Changes to tax treatment of TTRs

What changes are triggered by this reform?

From 1 July 2017, Transition to Retirement (“TTR”) Income Streams will generally no longer be classified as ‘tax-exempt pension assets’, meaning tax will be levied on assessable investment income and realised capital gains.

However, proposed changes to the legislation have very recently been announced which will result, if enacted, in TTR members being considered to be in ‘Retirement Phase’ where they have met a condition of release with nil cashing restrictions. This will result the assets supporting such TTR’s being able to claim the earnings tax exemption and being restricted by the $1.6 million transfer balance cap.

What action does Netwealth intend to take?

We are keen to ensure your clients are not unnecessarily impacted by the new tax treatment of TTRs.

Where we have identified that your TTR clients have previously met a condition of release with a nil cashing restriction (such as attaining age 65 or permanently retiring), we intend to automatically convert these accounts to a TTR which will be considered to be in ‘Retirement phase’ from 1 July 2017. For administration purposes only, we will be issuing these members with a new account number for their TTR. We will undertake this exercise once the proposed legislation is enacted, and no instruction will be required by you or your clients to affect these transfers. We will send confirmation to your clients once this conversion is complete.

In coming days we will issue a letter to your clients to notify them of the upcoming change. A copy of the notification letter (which will be sent to you beforehand) are available here (>Age 65) and here (Retirement CoR). It contains important information – please read this carefully.

Furthermore, we are implementing a new business rule so that going forward, at any time we identify that a TTR client has met a condition of release (such as reaching age 65), their TTR account will be converted into a TTR ‘Retirement Phase’ account as soon as possible thereafter.

Do you or your clients need to take action?

Please review the notification letters we’ll be issuing to your clients who have met a condition of release and are eligible to have their TTR account moved to a TTR ‘Retirement Phase’ account. If you would prefer for these clients be transferred to a Standard Income Stream (“SIS”) account, you can request this using the Transfer Between Accounts form.

Please note: The above process has been put in place following Treasury and the ATO’s recent confirmation that a ‘TTR is always a TTR’ and transferring from a TTR to a SIS will require commutation to accumulation and the starting of a new SIS. As such, we will require members electing to transfer to a SIS to meet their pro-rata’d minimum pension requirements prior to transfer. This may affect certain grand-fathering provisions for Centrelink purposes, and members should seek advice in relation to this.

CGT relief for TTR accounts

What changes are triggered by this reform?

To ensure clients who held a TTR account as at 9 November 2016 are not disadvantaged by changes in tax treatment of TTRs, the government is allowing TTR clients to re-set the cost base of any investments held within a TTR account as at 9 November 2016. This is also referred to as electing to obtain Capital Gains Tax relief (‘CGT Relief’), and can only be done up to close of business 30 June 2017.

In practice, CGT relief is obtained by notionally selling an investment, and then immediately re-purchasing it at its prevailing market value. This has the effect of re-setting its cost base and purchase date.

What action does Netwealth intend to take?

If a client intends to remain in TTR from 1 July 2017 and has not been converted to a TTR ‘Retirement Phase’ account, in many cases it will be advantageous for them to obtain CGT relief on any investment that is in an unrealised capital gains position, i.e. by obtaining CGT relief and re-setting the cost base of an investment upwards, if the client eventually sells the investment in an accumulation or TTR account, the capital gains tax incurred would generally be lower.

To protect the best interests of clients (and in order to reduce the administrative burden on clients and their financial advisers), Netwealth (as Trustee) has established a ‘default position’. We intend to obtain CGT relief on behalf of TTR clients for all eligible investment parcels that are in an unrealised gain position as at 30 June 2017.

In coming days we will issue a letter to your clients to notify them of the Trustee’s default position and intention to obtain CGT relief on their behalf. A copy of the letter is found here. It contains important information – please read it carefully.

Important: Whilst the law to implement these reforms has been passed, the detail and full practical implications of the reforms are still in the course of consideration. Netwealth and its tax advisers have been in close consultation with the Australian Taxation Office and Treasury and have recently proposed changes which will support our intended course of action for clients with TTRs. We are monitoring this topic very closely, and if changes to law are not enacted in the manner we expect, we will issue further notifications to advisers and clients.

Do you or your clients need to take action?

If you or your TTR clients are not satisfied with the Trustee’s default position, you can opt-out (by completing the form enclosed in the notification letter.)

Alternatively, you or your client can elect to obtain CGT relief prior to close of business on 30 June 2017 on one or more eligible investments by completing the ‘CGT relief application – Transition to Retirement’ form found  here.

Please note, if your clients seek to obtain CGT relief for one or more investments prior to 30 June 2017, those investments must be transferred back to an accumulation account immediately. (This requirement does not apply if CGT relief is obtained on 30 June 2017 via the default process described above)

Are there any risks with the Trustee’s intended ‘default position?

As the election of CGT relief restarts the 12-month holding period to be eligible for CGT discounting, there may be rare scenarios where electing for CGT relief may not be beneficial for all investment parcels. From our analysis, this could occur when:

• The investment parcel is sold within 12-months of receiving CGT relief; and
• The investment parcel would have been eligible for CGT discounting if not for the application of CGT relief; and
• The investment gain after 30/06/2017 is more than twice the gain prior to 30/06/2017; and
• The investment parcel is in a TTR or accumulation account at the point of sale.

For example:

Mrs Miggins purchased 100 units of XYZ Pty Ltd on 01/07/2014 for $1,000;

The investment is valued on 30 June 2017 at $2,000

She sells the investment on 20 February 2018 (less than 12 months after 30 June 2017) for $6,000;

If she had NOT applied for CGT relief, the tax bill would be $500 [being $5,000 ($6,000-$1,000) x 10% = $500]

If she had applied for CGT relief, the tax bill would be $600 [being $1,000 ($2,000 - $1,000) x 0% + $4,000 ($6,000 - $2,000) x 15% = $600]

The Trustee has assessed this risk. Whilst acknowledging that in rare circumstances the default position will not be beneficial, we feel that most clients will benefit from this approach. Furthermore, clients have the opportunity to opt-out, and/or to submit their own instructions, prior to close of business on 30 June 2017.

$1.6 million transfer balance cap

What are the changes?

From 1 July 2017, a $1.6 million transfer balance cap will be introduced to restrict the amount a client can hold in ‘Retirement phase’ across all of their superannuation interests. Given clients may hold superannuation interests outside of Netwealth, it is not possible for us to monitor this cap, and the responsibility for ensuring compliance rests with clients and financial advisers.

To reduce the impact of these changes and encourage voluntary compliance, the government is allowing clients to elect to obtain CGT relief on investments moved to accumulation phase in order to comply with the $1.6 transfer balance cap. Election for CGT relief is available on investments owned within a SIS as at 9 November 2016.

Given an election for CGT relief can only be obtained prior to 1 July 2017 (yet the $1.6 million transfer balance cap is based on the value as at 1 July 2017), it is very unlikely clients will be able to nominate an amount to move to accumulation that will leave them with exactly $1.6 million in income stream at 1 July 2017. Therefore, the legislation has provided that where the value of the income stream is in excess of the $1.6m cap. by no more than $100,000, there is a 6 months to rectify the situation without penalty.

We have created a form to assist clients and advisers in providing instructions to transfer benefits (in part or in full) to an accumulation account. An election for CGT relief may be available on some or all of the investments being transferred. The form is available here.

CGT relief for Self-Managed Superannuation Funds (SMSF)

Much like the Netwealth Superannuation Master Fund, CGT relief is also available to SMSF trustees holding Netwealth Wrap Service accounts, however the responsibility for electing to obtain CGT relief rests with SMSF trustees.

Unlike our fund, many SMSFs are unsegregated funds, and legislation surrounding the election of CGT relief allows SMSF trustees to make an election after 1 July 2017.

Whilst Netweallth only performs investment administration for SMSFs in the Wrap Service (as opposed to managing the SMSFs tax affairs), we are keen to assist SMSF trustees manage the process.

Accordingly, we will accept instructions from SMSF trustees or their advisers to record the deemed disposal and reset the cost base of investments where the trustees have elected to obtain CGT relief. In the case of unsegregated assets, trustees also have the choice to defer any resulting gain to when the asset is eventually sold. Please note that we are unable to record the deferral of capital gains.

We will process instructions where ever it is possible for us to do so, however where the investment has been sold, transferred out of the SMSF, or had a corporate action which resulted in the investment being sold prior to us executing the instruction to reflect the CGT relief event, we will not be able to facilitate the request.

We understand many SMSF trustees may hold off providing instruction until lodging the SMSFs tax return, however we would recommend, where possible, they provide these instructions as soon as possible after 1 July 2017 to avoid unnecessary complications that may arise in endeavouring to backdate these notional transactions.

The application of CGT relief will result in a CGT tax event having occurred. We are making changes to Wrap Service Tax Statements to assist trustees and their advisers in identifying CGT events that arose where CGT relief has been obtained. If instructions to obtain CGT relief are received after we have issued an SMSFs Tax Statement for 2016/17, we can provide a revised tax statement upon request. 

The form used to obtain CGT relief on investments held in SMSFs can be found here.