Exciting Upgrades to Pro-Super’s Trust Deed

The changes to superannuation introduced by last year’s Federal Budget will have a significant impact on many of our superannuation clients, especially those who have balances approaching or exceeding the $1.6m transfer balance cap.

The changes introduced are largely taxation related, rather than changes to the Superannuation Industry (Supervision) Act. It is the latter which normally drives significant changes to our trust deed, whereas most taxation changes cannot be affected or ameliorated by anything in a deed.

However, the present Budget measures have severely taxed advisors’ and clients’ minds for a different reason; the removal of the so-called “accountant’s exemption” from 1 July 2016. The effect of this and the new SMSF licensing requirements has brought three areas – SMSF establishment, contributions and benefit payments – into the financial advice realm.

And because the Budget changes primarily impact upon contributions and pensions, there is considerable angst about whether or not statements of advice need to be issued to clients, and how unlicensed accountants can legally provide their clients with the assistance they need.

Even for licensed advisors, statements of advice do not come cheap, and the question of whether and how much the client will pay is focussing minds right across the country.

While we cannot solve all of these problems with a trust deed, at Pro-Super we have developed some exciting innovations to at least ameliorate certain issues.

Auto-commutation Above Transfer Balance Caps [Rule 5.1(e)]

One of the potential licensed areas involves clients with pension balances in excess of the new $1.6m transfer balance cap. The new changes do not require a member to commute this excess back into accumulation phase, however a failure to do so will result in the ATO deeming the excess to earn income at the general interest charge rate (presently in excess of 9% p.a.), and imposing tax at 15% on that amount. So, how does an advisor (either licensed or unlicensed) counsel their clients to commute this excess, without providing a statement of advice?

This is certainly an issue come 1 July 2017, however it will also be an ongoing concern, as clients in future years come close to, or exceed their caps.

Pro-Super has now added new rules to our deed which requires the trustee of a fund to commute one or more pensions (if more than one pension is being paid to a member, the trustee can decide which ones) to the extent necessary to reduce the member’s retirement phase benefits down to the transfer balance cap. In other words, there is no advice required – the trustee is obliged to do this under the fund’s rules, and any calculations or other paperwork necessary becomes an administrative and accounting task to be carried out by the fund’s administrator.

Benefits for Reversionary Beneficiaries [Rule 5.1(e)]

Under the new rules, where one or both members’ balances exceed the transfer balance cap, one member passes away and the benefit is to be paid as either a reversionary pension or death benefits pension to the survivor, it is important that the correct balance is commuted to reduce the benefit down below the transfer balance cap. The correct balance to commute is the one belonging to the surviving member. If the deceased member’s balance is accidentally commuted (in whole or in part), then that amount will need to be paid out of the fund as a lump sum death benefit.

Once again, this is an area where a statement of advice may be required, except that Pro-Super’s new rules require that the trustee commute the surviving member’s benefits – not the deceased spouse’s benefits. This overcomes the dual problem of making an error in the administration, and negates the need to provide a statement of advice on the matter. An advisor using the new Pro-Super deed is not providing advice as to which member’s benefits they recommend to be commuted upon a spouse’s death – they are merely informing the client what is required by the fund’s rules.

Auto-pension Commencements [Rule 5.1(c)]

As mentioned above, advising a member to stop or start a pension is also now a licensed advice area and advisors need to tread very carefully. This is despite the fact that, in almost all cases, the decision is made because it is overwhelmingly advantageous from a taxation perspective for a retiree over 60 to have their benefits paid as a pension.

While we cannot do anything about the first pension which a member starts and the advice considerations around that decision, we have come up with a unique solution to the problem of how you advise that client to commence a new pension when subsequent non-concessional contributions are made, or where new benefits are rolled into the fund for members already receiving a pension.

Under our new rules, where a member is receiving an existing pension and a non-concessional contribution is made or a benefit is rolled in, the trustee is required to commence a new pension on the same terms as the existing pension, from the day the contribution is made. (There is provision for the member to direct the trustee either not to commence such a pension, or to choose an alternative starting date.) The trustee is also required to ensure that only so much of the contribution is used which would keep the member below their transfer balance cap.

So, this once again becomes an area where the pension is commenced by the operation of the deed, rather than requiring the advisor to decide whether or not they need to provide a statement of advice to the client.

Additionally, there is no question about whether or not pension documentation needs to be provided for each new non-concessional contribution – it doesn’t – and it will forever more remove questions about whether the pension was “back-dated”.

We truly believe that these are some of the most important and innovative changes to our deed for years. For the price of a deed amendment, versus the cost to the client of statements of advice, ongoing pension documentation, etc. we think it is a compelling proposition for clients who may be affected.

Download our latest order forms here.

As always, please don’t hesitate to contact us to discuss further, should you wish.