How super rule changes will affect CGT relief, death benefits

As super changes progress, how will they will affect capital gains tax relief and death benefits?

What we have ahead of us is a major overhaul of the super rules as we have come to understand them.

The government’s super changes continue to move forward. In the past week, the proposed laws were introduced into parliament and a Senate committee will review them quickly and report by November 23.

The plan appears to be to get the laws through the legislative process, including the royal assent, before parliament breaks off for Christmas holidays in early December.

Much has been written already about these proposed rules, and the major political parties have made it clear where they stand on the issue.

If and when the laws are in place, our challenge is to work out what we should be doing. The laws are meant to start in July 2017. Many of the changes are large and significant and it will take a long time to work out what should be done, the specific transactions that achieve a strategy and their timing.

During September and October, the government released draft versions of its proposed super rules. The legislation that was introduced into parliament contains quite a few changes to the draft.

The variations don’t really alter the top level amendments the government is trying to push through. Rather they change how the law will be administered by government departments such as the tax office, super funds, accountants and financial advisers. In other words, the changes are in the “weeds”, which doesn’t imply the changes aren’t important.

Overall, I think the changes made from draft to proposed legislation improve the operation of the new rules. Here I will look at two interesting issues: capital gains tax relief and death benefits.

CGT relief

Super funds will be eligible for some CGT relief if they stop a pension before July 1, 2017. When the pension stops, any capital gain on associated assets and their earnings will be taxed at 15 per cent each year. The CGT relief will apply for the period of time the asset was used to pay a pension.

Why stop a pension before July 17? You may currently have more than $1.6 million in total pension assets, which is more than the government will allow you to have. Or you might have a transition to retirement pension and you decide that as the income earned on that pension’s assets will be taxed at 15 per cent it will make this pension a waste of time and money.

These CGT relief provisions are very complex and in most cases any choice made can’t be changed. Super funds and their advisers will need to work methodically through how they might use this concessions. They will need to do this by testing several scenarios to determine the best outcome.

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Death benefits

Every superannuant needs to re-examine how death benefits might be paid and to whom.

One of the government’s arguments for introducing these changes is to help prevent super being used for estate planning purposes. Under government legislated requirements — which at present haven’t been changed — super funds must be used for certain purposes, such as funding a member’s retirement benefits or disability benefits or death benefits to a member’s beneficiaries. But obvious questions will arise: for example, death and disability benefits are surely estate planning?

Here’s another puzzle: suppose you have a typical family with Mum and Dad and one or more dependent children. One of the parents is the primary income earner. The couple want to make sure that if that person were to die then their family’s finances wouldn’t become a basket case. Right now the main income earner has $2.5m of death insurance in their super fund to achieve this objective.

The plan is for $600,000 of this to pay off the mortgage and the balance of $1.9m to pay the other parent a pension income of $80,000 each year to cover the family’s future living costs. This is a stock standard arrangement.

Under the government’s new rules, the family can only pay the surviving spouse a pension with an initial balance of $1.6m and the remaining money will have to be paid out as pensions to minor children if possible or a lump sum.

What we have ahead of us is a major overhaul of the super rules as we have come to understand them. There will be many more questions to be answered in the months ahead.

Tony Negline is author of The Essential SMSF Guide 2016-17, published by Thomson Reuters.