Peter Bobbin points to the ‘alternative facts’ being peddled by the Australian Taxation Office with respect to the 2016 Federal Budget changes to superannuation.
Alternative Facts have crept into the superannuation information quagmire. But the Australian Taxation Office (ATO) can be excused for their mistake.
In just over a week the greatest change in super in almost three decades will commence. Announced in the 2016 Federal Budget, in a real first we have most of the legislation in place before the commencement of the law. But with only weeks remaining the official Alternative Facts are beginning to emerge.
With the weight of change in mind, I can excuse the ATO for getting its most recent statement wrong: Practical Compliance Guideline 2017/6 (PCG 2017/6) is built upon a simple error of judgement; it is based upon ATO Alternative Facts.
The first mistake is in the heading: ‘Superannuation reform: commutation of a death benefit income stream before 1 July 2017. There is no such thing as a death benefit income stream.
For support PCG 2017/6 refers to Subsections 307-5(1) and (4) of the Income Tax Assessment Act 1997 (ITAA97) to find a meaning of superannuation death benefit. This is mistake number two: mixing laws does not work, especially tax and super laws. There are very many parts of the tax and super laws that do not line up, you simply cannot rely on one to justify meaning for the other.
It is not all wrong; very importantly, the ATO gets its first statement in the PCG correct: an individual may choose to commute a super income stream. For the vast majority of income streams, or should I say for proper analysis purposes, pensions, this statement is correct.
After 50 plus years of large funds and self-managed super funds (SMSFs), the legal interest of a member has evolved very much into a fully vested-in-interest entitlement. What this trust law phrase means is that, subject to conditions of release, the value in the super fund belongs to the member. This is why it is correct for the ATO to say that it is the member who may choose to commute a super income stream; nowadays it is rarely the trustee who can or should do this.
This concept that the value wholly belongs to the member is absolutely critical in every aspect of today’s superannuation. It is good that the ATO recognises this.
However, ATO mistake number three is where PCG 2017/6 builds its Alternative Facts and wholly fails. Because of this fail paragraph 8 is worthy of close analysis.
Where the superannuation provider (why not say SMSF, the PCG is said to only apply to SMSFs) cashes a deceased member’s superannuation interest to a dependant beneficiary (which concept is different in tax and super laws) as a death benefit income stream (again, this concept does not exist in super laws), the compulsory cashing requirement is met (another correct statement) as long as the super income stream continues to be paid (where did this come from, where does the Superannuation Industry (Supervision) Regulation (SISR) 6.21 say this?).
SISR 6.21 merely refers to the cashing being in the form of lump sums or one or more pensions. Call me old fashioned but I look for the meaning of pensions within the law to which it relates. I look within the super laws.
As many readers will be aware SISR 1.06 states that a benefit is taken to be a pension for the purposes of the super laws if it comes within a description of subregulations, paragraphs and subparagraphs that are expressed within 245 lines of the most convoluted and circuitous language ever written. Some pensions are income streams that are continuous. However the most common pension in use today is the account-based-at-least-one-minimum-payment-a-year-pension.
Personally I have always preferred a pension to be a series of regular payments made as a super income stream. And I note that the ATO and I agree on this point. But the super law says that the account-based-at-least-one-minimum-payment-a-year-pension is a pension. As long as this is what the superannuation provider trustee commences, the cashing principles within SISR 6.21 are satisfied once the first payment is made. Thereafter the benefit of this pension form belongs to and is wholly vested in the member and it is the member who may choose to commute a super income stream that is a pension. Both the ATO and I also agree on this.
SISR principally applies to super provider trustees, not to members. The trustee does the SISR 6.21 action, it is the pension member who later commutes this. Any failure by the trustee to continue to pay a superannuation income stream because the member pensioner has commuted this is not an action by the trustee; the member pensioner commutation action cannot be a trustee failure of SISR 6.21.
Were the Alternative Fact logic of the ATO correct, every non-SMSF super trustee in Australia would be very worried about a lack of control over SISR compliance and as they suffer from member pensioner actioned commutations.
I note that the ATO has identified that it is not alone in its worry. It has said that others share its concerns.
It and everybody else that is worried would have benefited from looking at what is the intent of the greatest changes since 1988. This is neatly captured by the Treasury when it says:
From 1 July 2017, there will be a $1.6 million transfer balance cap on the total amount of accumulated super an individual can transfer into the tax–free retirement phase. Subsequent earnings on balances in the retirement phase will not be capped or restricted.
Savings beyond this can remain in an accumulation account (where earnings are taxed at 15 per cent) or outside the super system.
It is the super laws that allow value to remain in super. It is the taxation laws that tax the outcome.
Nowhere does the law say that super from a deceased spouse cannot remain in super. All that is said is that there will be a $1.6 million cap on the pension source at the commencement of the pension. I am a simple person. If this was intended why not say this?
Paragraph 3.78 of the explanatory memorandum (EM) to one of the law changes states that: “If a death benefit income stream in combination with the individual’s own super income stream results in a beneficiary exceeding their transfer balance cap, they will need to decide which super income stream to commute. Importantly, a super death benefit cannot be held in an accumulation interest as this contravenes the regulatory requirement to cash the benefit out of the system as soon as practicable”.
I have no problem with this, even though it misinterprets what super is about and particularly in our current low interest environment it has no appreciation of the true intention of the parties. It is common for committed parties to promise a continuing or reversionary pension to the other. Indeed, many thousands of such promised pensions existed before Budget 2016. Technically the issue is not about a super death benefit. It is about a former conditional vested interest that has crystalised following the death of a loved one.
The EM has fallen under the same misguided SIS Act versus Tax Act language. If the intention was to limit a couple on the death of one of them it would have been easy to have said this.
The mandatory system for the $1.6 million cap is found in the Taxation Administration Act (TAA). It may be convoluted and circuitous but a systematic reading and application of this reveals that as long as the surviving spouse converts the excess over $1.6 million of their deceased spouse sourced pension into an accumulation entitlement, the TAA has been complied with. There is no 1 July 2017 impact on this.
There is nothing morally, legally or 2016-Budget wrong with this. In other words, there was nothing to worry about a surviving spouse being able to leave within super their deceased spouse’s super pension entitlement. They too are merely limited to putting no more than $1.6 million into a tax-free super fund environment. As everyone knows, once it is in it does not matter if it grows or reduces.
I am grateful for the ATO’s Alternative Facts mistake in PCG 2017/6. It has helped to highlight an issue that worried some. It is important that PCG 2017/6 is expressed to only apply in respect of super death benefits that have been rolled over before 1 July 2017. From that date it is the law that will apply. Even the ATO has to follow the law.
Peter Bobbin is the managing principal of Argyle Lawyers.