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With the introduction of the transfer balance cap and the now critical importance of a member’s total superannuation balance, getting the lodgement of the 2016/17 income tax and regulatory return is imperative.
There are some one-off elements that need to be factored into this year’s lodgement that make it easy to forget, or give less consideration to, than other obligations the fund might have. The following checklist identifies the key issues that an SMSF needs to contemplate prior to lodging the annual return for 2016/17.
Reconcile all 2016/17 transactions
This might seem an obvious statement but it is important that all transactions are reconciled appropriately. The ATO has noted in its ‘Super Changes – frequently asked questions’ document, a number of key issues that are linked to member balance and asset valuations which are covered throughout this article. Two of the key elements in reconciling the transactions at year end are directly related to the member’s interests in the fund:
- Allocation and nature of contributions; and
- Allocation of pension payments.
Contributions
Contributions made up to and including 30 June 2017 will impact on a member’s total superannuation balance. It is important to reconcile contributions as they will not only impact on what the member’s balance is but also on how much the member might be able to contribute in the future.
Concessional contributions
Given that 2016/17 is the final year where a member is required to satisfy the substantially self-employed rule, more commonly referred to as the 10 per cent test, the acceptance and acknowledgement of a section 290-170 (ITAA 1997) notice of intent to claim a personal deduction is critical. As has always been the issue with these notices of intent, was the actual ability for the member to claim what they request to claim. Whilst this problem subsides with the collective ability for all to claim deductions from 1 July, ensuring the notices are correct in 2016/17 is nonetheless important.
Further to this is the use of contribution reserves, usually linked to a member doubling up on their contributions to increase the value of a deduction, whilst avoiding excess contributions. Historically, these reserves have created end of year problems as they have been incorrectly reported.
It is important to allocate the entire contribution to the appropriate member and then lodge a request with the ATO to reallocate the contribution to the following year. Two things become apparent from this strategy, the first is that bringing forward a future year’s contribution will increase the member’s total superannuation balance 12 months earlier and the second is that the reduction in the concessional cap could result in over-contributing.
Non-concessional contributions
Whilst concessional contributions create taxation issues which will impact the fund and the member’s returns, non-concessional contributions need to be reconciled because of the impact the total superannuation balance has on a member’s ability to contribute post 1 July.
Not only is the ability to make non-concessional contributions linked to the total superannuation balance at the previous 30 June, but there are also pre-30 June 2017 bring-forward triggers to consider. If a member made non-concessional contributions prior to 30 June 2017 that were greater than the cap of $180,000 then this will impact how much can be contributed after that date.
Pension payments
Everyone paying a pension is required to meet a minimum obligation. Beyond that there are a number of factors to determine who and how additional benefit payments are allocated. Excluding requests to take a lump sum, it is important to ensure the pension allocations made across the year are done on the most tax-effective manner. For members under the age of 60 there is the added requirement to withhold PAYG tax but we can assume these members have already reconciled as the tax will have already been withheld and remitted.
For those members over 60, how pension payments are allocated in 2016/17 could have an impact on the transfer balance cap and perhaps whether the member has a requirement to partially commute or not. That leads directly into one of the one-off requirements for 2016/17, commutation requests and implementation.
Commutation requests
Prior to 1 July it was important for a fund to receive a request from the member to commute any pensions, as nominated, to ensure compliance with the transfer balance cap. It was also a requirement to acknowledge the request. Whilst not directly related to fund lodgement, it is important that funds now follow through with these requests, so they can proceed to reporting against the member’s transfer balance account.
Administrative checklists
Beyond the requirements to determine the nature of physical transactions that occurred are the annual requirements of the fund, both ongoing and one-off.
Asset valuations
As part of the reconciliation process, asset valuation is going to be one of the more highly scrutinised areas of the fund accounts. A review of the current valuation guidelines published by the ATO is recommended to all. Asset valuation is twofold in 2016/17 as it impacts on the member’s balance which flows through to the transfer balance cap obligations, but it is also the catalyst for capital gains tax relief.
CGT relief
CGT relief decision time is now. If an SMSF was paying a transition to retirement income stream (TRIS) or a member had more than $1.6 million in an account-based pension, now is the time to make a decision, if one hasn't already been made.
This is why correct asset valuations are important and in line with the ATO guidelines. By reconciling fund transactions and applying appropriate valuations, a fund is now ready to review its unrealised capital gains tax position to determine whether to apply CGT relief. If CGT relief is to apply then the fund needs to ensure that it makes the appropriate election, but just as important is to ensure that it updates the cost base information and records any deferred tax liability for when the asset is eventually sold, if the proportionate approach was taken.
The CGT election and member commutation requests are exclusive to the 2016/17 year, the commutation request is mandatory for those with a transfer balance cap issue, and CGT relief is not compulsory.
Distributions and franking credits
One of the considerations raised by the ATO is how distributions and franking credits impact a member’s balance and the asset valuations. Particularly in light of CGT relief, any investment that has the distribution bought into account at 30 June needs to ensure that for valuation purposes it is recorded at ex-distribution price, otherwise the value of the asset is incorrectly inflated.
Similarly, the tax reconciliation needs to occur as franking credits and will be distributed proportionally which will be an impact issue for a member’s total superannuation balance.
Actuarial certificates
Another important issue is the actuarial certificate, particularly with all of the focus on TRIS no longer being entitled to a tax exemption on the earnings. That only applies from 1 July 2017. All TRIS and account-based pension paying funds that had accumulation interests need to obtain an actuarial certificate, unless segregation applied. The timing of CGT relief may also impact upon actuarial requirements. Actuarial certificates are required prior to lodging a return.
Post-lodgement reporting
Once the 2016/17 return is audited and lodged additional reporting requirements will exist for pensions in place at 30 June 2017, all transfer balance account reporting is due no later than 1 July 2018. Any pension commencement undertaken since 1 July also has an extension until that date with an additional extension until 2017/18 lodgement for SMSFs with pensions under $1 million.
It’s important to understand all of the obligations in place for 2016/17 and that many of them don’t cease with the lodgement of the return.
Tim Miller, founder, Miller Super Solutions