Reserving From May 2004

The May Budget resulted in several significant changes to reserving strategies in superannuation funds.

Contributions Reserving

The new SIS Regulations preclude the payment of employer contributions directly to a contributions reserve thereby postponing the surcharge liability until subsequent allocation to a member’s account.

From 12 May 2004, the trustee of an accumulation fund must generally allocate contributions to a member’s account within 28 days after the end of the month in which the contribution was received.

Self Managed Superannuation Funds (‘SMSFs’) with contributions in reserves should determine whether they are considered a defined benefit fund (‘DBF’) under the new SIS Regulations. From 12 May 2004, a DBF must generally have at least 50 defined benefit members.

Investment Reserving

Typically, investment reserving allows net earnings to be set aside in good years (in a reserve account) so earnings can be increased in bad years.

Investment reserving does not appear to have been impacted by the Budget. However, note that unless suitable powers and documentation exists, the SIS Act and Regulations may be breached.

SMSFs that maintain reserves normally require:

• power in their deeds to prudentially manage reserves;
• a suitable investment strategy for managing reserves; and
• trustee resolutions and a crediting policy to evidence how and when reserves will be applied.

Forfeiture

From 12 May 2004 all of a member’s benefits in an accumulation fund are ‘minimum benefits’. Accordingly, it is no longer possible to forfeit a member’s benefit.

Prior to this change, the SIS Regulations permitted a member’s ‘non-minimum benefits’ to be forfeited if the correct process was followed, eg the member’s prior written consent was obtained, the relevant procedure in the deed was complied with and appropriate trustee resolutions were made.

Defined Benefit Pensions

The 19 May 2004 Budget edition of DBA News summarised the transitional relief available to SMSFs regarding defined benefit pensions (‘DBP’).

In summary, DBA’s view is:

• SMSFs that were established on or before 11 May 2004 that had sufficient power in their governing rules (‘GRs’) can continue to provide a DBP.
• However, SMSFs set up after 11 May 2004 and pre-12 May 2004 SMSFs that have their GRs amended after 11 May 2004 to provide for DBPs are forever precluded from paying DBPs.

Since our last newsletter, however, it has become evident that both Treasury and the ATO hold a different view on what qualifies for transitional relief. This view requires the exact terms and conditions of the pension to be expressed in the fund’s GRs as of 11 May 2004, eg, a $30,000 p.a. lifetime pension, indexed by 3% p.a. that is 100% reversionary to the pensioner’s surviving spouse.

The ATO’s view is that a power in the fund’s GRs to pay a DBP in the future is not sufficient. If the ATO’s view is the correct interpretation of the law, then very few, if any, SMSFs will qualify.

The ATO is nevertheless consulting with the superannuation industry to clarify its view on particular cases. DBA is liaising with the ATO in this regard.

In view of the above difference of opinion, expert advice should be obtained prior to commencing a DBP.

Expert advice should also be obtained prior to amending any term or condition of a pre-12 May 2004 DBP to ensure the pension will not be considered a fresh DBP (eg, changing the indexation rate from 4% to 3%).

Due to the difference of opinion, there may well be some future legislative clarification on what is required to obtain transitional relief.

There may also be some further relief for those at compulsory cashing age (eg, 65) who are unable to access a pension that obtains the pension RBL or assets test exemption. These people may otherwise have to wait until 20 September 2004 to access the proposed growth pension.

This current uncertainty is unfortunate as the complying lifetime pension (‘CLP’) is perhaps the most appropriate option given the need to encourage self-sufficiency in retirement and old age.

It is understood that several professional bodies have highlighted the fact that the pension valuation factors currently used to value CLPs are out of date. Accordingly, it is hoped that the Government will reconsider its position and adopt a practical solution that encourages lifetime income streams.

Tax-Free Dependants

The range of dependants who can get a tax-free death benefit from a superannuation fund is to be expanded to include certain ‘interdependent’ relationships.

This is ‘one of continuing mutual commitment to financial and emotional support between two people who reside together’. Typically, this will include:

• same-sex couples who reside together;
• an adult child who resides with and cares for an adult parent; and
• two adult interdependent siblings who reside together.

Planning Tips July 2004

New regulations, due to commence on 1 July 2004, require planning to start now!

Compulsory cashing of all superannuation benefits will generally need to occur at age 75 from 1 July 2004 (or as soon as practicable thereafter assuming the new SIS Regulations are passed as law by then).

The current rules only require cashing after 75 if the person is not gainfully employed (‘GE’) for at least 30 hours per week on an ongoing basis.

Note, between 65 to 75 years, a person must currently be able to show at least 10 hours per week GE on an ongoing basis to continue to accumulate their super moneys in a fund. They must cash all their super benefits if they fail this test.

From 1 July 2004, a new 480 hours p.a. test is to be introduced instead of the current 10 hours per week test. The new test will generally allow more flexibility to satisfy the work test as it will not require weekly monitoring. However, there are some people that are concerned they may not be able to satisfy the new test as it appears to set a higher benchmark.

These people (65-75 year olds) may therefore also have to cash their super benefits soon. Moreover, the ATO is taking a closer look at what qualifies as being GE.