Ask Colley budget special: impact on SMSFs
Whilst the Federal Budget was relatively quiet on superannuation, there were still a number of announcements that will impact SMSFs. In this budget special of Ask Colley, Graeme takes an in-depth look at impacts for SMSFs.
Well…as expected, this year’s Federal budget was a quiet one for superannuation and the SMSF sector with no major announcements. This was a welcome relief given everyone is still getting used to the last set of changes.
Briefly, the main news impacting SMSFs this year were an increase in the maximum number of members of SMSFs, the introduction of a three-year audit cycle for SMSFs with good compliance track records, and an increase in superannuation supervisory levy from 1 July 2018.
Let’s have a look at the announcements in more depth.
The increase in the maximum number of members of an SMSF from four to six will provide greater flexibility – particularly for small business operators with multiple owners who wish to pool their superannuation.
Likewise – family businesses wishing to retain control of their business premises over two or more generations can draw on a larger asset pool accumulating in the one SMSF. Also, increasing member numbers in an SMSF may provide some protection if changes to franking credits refunds were to be introduced. By adding new members in accumulation phase, extra franking credits could be absorbed within the fund and offset against non-franked income and taxable contributions.
As the clear majority of SMSFs – around 90% according to the ATO – have only one or two members, the change may have a marginal impact on the SMSF sector.
For the larger member SMSFs, recent research done by SuperConcepts and the University of Adelaide shows that as the number of fund members increases, investments made by trustees tend to be less risky. The idea is that group-think leads toward more familiar investments such cash and domestic equities. So, funds wishing to expand their membership will need to take care to properly identify and address these behavioural factors.
As well, with decision making becoming less centralised, there’s the increased likelihood of undesirable outcomes.
This move to allow up to six members in a fund could be, in my opinion, a good opportunity to mandate a corporate trustee structure for all SMSFs.
The introduction of a three-year cycle commencing on 1 July 2019 for funds to be audited where they have a history of good record keeping and compliance may reduce the cost of fund administration. Part of having a good track record includes lodgement of the fund’s annual returns with the ATO in a timely manner. Late lodgement of returns will deny access to the three-year cycle.
Details of the proposal are yet to be worked out and will be undertaken in consultation with the industry and other interested parties. It’s not yet clear whether the three-year audit will be an audit of the fund for one of the three years of the cycle, or for each of the financial years covered by the cycle. Also, there are no details on the circumstances in which a fund would be required to return to an annual audit.
In the longer run, it could be expected that funds required to be audited annually may be more expensive in view of the possible compliance issues with the fund. But is remains to be seen whether the three-year audit may be less expensive, as it depends on the outcome of the consultations. It could be that some auditors may take a greater interest in the details of the records and activities of the SMSF to make sure it is absolutely squeaky clean before going onto the three-year cycle.
From 1 July this year, the ATO’s supervisory levy is expected to be increased to fully recover the cost of the ATO’s superannuation activities. An additional $31.9 million could be raised by the government if it increases lodgement fees for SMSFs from the current charge of $259.
Other important Superannuation changes
Some of the other changes which apply to super, in general, may have an impact on you as well.
Amendments will be made to the tax law for the transition to retirement pensions which pay a reversionary pension to a surviving dependant. Under the current rules, if the surviving dependant does not meet a specified condition of release, then the reversionary pension is to be transferred to an accumulation account of the deceased before a decision on how the death benefit will be paid as a lump sum or death benefit pension. This denies access to the 12-month concession that applies before it is counted against the survivor’s Transfer Balance Cap. The amendments will enable the 12-month concession to apply.
A work test exemption is to be introduced from 1 July 2019 for anyone aged 65 to 74 with a total superannuation balance of no more than $300,000. It will apply to the first year in which they don’t meet the work test and allow voluntary superannuation contributions to be made. It’s assumed that this means non-concessional contributions of up to $100,000 but not to voluntary tax-deductible contributions. Watch this space to see how it will work.
From 1 July 2018, an opt-out will be introduced for high-income employees with several jobs, where each employer is making superannuation guarantee contributions that result in the concessional contribution threshold of $25,000 being exceeded. This will ensure anyone with an income of more than $263,157 can avoid having excess concessional contributions being penalised by nominating which wage will not be subject to superannuation guarantee. It will be up to the employee to negotiate an increase in salary to compensate for any excess.
Superannuation fund members who have balances of less than $6,000, or who are under 25, or who have inactive accounts, will be offered insurance on an opt-in basis rather than needing to opt out. This will reduce the duplication of cover for anyone with multiple superannuation accounts.
For anyone with a fund balance of less than $6,000, fees will be capped at 3% ($180) from 1 July 2019. Also, a ban on exit fees will apply which will allow a member to close an account at no cost. Many of these accounts are for small amounts which are being rolled over to other funds, including SMSFs, to consolidate superannuation benefits. The ATO will play a more active role in consolidating member balances of less than $6,000.
There have been some issues with personal deductible contributions where a deduction has been claimed and no notice has been provided to the fund to have the amount taxed at 15%. The ATO will be making sure a notice has been lodged with the fund and matched with the claim in a person’s tax return. This is called an integrity measure which means getting the law to work as it’s supposed to.
So, there you have it, our wrap-up of this year’s budget.