administration has occurred (instead of a balance of probabilities).

– ATO procedures will require its staff to take into account a small business’s financial and personal capacity to respond to a review, audit or other compliance process.

– The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) will establish a new assistance function to help small businesses understand how they can pursue CDDA claims. The ATO will also work to increase awareness of the scheme.

– The ATO will review and update its guidance material to ensure that making a claim is as simple as possible and decisions are explained in succinct everyday language.

– The government will strengthen oversight of CDDA matters and accountability by ensuring the Assistant Treasurer is well briefed on the operation of the scheme. Delegations to the ATO will reflect how the Assistant Treasurer wants the ATO to administer the scheme on the Minister’s behalf.

For more detailed overview of the recommendations, and the government’s intentions, see this Department of Finance paper.

DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, councillors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Ltd (ABN 96 075 950 284).