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QUARTER III | ISSUE 051 | THE PREMIER SELF-MANAGED SUPER MAGAZINE

2025 SMSF ROUNDTABLE

FEATURE

COMPLIANCE

STRATEGY

COMPLIANCE

SMSF roundtable Pressing issues discussed

Not fit for work Relevant insurance cover

Frailty risk Advice implications

CSLR funding A flawed mechanism

COLUMNS Investing | 28 Advantages of a long-short strategy.

Investing | 32 Identifying solid AI stocks.

Compliance | 36 Leaving the workforce for medical reasons.

Compliance | 44 Failing the pension payment standards..

Strategy | 48 SMSF advice and frailty risk.

Compliance | 52 Flaws with the Compensation Scheme of Last Resort.

Strategy | 56 NALI provisions and the other super rules.

Compliance | 58 Accessing member benefits correctly.

Compliance | 62 Trustee obligations regarding member exits.

REGULARS 2025 SMSF ROUNDTABLE KEY STAKEHOLDERS TACKLE PRESSING MATTERS Cover story | 12

PROFILE

What’s on | 3 News | 4 News in brief | 5 SMSFA | 7 CPA | 8 IFPA | 9 IPA | 10 Regulation round-up | 11 Super events | 66

Kate Cooper | 42 Chief executive highlights the need for digital asset education.

QUARTER III 2025 1

FROM THE EDITOR DARIN TYSON-CHAN INAUGURAL SMSF ASSOCIATION TRADE MEDIA JOURNALIST OF THE YEAR

Too big to ignore For the past few years, every time the ATO has released its SMSF statistics it has been recognised younger Australians are dominating the number of new funds being established. It has also been noted many of these first-time trustees are setting up their SMSFs without the aid of financial advice.

Examining these two facts together often leads to one conclusion involving an asset class that has continued to develop and is definitely not going away – digital assets and in particular cryptocurrency.

The ever-growing interest in digital assets and cryptocurrency means the sector must now treat them seriously and the process has already begun in earnest. For too long cryptocurrency has been plagued by compliance issues, such as the ability to purchase it in a super fund’s name, and its volatile nature leading it to be completely dismissed as being an inappropriate investment for SMSFs, including by advisers.

This could well be one of the reasons why younger superannuants who are looking to set up an SMSF to hold cryptocurrency are bypassing financial advice when doing so.

Further to this point, I have heard anecdotal evidence licensees and professional indemnity insurance underwriters are continuing to apply a $500,000 minimum establishment threshold for SMSFs, even though this recommended asset balance has been removed from materials such as Australian Securities and Investments Commission (ASIC) Information Sheet 274. Given younger individuals will be setting up an SMSF with a lower balance, as they haven’t yet spent a significant amount of time in the workforce, it could mean they would not be able to receive financial advice for this action even if they wanted to.

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Regardless of the root causes for the reluctance of the SMSF sector to embrace digital assets, it seems we’ve reached a juncture where this has to change.

What will help the next stage of this journey is the willingness of some digital asset providers to approach interaction with SMSFs in an entirely different way.

As mentioned above, scepticism over digital assets and cryptocurrency has been fuelled compliance concerns. While acquisition and storage solutions are key to addressing this matter, education is also a significant component in this process.

To this end, we are already seeing progress with the formation of the SMSF Innovation Council with OKX Australia chief executive Kate Cooper as chair and the involvement of key stakeholder organisations such as ASF Audits, LightYear Docs, Saul SMSF and accounting firm PKF. This body has been put together to provide a forum to address governance, education and innovation gaps in the sector’s participation in digital assets.

In addition, OKX has launched an SMSF platform to help trustees include digital asset in their funds.

Crypto-exchange Coinstash is also approaching the sector from a diminished sales perspective, again with more emphasis on informative discussions. The fact Coinstash chief investment officer and head of SMSF strategy Simon Ho has a chartered accounting background is a point of difference in itself.

So it would appear the sector’s interaction with digital assets and cryptocurrency has reached a tipping point that will see a noticeable shift in the treatment of these types of investments.

While more work will be required on both sides of the fence before we can say the asset class has become mainstream, I think we can certainly agree it is now too big to ignore.

Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au Senior journalist Jason Spits Sub-editor Taras Misko Head of events and corporate partnerships Cynthia O’Young c.oyoung@bmarkmedia.com.au Publisher Benchmark Media info@bmarkmedia.com.au Design and production AJRM Graphic Design Services

WHAT’S ON

DBA Lawyers Inquiries: dba@dbanetwork.com.au

To have an upcoming event featured on the What’s On page, please contact darin.tyson-chan@bmarkmedia.com.au.

SMSFs and the provision of private loans

SMSF Online Updates

5 October 2025 Webinar 2.00pm-3.15pm AEST

3 October 2025 Webinar 12.00pm-1.30pm AEST

ECPI: Rollovers, wind-ups and death

14 November 2025 Webinar

9 October 2025 Webinar 2.00pm-3.00pm AEDT

12.00pm-1.30pm AEDT

Heffron Inquiries: 1300 433 376 or events@heffron.com.au

SMSFs & Property Masterclass Part 1 & 2 30 October 2025 – Part 1 Webinar 1.00pm-3.30pm AEDT 6 November 2025 – Part 2 Webinar 1.00pm-3.30pm AEDT

SMSF Clinic 11 November 2025 Webinar 1.30pm-2.30pm AEDT

Downsizer Contributions – Eligibility requirements 29 October 2025 Webinar 2.00pm-3.15pm AEDT

SMSFs and GST 5 November 2025 Webinar 2:00pm-3:15pm AEDT

Superannuation in estate planning: getting it right, beyond the will

SMSFs and property – Understanding the risks and getting it right!

1 October 2025 Webinar 2.00pm-3.15pm AEST

In Practice Webinar Series 18 November 2025 Webinar 2.00 pm-1.00 pm AEDT

SMSF Industry Update 2 December 2025 Webinar 11.00am-12.00pm AEDT

SMSF Specialist Auditor Discussion Group

SMSF Association National Conference 2026

SMSF Specialist Auditor Discussion Group

Inquiries: 1800 203 123 or email: enquiries@accurium.com.au

6 November 2025 Webinar 10:30am-11:30am AEDT

SMSF Association

13 November 2025 Webinar 2.00pm-3.00pm AEDT

Accurium

SMSF Specialist Auditor Discussion Group

4 December 2025 Webinar 10.30am-11.30am AEDT

Inquiries: events@smsfassociation.com

4 December 2025 Webinar 1.30pm-3.00pm AEDT

NSW 22 October 2025 4.00 pm-5.30 pm AEDT BDO Sydney Level 25, 252 Pitt Street, Sydney

19 November 2025 Webinar 2.00pm-3.15pm AEDT

Super in 60

Quarterly Technical Webinar

Growing Your Practice – Sydney Local Community

18-20 February 2026 Adelaide Convention Centre, North Terrace, Adelaide

2 October 2025 Webinar 10.30am-11.30am AEST

The Auditors Institute

Roadshow 2025

Risks, realities and opportunities of holding property in an SMSF

WA 16 October 2025 Double Tree by Hilton Perth Northbridge 100 James Street, Perth

In Practice Webinar Series 21 October 2025 Webinar 2.00 pm-1.00 pm AEDT

Inquiries: (02) 8315 7796

14 October 2025 Webinar 1.00pm-2.00pm AEDT

Auditors Day 2025 VIC 16 October 2025 The Langham Hotel 1 Southgate Avenue, Melbourne

The ATO’s compliance program for 2025/26 18 November 2025 Webinar 1.00pm-2.00pm AEDT

Online Forum Discussion 25 November 2025 Webinar 1.00pm-2.00pm AEDT

Institute of Financial Professionals Australia Inquiries: 1800 203 123 or email info@ifpa.com.au

Super Discussion Group 14 October 2025 Webinar 12.00pm-2.00pm AEDT 9 December 2025 Webinar 12.00pm-2.00pm AEDT VIC 9 October 2025 6.00pm-8.00pm AEDT The Veneto Club 119 Bulleen Road, Bulleen Super Discussion Group 11 December 2025 6.00pm-8.00pm AEDT The Veneto Club 119 Bulleen Road, Bulleen NSW 14 October 2025 6.00pm-8.00pm AEDT Karstens Level 1, 111 Harrington Street, Sydney 9 December 2025 6.00pm-8.00pm AEST Karstens Level 1, 111 Harrington Street, Sydney

Super Quarterly Update 4 December 2025 Webinar 12.30pm-1.30pm AEDT

QUARTER III 2025 3

NEWS

Call to apply DBFO package nudge to SMSFs

By Darin Tyson-Chan

The SMSF Association is pushing to have specific aspects included in Tranche 2A of the Delivering Better Financial Outcomes package apply to the entire superannuation landscape and not just public offer funds.

In particular, the industry body believes the proposed legislation regarding the ability of superannuation funds to prompt members to act during certain life stages should be amended to have relevance for SMSFs. “This is about [giving industry funds the permission]

to provide some information to [members when they experience a significant life event]. The classic example is where someone has turned 65 [and] the industry [has been given permission] to write out to that member and say: ‘Look, you should think about going into pension phase,’” SMSF Association chief executive Peter Burgess told delegates at the ASF Audits Technical Seminar 2025 held in Melbourne recently.

“We have made the point [and asked:] what about self-managed super funds?

We can see some situations where it would be useful for the service provider to nudge the trustee to [take some sort

of relevant action].”

Burgess clarified the suggestion has taken into account the unique structure of an SMSF whereby the fund trustee and member are one and the same.

“I’m not saying that trustees should be able to nudge themselves to do something [when a lifechanging event occurs], but they have relationships with service providers and if we’re going to allow large funds the ability to nudge their members, why can’t we allow service providers in our industry to nudge SMSF members when certain life events happen,” he said.

“Now we think there’s a better chance of an SMSF

member actually acting on the nudge than perhaps members of some of these large funds.

“So we have made that point to government.”

He pointed out the next tranches of the Delivering Better Financial Outcomes package are still only in their draft stages.

Peter Burgess

Recurring administrative errors revealed

By Darin Tyson-Chan

The ATO has highlighted some of the fundamental and recurring errors it is observing with regard to the SMSF annual return and process involving the winding up of funds.

Speaking at SMSF Trustee Empowerment Day 2025, recently co-hosted by smstrusteenews and the SMSF Association, ATO trustee regulatory obligations director Paul Delahunty revealed: “One common error we do see is the annual return not providing all members’ information, such as names and TFNs (tax file numbers).

“We also see incomplete or inaccurate auditor details, including the auditor number and the date the audit was completed, [which are key integrity checks] for the lodgement process, so those details need to be absolutely accurate.

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“Additionally, we see closing account balances not matching accumulation and retirement-phase account balance amounts.”

To this end, Delahunty stipulated if a member’s closing account balance is zero or negative, then an amount of zero must be entered on the SMSF annual return.

He also took the opportunity to point out some administrative errors frequently occurring when trustees are looking to close their SMSFs. “While the concept of winding up [a fund] seems simple on face value, there are some compliance and tax obligations you will need to consider,” he advised.

“Some areas we are seeing trustees come unstuck include not making sure they dispose of fund assets in accordance to super law and the trust deed, not distributing member benefits and [when they are distributed], whether [the members] have met a condition of release and not checking whether they’ve met a condition of release. If [the member has not met

a condition of release], you must roll over the benefits to another complying super fund using SuperStream.

“And thirdly, trustees forgetting they still need to have their fund audited and need to lodge the final SMSF annual return.”

He issued a reminder the ATO has a checklist for SMSF wind-ups on its website to provide assistance as to the procedures to be followed when a fund is to be closed down.

Paul Delahunty

NEWS IN BRIEF

Div 296 changes likely The SMSF Association has confirmed the validity of recent media reports the government has currently paused the progression of the proposed Division 296 tax and suggested if the ALP goes ahead with the policy, it will not be in the form set out in the original bill designed to introduce the measure. “[The reported pausing of the legislation] is consistent with what we’ve been hearing coming out of Canberra now for a few weeks. There is growing discontent within the Labor Party about this tax. The backbenchers are not happy with this tax and we’re also hearing the Prime Minister has some concerns about this tax as well,” SMSF Association chief executive Peter Burgess noted. “[However], we don’t know if the Treasurer will amend this tax or scrap this tax, but it is looking increasingly likely that if we do see this legislation reintroduced, it won’t look the same as it has in the past.”

Burgess suggested one amendment that is likely to be made if the Division 296 tax bill is reintroduced to parliament is allowing the $3 million threshold to be indexed.

Digital asset platform launched Cryptocurrency exchange OKX has launched a specific SMSF platform in Australia aimed at giving both individual and corporate trustees the ability to integrate digital assets into their funds’ investment portfolios.

The service provider indicated it made the move in response to the

growing demand SMSFs have shown for digital assets, with data OKX cited revealing cryptocurrency allocations within the sector surged by 746 per cent in the five years to March 2025.

The OKX SMSF crypto-platform provides secure infrastructure for trustees to buy, manage and report on digital assets. It also has dashboards for transaction and portfolio monitoring, exportable end-offinancial-year reports, and AUSTRACregistered digital currency exchange services across major assets such as Bitcoin and Ethereum.

Further, it provides institutionalgrade cryptocurrency custody, implements multi-signature security measures and produces monthly proof-of-reserves reports for 22 widely traded assets.

“Trustees have been crying out for institutional-grade infrastructure that doesn’t compromise on compliance or security. That’s exactly what we’ve built,” OKX Australia chief executive Kate Cooper explained.

Retirement more expensive The latest Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard analysis has indicated the amount needed to achieve a comfortable retirement for a couple aged around 65 rose by 1.95 per cent over the June quarter and now sits at $75,319 a year.

The figures also showed the required annual amount for a single person to achieve a comfortable retirement is now $53,289, an increase of 1.72 per cent over the quarter, while the modest retirement level rose by 3.75 per cent to $49,992 for a couple and 3.4 per cent to $34,522 for an individual.

With regard to specific items,

ASFA reported digital connectivity, or smartphones, streaming services and high-speed internet, is now accounting for an increasing amount of retirees’ expenditure.

The superannuation industry peak body updated the standard this quarter to include budgeting for smartphones and NBN plans. These services now cost couples $58 a week at the comfortable level and $45 at the modest level.

Accountant gets decade ban The Australian Securities and Investments Commission (ASIC) has banned a New South Wales solicitor and accountant from providing financial services after it found he provided advice about setting up SMSFs and rolling funds into them without holding an Australian financial services (AFS) licence.

ASIC stated it banned Christopher Malcolm Edwards, who operates as a sole trader in Richmond, NSW, under the name Christopher M Edwards Solicitors and Accountants (Business), from providing financial services for 10 years.

Edwards, who is also a registered tax agent, registered SMSF auditor and registered real estate agent, is also banned from controlling, whether alone or with others, an entity that carries on a financial services business and from performing any functions involved in the carrying on of such a business over the same period.

The corporate watchdog stated it imposed the ban given Edwards carried on a financial services business without an AFS licence and arranged for clients to establish SMSFs, roll over funds into them and invest in debentures issued by companies he controlled.

QUARTER III 2025 5

NEWS IN BRIEF

Younger trustees on the rise The ATO “Self-managed super funds: quarterly statistical report June 2025” has indicated younger Australians are continuing to dominate SMSF establishments.

The SMSF Association acknowledged this fact, stating: “While most SMSF members are still aged 50 and above, individuals in the 35 to 44 age group made up 37 per cent of new entries in the June quarter, while only representing 12 per cent of the total SMSF membership.

“Conversely, older age groups, that is 60 and above, are joining at much lower rates – less than 10 per cent in the June 2025 quarter – compared to their overall presence in the SMSF membership, over 50 per cent at June 2025.”

The ATO statistics also showed the size of the SMSF sector has continued to increase with the total number of funds passing 653,000, comprised of 1.2 million members holding total assets of $1.05 trillion.

Further, the data acknowledged the average assets per member at 30 June 2024 was $881,000 with the average assets per fund sitting at $1.6 million.

Banton to leave ASF Audits ASF Audits head of technical Shelly Banton will leave the firm at the end of the month after more than eight years of service, but will continue to work in the SMSF auditing space as a consultant.

ASF Audits strategic development director Richard Smith announced Banton’s departure recently, noting she started with the company in August 2017 and since that time held the roles

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of technical services executive general manager, head of education and most recently head of technical.

Smith highlighted the contribution she had made to ASF Audits and the wider SMSF sector.

“Shelley has been leading education for us as a business over that time and, in my view, is definitely the leading educator in the SMSF audit space,” he said.

“We have quite a bit of content online – the articles, the blogs, the podcasts, the webinars – that’s all of Shelley’s doing and she’s done an amazing job.

“She is highly respected by our clients and is always open to answering questions so will be missed by us as a business.”

Call for CSLR reform Three accounting bodies have stated a government decision to impose an additional levy on financial advisers to fund claims before the Compensation Scheme of Last Resort (CSLR) is a short-term solution and highlights the need for reform of the initiative.

Chartered Accountants Australia and New Zealand, CPA Australia and the Institute of Public Accountants labelled the exercise of ministerial powers to create a special levy to meet the additional $47.3 million in claims as “simply a band-aid funding solution to a much larger issue that needs to be resolved as a matter of urgency”.

The accounting bodies made the statement in a joint submission in response to a Treasury consultation paper on how to meet the funding shortfall for the CSLR expected in 2025/26.

“The growing number of high-profile cases of financial services misconduct resulting in claims against the CSLR are placing considerable strain on the

ongoing funding of the scheme,” the submission stated.

“The additional funding burden is disproportionally falling on the financial advice sector, in turn impacting on the financial viability of many financial advisers.

“This is unsustainable and will likely impact the ongoing viability of the scheme itself. Legislative reform is urgently needed to address this.”

UGC-linked adviser sanctioned An adviser who recommended setting up SMSFs for investments into a related property investment company has been banned for six years from providing financial services or being involved in any way in their provision.

The Australian Securities and Investments Commission (ASIC) banned Milutin Petrovic after it found he failed key advice obligations when recommending clients invest their retirement savings into financial products related to his licensee, United Global Capital Pty Ltd (UGC).

Specifically, Petrovic advised clients to set up an SMSF and then invest in the Global Capital Property Fund Limited (GCPF), which was a related property investment company that has since gone into liquidation.

ASIC stated Petrovic told clients he was only providing limited advice, while also telling them he was required to act in their best interests and provided comparisons between their existing superannuation funds and the SMSF and GCPF investment that indicated they would be better off by switching to the latter.

The regulator also found he issued defective statements of advice and therefore engaged in misleading and deceptive conduct regarding acting in clients’ best interests.

SMSFA

Always a valuable experience

PETER BURGESS is chief executive of the SMSF Association.

The SMSF Association Technical Summit – it’s one of my personal highlights of the year. Over two days, you are cloistered with like-minded SMSF specialists who share a thirst for knowledge, relish the opportunity to network with fellow professionals and even enjoy a convivial drink or two.

You know those attending are there because they are committed to the sector and appreciate the assembled line-up of speakers will enhance their skill set, whether it be how they run their businesses, what advice to impart to clients or navigating the complex regulatory environment.

On the latter point, no one in the room needed reminding the fragmented regulatory framework underpinning the sector is not fit for purpose.

What we currently have are complex and blurred boundaries between tax, financial planning, legal and accounting advice. This means SMSF specialists are often placed in impossible situations, expected to provide guidance on matters where they are not licensed or authorised to give advice.

From the SMSF Association’s perspective, what is needed is a more flexible, principles-based model of professional advice, one that better reflects the real-world needs of clients and enables professionals to support them through significant life events, such as starting a business, funding aged care or managing family wealth.

But it wasn’t all doom and gloom at the summit.

An ageing population is creating an opportunity for advisers to step into a gap left by a system that is failing to keep pace with demographic reality.

The simple fact is many retirees are unprepared for the complex decisions that come with ageing. With the gap being increasingly filled by unlicensed advisers, potentially giving inappropriate advice, it is creating an opening for those practitioners with the relevant expertise to make a real difference.

The emphasis here is on expertise and nowhere is this more relevant than when dealing with death benefits. Look at a court list and there’s no shortage of cases highlighting what happens when a will’s intentions are not explicit or documents conflict, leading to disputes that test family relationships and potentially cause genuine financial pain.

Finally, it would not have been an SMSF gathering in recent years without Division 296 getting an airing.

With the growing prospect of this legislation becoming law, delegates were brought up to speed on the lie of the land regarding this controversial legislation.

The common perception that it would only impact individuals with balances above $3 million was debunked as the summit heard how changes to total super balance calculations could have consequences for members with defined benefit pensions irrespective of their account balance. There was also plenty of discussion about the dangers and unfairness of retrospective legislation, and how the proposed implementation timeline leaves precious little time for members to restructure their affairs.

Another voice on Division 296 was Geoff Wilson, founder of Wilson Asset Management, who gave his views on this proposed tax in a discussion with yours truly. True to form, Geoff did not hold back, highlighting the potential distortions to investor behaviour, capital flows and the impact on SMSF liquidity.

These are all arguments the SMSF Association has been mounting since this tax was first mooted in early 2023, so it was pleasing to hear a leading light from the funds management industry expressing similar sentiments.

I used my keynote address to make public, yet again, our vehement opposition to this tax. But if the government does proceed with this ill-conceived legislation, then its introduction should be delayed by at least 12 months to give individuals time to make the necessary changes to their superannuation affairs.

As Treasury has previously pointed out, those impacted by this tax would potentially require a minimum of 12 months to transfer ownership of assets and to manage any associated costs. It stands to reason, this 12-month period should only begin once the tax has become law.

On this proposal, the government has emphatically ruled out any compromises, whether it be the taxing of unrealised capital gains or indexation. Even the intervention of Labor heavyweights, such as former prime minister and treasurer Paul Keating and former Australian Council of Trade Unions secretary Bill Kelty urging caution, has been to no avail.

So, it was somewhat surprising to recently hear Treasurer Jim Chalmers announce he’s in “no hurry” to pass the legislation, simply adding to the confusion that surrounds this proposal. For an industry that’s crying out for certainty, this just added insult to injury.

QUARTER III 2025 7

CPA

Superannuation’s uncertain future

RICHARD WEBB is superannuation lead at CPA Australia.

As we move towards the final quarter of 2025, the superannuation sector finds itself in a state of legislative limbo. The two headline reforms to super under the current government, Payday Super and the Better Targeted Superannuation Concessions, including the contentious Division 296 tax, remain unlegislated with less than a year before they become effective. For trustees, financial advisers and auditors of SMSFs, this uncertainty is more than a political inconvenience, it’s a planning nightmare.

Payday Super: still waiting for parliament Under the government’s Payday Super reform, announced in the 2023/24 budget, employers must pay superannuation contributions at the same time as salary and wages from 1 July 2026. The reform is intended to address the persistent issue of unpaid super and improve retirement outcomes, particularly for younger and lowerincome workers.

Despite widespread support and the release of exposure draft legislation in March, the measure has still not yet been introduced to parliament. The ATO has already begun preparing for implementation, including the closure of the Small Business Superannuation Clearing House from 1 July 2026. However, without enabling legislation, these preparations remain speculative and potentially costly.

The much-vaunted proactive support for employees whose superannuation is underpaid, or not paid at all, will really only be available for members of Australian Prudential Regulation Authority-regulated funds, due to their reporting regime. This leaves members of SMSFs more or less in the same situation they are now in, whereby the ATO will not necessarily be able to proactively investigate underpayments and SMSF members will still have to lodge a complaint with the regulator if their employer has underpaid their contributions.

Division 296: a tax still in limbo The Division 296 tax, part of the broader Better Targeted Superannuation Concessions package, proposes an additional 15 per cent tax on earnings attributable to super balances above $3 million. The measure commences for the 2026 financial year, but as of early September the legislation had not yet been reintroduced to parliament following the May 2025 federal election.

The bill previously stalled in the Senate, reportedly due to insufficient support and controversy surrounding its design, particularly the lack of indexation on the $3 million threshold and the inclusion of unrealised gains in the tax calculation. These features have drawn criticism from across the sector, with concerns about pressures on SMSFs holding illiquid assets, such as property and other

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unlisted investments.

The government has reaffirmed its commitment to the measure, but time is running short. The next Senate sitting period is scheduled for October and with the start date this year, trustees and advisers are left in a precarious position. Should trustees begin liquidity planning now or wait for legislative certainty? Should members consider recontributions or asset restructuring? These decisions carry significant tax and strategic implications.

Planning in the absence of law For SMSF professionals this uncertainty demands a proactive yet cautious approach for advising clients.

While the Division 296 tax is not yet law, the proposed calculation method is reasonably certain. The tax applies to the increase in a member’s total superannuation balance over the financial year, adjusted for contributions and withdrawals, with the portion attributable to balances above $3 million subject to the additional 15 per cent tax.

Importantly, the tax applies to unrealised gains, meaning members could face a tax liability without having sold any assets. This is particularly problematic for SMSFs with concentrated holdings in property or private equity.

Advisers should consider modelling potential tax impacts and reviewing asset allocations now, even if the legislation is not yet enacted.

The cost of uncertainty Legislative uncertainty is not new to superannuation but the stakes now are higher than usual. Both of the big reforms are significant in scope and impact: the Division 296 tax alone is expected to affect around 80,000 individuals, or 0.5 per cent of superannuation members, but those numbers will grow over time due to the lack of an indexation measure.

For auditors the uncertainty complicates the assessment of fund compliance and member tax obligations. For advisers it makes strategic planning more difficult. And for trustees it raises questions about the long-term sustainability of their retirement strategies.

Certainty is needed The superannuation system is built on long-term planning. Members are compelled to lock away their savings for decades, trusting the rules will remain fair and predictable. When legislation is delayed or unclear, that trust is eroded.

It is incumbent on policymakers to provide clarity either by passing the legislation or by clearly communicating revised timelines. In the meantime, SMSF professionals must remain vigilant, informed and ready to adapt.

Whether it’s preparing for a new tax or payment regime, the message is clear – hope for certainty, but plan for change.

IFPA

Weathering the regulatory storm

NATASHA PANAGIS is head of technical services at the Institute of Financial Professionals Australia.

Financial advisers in Australia have endured a decade of relentless regulatory change, often feeling like they are navigating an obstacle course of red tape. While the challenges have been real, this is not a story of doom and gloom. Within the turbulence lie important lessons, signs of progress and the foundations of a stronger profession. Let’s take a look at the journey so far and where the silver lining might be.

The Future of Financial Advice reforms in 2013 were introduced to restore trust after banking scandals by banning conflicted commissions and creating a best interest duty. Noble in intent, the reforms instead buried advisers in paperwork.

Disclosures, opt-in forms and checklists designed for bank staff fell equally on small practices, inflating compliance costs and pulling focus away from clients.

Then came the Financial Adviser Standards and Ethics Authority (FASEA) standards in 2017, aimed at professionalising advice through higher education requirements, exams and ethics codes.

The concept was widely supported, but the rollout was messy. Shifting rules and late guidance saw experienced advisers suddenly deemed unqualified. Many mid-career professionals chose early retirement over expensive retraining. By the time FASEA was dismantled in 2022, thousands of advisers had already left the industry.

The Hayne royal commission brought the next wave of change. From 2021, advisers were required to secure annual fee consent from clients or risk revenue being cut off. While designed to strengthen transparency, in practice it created an administrative treadmill, adding costs that often priced everyday Australians out of advice. Then, in 2024, came the Compensation Scheme of Last Resort (CSLR), funded by adviser levies. This has shifted the financial burden of failed products onto advisers who had no involvement in them. For small firms, the risk of ballooning levies after major collapses has created yet another heavy load.

The effect of this regulatory layering has been stark. In 2018, there were around 28,500 financial advisers in Australia. Today, the number is closer to 15,500, representing a loss of almost half the profession in just six years. And more exits may follow when transitional education rules expire at the end of this year.

Every adviser who leaves means hundreds of clients are without support. Many Australians now turn to Google, social media or lead generators for financial guidance. This too often leads them into high-pressure sales funnels or questionable schemes, further undermining the very trust the reforms set out to rebuild.

At the same time the market itself is splitting.

Affluent clients can still afford comprehensive advice, while the broader public is pushed toward robo-advisers or one-size-fits-all online tools.

The real challenge, and opportunity, sits with middle Australia where families need accessible, personalised and affordable guidance.

It’s easy to dwell on the negatives, but there are reasons to be optimistic as well. The advisers who have remained in the industry are highly qualified, ethical and committed, forming a core group that can continue to drive the profession forward.

This resilience is one of the industry’s greatest strengths.

Technology is also proving to be an ally. Digital tools, such as e-signature platforms and automated compliance systems, are helping reduce paperwork, lower costs and improve the client experience. Over time, these innovations will make advice delivery more efficient and sustainable.

And while the CSLR has been a major sore point, momentum is building for reform.

Industry groups are uniting to call for product manufacturers and managed investment scheme operators to share the funding load. Progress may be slow, but this push represents a real step toward fairness and if successful, will ease the burden on advisers and place responsibility where it belongs.

Policymakers, too, appear to be listening. There is now open discussion about pragmatic fixes and a recognition that adviser numbers have fallen too far. The truth is clear: quality financial advice is not a luxury, but something every Australian deserves.

For advisers, the message is to stay the course.

The upheaval of the past decade has created a more resilient and passionate profession. What has been a difficult journey has also reinforced the central role advisers play as builders of trust, guiding Australians toward financial security. And while the storm of regulation has been long, the clouds are beginning to clear, bringing with them the promise of a stronger, fairer system for advisers and clients alike.

QUARTER III 2025 9

IPA

The payday super shift

LETTY CHEN is tax and super adviser at the Institute of Public Accountants.

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The ATO’s Small Business Superannuation Clearing House (SBSCH) will no longer accept new users from 1 October 2025 as part of its preparation for the payday super (PDS) reforms. This is despite the fact the PDS legislation, including the closure of the SBSCH, has not been enacted.

The ATO is encouraging existing users to start taking steps to transition to alternative options, such as considering those offered by superannuation funds, commercial clearing houses or other payroll software providers.

Treasury’s additional impact analysis of the Securing Australians’ Superannuation Package estimates the SBSCH currently has around 270,000 users. The impending closure is expected to result in a minor increase in the average annual regulatory costs for these users by $1.2 million. This increase will be due to SBSCH users spending additional time either subscribing to new payroll software with superannuation integrated or remaining in their existing software and upgrading their subscription.

In addition, the estimated additional cost for employers to subscribe to a commercial clearing house instead of using the free SBSCH is $84.2 million, equating to an annual cost of $1083 per employer. The $84.2 million figure is an ‘upper bound’ and assumes employers will stay with their current digital service provider, upgrading to a higher-tier subscription.

The closure will also have also negative impacts aside from additional subscription costs.

For superannuation guarantee (SG) compliance purposes, a contribution by way of electronic transfer of funds is treated as being ‘made’ when the funds are credited to the super provider’s account. Critically, it is not made when the employer pays a clearing house, with an exception for the SBSCH. An employer is treated as discharging their SG obligation at the time they pay the contribution amount on or before the due date to an approved clearing house, where the approved clearing house accepts the payment. Currently, the SBSCH is the only approved clearing house and its users benefit from this certainty.

In addition, contributions are deductible to an employer only when they are considered to have been made. The ATO treats an employer who uses the SBSCH as having made the contribution for tax deductibility purposes in the same year in which they make a valid payment to the SBSCH, unlike

users of other clearing houses that have to wait until the fund receives the contributions.

So the closure of the SBSCH will mean its 270,000 users will lose the certainty of knowing that, once the clearing house has been paid, the employer will be treated as having satisfied its SG obligations and, by extension, will be entitled to the tax deduction for that income year without having to check if contributions have been received by each employee’s fund.

There is nothing in the payday super draft legislation to extend this existing relief for current users of the SBSCH, or indeed for any employer, after the service is decommissioned. In fact, the uncertainty will be exacerbated.

An employer that uses a commercial clearing house, none of which are approved clearing houses, will satisfy their SG obligations only once the contributions are received by the relevant superannuation funds and are capable of being allocated to members’ accounts. Currently, clearing houses are not subject to processing time requirements. Under PDS, employers will be exposed to the SG charge if this does not occur within seven calendar days from payday. This will be the case for each and every payday instead of the current once a quarter. There will be no relief for delays outside the employer’s control.

The joint bodies, comprising the Institute of Public Accountants, Australian Bookkeepers Association, Chartered Accountants Australia and New Zealand, CPA Australia, Financial Advisers Association Australia, Institute of Certified Bookkeepers, SMSF Association and the Tax Institute, have made recommendations to Treasury, in relation to the design of the PDS legislation, that include the following: • commercial clearing houses holding an Australian financial services licence should be recognised as ‘approved clearing houses’ so employers will be treated as satisfying their obligations once they make a valid payment to the clearing house, and • licensed commercial clearing houses should be subject to payment standards to ensure contributions and error messaging are promptly processed.

While it would be preferable for the ATO to retain the SBSCH, these two changes would alleviate the future additional administrative burden and penalty risk that will be borne by SBSCH users who will have to transition to other platforms.

REGULATION ROUND-UP

Death benefit payment timeframe clarified

NICHOLAS ALI is SMSF technical service director at NEO Super.

The ATO has removed reference to the payments of death benefits having to be made “as soon as practicable”.

The regulator had previously stated it considered six months from the date of death to be sufficient time to pay a death benefit, unless there was some impediment to the payment being made, such as the inability to locate beneficiaries or court challenges to the payment of a benefit.

Now, the ATO website simply mentions the payment should be made “as soon as possible after the member’s death”.

However, Superannuation Industry (Supervision) (SIS) Regulation 6.21 outlines the compulsory cashing requirements for a member’s benefits in a regulated super fund, stating these benefits must be cashed as soon as practicable after the member’s death.

The ATO’s more common-sense approach is welcome relief and better reflects reality.

However, trustees are still under other legislative obligations, such as the covenants outlined in section 52 of the SIS Act, which makes clear trustees must act honestly and exercise skill and diligence as a prudent person would do when dealing with someone else’s money.

covering both the set-up year and the following financial year.

Division 296 tax status The Division 296 tax is set to take effect from 1 July 2025, however, it has not yet been passed into law as of now.

This tax will apply to individuals with total superannuation balances (TSB) exceeding $3 million.

Earnings attributable to the portion of a TSB over $3 million will be taxed at a flat rate of 15 per cent.

The tax will include potential taxation on unrealised gains, meaning individuals could be taxed on increases in their super balance even if they haven’t sold any assets.

The first assessment for the Division 296 tax will be based on an individual’s TSB at the start and end of the 2026 financial year (from 1 July 2025 to 30 June 2026).

Individuals may withdraw funds to reduce their TSB to below $3 million in an effort to avoid being caught by this measure, but this could lead to other financial implications, such as capital gains tax or higher personal tax rates.

The specific details of this policy may still change before the legislation is officially passed.

Review of ATO Auditor Program First-year SMSFs must lodge by 31 October 2025 Funds that have been recently established must lodge applicable annual returns by 31 October 2025.

Those SMSFs that are included in a registered tax agent’s lodgement program can have this timeframe extended to 28 February 2026.

If a new fund has no assets in the first year it was registered, it can lodge a ‘return not necessary’ form.

For new SMSFs, the supervisory levy is $518,

The ATO’s review of the SMSF Auditor Program for 2024/25 involved comprehensive assessments of over 200 auditors resulting in 41 referrals to the Australian Securities and Investments Commission and 36 voluntary cancellations of auditor registrations due to non-compliance with auditing standards.

Key issues identified included insufficient evidence for arm’s-length transactions and failure to meet independence requirements, highlighting the importance of maintaining high-quality audits in the SMSF sector.

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FEATURE

2025 SMSF ROUNDTABLE

There are plenty of issues dominating SMSF sector discussions, including the evolving trustee landscape, the increasing popularity of digital assets, persistent compliance problems and the one still playing out in real time – the proposed Division 296 tax. These topics and more were addressed among key industry stakeholders at the selfmanagedsuper 2025 SMSF roundtable.

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FEATURE

Participants

Division 296 tax

Peter Burgess (PB) SMSF Association cheif executive

Shelley Banton (SB) ASF Audits head of technical

Mailene Wheeler (MW) Vincents superannuation advisory director

Craig Day (CD) Colonial First State head of technical services

Moderators Darin Tyson-Chan (DTC) selfmanagedsuper editor

Jason Spits (JS) selfmanagedsuper senior journalist

DTC: The proposed Division 296 tax is still dominating industry discussions. So where are we at with this measure?

PB: I’m on the record as saying I don’t think the passage of this legislation today is any more certain than what it was at the beginning of the year. The pathway appears to be simpler for the government compared to the previous parliament, so it only needs the support of the Greens to pass this in the Senate, whereas in the old parliament, of course, they didn’t only need the Greens, but they needed three of the crossbench members as well. But right now the Greens are holding their ground and not willing to budge on their demands around a lower threshold of $2 million and to have an indexation mechanism included. So it is unclear where the policy is at and it’s looking more and more likely if the legislation is passed, it will have a deferred start date. There are lots of problems with backdating a tax like this and we face the prospect now, even if it is passed during the next parliamentary sitting, that it’s going to be backdated by over two months. If the government doesn’t pass it in the next sitting, the earliest it will be passed will be late October and we know that’s going to cause a lot of problems.

For one, the total super balance calculation will be impacted. So people with a defined benefit pension, regardless of whether they are SMSF members or have more than $3 million in benefits, will have their total super balance impacted by this measure. It’s disruptive when you have a change to how your total super balance is calculated halfway through a financial year because it is such an important threshold as

it determines things like a person’s ability to make contributions. So we think there’s a good chance that they’ll have to defer the start date, which means the budget estimates for this measure will have to be revisited. So the forward estimates will have to be updated to factor in a lost year essentially. And we think that’s a real opportunity for the industry to negotiate with government on some of the features of this tax which so far have been non-negotiable and tell it there are other ways to achieve the desired goals. Perhaps only then we will have a chance of addressing the taxing of unrealised capital gains.

It’s very difficult to pass legislation in one sitting unless something like a guillotine motion exists. This will allow the government to pass it very quickly and bypass the debate stage and also the committee stage. We think the government is reluctant to pass this bill without the support of the Greens and feel what it is trying to do is put a guillotine motion in place. Without this element, the bill will take a lot longer to pass.

DTC: So there were no new developments at the recent Economic Reform Roundtable?

PB: Looking at some of the roundtable transcripts, it looks like deputy opposition leader Ted O’Brien did mention it. He raised the measure in the context of superannuation tax and expressed his concerns about it, but we haven’t heard anything else as to whether the policy was discussed. We had our say beforehand, that this is about productivity and improving productivity, not introducing taxes that do the opposite is a good place to start.

DTC: Is delaying the starting Continued on next page

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It is unclear where the policy is at and it’s looking more and more likely if the legislation is passed, it will have a deferred start date. There are lots of problems with backdating a tax like this.

– Peter Burgess, SMSF Association.

Division 296 tax (continued) Continued from previous page

date of the Division 296 tax the only practical option now?

SB: I’m wondering whether there is a predetermined cut-off point that will prevent the government from implementing the policy retrospectively on 1 July 2025. Could it be December? Is it next March?

We need to know what it is because it makes it impossible for people to plan efficiently, sufficiently in terms of looking at the options they have to manage their Division 296 tax liability. So it becomes a little bit of a juggling act for the industry. Of course, this is a tax issue, but it does lend itself to other areas we need to focus on such as market valuations.

We need to look at whether there are different methodologies that are going to be employed each year to provide a little bit of a buffer for those people whose total super balance is around the $3 million mark, such as tax-effect accounting. We also need to determine whether investment returns have been allocated on a fair and reasonable basis to members.

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SIS (Superannuation Industry (Supervision)) Regulation 503 doesn’t say they have to be allocated on a proportional basis. So at what point are we going to know when we have to examine these things?

CD: I might take a little bit of a contrarian view. I do see Peter’s point of view completely and I think delaying the measure’s start date would actually be a sensible outcome. I know the government has said people have had three years to prepare for this, but I think that’s a little bit disingenuous because we don’t have legislation and to expect people to make significant changes to their financial affairs based on a potential piece of legislation I think is a little bit unfair. Coming back to the backdating of it, if you’ve got an accumulation account sitting inside an SMSF or an account-based pension or both, the change to how the total superannuation balance is determined will not impact you at all. It will only impact those people that have a defined benefit pension, such as a lifetime pension running out of a self-managed super fund that they started pre-2005. In that situation when you look at those proposed rules they talk about using the family law value, or an actuarial

value based on plus or minus 10 per cent of that family law value. And when you go back and look at those family law valuations for a lot of those pensions, given the rates of inflation in Australia and the indexation of those pensions over that period of time, it’s highly likely the total super balance value of those pensions will decline, potentially substantially.

Therefore it could mean the client’s not going to be any worse off from these changes coming through. For example, you might have someone who’s got a total super balance just over $2 million on 30 June 2025 and, due to the revaluation of their defined lifetime defined benefit pension, all of a sudden that amount is around $1.7 million. Further, the people I have spoken to about this have fallen into two categories. The first group is completely opposed to the notion of paying more tax. The second, once they actually understand the tax and how it works and what the actual tax liability will be, say: “Is that all it is?

What was all the fuss about? Let’s just pay the tax and move on.” As such, we might see the government take the view no one is going to be significantly worse off so we’ll go Continued on next page

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Continued from previous page

ahead and push the measure through.

MW: If the start date is pushed out, it means we will have legislation and we can implement strategies to deal with the measure with certainty and not act on the basis of the information that has been out there for three years that ends up being changed.

With reference to Craig’s comments about client reaction, some people have told me they’d be happy to pay more tax on their superannuation if it was levied at a fixed rate, say 30 per cent. But they’re not happy with the concept of being taxed on unrealised capital gains because they feel they can’t control or plan to manage their total super balance adequately due to its variable nature. We’ve already put some strategies in place with clients, particularly where they’re over age 60 and satisfy a condition of release.

They’re looking at their succession planning and intergenerational wealth transfers, but this tax has pushed some of them to act a lot quicker. It is clear some of them are listening to the mainstream media about the measure and they’re scared. Delaying the starting date will allow clients the opportunity to prevent having to rush their Division 296 strategies, so I

would definitely welcome a move like that.

DTC: Is the confluence of taxing unrealised capital gains and charging more tax on super complicating the whole issue?

PB: We’ve had a lot of feedback from our members that they’re not opposed to individuals with very large superannuation balances paying more tax, and I think we’d all agree with that, especially those members with excessively large balances. It’s a perfectly valid policy position to take to claw back some of the super concessions. The issue is the design of this tax. Taxing unrealised gains is just not the solution here. I’ve said that to the politicians on many occasions that we’re not here to argue against people with very large balances paying more tax. Instead, we’re here to argue against the design of this tax and there are other ways to go about clawing back these tax concessions which would not have the unintended consequences and the knock-on implications this tax is going to have. I think when they start to understand that, there is talk as to alternative ways to go about it.

We’ve seen plenty of suggestions put forward as to how you might claw back these concessions and I’d have

to say the option we’ve got on the table right now is probably the worst approach.

SB: I agree with that. I don’t think, philosophically, anybody would be against taxing higher balances in super. But let’s be transparent and honest about what some of the motivation is. It’s about supporting social programs in Australia and infrastructure projects and so forth and deciding on a way to do that which isn’t unprecedented. It should be done in a way where everybody is going to be happy in terms of putting their hand in their pocket and paying for the rest of Australia.

CD: We saw similar arguments when the transfer balance cap came in that the people with very, very large super balances need to pay a bit more tax. In all my conversations around Australia, or even my reading of every comment around division 296, I have not seen anyone argue that people with this level of money in superannuation shouldn’t be paying a bit more tax. As Peter said, it all comes back to the way the tax is designed and, for me, it shouldn’t be introducing this new concept of taxing unrealised capital gains Continued on next page

I have not seen anyone argue that people with this level of money in superannuation shouldn’t be paying a bit more tax. It all comes back to the way the tax is designed and, for me, it shouldn’t be introducing this new concept of taxing unrealised capital gains because it is quite problematic. – Craig Day, Colonial First State

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Division 296 tax (continued) Continued from previous page

because it is quite problematic.

However, you can argue about how it works, or where you draw the line, or the minutiae of it, but essentially if you’ve got $3 million in superannuation, you’ve got enough to fund a good income in retirement. When the changes to the superannuation framework were made in 2007, I felt this tax-free super from age 60 is not going to actually last that long because you can’t have people out there doing a hard day’s work paying an average rate of 30 to 35 per cent in tax, while people with millions of dollars in superannuation not paying any tax at all. So from a whole policy spending-setting angle, I think no one’s got a problem with paying more tax. It’s just about how it works and how it’s designed.

MW: We don’t want a precedent set where companies or trusts will be taxed on unrealised capital gains. The other concern I have is the impact the new tax will have on where superannuants invest their money and

the aspirational dimension associated with it. If you’re a 20 or 30-year-old, you’re wanting a growth asset in your super fund for the next 30-odd years, but if you’re going to be taxed on that growth each year, it’s no longer an attractive option to hold the asset in your SMSF. So there are going to be unintended consequences. Also, I’ve got a client who owns a business who is looking to raise capital of around $50 million and has had to approach the US market for the money because he can’t attract interest from SMSFs because of this proposed tax. Will this happen to other entities? So all of these things come into play. I have no opposition to taxing higher balances, but it needs to be implemented in a manner that is easy for people to understand and not extremely difficult to implement.

JS: Is trustee behaviour already changing as to the assets in which they are invested in response to this propose policy?

MW: I don’t do the investment advice piece for clients, but I am often involved in sitting in with the financial planner and hearing them talking about where they’re going to allocate the assets. I’m finding some of these newer funds that are

being established are still ignoring the proposed tax and pushing ahead with their growth strategy until they know what is going to happen.

They’re adopting the attitude that the proposed tax should not dictate how they invest their funds and it should be based on things like risk profile and returns. That relates to clients who have an adviser. Where I’ve got clients who don’t have a financial adviser involved I’m fielding a lot more questions about the situation.

They’re hesitant to make certain investments and it has impacted how they are currently investing within their SMSF. They’re holding off on taking actions they might have taken before. So the proposed policy is already having an impact. It does, however, vary depending on who the trustees are and the total super balances they have. For those individuals who are over the $3 million threshold, it’s purely a waiting game, but it also depends on their age. For example, a 40-year-old client with $6 million in super is restricted so they’re just riding out the tide and sticking with their current investment allocations. However, more in-depth Continued on next page

I don’t know whether or not we should be subjected to even more scrutiny because of Division 296, but we will be adopting a more careful approach in terms of making sure valuations include all the necessary requirements. – Shelley Banton, ASF Audits.

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Continued from previous page

discussions are being held with clients over the age of 60. We’ve done some modelling demonstrating the impact of the tax and what might happen if they move money out of their SMSF and put it in a company or a trust.

But it amounts to a lot of talking and a lot of planning and no action yet.

Nevertheless, some of these clients are already expressing a desire to help their grandchildren and are adamant they are not going to pay any more tax. So they’re looking to start the intergenerational wealth transfer process now and there is a bit more focus on that strategy.

JS: Has it had any effect on how trustees approach the valuation of their SMSF assets?

SB: It’ll come down to what they’re investing in. Obviously there are ready markets for things like listed shares so those values are locked in. But when we have more complex assets, like unlisted entities and also business real property, valuations become more tenuous. I’ve already had some trustees ask me whether or not they could use a valuation that they know specifically is going to provide them with a higher value as at 30 June 2025 and then a different valuation methodology in the following income year that will provide them with a lower valuation on 30 June 2026.

That’s because if your total super balance is under $3 million at 30 June 2026, the Division 296 tax won’t matter. The education piece is going to become more important too.

Informing SMSF trustees about their responsibilities and obligations each year with regard to the valuation of

investments, such as those in unlisted entities, may result in them deciding not to hold that particular asset in their super fund. Trustees need to know there is a cost involved with getting the valuations done for those types of assets each and every year.

You don’t have to get an independent valuation done each and every year, that’s not a requirement of SIS and it’s not a requirement of the auditing standards, but you need to have the evidence to prove that that valuation is stated fair and reasonably within the accounts.

MW: With regard to the education piece Shelly was referring to, we’ve already spoken to many trustees about particular investments and what the additional compliance obligations associated with them might be.

Third parties can also add to the complications. Where a new fund is preparing its accounts for the first time, information for certain assets needs to be obtained from third parties and they often ask why they are required to provide these details as it isn’t necessary for other clients.

It makes it really, really difficult for the auditors and the accountants and the trustees. So we’ve been warning clients the introduction of this tax will lead to increased scrutiny of asset valuations. We’ve already seen this because of the contributions caps and the pension payment standards, but we have alerted clients for the need to be prepared for additional costs their fund will incur because of these types of investments.

SB: As we’ve said before, a lack of audit evidence, especially in relation to market valuations, is the biggest reason why auditors are referred

to ASIC (Australian Securities and Investments Commission). So you’ll be finding auditors aren’t going to be accepting valuations that may not provide them with sufficient appropriate audit evidence moving forward.

JS: Is there a concern the introduction of the Division 296 tax will place even more responsibility on auditors to safeguard compliance processes?

SB: SIS Regulation 8.02B, dictating an asset must be valued at market value, has been in place since 2013 and that requirement has never changed. Obviously this measure puts a little bit more pressure on auditors in terms of making sure valuations for more complex assets are 100 per cent evidenced by objective and supportable data the trustees provide during the audit of their SMSF. I don’t know whether or not we should be subjected to even more scrutiny because of Division 296, but we will be adopting a more careful approach in terms of making sure valuations include all the necessary requirements. For example, if there is an investment in an unlisted entity, and there is no actual independent valuation for it, we’ll be wanting to see what other information can be provided, such as whether there is a capitalisation of net income for that particular asset or an independent report from a CFO (chief financial officer) that provides us with evidence as to what the unit price should be, or a share or unit registry. We can’t audit what we don’t have and when there is that lack of evidence, then we need Continued on next page

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FEATURE ROUNDTABLE

Division 296 tax (continued) Continued from previous page

to look at SIS Regulation 8.02B to see if there’s been a reportable breach unfortunately.

JS: Has there been any evidence SMSF trustees are exiting their funds in anticipation of the Division 296 tax?

MW: I haven’t had any clients who have indicated they’d go across to an APRA (Australian Prudential Regulation Authority)-regulated fund. An element of control comes with establishing an SMSF that clients really like. In addition, they might have particular investments in their fund, like unlisted assets, that just makes it near impossible for them to switch to an APRA fund. I’ve had more comments

SMSF establishments DTC: We continue to see younger Australians dominating the number of SMSF establishments, but many are taking this step without receiving financial advice. How much of a concern is this?

PB: It is a concern. We’re an association that’s pro advice and believe people get better outcomes when they receive financial advice.

It is true that we’re seeing a lot of people set up self-managed super funds today without financial advice, but that’s not to say at

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along the lines of “once I’m 60, I’m cashing my super out and leaving the country”. This is usually followed by a tirade on the government and its policies. But most people are still happy to have an SMSF. They just want certainty on the course of action they can take and at present we don’t have that with this measure.

JS: If people with large balances end up abandoning their SMSFs and leaving the superannuation environment completely, will the government consider that a win?

PB: I don’t think, per se, it is concerned about large balances coming out of the super system.

It seems to be part of the policy objective here. But you wonder just how much modelling has been done here about the consequences of this outcome. If this money did stay in super funds, when these members pass on, there is a tax that’s deducted

from the taxable component if the death benefit goes to a non-tax dependant so the government will be missing out on some revenue at that point. Our members are telling us they’re certainly receiving lots of question about the measure. Some of their clients are acting on the proposed legislation already and have taken money out of their fund and given it to their kids so they can get into the property market. I also noticed some statistics the other day there has been quite a significant increase in things like recontribution strategies and it makes sense for people to be evening up their balances. Even if they reduce their balance by just a small amount, if they’re over $3 million, it’s going to have an impact on their Division 296 tax liability. So I have often wondered how much modelling the government has done on this tax.

some point during their SMSF life cycle they won’t seek advice. We know self-managed super funds can get complicated, particularly when trustees are moving into their retirement phase. So I think we will still see these people will gravitate towards advice at some point in time.

Yes it’s true they may not be getting it at the time of establishment. We would prefer they did because it is a significant decision they’re making and it’s important they understand their obligations as an SMSF trustee and we want to ensure they are entering into it for the right reasons.

We don’t want to see more instances of illegal early access so that’s what concerns us here.

MW: We often have clients approach

us just to say, “look, I want to set up an SMSF, but I don’t want any advice”. They’re who we call the execution-only clients. However, we do recommend they get holistic advice to assess their entire situation and make sure an SMSF is appropriate for their circumstances. Most of the time clients are deciding not to seek financial advice because of the sheer cost involved, which is a separate conversation that we could have. But it is so important for us as advisers and accountants to make sure we’re giving them the education on the fundamentals, understanding the rules, that it’s their money for retirement and can’t be accessed Continued on next page

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SMSF establishments (continued) Continued from previous page

right now, when the fund is set up.

They need to understand these rules because if they get it wrong, there will be significant consequences.

So we’d love everyone to get advice when setting up an SMSF and love for that advice to be more affordable to potentially reduce the popularity of finfluencers on mediums like TikTok. It is great to see the younger generations being interested in their superannuation, whether it is in an SMSF or an APRA fund, but they need to get the fundamentals right. If they get the fundamentals wrong with an SMSF because they didn’t want to pay for advice, it often becomes even more costly.

DTC: From an audit perspective, do trustees who set up an SMSF without financial advice represent a red flag?

SB: Not really. We’re more interested in the assets they invested in, but we don’t draw the line between whether they’re holding cryptocurrency or an unlisted asset or ASX 200 shares.

And we don’t draw the line between whether they have received advice

or not. We think it’s up to the trustees themselves to understand their responsibilities and obligations. So it’s all about making sure that they’ve got the rules and regulations set out in their trust deed and that they’ve put in place an effective investment strategy. They need to be aware of the risk they’re undertaking and the covenants they’re signing up for when they become a trustee of a super fund. We’re just there to do the job in line with the SIS Regulations and our obligations under the auditing standards. So no judgment from our part.

DTC: While ASIC Information Sheet 274 scrapped its suggestion $500,000 is an appropriate benefit balance for an individual to accumulate before they should consider setting up an SMSF, we are hearing some Australian financial services licensees and professional indemnity insurers are still using this threshold to determine whether practitioners can advise on fund establishments. To this end, is there something the industry can and should do to ensure more SMSFs are set up after advice has been received?

PB: I can say a few things here. I don’t think it’s a surprise the figures are showing a lot of people nowadays are

setting up an SMSF without receiving advice. We know accountants can’t give advice when it comes to the establishment of an SMSF unless they’re licensed to do so. We also know the number of financial planners has reduced substantially over the years. We’ve also seen platforms evolve in recent times and that has led to some advisers saying: “Why would I recommend a self-managed super fund when I can get plenty of investment flexibility just by using a platform and it’s a lot easier for me to do so because the compliance risk is significantly lower?” In many cases that’s probably true, but there is a role for education here. Practitioners need to know running an SMSF is not just about investment returns. There are other reasons as to why a selfmanaged super fund might be the right option for a client, such as for estate planning purposes. So I think, from an association perspective, we’ve got some work to do, not just in educating trustees on their role, but also educating the advice profession with respect to many of the scenarios where a self-managed super fund is the right option for a client. We know they’re not the right option for everyone, but our concern is there are circumstances where they are appropriate retirement savings Continued on next page

It is great to see the younger generations being interested in their superannuation, whether it is in an SMSF or an APRA fund, but they need to get the fundamentals right. If they get the fundamentals wrong with an SMSF because they didn’t want to pay for advice, it often becomes even more costly. – Mailene Wheeler, Vincents

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SMSF establishments (continued) Continued from previous page

vehicles for some individuals and our concern is that they’re being overlooked by advisers who are just concentrating on the investment flexibility side of things. So I think there is some work for us to do in that area.

DTC: Mailene, have you heard of any licensee restriction among your peers regarding SMSF advice?

MW: Not from anyone I’ve spoken to recently. They’re more saying the critical thing is to be able to prove a self-managed super fund is in the best interest of the client. Further to Peter’s comments, they say that can be hard to demonstrate given what they can do on investment platforms and the range of options and choices they offer. So they’re dealing with those challenges as opposed to member balances because some people with a lower level of benefits might have the ability to grow it very fast. They could have contribution strategies in place to enable them to do this or

perhaps they have an inheritance they know will be coming their way soon.

The super balance is only a part of the overall picture. So I haven’t heard from any of my peers about advice restrictions on low member balances imposed by their licensee, but I will be asking them after this.

JS: Could it be the SMSF advice journey will now commence further down the track and not at establishment as it has typically done in the past?

MW: I see that in practice all the time.

I’ve got clients who might start an SMSF in their 30s, but they run their own business and they’re focused on that and paying off their mortgage and getting their kids through school.

We talk a couple of times a year, but mainly around preparing the financial statements and the tax return. When they approach age 45 or 50 and their kids are older and they’re close to paying off their mortgage, that’s the time they consider seeking advice.

It’s when they are approaching retirement in their 60s, can see their runway, and realise they have to start acting on it. When they are in their 20s, retirement is four decades away so they don’t care about it as much.

They should be more involved, but they see it as something to set and forget.

PB: I guess you could argue it the other way. That is if their destiny is a self-managed super fund because they have an interest in investments and they want to access a broader range of investment options, the sooner they fully move into the structure, the better off they’ll be because it will be less expensive. If they wait until their balance has built up before they establish an SMSF, they could have a capital gains tax event at that time. So if an SMSF is their destiny, then setting one up at a younger age may make sense.

MW: I’ve got lots of clients who do set SMSFs up at a younger age. It’s just that the advice piece is more involved at the end around when they turn 50 when they have more strategies to implement. I always joke with my clients their golden age is between 60 and 65 given all the strategies available with regard to tax-free pensions and the like.

That’s when I speak a lot more with my clients. By contrast, the 20 year olds might be keen to invest in cryptocurrency or direct property and believe an SMSF is the best vehicle they can use to do so. So they establish an SMSF and have a long-term investment strategy and say they’ll chat to you later when more strategic advice is needed.

In terms of those trustee forums, I’m concerned there are participants trying to perpetrate a pump-and-dump scheme, effectively talking up the hype around a specific cryptocurrency, getting everybody on board, then selling it all on the market and disappearing.

– Shelley Banton, ASF Audits

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Cryptocurrency and digital assets DTC: Do you think the increasing popularity of cryptocurrency and digital assets, and adviser and licensee sentiment toward them, is contributing to the number of SMSF establishments without the help of financial advice?

PB: We would be naive to say that it’s not a factor. The ATO data on this is a couple of years old and things are moving so quickly in this market that it’s hard to get a hold on up-to-date data as to exactly what’s happening out there. We’re hearing anecdotal evidence that suggests crypto is something SMSF investors are finding attractive. We are pro-choice as an association and don’t like having restrictions on where people can invest, but we would be concerned if this is an undiversified portfolio type of approach. If it’s part of a diversified portfolio, we are relaxed about it. We get concerned about stories where it’s representing a significant proportion of their fund balance.

DTC: Mailene, are you seeing an increase in inquiries from people who want to set up an SMSF super fund to invest in cryptocurrency and doing so without receiving advice?

MW: People are not coming to us

to set up SMSFs so they can invest in cryptocurrency, but I have had more clients in the last year talk about getting into it and asking what bank they can use because their particular institution doesn’t allow digital asset transactions within an SMSF. So there are clients who are looking at it more and thankfully most of those clients are diversified. They’ve been hearing what’s been happening in the news with prices and that’s why they want to get into it. I look at the online forums for SMSF trustees because I want to know what trustees are talking about, especially those that aren’t getting formal advice, and in many of them they’re discussing crypto and making recommendations to each other about which of these assets in which to invest. They do look like they are younger members and people who aren’t wanting to pay for the advice and there are a lot of questions around where they go to set up a fund, how much will it cost and where the cheapest place to do so is because they want to get into crypto. Some of these people have super balances as low as $20,000 and this is all happening in chats without anyone participating who might be a professional recommending the person should get some formal advice or read a bit more about portfolio diversification, or provide some information on what is an appropriate balance to start an SMSF.

Unfortunately, when someone has made up their mind on a particular investment, whether it is crypto or property, they tend to go with that. I know in super funds where members aren’t actively engaging with advice, and even clients who are actively engaging with advice, once they have decided on what they want to invest in, they will do so. They may take on board the feedback about lack of diversification and know the auditor is going to raise concerns, but at the end of the day it’s their choice. As Peter said, we don’t want to restrict clients from making those choices, but would like them to be aware of the risks when you have a significant concentration in one particular asset.

DTC: Craig, in comparison, what are public offer funds doing with regard to recognising cryptocurrency and digital assets as an investment option for members?

CD: They’re most certainly looking at it and my employer, Colonial First State, have a crypto or digital asset fund people can invest into via superannuation, but it’s not available to retail investors. It’s a wholesale-only investment and because the nature of the asset class is risky, we want to make sure the people exposing themselves to those kinds of assets know exactly what they’re doing. We Continued on next page

We want to make sure that if someone moves across to an SMSF, the system is safe and people are not losing their money because they’ve had their identity stolen and someone nefarious has got hold of their superannuation fund details and is trying to roll over the benefits into a fund they don’t have anything to do with and then disappear with the money. – Craig Day, Colonial First State

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Cryptocurrency and digital assets (continued) Continued from previous page

don’t want to be in a situation where people are loading 100 per cent of their portfolio into cryptocurrencies only to get wiped out by these highly volatile assets when things go sour.

In terms of financial advisers, I don’t know any licensees or self-licensed practitioners that are willing to advise on cryptocurrency. This comes back to the discussion that people who most need advice are the ones getting themselves into assets an adviser is not going to want to be associated with or can’t advise on because of the associated risks. We talked about establishments and when things go wrong people say get some advice, but once things have gone wrong, an adviser can’t actually help. They might even look at that particular client and see just a whole bunch of risk without any clear return and think: “I’ve got to run a business so do I want to load myself up with a lot of risk for something that I don’t even know how to charge for and even if I can charge for it?” It’s these kinds of clients who are doing the crazy stuff with cryptocurrency inside their SMSFs. It’s

certainly an asset class people look at, but one trustees of large funds will acknowledge members might want to invest in, but don’t want them to take on that kind of risk. Even if there was a retail option available, you would probably find the trustees limiting access to them.

JS: Shelley, you’re part of the recently launched SMSF Innovation Council, which deals with interest in cryptocurrency and digital assets. How big is this interest expected to get and how should the SMSF and advice sector approach it?

SB: We’ve certainly seen some expansion in the cryptocurrency space within SMSFs. The ATO started reporting on crypto in 2019 and since then SMSF holdings have gone from $200 million to around $7 billion at March 2025. The statistics the regulator publishes come from annual returns, which are done annually after the fact, so we don’t actually know what we don’t know nor have up-to-date information on how many members are actually investing in crypto. We are also not clear on what are they investing in, the reasons for investing, whether they are they holding it or looking to turn it over quickly, so understanding all of those factors would be really interesting. We are seeing new developments, meaning we will start seeing, not just cryptocurrency in

super funds, but also stable coins, and people will hold these new digital assets for different reasons because they could act as a hedge against cryptocurrency price fluctuations.

What we’re wanting to do at the SMSF Innovation Council is make sure trustees are educated properly, so they have enough information to invest in crypto and digital assets knowing they’re secure, functional, are going to be there tomorrow. This means having them understand the different types of exchange platforms, cryptocurrencies, securities and protocols that are out there, and whether there are any compliance issues of which they need to be aware. I was at the Digital Economy Council of Australia conference recently talking about SMSF rules and superannuation legislation. I asked how many people held crypto and then how many people would like to transfer that into their super funds and everyone raised their hand. I said: “Congratulations, you just had your first breach because cryptocurrency isn’t money, it’s a capital gains tax (CGT) asset, and you can’t transfer your personal cryptocurrency into your SMSF.” Nobody had realised that. So the aim is to get the message out about what they can and can’t do from a compliance perspective, not only through trustees, but through advisers too and also through the rest of the SMSF profession. Part of

There are threats and other things that can potentially happen, but focusing on the opportunity of educating people about superannuation and how they can best utilise it is what I’d like to see over the next 12 months. – Mailene Wheeler, Vincents

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Continued from previous page

our brief within the council is to make sure the education piece continues and reaches as many people as it can because these types of assets aren’t going to go away. It’s been estimated there is a $19 billion benefit to the Australian economy if we keep moving through with digital assets, tokenisation and continuing with the cryptocurrency and developing products of that nature. So it’s about making the associated transactions happen seamlessly, without intermediaries taking a cut and delaying the settlement period along the way. That’s where the benefits will be coming and it’s only going to increase.

JS: Are we at a tipping point regarding the appeal of these assets for the SMSF sector and how it should be managed?

SB: We can’t legislate against stupidity, but there are already certain guidelines that have been put in place from a compliance perspective for people to consider with regard to any sort of investment. That’s what the investment strategy is for – to be able to look at the risk, the reward, the liquidity and the diversification.

You can invest in Bitcoin, which has a market cap of $2.7 trillion, or you could invest in a crypto called Audit, which is worth about one-and-a-half cents and stands on the market cap

ladder at around 3600. It’s horses for courses and you’re always going to have crypto scammers out there.

In terms of those trustee forums, I’m concerned there are participants trying to perpetrate a pump-and-dump scheme, effectively talking up the hype around a specific cryptocurrency, getting everybody on board, then selling it all on the market and disappearing. There are lots of scams of which people need to be aware either through deep-fake artificial intelligence (AI) promotions, pumpand-dump schemes, phishing scams and so forth. Part of the education piece from the SMSF Innovation Council will absolutely capture that area of the market. We talk about scamming and hacking like it’s some sort of soft activity, but it’s not. It often involves organised crime been carried out from overseas where investors’ money is going to disappear and never be seen again. That is the bottom line. So the more we can get that education piece out, the better off everybody will be, especially in this digital asset space.

JS: Will the introduction of the Division 296 tax impede or deter investments in digital assets in the future?

CD: The question trustees need to ask themselves is if they’re going to be subject to the Division 296 tax, do they really want very volatile assets in their SMSF portfolio that

aren’t going to generate any income.

With reference to the digital asset Shelley was talking about before, worth less than two cents, imagine if that quadruples in value and sends someone’s total super balance over $3 million so they’ve got a big bill but don’t have any revenue to pay it. I don’t know whether there are a lot of people out there with large balances really loading up to their eyeballs in digital assets, but if you were going to be potentially exposed to Division 296, you want to think about how much tax will be incurred and whether you have the liquidity to pay it. That’s one of the big problems – situations where people have farms and illiquid assets like them inside an SMSF and experience a spike in the fund’s asset valuations, but don’t have the cash flow to pay the tax bill, resulting in a forced sale of the asset. That would be a situation resulting from cryptocurrency investments because they don’t generate revenue. Instead they are a CGT asset.

SB: They can generate revenue through staking rewards programs and proof of reserves. There are different ways in which they can enter into a mining pool where they’re basically a passive investor, whether it’s hosted by a company that has infrastructure where they get rewards for mining or where they’ve verified transactions on the blockchain and added new blocks to it. In those cases it comes

We’re not opposed to the ATO coming out and saying it will take action against these individuals. The more they come out and say it, and people understand the consequences of taking money out illegally, it should change behaviours. – Peter Burgess, SMSF Association

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down to documentation and we need to know, from an audit perspective, the staking program they’ve entered into. How do we know the trustees actually got the rewards that are supposed to go into the fund and they didn’t enter into the program because they were also getting a personal kickback or commission or reward outside of super? There are a whole lot of questions that come into play, but staking is a way for super funds to make income on their cryptocurrency investment and it’s happening either on an exchange or other external staking platforms. For SMSFs it’s a matter of making sure it is documented

from an audit perspective, so when those rewards come in, the cost base has been recorded correctly, because it is a CGT event. It is also about making sure documentation for an access plan for crypto within super is in place. If they lose their crypto, private key or passcode, the asset is gone. It’s not like walking into a bank, showing your ID, providing answers to some security questions and walking off happily into the sunset with your asset.

This is an asset that will disappear completely and it is estimated about 20 per cent of all Bitcoin has been lost simply because people lost access to their private keys and can’t get hold

of it.

CD: If you see a client with Bitcoin in their SMSF, does that mean the cost of the audit increases significantly or will it become part of the normal hourly fee and you’ll just have extra hours now?

SB: It depends on what they have invested in, what sort of platforms they’re using, whether they’re trading on chain or off chain as the latter creates a different level of complexity. Primarily there will be a higher cost involved since it’s not a vanilla investment and there’s more work involved, which is not done as a charity case, so it does come with a higher audit fee.

Illegal early access

so. We know some do, and that’s good to see, and we’ve provided material our members can push out to people about the risk of illegal early access and the associated consequences. We’ve also had discussions with some financial institutions as to ways they could disrupt some of these transactions. They are doing some of it now and have very sophisticated systems that identify certain suspicious transactions and, in some cases, block them. We know in some circumstances they return a message to say this looks like a suspicious transaction and ask the relevant person whether they want to proceed. We think it’s possible they could perhaps do this around illegal early access. By identifying individuals who have not reached preservation age, and where it’s clear money being withdrawn is going to the member, the institution could send a message to them stating it looks like an illegal transaction and if the person understands the consequences of doing this type of thing. We’re confident we will see some of those practices followed by the financial institutions in the future. That will help the cohort of individuals who are taking money out illegally because they don’t understand they shouldn’t be doing it. The much harder group to deal with is

the one made up of people who are doing it with full knowledge they shouldn’t be.

JS: If the situation doesn’t improve soon, is there a real possibility regulators will introduce more restrictions to prevent illegal early access from happening?

PB: The ATO has already put some measures in place to address the issue through preventing some applications it receives for people setting up SMSFs. It has a process of identifying people who look like a higher risk, contact and talk to them about the consequences and risks of certain things. So the regulator is doing some preventative work now and will continue to do so over time. The systems will get more advanced at the ATO and it should enable it to weed out these individuals more effectively in the future.

We’re not opposed to the ATO coming out and saying it will take action against these individuals. The more they come out and say it, and people understand the consequences of taking money out illegally, it should change behaviours.

DTC: Is education the key, particularly when defining the difference between illegal early access and

JS: The illegal early access of SMSF benefits continues to be a problem and a concern for the ATO. Is there something the sector can do to address this issue?

PB: It is a concern as illegal access is around the $500 million mark. In terms of what could be done about this, within this group of people are those taking money out illegally and perhaps not understanding the rules. They don’t understand they can’t do that. They don’t understand the consequences.

Also in this group are those individuals who absolutely understand the rules, but they’re doing it deliberately with full knowledge they shouldn’t be. It’s the former group where we can influence behaviour. For those individuals who don’t fully understand the rules, we’d like to see service providers giving educational material to them when they are setting up an SMSF about the preservation rules and the rules around taking your money out early and the consequences of doing

24 selfmanagedsuper

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FEATURE

Illegal early access (continued) Continued from previous page SMSF loans to members?

SB: Most definitely because there’s a difference between illegal early access, which is just money blatantly taken out of a fund, and illegal early access disguised as a loan to a member. The ATO is very concerned about whether or not loans to members are genuine. Of course, a loan to a member is still a breach of section 65 of the SIS Act, but for some reason the industry seems to think this type of breach isn’t a high risk or is looked at less harshly by the ATO than a breach of SIS Regulation 6.17, which is just illegal early access and how it should be reported.

When a genuine loan to a member is made, there should be a loan agreement in place drafted on commercial terms. It should be signed, sealed, delivered and dated before any money is accessed from the super fund. Unfortunately, from an audit perspective, we can’t really tell and identify whether that is the case. We may get draft loan documents at audit and then ask for the signed versions before we issue the audit report. So that can be something we can’t identify. When we’re reporting this to the ATO, it will be up to

the regulator to investigate further and it is seeing more of this behaviour, and it will be looking at the issue more closely.

Of greater alarm is where the relevant documentation is being backdated, making them fraudulent documents.

Different pathways exist for trustees who are backdating these documents fraudulently versus a professional who is backdating it on behalf of their client to try and cover up for them. There are harsher penalties for the SMSF professional whereby they can lose their licence and ability to work as a result of fraudulently preparing these documents. Advisers of course want to protect clients and help them as much as possible, but not at the expense of their own professional standing and ability to continue assisting other people. It can be a fine line, but the ATO data shows there was $251 million taken out of super via illegal early access versus $231 million withdrawn as loans to members. It is imperative as an auditor to make sure you know what has been reported is correct and true and what is reflected in the audit file matches the fund accountant’s records. It will mean the ATO will know it is a bona fide loan to a member when it scrutinises the transaction.

DTC: Do the public offer funds have a responsibility to address the matter as well, seeing many instances of illegal early access involve rollovers from APRA-regulated retirement savings vehicles into SMSFs through which the money is then withdrawn?

CD: I can’t speak for other funds, but most certainly for Colonial First State the integrity of the system is key for all participants. If we have a leaky system, the government is going to shut it down very quickly. People are going to lose faith in the superannuation system if this is not stopped and it’s not going to achieve its desired objectives. From our perspective, it’s absolutely critical we play our part in terms of making sure that the system is safe, reliable and does what it’s meant to do. In terms of rollovers, we do have the SMSF Verification Service that we, like all other large funds, are required to comply with. There’s a number of steps we need to go through to verify the person requesting a rollover to an SMSF is who they say they are. It causes a lot of friction actually because people accuse us of trying to hold on to their money when something doesn’t match and we are not provided with the correct information needed to process the rollover. It’s what we have to do to make sure there’s not some sort of cybercriminal involved in this situation stealing people’s retirement savings. So unfortunately there is always tension in the system. We want to make sure that if someone moves across to an SMSF, the system is safe and people are not losing their money because they’ve had their identity stolen and someone nefarious has got hold of their superannuation fund details and is trying to roll over the benefits into a fund they don’t have anything to do with and then disappear with the money.

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Health of the sector DTC: How healthy is the sector overall and have you recognised any threats or opportunities as we move into the next 12 months?

CD: For the superannuation sector as a whole, we’re in an era where high balances are starting to be looked at.

What came out of the government’s recent Economic Reform Roundtable was we need to start looking at intergenerational equity. At the moment we’ve got older generations who have very generous concessional tax rates within the superannuation environment, so we’re likely to see more pressure on the very high balances. The proposed Division 296 tax may not be where it stops. We may continue to see pressure on the taxation of older members because we have this issue at the moment where workers are being hit with a lot of taxes, whereas retirees with up to $3 million in superannuation have large tax concessions. Looking into my crystal ball, we’re going to see more focus on those tax concessions in superannuation as a whole. I don’t see any particular issues around SMSFs, but with more people heading into retirement we’re going to see more focus around retirement income streams and the policy settings we’ve got at the moment. We’ve seen the government come out in the last couple of weeks with comments around looking more closely at the retirement phase of superannuation, so we’re probably going to see more focus on the types of products that are going to be available to people to help them fund their retirement and manage those competing issues around certainty and flexibility.

SB: I think SMSF auditors in the main are doing a damn fine job in terms of upholding the integrity of the sector and the ATO is continuing to single out those who aren’t. We continue to see those auditors who are not doing the right thing maybe providing a

26 selfmanagedsuper

rubber stamp for the audit report when they shouldn’t be. They are being weeded out and I don’t think that’s a bad thing. It leaves those left within the industry to do our job properly and also raise standards. That comes to the education piece, which should mean whatever members invest in, and how they do it, will not create compliance issues for their SMSF. I don’t know how many times we’ve seen the situation where there’s been a breach and the trustee, because they don’t know what they’ve done in the first place, has tried to rectify it and created even more breaches. So we’re trying to get away from that and get clients on top of it, but with quality information, not information from the pub or ChatGPT. Moving forward, the opportunity is to continue down the technology path and to work with the artificial intelligence tools available, which are going to make our lives easier, especially when we get to a critical mass of that information being at a high quality. We’re really just at the start of where we can go with AI, what it can do and how it can make our lives easier. It should result in the ability to focus on the quality work and the compliance issues and leave the mundane processing to bots that can perform the task quicker than we can. The opportunity is to embed AI into what we’re doing and work as a partnership and not be afraid because there will not be a situation where we all lose our jobs because AI has taken over. We’re going to develop in other areas and other roles in conjunction with AI, which will help make our lives easier and also hopefully make the trustees operate their funds in a more compliant fashion as well.

MW: There are a lot of negative discussions about the Division 296 tax, but it does give us the opportunity to be educating people about super.

One of the things that is really common when we talk about this tax is the education of SMSF trustees, but also educating people in general about super. While we’ve got this tax out there, and the discussions about

the taxation of unrealised gains, we are talking with clients about potential strategies. So it provides an opportunity to be out there as an industry saying this is super, and these are the great things about it. We can add that if you are interested in an SMSF, there are resources we have through associations, auditors and educational providers. Collectively, there is so much information we have available and that’s our opportunity.

There are threats and other things that can potentially happen, but focusing on the opportunity of educating people about superannuation and how they can best utilise it is what I’d like to see over the next 12 months.

PB: I’m very positive about the sector.

We can bring a lot of things together that we talked about today because the sector has grown and that’s good to see. We’ve seen growth in establishments and from the SMSF Association’s perspective, we’ve seen strong growth in the number of professionals who are voluntarily stepping up and doing accreditation programs and improving their knowledge in this space. That’s not to say everything is perfect. We need to spend a lot of time with the regulators and also the government making sure the SMSF sector is not being unfairly singled out. We touched on some of this with illegal early access and recently saw in a media release from the Australian Financial Complaints Authority that there was a 95 per cent increase in complaints around SMSFs. It’s very easy to point the finger at the self-managed super funds, but the reality is the root cause really has nothing to do with SMSFs. It’s more about inappropriate advice and conflicted advice. That is a systemwide issue and illegal early access fits in that boat as well. We have to work together as part of the broader financial services industry to try and solve these issues. So it’s important we make the point clear to others within the wider industry, that in many cases the SMSF is not the problem despite how complaints may be reported.

INVESTING

The long-short strategy appeal

Long-short strategies can add an additional dynamic to investment portfolios.

Jason Todd explains how this approach works and the associated risks and rewards.

JASON TODD is chief investment officer at Ten Cap.

In a time marked by persistent geopolitical volatility and economic uncertainty, investors face an increasingly complex investment landscape. As global markets react to events in the Middle East or the shifting policies in the United States, prudent portfolio management becomes important, especially for those nearing retirement. While traditional long-only strategies remain the standard investment approach, other investment styles, such as long-short, are gaining greater traction for their ability to generate alpha and mitigate risk, especially during times of uncertainty.

Understanding the long-short strategy Most investors are familiar with long-only strategies.

These strategies buy stocks in companies they believe will appreciate over time, profiting as these holdings rise in value. However, this approach has a notable limitation as it only benefits from upward market movements.

In contrast, a long-short equity strategy capitalises on both positive and negative outlooks by simultaneously buying (going long) stocks expected to increase in value and selling (going short) those expected to decrease in

28 selfmanagedsuper

value.

To execute a short position the investor borrows shares from another party and sells them in the market.

If the share price drops as anticipated, the investor can buy back the shares at the lower price, return them to the lender and keep the difference (minus the interest costs to borrow the stock) as profit. For example, if a stock is sold short at $20 and later repurchased at $18, the gain is $2 per share, excluding transaction and interest costs.

Long-short funds can adopt different combinations of long and short positions. A common approach is the active extension strategy. This type of strategy will vary depending on the amount of leverage it can take and will usually be a 130/30 or 150/50 long-short strategy.

For example, a 150/50 fund can take long positions up to 150 per cent of its fund value plus an additional 50 per cent of short positions, for a total gross exposure of 200 per cent.

However, the fund maintains a net market exposure of 100 per cent because funds generated from short sales Continued on next page

Chart 1

Chart 2

Outperformance ratio in up vs down months

150%

150/50 Long-short approach

Long only

Alpha+ vs ASX200 accumulation index

100%

70%

Long Exposure 1.5x

60%

-70 Long positions

50% 50%

Long 1.0x

40%

0% Short Exposure 0.5x

30%

-30 Short positions

-50%

20% 10% 0% ASX 200 Accumulation Index

Down market ourperformance

Continued from previous page

are reinvested into additional long positions.

In simple terms, selling short allows the fund to raise its long exposure while controlling for overall market risk.

Benefits of a long-short extension strategy A long-short extension strategy has several benefits.

Market agnostic with greater downside protection A long-short strategy’s defining feature is its ability to perform in both rising and falling markets. Because gains can be generated from declining stock prices via short positions, the fund’s performance is less tethered to the overall direction of the market (see chart 1).

This ‘market agnostic’ quality is particularly valuable during periods of heightened volatility or economic downturns, providing protection when traditional portfolios may suffer. In bear markets managers can increase their short

exposure, helping limit downside, lowering the impact of drawdowns and potentially improving risk-adjusted performance.

Expanding the investment universe Long-short funds do not follow investment benchmarks, instead they allow short positions, which increases the investible universe and reduces index weight constraints by allowing positions to be based on conviction and not only on market cap weight.

Chart 2 shows visually how a fund’s universe can expand. The 150/50 approach can hold 100 positions, whereas the long-only is limited to holding 50. This flexibility is valuable in a market such as Australia, which is heavily weighted in financials and resources, with a few big companies dominating these sectors. A long-short approach means investor funds are not stuck in a few big names.

Dampening portfolio volatility A broader and more varied investible universe gives long-short managers greater leeway to neutralise unwanted risks and hedge specific exposures. By shorting stocks or sectors correlated with particular risks, managers can reduce overall volatility and tracking error versus the benchmark. This dynamic risk

While traditional long-only strategies remain the standard investment approach, other investment styles, such as long-short, are gaining greater traction for their ability to generate alpha and mitigate risk, especially during times of uncertainty. management is especially useful for targeting sector neutrality or balancing factor exposures, making the portfolio more resilient to market shocks or sudden regime shifts.

The ability to profit from both rising and falling asset prices means the fund’s gross exposure can be dialled up or down in response to market conditions. When markets are rising higher, gross exposure can enhance returns, whereas when markets falter, reducing gross exposure and increasing shorts can protect capital.

Enhancing return potential and diversification By enabling active bets on both relative winners and losers, a long-short strategy unlocks new avenues for alpha generation. The reinvestment of proceeds from short sales into additional long positions amplifies the potential for outperformance relative to benchmarks, while still maintaining prudent net market exposure.

Moreover, the diversification benefits are substantial. Because returns stem from both Continued on next page

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INVESTING

Continued from previous page

sides of the market, long-short strategies exhibit lower correlations with traditional long-only funds, making them valuable as a ‘satellite’ allocation within a broader, diversified portfolio. They can help reduce concentration risk and smooth overall portfolio returns.

Risks and considerations While the benefits are compelling, long-short strategies introduce unique risks investors must understand, given the added complexity of using short selling.

Leverage risk Long-short strategies often use leverage, which means they borrow funds to increase their investment exposure. While this can amplify potential gains, leverage also increases the risk of losses as investors become more exposed to losing bets. This can magnify both gains and losses.

Short-selling risk Short positions theoretically have unlimited downside risk, meaning losses on short positions are unlimited because the price of a stock can rise indefinitely. If, instead of falling, a shorted stock rises dramatically, for example, from $20 to $100, the investor faces substantial losses and must eventually buy back at the higher price. As such, short positions can have substantially more downside if the value of the stock keeps moving higher.

Operational and regulatory risk As capital markets evolve, certain regulations or market conditions can impact the performance of long-short strategies. This is because short selling depends on the ability to borrow shares, which may be restricted by changes in regulation or market conditions.

Liquidity constraints Long-short equity strategies can find it more difficult to liquidate short positions quickly

30 selfmanagedsuper

and at favourable prices if the market for those stocks becomes illiquid. In addition, as funds grow and the fund becomes too large, its size or capacity can limit the ability to execute short positions effectively.

Costs and complexity Long-short strategies may come with higher fees compared to traditional long-only equities strategies. Short selling involves borrowing costs, margin requirements and higher transaction fees, which can erode returns.

The active trading involved in also managing long positions can lead to higher transaction costs compared to less actively managed strategies. Long-short funds may charge higher fees compared to traditional managed funds.

If investors want to enjoy positive returns in a down market and reap downside protection as part of the investment strategy, then the fees charged can deliver real value for money.

Fund manager’s investment skill Long-short investing amplifies investor exposure to a fund manager’s investment skill. If the manager selects stocks poorly, the outcome could be worse than it might be for a long-only equities fund. Experience and track record are therefore highly important for longequity investing.

A common misconception A common misconception is that alpha extension strategies belong to the alternative asset class and should be compared to traditional equity hedge funds, which have a cash rate benchmark and are variable beta.

Alpha extension strategies are a ‘beta of one’ product, which benchmark against one of the indices, like the ASX 200, and therefore should be compared with long-only ASX 200 benchmarked managers.

Strategic role in a diversified portfolio Long-short strategies can transform the dynamics of traditional long-term equity allocations by expanding the investment

Long-short strategies can transform the dynamics of traditional long-term equity allocations by expanding the investment universe, dampening volatility, providing downside protection and enhancing return potential, especially in unpredictable markets. universe, dampening volatility, providing downside protection and enhancing return potential, especially in unpredictable markets.

This type of strategy is designed to provide an additional source of diversification and alpha capture versus traditional long-only equity strategies. It can be paired with a traditional long-only equity allocation to reduce overall portfolio risk and to help boost returns. These strategies are highly dependent on the portfolio manager, who runs both a long and short investment book. Experience and track record are therefore highly sought after for these types of investments as is a tightly controlled and systematically applied investment process.

Given these characteristics, alpha extension strategies should form part of a ‘core’ Australian equities portfolio alongside other long-only equity strategies. In the current macroeconomic climate characterised by geopolitical and growth instability, inflationary pressures and unpredictable central bank policies, long-short extension strategies take advantage of any market conditions through the ability to long and short positions, offering valuable flexibility and enhanced risk-reward benefits.

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INVESTING

The monumental technological shift

The use of AI is growing rapidly, presenting solid investment opportunities.

Nick Griffin outlines some significant areas of the sector’s development and a few of the stocks currently offering the best prospects for investors.

NICK GRIFFIN is chief investment officer at Munro Partners.

32 selfmanagedsuper

The fourth era of computing has arrived and with it a tremendous investment opportunity. Since 1977 we have seen computing eras evolve from the mainframe, personal computer, internet and mobile phones and now to artificial intelligence (AI). This is likely the biggest technology shift of our lifetime. Every business in the world will eventually leverage AI to reduce its cost structure or improve productivity for the benefit of its customers. Already, around two years into the AI revolution, we are starting to see the AI stack evolve, creating opportunities for investors and replicating the pattern we saw during the mobile phone tech boom era.

It was the smartphone app ecosystem that revolutionised the way consumers and businesses interacted with technology, creating the mobile era and enabling Apple to become the biggest company in the world.

This revolution led to billions of dollars of investible opportunities. Interestingly, it wasn’t the hardware and software of the iPhone that provided the opportunity, but the app ecosystem it was based on. This helped Apple grow from US$50 billion in 2007 to over US$3 trillion today. The app ecosystem changed the way consumers interacted with this technology, but many of

the applications that are now ‘front-page apps’ for the iPhone were created several years after the first iPhone was released. A similar pattern will likely occur with AI applications.

We believe there is potential for there to be an AI app or ‘agent’ for everything and, just as the smartphone apps did back in the mid-2000s, they will work in an ecosystem with existing hardware and software to run the AI apps.

It is the AI enablers that will be the true winners from this era, generating faster and more durable earnings growth than the market anticipates, just like Apple did during the mobile era.

Leading the charge The AI stack as we see it today is made up of lots of opportunities, but a very limited number of enablers. Like most structural thematics we have invested in over the years, we aim to find the key enablers and beneficiaries of that structural change. Our approach is no different with AI. As Diagram 1 shows, the AI stack is made up of Continued on next page

Diagram 1: The AI stacks — lots of players but only a few enablers Applications Panning for gold

Large language models

Cloud service providers The shovels in the boom

Semiconductors

Note: For illustrative purposes, the companies shown may or may not be held in the Munro funds.

Continued from previous page

semiconductors, cloud service providers, large language models and the applications. Our focus is on the critical companies towards the bottom of the AI stack pyramid – the hyperscale and semiconductor companies. It is these companies all the AI applications consumers and businesses will interact with in the future.

One company we like in this area is Nvidia Corp. Although a household name in investment circles today, we recognised its potential many years ago and invested in Nvidia back in 2019. As the world’s leading manufacturer of graphics processing units (GPU), and the pioneer of accelerated computing, Nvidia produces the chips that power AI, as well as the compute unified device architecture, which is the software developers use to program them. Nvidia has positioned itself as the key enabler of AI technology by being the hardware-software platform for AI. Around two years into the AI revolution, all Nvidia’s customers, including the hyperscalers, are still spending at breakneck speed in order

to deploy large computing clusters for training large language models. The hyperscale customers, including Alphabet, Amazon, Microsoft and Oracle are spending hundreds of billions of dollars each per year to build AI data centres or AI compute infrastructure (the integrated hardware, software and networking system designed to support intensive AI and machine-learning workloads) because they can see tangible benefits for their customers.

As other companies rapidly scale up their AI computing resources, Nvidia is poised to capture the lion’s share of this opportunity, leveraging its dominance with over 90 per cent market share in AI accelerators. And this won’t be slowing down in the near term.

The company frames this as a trillion-dollar opportunity. Around 70 per cent of this growth will be driven by hyperscaler capital expenditure, which goes beyond the GPU, with the other 30 per cent generated by sectors wanting to invest and build their own AI infrastructure.

For example, governments in both Europe and the Middle East have already announced plans to invest and build their own AI

It is the AI enablers that will be the true winners from this era, generating faster and more durable earnings growth than the market anticipates, just like Apple did during the mobile era. infrastructure. New industries, such as robotics, will also become major players in the years to come, while others will start to implement the concept of ‘AI factories’. As an example, a pharmaceutical company such as Eli Lilly may invest and build its own AI-dedicated facility exclusively for company use in drug discovery.

AI opportunities flying under the radar Over time, more investment opportunities will arise at the application layer of the AI stack. For companies that adopt this technology early, the benefits could be huge in terms of cost savings, better customer experiences and stronger performance. These AI opportunities are flying under the radar at the moment, but as these leaders push ahead, competitors will follow. We are starting to see opportunities across a range of other sectors as well, including construction, innovative health, security and autonomous driving.

ChatGPT and Perplexity are examples of applications that improve productivity and others will follow. The exciting part about AI is that unlike past technology revolutions like the mobile or cloud, this technology advancement applies to almost every industry. For example, autonomous vehicles are becoming safer and more commonplace on roads, and instead of developers writing lines of code, these large language models can be taught to do the Continued on next page

QUARTER III 2025 33

INVESTING

Continued from previous page

same. Digital agents and chatbots are already outperforming humans in some tasks and physical robots are an example of what may be possible in the future, especially as training these machines can be as simple as showing a video. AI also has enormous potential in the medical industry, whether that be through drug discovery or in more targeted and effective medical imaging.

It is impossible to put a number on what the total addressable market for AI is or to quantitatively define the return on investment.

There is no doubt applications such as these will increasingly show productivity gains, efficiency improvements and cost or time savings and should be measured as such.

One example of a live AI productivity improvement comes from public safety company Axon Enterprise. It produces the bodycam police officers in the United States wear during their shifts. The company has developed AI capabilities for this bodycam, transforming it into a virtual assistant for the officer while they are on the job. Harnessing the data this bodycam captures allows a police report to be automatically generated through integrating AI into the bodycam software.

Instead of spending one to two hours per day writing police reports, as the average US police officer does, AI can generate that police report directly from the bodycam. This is one small example where AI is already creating a productivity improvement and we expect many more examples like this one to emerge over time.

Finding opportunities through valuations The share market is made up of thousands of mediocre companies and a handful of really good ones. This is also true of the AI sector.

To find these great growth companies we think it is essential to assess them on six key

34 selfmanagedsuper

characteristics: can it grow, can it leverage that growth, is the growth runway durable, does it have good environmental, sustainability and governance characteristics, does it have aligned management and does it have great customer perception?

We do not purchase stocks at any price and the score generated from answering these six questions helps guide our team on the multiple we are willing to pay for the company. We also conduct a detailed bottom-up analysis to assess whether a stock has the potential to double in value over the next five years. Long positions are assessed using the following criteria: • earnings upside/downside: an in-house valuation model is used to evaluate both bull and bear case scenarios, comparing Munro’s earnings projections against market consensus, • multiple upside/downside: corporate characteristics are carefully analysed to determine the appropriate earnings multiple and price target, with the investment team conducting weekly reviews to stay aligned, and • catalysts: a catalyst calendar is maintained to track the timing and potential impact of events that could trigger earnings or multiple re-ratings.

Consensus earnings estimates often underestimate a stock’s growth, its sustainability and its cash-generation capacity, allowing investors like us to capitalise on these opportunities well below intrinsic value.

Currently valuations could be seen as high for AI and big tech stocks, but should not be dismissed just on this basis. Given the analysis of growth potential, current valuations of many of these stocks suggest three to five years of sustained growth ahead.

Looking purely at valuations, stocks we like include semiconductor chip designers like Nvidia, chip manufacturers like TSMC and

Over time, more investment opportunities will arise at the application layer of the AI stack. For companies that adopt this technology early, the benefits could be huge in terms of cost savings, better customer experiences and stronger performance.

power suppliers like Constellation Energy, as well as a leader in the liquid cooling space necessary for operating data centres, like Vertiv Holdings. As of the end of August, none of these stocks trade at more than 30 times earnings and we do not see them as particularly expensive. We expect these companies’ earnings to grow in the next 12 to 18 months, which will ultimately lead to share price growth.

The sky’s the limit There will be more opportunities for investment at the application layer of the AI stack.

Companies are already rapidly advancing the use of AI in their businesses and this will trickle through to productivity across the economy and also result in strong earnings growth for those companies leading the charge.

COMPLIANCE

Ruled out of the workforce

Accessing total and permanent disablement cover is intricate and involves several tax considerations, Jason Hurst writes.

JASON HURST is technical superannuation adviser at Accurium.

36 selfmanagedsuper

When clients are facing long-term injury or illness, they may seek guidance on whether they can access their superannuation. It is important to understand the requirements to meet the permanent incapacity condition of release, as well as the taxation implications if clients do access funds in the form of either a pension or lump sum.

The rules discussed in this article are broadly the same for an SMSF and public offer fund.

However, when working with SMSF clients, it is important to remember the member will also usually be a trustee or director of the trustee

company. Where relevant SMSF trustees will also be responsible for certain administrative tasks, such as pay-as-you-go (PAYG) withholding and providing a payment summary to the member, a public offer fund trustee will deal with these requirements on behalf of the member.

This article will cover the implications of accessing superannuation that includes tax-free and taxable elements, but not untaxed funds.

Social security implications will also not be covered.

Continued on next page

Continued from previous page

The condition of release The permanent incapacity condition of release, sometimes referred to as total and permanent disability, is defined in Superannuation Industry (Supervision) (SIS) Regulation 1.03C. Meaning of permanent incapacity For subsection 10(1) of the SIS Act, a member of a superannuation fund or an approved deposit fund is taken to be suffering permanent incapacity if a trustee of the fund is reasonably satisfied the member’s ill health (whether physical or mental) makes it unlikely the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience.

It is important to note the condition of release requires the trustee to be satisfied the member has met this definition, but does not prescribe the evidence trustees need to obtain from the member. SMSF trustees will also need to refer to the fund’s trust deed for guidance on what documentation is required. Further, the trustees will need to be able to back up their determination and it is important to note the tax definition of a disability superannuation benefit (discussed below) includes more specific medical requirements.

The tax definition A disability superannuation benefit is defined in Income Tax Assessment Act 1997 (ITAA) section 995-1.

Table 1 Age

60 and over

Below 60

Tax component

Lump sum tax rate

Income stream tax rate

Tax-free

Nil

Nil

Taxable element taxed

Nil

Nil

Tax-free

Nil

Nil

Taxable element taxed

Up to 22%*^

Marginal tax rate with a 15% offset

^Includes Medicare levy *This is a maximum rate. The element taxed will be included in the member’s assessable income, however, an offset will ensure that tax cannot be higher than this figure. Where the final amount of tax is lower than the 22 per cent, a member may receive a tax refund.

Disability superannuation benefit means a superannuation benefit if: (a) the benefit is paid to an individual because he or she suffers from ill health (whether physical or mental), and (b) two legally qualified medical practitioners have certified that, because of the ill health, it is unlikely the individual can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

The above definition needs to be met for a member to be eligible for the following taxation concessions: • a tax-free uplift on a lump sum under ITAA section 307-145, and • a 15 per cent offset on the taxed portion of pension payments for members under age 60.

Due to this definition, many super trustees will collect two medical

certificates to support their determination that the member meets both the SIS permanent incapacity requirements and the tax requirements above.

Taxation of superannuation benefits – disability With the preservation age having increased to 60 on 1 July 2024, the tax treatment of disability superannuation benefits will depend on whether the member has reached that age (Table 1).

The tax-free uplift Where a superannuation lump sum is paid that meets the requirements of a disability superannuation benefit, a taxfree uplift will be triggered under ITAA section 307-145. Where a member is under 60 years of age, this will reduce Continued on next page

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COMPLIANCE

Continued from previous page

the portion of the lump sum that is taxed at up to 22 per cent.

Increased tax-free formula The tax-free component of a disability superannuation benefit is the original taxfree amount plus an amount calculated by the formula below.

Lump sum amount x (Days to retirement / (Service days + Days to retirement)) Days to retirement = number of days from the day when the member stopped being capable of gainful employment to their last retirement date (usually age 65).

Service days = number of days in the service period. The service period commences on the members eligible service date in the fund and ends when the disability superannuation lump sum is paid.

Each member of a super fund will have an eligible service date. This will usually be the date the member joined the fund, however, it can be earlier where the date the member joined the employer is before they joined the fund or they roll into the fund an amount from another superannuation fund with an earlier eligible service date.

ATO approach Despite the wording of the uplift formula in ITAA section 307-145, the ATO takes a slightly different approach in its guidance. Its view is that when looking at the denominator, any days that are

38 selfmanagedsuper

included in both ‘service days’ and ‘days to retirement’ are only counted once.

This means the denominator will become the days between the eligible service date and the date of the member’s usual retirement date.

The ATO includes some further guidance on its website – see under the heading “Paying a disability super benefit” (QC 45249).

When working with members of a public offer fund, advisers are encouraged to confirm the method used before a lump sum request is lodged.

Typically, the ATO approach will result in a higher tax-free uplift where there is a longer period of time between the member first being unable to work and the date the lump sum is paid.

Total and permanent disablement insurance Where a superannuation fund holds total and permanent disablement (TPD) insurance, there may also be additional medical requirements to allow a claim to be made. For policies taken out on or after 1 July 2014, this insurance should be based on an ‘any occupation’ definition.

This means the policy will pay out where it is determined the member is unable to work in any occupation they are reasonably qualified for. This aligns with the SIS condition of release, which will mean if the member meets the insurance definition, they should also have access to their superannuation benefits.

Where a member is able to claim on a pre-1 July 2014 ‘own occupation’ TPD policy, they may not be able to access

A member may receive a better outcome by holding their T PD cover in a fund with a shorter service period, which could mean opening a new fund.

these benefits prior to retirement or age 65 unless they also meet the SIS definition of permanent incapacity.

When a successful claim is made on a superannuation-owned TPD policy, the proceeds will be paid into the member’s interest and where the member is in accumulation will form part of the taxable component.

Rules of thumb and triggering the uplift The tax-free uplift can be triggered by either a lump sum benefit payment or a rollover to a new superannuation fund.

It will not be triggered by commencing a pension in the same fund.

Continued on next page

Table 2 Amount

Tax payable

Net benefit

Taxable

$223,321

$49,131

$174,190

Tax-free

$176,679

$0

$176,679

Total

$400,000

$49,131

$350,869

*The ATO method has been used in this case

Table 3 $

Pension payment

160,000

Tax-free portion

80,000

Taxable income

80,000

Gross tax including Medicare levy

16,388

Less 15% offset on $80,000

12,000

Net tax including Medicare levy

4388

Note: Tessa could access these funds over three financial year and pay total tax of $13,164 rather than $55,000. superannuation. A member may receive Continued from previous page a better outcome by holding their TPD cover in a fund with a shorter service Younger members should receive a period, which could mean opening a higher tax-free uplift. This is because new fund. the time until they reach their retirement date, generally age 65, refer to definition Example – tax-free uplift with of ‘last retirement day’ in section 995.1 insurance ITAA definitions, will be longer and their Armit was born on 2 July 1978 and service period would typically be shorter. due to an accident is permanently Where a super fund has a shorter incapacitated. His super balance was service period, the member will $100,000, including $10,000 of tax-free also receive a higher tax-free component. He had $300,000 in TPD uplift. This should be considered insurance cover, which has been paid when recommending TPD cover in into his fund. He has been unable to

Where there are withholding requirements, the SMSF must be registered for PAYG withholding.

Typically there will be withholding requirements when a member under age 60 receives a lump sum benefit payment or commences an income stream.

work since 30 May 2025.

The eligible service period of his fund is 1 February 2000 and on 1 September 2025, he withdraws his balance in full.

Uplift = $400,000 x 6608/15,858 = $166,679 Plus $10,000 original tax-free = $176,679 in tax-free* (see Table 2) Lump sum versus income stream The tax-free uplift will be applied to a benefit that is rolled over to another superannuation trustee as a disability benefit. In some cases, members might Continued on next page

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COMPLIANCE

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consider rolling their benefits over to another superannuation fund to trigger this uplift before starting a pension.

Example Tessa is aged 40 and has $500,000 in her super fund, including insurance proceeds from TPD cover. She would like to withdraw these funds in full to repay the family’s mortgage of approximately $450,000. She has no other taxable income and the family’s lifestyle can be funded by her husband Simon’s income.

Her tax-free uplift has been calculated and will result in a tax-free proportion of 50 per cent.

Option 1 – Full lump sum Of the $500,000 withdrawal, $250,000 will be taxable component.

The taxable component will be taxed at up to 22 per cent, which means tax of $55,000 would be withheld.

When Tessa completes her tax return, her rate of tax is higher than 22 per cent, meaning she pays the $55,000 in tax and is left with net proceeds of $445,000.

Option 2 – Could Tessa keep her mortgage for three years and pay it down with an income stream?

Step 1 – Rollover to crystallise 50 per cent tax-free uplift.

Step 2 – Start a pension and draw an annual income of $160,000 a year (see Table 3).

Each case should be looked at

40 selfmanagedsuper

individually as each client will have different goals, different tax-free proportions and some may also have other taxable income, such as from income protection cover, which could make the lump sum a more attractive option.

When clients are closer to age 60, consideration should be given to waiting until they reach this age to access larger amounts. If Tessa was aged 57, she may be comfortable making the minimum payments on her mortgage for three years and then making a large tax-free pension payment or lump sum to clear the mortgage at age 60.

Paying a pension or lump sum Where a member is accessing money from a public offer fund in the form of a lump sum or pension, the superannuation fund will calculate the tax-free uplift and deal with any PAYG withholding requirements. The fund should provide any members who are under age 60 with a payment summary detailing the tax components, any tax withheld and details of offset eligibility where the member is receiving an income stream.

When working with an SMSF, the trustees will be responsible for meeting these requirements. Commonly they will outsource these processes to their SMSF accountant or administrator.

Where there are withholding requirements, the SMSF must be registered for PAYG withholding.

Typically there will be withholding requirements when a member under age

Where a member is able to claim on a pre-1 July 2014 ‘own occupation’ T PD policy, they may not be able to access these benefits prior to retirement or age 65 unless they also meet the SIS definition of permanent incapacity.

60 receives a lump sum benefit payment or commences an income stream.

SMSF trustees must provide a payment summary to any members under age 60 who receive a lump sum payment or a superannuation income stream. When paying an income stream, the trustees must provide these payment summaries to the member by 14 July following the end of a financial year or within 14 days of a member request Continued on next page

Continued from previous page

for a payment summary before 9 June.

When paying a lump sum, the trustees should provide a payment summary to the member within 14 days of making the payment. The ATO should also receive a copy of the payment summaries as part of the fund’s annual PAYG withholding payment summary by 14 August.

It is also possible for the payment summary information to be submitted online using the ATO online services for business. Where reporting is undertaken this way, sending copies of payment summaries to the ATO is not required.

When paying a lump sum or an income stream to a member who is under age 60, the SMSF trustee(s) will also need to consider the withholding requirements. These requirements can depend on the form of the payment and the amount.

The trustees will need to withhold 22 per cent of any taxable component

taxed when paying a lump sum benefit payment to a member who is under age 60. The full PAYG rates for superannuation lump sums are included in Schedule 12 – Tax table for superannuation lump sums (ATO website QC 104939).

Where an SMSF pays a pension to a member under age 60, they will need to follow the process in Schedule 13 – Tax table for superannuation income streams (ATO website QC 104940) to calculate any withholding. Provided the member meets the requirements to receive a disability superannuation benefit, as discussed above, they will be entitled to a 15 per cent offset on the portion of their pension payments representing the taxable element taxed.

Personal taxation obligations for the member Superannuation fund members under age 60 will usually need to include the amounts detailed on the payment

Table 4 $

Disability support pension (exempt)

30,646.20

Investment income

10,000.00

Lump sum – element taxed

12,000.00

Taxable income

22,000.00

Tax payable (including LITO)

0

Tax withheld

2640.00

Refund

2640.00

summary in their personal tax returns.

Where members receiving an income stream are in a higher tax bracket due to other income, the PAYG withholding amount may not be enough to cover the tax on the income stream and they may receive a tax bill when their personal return is lodged.

The withholding rates on a lump sum benefit payment should be at a level that ensures the member will not need to pay more tax than the amount withheld and, in some cases, members may receive a refund when their individual return is lodged.

ITAA section 301-35 provides for an offset that will ensure the tax rate on element taxed for someone under age 60 cannot exceed the 22 per cent that has been withheld.

Lump sum commutation – tax refund Joseph is 40 and currently his income consists of the full Centrelink disability support pension of $27,224.60 a year and $10,000 worth of investment income. Because Joseph is under age pension age, his disability support pension is exempt from tax.

Joseph has taken a lump sum of $40,000 from his superannuation fund and due to the tax-free uplift, 70 per cent of this amount will be tax-free and 30 per cent will be taxed.

Joseph’s super fund is required to withhold $2640 (22 per cent of $12,000) when making the payment.

When Joseph lodges his tax return, he will receive a refund of the $2640. His tax position is shown in Table 4.

QUARTER III 2025 41

PROFILE

One on one with... Kate Cooper The SMSF sector is evolving as to how it approaches cryptocurrency. OKX Australia chief executive Kate Cooper shares her journey in the digital asset space with Darin Tyson-Chan and outlines what the newly formed SMSF Innovation Council is looking to achieve.

What is your financial services background?

I’m 25 years into my career now and the first 15 were actually spent in a completely different sector and kind of media and marketing. During that time I ran my own business. Then I moved to Australia and joined Westpac as its head of innovation. So I was at Westpac for five years where I not only led innovation, but I also ended up leading the transformation program for them under Brian Hartzer, who was the chief executive at the time. Next, I moved to nab and spent almost five years there. At nab my primary role, aside from leading kind of innovation projects, was around digital assets. So that’s when I started to get into the space and the interest for me was much more about the underlying technology than cryptocurrency per se and the way in which blockchain technology can help drive efficiency and cost effectiveness in particular. So it was much more about tokenisation, but we did look at key capabilities that are needed for institutional adoption, like, for example, custody and safe keeping of digital assets, which was particularly pertinent because at the time that was when the FTX scandal happened. It gave me an understanding of the role banks had to play in what was the first new asset class to start circulating in 25 years with regard to how people’s hard-earned income can be safely and securely stored.

From there I ended up being seconded to Zodiac Custody for 12 months, which was founded by Standard Chartered Bank, and I ran the APAC (Asia-Pacific) region for them.

This experience gave me a really good grounding in understanding what does safe and secure actually mean in the digital assets and cryptocurrency space.

What narrowed your focus to cryptocurrency?

I think it’s fair to say I drank the Kool-Aid when I was working at nab on digital assets and the thing that excited me was the ability to provide access to investment opportunities that had traditionally only been available to wholesale investors. So there was a democratisation of investment opportunities and the efficiency gains that are possible through the underlying technology. And if we think about cryptocurrency specifically, they’re really only the first use case to catch people’s attention. So as I looked at going into what I call deep crypto, I wanted to find an organisation with the foundations from a cryptocurrency perspective, but also understood the role from an infrastructure perspective exchanges can play in maturing the sector as a whole. That’s why OKX was a very natural home to me because of all the exchanges I spoke to it’s an organisation that puts compliance at the fundamental heart of its business.

What then made you turn your attention to the SMSF sector?

Very selfish reasons. I tried to set up an SMSF about four years ago and one of the asset classes I wanted to invest in was cryptocurrency and I found the experience an absolute nightmare. Even until very recently I haven’t been happy with my holdings as to how those assets were being stored. So seeing I felt the customer problem so acutely, because it was my own problem and I knew OKX could do something to solve it, I went to work with a vision for what an end-to-end platform could look like. But I didn’t want us to go to market with a solution that was just based on our own opinion of what

a solution might look like, so I started to really get into under the hood of the sector as a whole and to try and understand the problems more broadly. To this end, I spent my first three of four months as chief executive of OKX Australia holding roundtables and listening to trustees, advisers, accountants and auditors asking them about the problems they are having with the asset class. I discovered their issues were with the complexity involved and the onboarding and the need for an audit trail. Off the back of that we started building a solution. Now that I have a better understanding of the sector and have realised the extent to which there is an appetite for alternative asset classes, especially among younger trustees, I think we can provide a safe and secure cryptocurrency infrastructure that is easy to use.

You’ve now established the SMSF Innovation Council. Was that a natural progression after your introduction to the sector?

We hosted two roundtables where we invited sector experts and as we heard about the issues we weren’t sure it was OKX’s job to solve those problems. Instead we thought the organisation could provide a role in helping to curate a conversation about the broader digital economy, rather than just cryptocurrency, and the opportunity it represents to trustees and allowing them to understand their service provider network only has limited knowledge of this opportunity. We worked with key stakeholders and determined who holds a particular perspective. From that, our role has purely been that of the convener and administrator of the council. The council now Continued on next page

42 selfmanagedsuper

Continued from previous page

exists as an independent body and I think it’s really important in terms of what the next generation of SMSFs look like and the asset classes available to them.

How easy was it to get the key industry stakeholders to buy into the initiative?

I would say if we had have gone hard with trying to get people to advocate for cryptocurrencies, there would have been a lot of scepticism. But the conversation we had at the roundtable wasn’t about the reasons why you should invest in crypto, it was about the fact we’re seeing appetite here, we know there’s opportunity, we know there’s risk and we know there’s a future. From there the discussion was about how we triangulate all of the things. So it was a very open conversation and as soon as those stakeholders realised we weren’t there just to say crypto is a good thing, that definitely brought barriers down.

What would you like the council to achieve?

For quarter one of the council, and I speak with my council member hat on here, I think we realised that education is a key unlocker.

We know there’s education out there, but the question needs to be asked whether it is of a high enough quality and does it really meet the needs of the adviser network in particular, as well as trustees. So I think we’re going to use the first kind of iteration of the council to help build probably a best-in-class education platform. We’re also going to look at some research to really understand what’s actually happening in the market because as an industry we rely too heavily on ATO data that has a two to three-year lag attached to it. But what would it look like in 12, 18 or 24 months? It would look like a very vibrant conversation, a knowledgeable conversation among SMSF trustees and their adviser network about the frontier that is the digital economy and what the opportunities are and how you participate in it, if that’s what you choose to do, responsibly and safely. So in two years I’d like the conversation to be about things like the pilot project the Reserve Bank of Australia is currently undertaking, which is looking at tokenisation of government bonds.

Those are assets we can probably distribute

through the OKX platform and give our SMSF customers access to them. They’re the kind of assets we have the chance to give Australians access to in their retirement funds because at the moment only large institutions have that prospect.

How should SMSF members approach compliance with regard to cryptocurrency investments?

I would say there’s two buckets here. Bucket number one is for them to go into the investment process with their eyes open with regard to the cryptocurrency exchange they choose to use. They should recognise there are platforms that have done the hard yards to get an Australian financial services licence and therefore have to operate at a particular level that is scrutinised by the regulator. The second bucket, from a compliance perspective, is for those individuals to make sure their activities in the digital asset space are compliant. It’s actually something we’ve built into our platform whereby SMSF members can receive a complete downloadable audit trail allowing them to easily tell their accountant their cryptocurrency activities over the course of a 12-month financial year provided in a format the fund auditor is able to verify. I think that’s really important as it can demonstrate the client is a compliant trustee working with a platform provider operating within the regulated environment.

allows advisers to feel safe in discussing the full spectrum of assets with their clients and not just those investments the policy allows.

That may or may not mean cryptocurrency will be included in their advice proposition, but we want there to be the opportunity for all practitioners to have the right information and be able to give the advice appropriate for the appetite of the trustee.

What changes would you make to the way the sector interacts with the digital asset space if you could?

I’d like to change two things. Firstly, I would like to see regulation enable the adviser network to operate effectively and for the associated education to take place so they can service trustees prudently.

Secondly, I’d like to see professional indemnity insurance cover that

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COMPLIANCE

Failed pensions – the next chapter

The update to Taxation Ruling 2013/5 means trustees are faced with a range of decisions and issues to deal with if they fail to meet the minimum pension payment requirement. Lyn Formica explores some of the dilemmas they now face.

LYN FORMICA is head of education and content at Heffron.

In Issue 50 of selfmanagedsuper, Craig Day wrote an excellent article on the dilemma facing trustees, accountants and advisers when an SMSF fails to meet the minimum pension requirements.

As so often happens, there was even more to say than Craig’s word limit would allow. So I thought I would pick up where he left off and explore some of these issues in more detail, adding the SMSF administrator’s flavour.

A quick recap first The industry’s bible for dealing with pension underpayments has been a taxation ruling

44 selfmanagedsuper

(TR) first issued by the ATO back in 2013 – TR 2013/5.

This was the ruling that for the first time presented the ATO’s views on when pensions start and stop. It also specifically enshrined the concept funds failing to pay the minimum amount required from an account-based pension during a particular year would cause that pension to stop, for tax purposes, from the start of that financial year.

Importantly, that meant no exempt current pension income (ECPI) – the magical tax break Continued on next page

Continued from previous page

applying to retirement-phase pensions whereby income earned on super pension accounts is exempt from tax.

After that ruling, the widespread industry interpretation was while ECPI would be lost for the entire 12 months in the year of failure, it would restart from the following 1 July as long as the trustee paid the right amounts in future.

For example, a pension that failed in 2023/24 would start earning ECPI again from 1 July 2024 as long as the minimum payment requirements, and all the other rules for pensions, were followed throughout 2024/25.

However, the ruling was updated and reissued in late June 2024. Some small wording changes made it clear the ATO had a very different view to the general industry practice. In particular, the ATO view we now know is: • a failed pension will never be entitled to ECPI again – it will be considered a failure forever, • the only way to get ECPI in the future is to formally commute the tainted pension and start a new one that does comply with the rules, and • failed pensions effectively get mixed in with the member’s accumulation account – they don’t remain a separate superannuation interest (tax law language for a separate member account).

This obviously has a host of consequences, many of which Craig

covered in his article. For example: • SMSF members with both a failed pension and an accumulation account, or even multiple pensions that have failed, will find the careful planning they’ve done to create accounts with different tax components will end up scrambled together. And like eggs, they can’t be unscrambled.

• Transfer balance account entries are a bit more complicated. For example, if a pension fails in 2024/25, there will be a debit to the member’s transfer balance account on 30 June 2025, the end of the year of failure. This is the transaction that reduces a member’s transfer balance to reflect the fact the pension they used to have has lost its status as a retirement-phase income stream. In the past, the industry would have reported a new transfer balance credit to reflect the pension’s return to retirement phase on 1 July 2025.

Since the amounts would have been the same, it wouldn’t have made any practical difference to the member’s transfer balance cap. But now the credit won’t occur until the failed pension is formally terminated and a new pension starts in its place. The member’s account balance might have changed a lot in that time.

All in all, bad news.

What more is there to say?

The dangers of taking too long Often, pension failures aren’t discovered until the annual accounts are

SMSF members with both a failed pension and an accumulation account, or even multiple pensions that have failed, will find the careful planning they’ve done to create accounts with different tax components will end up scrambled together.

And like eggs, they can’t be unscrambled.

prepared for the SMSF. That will often be many months after the end of the financial year. The longer the process takes, the more time will elapse before the failed pension, with no ECPI, is stopped and a new income stream, with ECPI, is started. The more time that elapses, the more ECPI is lost.

Doubling up of accounting work A truly weird outcome of all these shenanigans is our tax law requires Continued on next page

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trustees to calculate the transfer balance debit value for failed pensions as if it hadn’t failed at all. In other words, if a pension fails in 2024/25, the trustee tells the ATO it stopped being in retirement phase. For transfer balance cap purposes only, it tells the regulator this happened on 30 June 2025, this is despite the fact the failure is backdated to the start of the year for everything else. When the value of the pension at 30 June 2025 is determined, the trustee pretends the pension account is still separate to the accumulation account and also pretends it’s still receiving ECPI. But a completely separate set of calculations is required for determining the new pension’s value when it commences (this would be done correctly, that is, assuming there was no ECPI in 2024/25 and however much of 2025/26 has elapsed already).

It’s feasible to imagine the trustees and their poor accountants would be processing a fund multiple times just to get all the numbers right.

What about commutations during the failed year?

It is unlikely, but sometimes pensions are partially commuted during the year of failure. This might happen because the member made an in-specie benefit payment, which has to be a commutation, and didn’t realise this did not count towards meeting the minimum

46 selfmanagedsuper

payment standards.

So given the pension gets cancelled from the start of the year, are these really commutations for transfer balance account purposes or just lump sums from accumulation accounts?

In our view, they are still commutations so will reduce the amount of the transfer balance cap that a member has used up. This is because at the time they occurred the fund hadn’t yet failed the pension rules. For example, at any point up until 30 June 2025, they might have met the rules for 2024/25. That means a commutation in March 2025 is still a commutation.

What about pro-rata pension payments before commuting a failed pension?

Normally whenever a trustee commutes a pension, they must ensure a minimum payment is made first.

For example, a pension that is fully commuted 90 days into a 365-day financial year must make a payment of 90/365 of the normal minimum before doing so. But will we still need to do this with a failed pension? Arguably no. The worst has already happened as the pension has lost its ECPI. However, we would suggest clients do make this extra payment. Our logic here is that the trustee has committed to meeting certain rules. The fact they’ve failed to meet them in one year isn’t a free ride to ignoring them in another year. However, this is something the ATO has chosen not

A truly weird outcome of all these shenanigans is our tax law requires trustees to calculate the transfer balance debit value for failed pensions as if it hadn’t failed at all. In other words, if a pension fails in 2024/25, the trustee tells the AT O it stopped being in retirement phase.

to clarify.

What about the 1/12th rule?

This is the rule that allows trustees to self-assess and let themselves off the hook if the pension failure meets certain criteria. To use it, the payment shortfall has to be less than 1/12th of the full amount. Nothing has changed here. The option still exists and works in the same way. A pension that meets the criteria here is treated as if it never Continued on next page

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failed in the first place, so none of the issues above apply. For example, there is no loss of ECPI, no need to combine accumulation and pension balances, no need to formally commute the old pension, et cetera.

It should be noted the size of the payment, that is, less than 1/12th of the required amount, is just one of the rules necessary to legitimately self-assess.

There are others which must also be followed, such as making a catch-up payment within 28 days of discovering there is a shortfall.

Those who don’t meet the requirements to self-assess can still present their case to the ATO and ask for specific permission to overlook the shortfall. But that’s just become a bit trickier.

Asking for ATO discretion Fortunately, the ATO eventually recognised the view expressed in its updated ruling was quite different to the long-held industry view. As done occasionally in these circumstances, it agreed to adopt a no compliance action approach to failures in 2023/24 and earlier years.

In other words, it committed to not proactively look for cases where historical pension failures had not been dealt with in accordance with its view. This prevented the necessity for accountants and advisers to go back

over the last 10 or more years, find failed pensions, relodge tax returns for the intervening years removing any ECPI claims in relation to those pensions for every year since the failure, adjust all the tax components for any payments taken during that time and other such administrative actions.

But taking no compliance action isn’t the same as saying it will accept the industry view for these historical failures.

Importantly, if asked to look at a particular fund, or if the fund was chosen for an audit for some other reason, the ATO would apply a compliance approach consistent with TR 2013/5 as it stands now. This places trustees in a very difficult position for funds with failures in 2023/24.

Sometimes there are good reasons for the failure and it’s reasonable to ask the ATO to exercise its discretion to formally overlook it. But what if the ATO says no to a request to use this discretion for 2023/24? The real risk now is that if it says no, the regulator will also insist on its view applying for 2024/25 and beyond.

A pension failure in 2023/24 where no discretion is sought is a contained problem. This means the old industry view can apply from 1 July 2024 and the pension automatically refreshes its status as a retirement-phase pension from that date. ECPI is safe in 2024/25 and beyond (as long as the rules are

followed).

But a pension failure in 2023/24 where the ATO is asked to exercise its discretion and the regulator says no, creates a whole different set of problems. For a start, the pension will lose its ECPI in 2023/24, 2024/25 and 2025/26 until the income stream is formally commuted and a new one commenced.

It also makes asking for discretion far more challenging in the future. Will trustees doing this choose to formally commute potentially failed pensions anyway just in case to hedge their bets?

For example, imagine a trustee discovered in September 2025 a pension had failed the minimum payment rules in 2024/25. Let’s also imagine the ATO will be asked to exercise its discretion. In this situation the trustee would be well advised to formally commute the pension now anyway. Just to make sure, at the very worst, everything is resolved from this point onwards. If the trustees wait six months for the ATO to make up its mind, they may find another six months of ECPI is lost if that discretion isn’t forthcoming.

To be honest, there is even more to say on this topic than I’ve been able to cover here. And lots of issues are still unclear. Given the ATO does not seem inclined to provide any more guidance, it’s likely things will stay that way for some time.

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STRATEGY

The next big retirement strategy test

Traditionally, SMSF financial advice has been focused on the accumulation and retirement phases of a person’s life. Louise Biti highlights an additional element requiring consideration when servicing elderly clients.

LOUISE BITI is a director at Aged Care Steps.

48 selfmanagedsuper

Aged care is no longer a niche concern tucked away at the periphery of retirement planning. It is rapidly emerging as the next big test of retirement strategy.

For years, financial advisers, accountants and lawyers working with SMSFs have built strategies around two central pillars: wealth accumulation and retirement income. But there is a third, often overlooked, dimension that is quickly moving to the forefront – aged-care readiness.

With Australians living longer and entering extended periods of frailty, representing between 17 per cent and 25 per cent of retirement, clients are increasingly facing the challenge of navigating one of the most complex, emotionally charged and financially significant decisions of their lives.

Aged care is one of the most critical challenges facing older clients and their families, and one that will test the

depth of professional advice more than almost any other retirement issue. Advisers who fail to integrate aged care into their planning frameworks risk leaving clients and businesses exposed.

The hidden fears of retirement While advice often focuses on investment returns, contribution strategies and pension structures, older clients may be preoccupied with something else entirely.

Surveys reveal a striking misalignment between advice and client concerns and paint a sobering picture.

According to an AMP client survey, conducted in November 2024, more than 80 per cent of respondents feel unprepared for the costs of aged care and 70 per cent worry about how they will fund it – with 30 per Continued on next page

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cent concerned about passing the burden on to their children. Half of surveyed clients admit they do not know what government support is available.

Even among high net worth retirees there is a tendency to dismiss aged care as an issue that can be solved later, or avoided, or assumed to be manageable simply by virtue of having wealth. The reality is costs are escalating sharply and the complexity of the system means preparation, not affluence, may determine outcomes.

Cost pressures are undeniable The financial burden of aged care has grown considerably in recent years and will continue to do so under the new framework commencing in November 2025.

Consider the cost of a room in residential care. As at July 2025, the average refundable accommodation deposit (RAD) for a room was $572,589 – an increase of 8.7 per cent since the start of the year. The real cost will continue to increase from November when residential care providers will be required to retain 2 per cent of the RAD each year for the first five years. On the current average deposit this can potentially amount to $54,532.

Daily living and care expenses are also on the rise. From November, the maximum daily living fee payable by residents may increase by up to $15.60, potentially adding almost $5700 to annual costs. The maximum fee for care contributions will climb by a further $7.16 a day, possibly adding another $2612 per year onto the bill.

Home care is not immune from rising costs either. Under the current system, a self-funded retiree might pay up to $18,557 per year in basic and income-tested fees. But under the new support-at-home model, the same retiree could face annual costs up to $56,160, depending on care needs and choices made.

These changes cement aged care as a

material cost centre within retirement planning, rather than an incidental expense. This shifts the advice equation: just as longevity risk and sequencing risk demand active management, so too does frailty risk.

When strategy meets lived reality The financial and legal challenges of aged care are best illustrated through examining case studies based on real-life situations.

Consider the situation of Nigel, a 74-year-old man, who after suffering a second stroke was left vision impaired and cognitively diminished.

His wife Elsie, a 68-year-old psychologist earning $250,000 annually, suddenly faced the reality her husband needed to move into residential care.

The RAD charged for the room was $750,000, and if fully paid as a daily fee, the total care fees for Nigel amounted to $115,955 per year, including $57,605 in care costs plus the room expense as a daily fee. If assessed under the new rules from November, the total cost would be higher at $121,210 per year.

For a household that owned a $1.2 million home, mortgaged office premises valued at $330,000, superannuation of $160,000 and part ownership of their son’s home, the challenge was not a lack of assets, but how to structure them to fund care while preserving Elsie’s ongoing financial security and family interdependencies.

One considered solution was unconventional: divorce. As a single person, Nigel’s means testing would not include Elsie’s income or share of assets, and the care fees could be substantially reduced, as well as qualifying Nigel for the age pension.

The strategy promised a saving of more than $61,000 annually, but this needed to be offset with consideration for other factors, such as emotional realities, elder abuse, transaction timing, impact on the former home and property settlements.

While not the right path for every family, it is an example that demonstrates how aged care

Aged care is one of the most critical challenges facing older clients and their families, and one that will test the depth of professional advice more than almost any other retirement issue.

forces advisers to think beyond conventional approaches and how there is always the need to consider a range of options and trade-offs. In this example, consideration could also be given to alternatives such as hardship applications, eligibility for a blind pension, the strategic use of daily accommodation payments (DAP) funded through home equity or continuing with support at home.

This case also highlights the critical role of lawyers and accountants working with the financial adviser. Structuring property ownership, ensuring powers of attorney are valid and navigating the delicate balance between financial pragmatism and family cohesion requires careful legal and taxation oversight.

Family entanglements and legal risk Another case study underscores the intersection of aged care and family dynamics.

Bernadette, a self-funded retiree, faced the need for residential care just as her daughter, Kaylene, was going through a marriage breakdown. Bernadette had withdrawn funds from her SMSF to purchase a 30 per cent share Continued on next page

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in her daughter’s home to help with a property settlement, while continuing to live in her own property with her son. Kaylene, acting as enduring power of attorney, now had to juggle her mother’s care needs with her own financial pressures.

The result was a tangle of competing interests. The SMSF withdrawal reduced Bernadette’s liquidity, compromising her ability to pay for aged care, but did not reduce her assessable assets due to gifting and deprivation provisions. As enduring power of attorney, Kaylene faced significant conflicts of interest. The family as a whole faced uncertainty about how to fund Bernadette’s care without destabilising their own home arrangements.

This scenario is a reminder aged-care advice cannot be confined to spreadsheets and projections. It requires a deep understanding of family structures, legal duties and the potential for disputes. Lawyers must ensure enduring powers of attorney are drafted and exercised with integrity and conflicts of interest are identified and managed. Financial advisers must be equally alert, guiding clients away from decisions that may jeopardise future funding or expose attorneys to allegations of misconduct.

Broadening the advice framework What these cases show is that aged-care advice cannot be a bolt-on at the eleventh hour. It must be woven into the retirement advice process from the outset.

For advisers, this requires stress testing client retirement strategies against future aged-care needs in the same way we stress test portfolios for inflation or market downturns.

This means considering not just whether clients will have enough money to retire, but whether their portfolio has the liquidity and flexibility to fund future care and whether estate plans will

50 selfmanagedsuper

withstand the strain of unexpected care needs.

For lawyers, it means ensuring documents, such as wills, enduring powers of attorney and guardianship arrangements, anticipate aged care. It means being prepared to advise on appropriate strategies, while safeguarding against the risks of elder abuse or unintended financial difficulty.

The risks of inaction The consequences of ignoring aged care are profound. Clients who delay planning may be forced to sell assets under duress, crystallising tax liabilities and undermining estate equalisation. Families may fracture under the strain of competing interests, particularly where powers of attorney are exercised without proper oversight.

And in the absence of professional guidance, many clients turn to unlicensed advice from providers, well-meaning family members or online forums with results that are often damaging, both financially and emotionally.

A call to action Retirement planning and advice is at a turning point. Just as the introduction of compulsory superannuation reshaped retirement planning in the 1990s, so too will the growing demand for aged care reshape retirement planning in the decades ahead. The advice professionals who recognise this shift, and who are willing to engage with the complexity of aged care, will be the ones who deliver the most value to clients and add to business growth.

The message is clear: aged care is not optional. It is a core component of modern SMSF and retirement advice that demands coordination between specialist practitioners and lawyers.

Advisers will require technical knowledge, strategic competence and a willingness to confront uncomfortable truths. Lawyers will

As the next big test of retirement strategy, the question is not whether clients will face agedcare considerations, but whether they will face them well prepared or unprepared. And that ultimately depends on the quality of the advice they receive.

require vigilance, compassion and a readiness to bridge the gap between legal frameworks and family realities.

As the next big test of retirement strategy, the question is not whether clients will face aged-care considerations, but whether they will face them well prepared or unprepared.

And that ultimately depends on the quality of the advice they receive.

For SMSF professionals, financial advisers and lawyers, aged-care planning represents both a responsibility and an opportunity.

Professionals who sidestep aged care leave clients exposed to financial hardship, poor decision-making and legal vulnerability.

By shifting the lens from retirement adequacy to aged-care readiness we can ensure clients face the frailty years with dignity, control and financial security.

FEATURING

TRACEY BESTERS DARIN TYSON-CHAN

Published every fortnight, this podcast covers essential insights for SMSF trustees, offering expert advice on managing your fund effectively.

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Rethinking consumer protection

The fee relating to the CSLR levied on Australian financial services licensees skyrocketed recently as a result of several catastrophic product failures.

Peter Burgess explains why the operation of the current consumer protection mechanism is flawed and prosecutes a case for a fairer and more sustainable funding model.

PETER BURGESS is chief executive of the SMSF Association.

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The Compensation Scheme of Last Resort (CSLR) provides a vital safety net in relation to maintaining trust in the financial services sector. However, the funding model underpinning it poses grave challenges. It also fails to recognise that maintaining and upholding trust in the personal financial advice sector is a shared responsibility and, as such, each participant has a role to play, not just Australian financial services (AFS) licensees and financial advisers.

The financial advice sub-sector is currently facing about $47.3 million in unpaid Australian Financial Complaints Authority (AFCA) determinations, significantly exceeding the $20 million sub-sector levy cap for the 2026 financial year.

If that is not concerning enough, the CSLR has

already predicted the current estimates for the 2027 financial year will likely exceed $120 million – more than double the current shortfall in unpaid determinations and a staggering $100 million above the sub-sector levy cap.

This situation raises two questions. How do we fund the immediate shortfall for 2025/26 and how do we address the serious and real threats to the sustainability and fairness of the scheme?

Under the design of the CSLR, the financial services minister has the power to issue a special levy to fund unpaid AFCA determinations that exceed the subsector cap of $20 million.

Continued on next page

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Importantly, the Corporations Act provides that the CSLR must pay compensation to a consumer who has met the eligibility criteria set out in the legislation. Therefore, even if the minister decides to take no action in this instance, the obligation to pay the compensation remains and any unpaid claims are simply added to the initial estimates in the following financial year.

Taking no action is therefore not an option.

This approach is not a fair or just outcome for those consumers who have an unpaid AFCA determination. Further, as there is no deadline for the CSLR to make a payment, there is a real risk that waiting for the program to be fully funded to pay all outstanding AFCA claims under the current model may be futile.

This may leave those impacted consumers in a financially vulnerable position indefinitely.

We also believe that choosing to spread the compensation over time will result in a similar outcome, noting we have now had not one, but multiple black swan events since the CSLR started in April 2024.

It is also worth noting that taking no action or spreading the compensation over time, coupled with the current design of the CSLR model, creates an unpredictable contingent liability for AFS licensees. As we know, the financial planning landscape has dramatically changed in recent times with many AFS licensees now small businesses. As such, they cannot sustain paying for the often deliberate or negligent failures of others, including those that were subsidiaries of Australian Securities Exchange-listed corporations.

Further, it means that simply applying the special levy in this instance to the financial advice sub-sector, being the primary subsector deemed responsible for the unpaid claims, unfairly burdens compliant AFS licensees.

This approach also runs the risk of encouraging AFS licensees, who provide

personal financial advice to retail clients, to look to service wholesale clients only, seeing licence holders in this cohort are not mandated to be members of AFCA and therefore not liable for the CSLR. It will likely deter new entrants into this space as well because who would want to start a business not knowing their potential CSLR levy cost or their Australian Securities and Investments Commission (ASIC) industry funding model (IFM) cost, for that matter, year to year?

It must also be acknowledged this cost will ultimately be passed on to clients, which will only exacerbate the financial advice gap.

This outcome appears to be at odds with the government’s own commitment to ensure more Australians have access to affordable and quality financial advice.

Given these challenges and the necessity to balance the needs of all stakeholders in the short term, we believe the most financially sustainable approach to paying timely compensation to impacted consumers is for the special levy to be spread broadly across all sub-sectors, based on the capacity of the relevant sub-sector to pay.

While on face value it may seem unequitable for a sub-sector to fund unpaid claims for another sub-sector, the reality is the current CSLR model is not equitable as each sub-sector is mandated to fund compensation for the misconduct and deliberate negligence of their peers, over which they have no control or influence.

In fact, there is not one element in the CSLR IFM that is predicated on direct industry culpability for instances or classes of misconduct.

In addition, no sub-sector can control or influence the conduct of its peers. The only recourse available is to report conduct of concern to the regulator and trust timely action will be taken where appropriate to prevent or limit the potential or actual consumer harm.

This gives rise to an interesting option raised in the consultation paper – whether the

We believe the most financially sustainable approach to paying timely compensation to impacted consumers is for the special levy to be spread broadly across all sub-sectors, based on the capacity of the relevant sub-sector to pay. cost of the unfunded claims should be spread across the ‘retail-facing’ sub-sectors based on regulatory effort. That is, to apportion the unpaid claims based on the regulatory effort applied to each sub-sector as reflected in ASIC’s most recent IFM determination.

The rationale being that using this method does not assign blame to any sub-sector for contributing to the specific losses to be covered by a special levy and is in harmony with the principles underpinning the CSLR’s annual levy process.

This statement is correct. It does align with the principles of the current funding model.

The same model the government referred to when announcing a comprehensive review of the CSLR in January this year. The key focus of this review is to ensure the scheme is delivering its intended objectives and is sustainable over time.

It is also worth noting 22 per cent of all ASIC’s recent regulatory costs have been allocated to the personal advice sector, the same sector that all black swan events have Continued on next page

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occurred in to date, resulting in the need for a special levy.

Importantly, the government and the regulator are key participants in the CSLR and, as such, must share some of the responsibility to address the immediate funding shortfall.

For example, the government is the only stakeholder in the financial services ecosystem that has the power to establish and control the regulatory settings for participants to operate under, and ASIC the power to enforce compliance.

Given this situation we believe the government should be responsible for funding part of the special levy, especially given its original commitment to pay for the first 12 months of unpaid claims and operating costs for the CSLR, but only ending up funding a much shorter period. This would signal its commitment to a maintainable scheme for impacted consumers, as well as demonstrating a commitment to the sustainability of the personal advice sector and giving stakeholders confidence in the scheme.

The allocation of regulator costs versus the systematic large-scale consumer losses we are seeing also gives rise to our second question: how do we address the serious and real threat to the sustainability and fairness of the CSLR? While the need for a special levy was considered in the design of the CSLR as a key funding mechanism for a black swan event following a large-scale failure, it is not designed to fund the flock of black swans that we have experienced and appear to continue to experience in recent times.

A key question that should have been asked in the consultation paper was not whether a potential option to fund a special levy is repeatable, but rather how do we address the issues giving rise to these consistent large-scale failures resulting in significant consumer financial harm?

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AFCA deputy ombudsman Dr June Smith recently stated: “We are well beyond black swan events and bad apples, and we need to look at these systemic issues across the industry and prevent them from happening in the first place. It’s not enough to have a Compensation Scheme of Last Resort at the end when harm has occurred.”

We could not agree more.

While we welcome ASIC’s statement in its 2025/26 Corporate Plan confirming it will enhance its processes for early detection of high-risk managed investment schemes (MIS) to reduce the risk of large-scale consumer harm, an immediate review of why these systematic issues are occurring in the personal advice sector is needed. The focus must be on identifying the common contributing factors, including the role of product failure, so they can be effectively addressed to prevent future large-scale consumer losses.

The government must also expedite its response to the review into the scheme’s operation and the outcomes it is delivering to ensure it is sustainably funded for both participants and consumers.

It is not equitable, sustainable or fair to expect AFCA members to just continually fund the sub-sector caps of $20 million for unpaid claims each year and expect they fund the growing funding shortfalls.

AFCA stated in its submission to the Scam Prevention Framework Bill 2024 that it considers it essential that the liability regime applies consistently across all sectors and that a ‘shared responsibility framework’ means each participant has a role to play to support timely and comprehensive resolution of complaints.

We believe the same approach should be applied to the CSLR. It should be a shared responsibility across all participants in the financial services sector, not just AFS licensees providing personal financial advice.

The exclusion of MIS from the CSLR regime, for example, continues to create a

While the need for a special levy was considered in the design of the CLSR as a key funding mechanism for a black swan event following a large-scale failure, it is not designed to fund the flock of black swans that we have experienced and appear to continue to experience in recent times. significant consumer protection gap in the regulatory settings. This must be addressed to protect those who choose to invest in such products without seeking professional financial advice – either by choice or because they may not realise they are directly investing in a financial product.

Excluding MIS products from the CSLR continues to encourage the creation of inappropriate high-risk products being marketed directly to consumers, including those near retirement who are ill-equipped to sustain financial losses, as in the case of the Sterling Income Trust.

These changes are vital.

While it is important the CSLR provides a safety net to protect consumers who suffer a financial loss through negligence or misconduct, maintaining trust and confidence in our personal advice sector is dependent on consumer detriment being prevented in the first place.

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Colliding rules

The interaction between the non-arm’s-length income and expenditure provisions and other superannuation rules can result in significant negative outcomes for SMSFs, write Daniel Butler and Fraser Steed.

DANIEL BUTLER (pictured) is director and FRASER STEED is a lawyer at DBA Lawyers.

56 selfmanagedsuper

The trustees of SMSFs must be aware of the nonarm’s-length income (NALI) provisions and how they interact with other areas of tax and superannuation law. This article focuses on the NALI interaction with contributions and the capital gains tax (CGT) provisions.

Contributions and NALI Despite the recent changes to NALI, there remains significant uncertainty around the distinction between a contribution and non-arm’s-length expenditure (NALE).

For example, where a related party pays an expense on behalf of an SMSF, the ATO’s longstanding position as outlined in Taxation Ruling (TR) 2010/1 provides: 174. Where a person pays an amount to a third party to satisfy a liability of a superannuation provider,

the superannuation provider is taken to have constructively received the payment made to the third party on the superannuation provider’s behalf.

Thus, where a member pays an expense, such as an accounting fee on behalf of an SMSF, the ATO generally considers this to be a contribution.

However, due to the recent amendments to the NALE provisions for general expenses, where a member or related party pays an expense on behalf of an SMSF, the fund will have a lower or nil expense that will invoke these rules.

The question is which one wins out: is the expense payment on behalf of the fund a contribution or is it NALE? Presumably NALE can be averted if the SMSF Continued on next page

Continued from previous page

treats the expense as a journalised contribution immediately or soon after the expense is paid.

Journalised contributions can be problematic as they may not be immediately obvious for whose benefit the contribution is made. For example, if there are two members of the fund, is the contribution in question intended to be split 50/50 or on some other basis?

It is important to be aware that if the fund does not record the expense payment as a contribution, the ATO is likely to treat the expense payment as NALE. Unfortunately, the ATO’s revised draft TR 2010/1DC2 does not provide any further clarification on this issue and therefore the position regarding contributions and NALE remains unclear.

CGT and NALI The ATO‘s view on the interaction between the NALI and CGT provisions of the Income Tax Assessment Act 1997 (ITAA) is reflected in Taxation Determination (TD) 2024/5.

As section 295-550(1) of the ITAA defines NALI to include an amount of ordinary or statutory income, and since statutory income includes net capital gains calculated under the method statement in section 102-5(1), there is an issue as to whether a capital gain that is tainted with NALI will impact another that is not tainted.

The ATO states in TD 2024/5: 7. …a capital gain made by a superannuation fund that arises as a result of a scheme – the parties to which were not dealing with each other at arm’s length – is NALI under subsection 295-550(1) where one or more of the following applies: • the amount of the capital gain is more than the amount the superannuation

fund might have been expected to derive if the parties had been acting at arm’s length in relation to the scheme … (paragraph 295-550(1)(a)), • for an SMSF or an APRA (Australian Prudential Regulation Authority)regulated superannuation fund with no more than six members – in gaining or producing the capital gain, NALE is incurred (including nil expenditure) in respect of a CGT asset that is less than the amount of a loss, outgoing or expenditure that the superannuation fund might have been expected to incur if those parties were dealing with each other at arm’s length in relation to the scheme (paragraphs 295-550(1) (b) or (c)).

The ATO further confirms in TD 2024/5 the interaction between NALI and CGT provisions can lead to a non-arm’s-length capital gain, tainting an arm’s-length capital gain. Technically, it is then possible a $100 non-arm’s-length capital gain will taint a $1 million arm’s-length gain if it is crystallised in the same income year. However, where a non-arm’s-length capital gain exceeds the fund’s net capital gain, the lower amount is applied.

A non-arm’s-length capital gain tainting an arm’s-length gain is highlighted in example three of TD 2024/5 where an SMSF receives inflated capital proceeds of $5 million for an asset worth $1.5 million.

The example demonstrates that where a non-arm’s-length capital gain is crystallised in the same income year as an arm’s-length gain, the entire net capital gain will be tainted and taxed at the NALI tax rate of 45 per cent. Here, the $1 million arm’s-length capital gain was tainted and taxed at 45 per cent. Thus, a non-arm’s-length capital gain effectively taints any other capital gain in the same income year.

Notably, in TD 2024/5, the tax

One aspect of the law is clear, that is, the interaction between the CGT and NALI provisions can result in excessive tax liabilities for the most minor and inadvertent of nonarm’s-length capital gains. commissioner expressly rejects the view that the amount of NALI in relation to a nonarm’s-length capital gain can be calculated by reference to the tainted gain alone.

Instead, it must be considered in relation to an amount that takes into account both arm’s-length and non-arm’s-length capital gains.

This aspect of NALI is particularly nasty.

Conclusion Despite the recent draft ruling TR 2010/1DC2, the interaction between the NALI provisions and contributions remains uncertain for SMSF trustees.

Unfortunately, one aspect of the law is clear, that is, the interaction between the CGT and NALI provisions can result in excessive tax liabilities for the most minor and inadvertent of non-arm’s-length capital gains. An urgent legislative fix is required to address disproportionate and unfair outcomes.

When in doubt, expert advice should be obtained so the NALI provisions are not enlivened.

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Getting at the money

Many legislative and regulatory restrictions apply when SMSF members want to draw down their retirement savings. Tim Miller looks at the different avenues of access and the rules relevant to them.

TIM MILLER is education and technical manager at Smarter SMSF.

The payment of benefits from an SMSF represents one of the most important and closely regulated aspects of superannuation law. Trustees are entrusted with ensuring member entitlements are only released in accordance with legislated conditions of release and the form, timing and taxation treatment of those benefits comply with the Superannuation Industry (Supervision) (SIS) Act 1993, the associated regulations and relevant tax law.

For members, receiving benefits is often the culmination of decades of contributions and investment growth. For trustees, it is the moment where regulatory discipline is most visible as breaches of benefit payment standards can result in severe penalties, disqualification and adverse tax outcomes. This article explores the framework for paying benefits from an SMSF, combining legislative rules, taxation implications and practical trustee considerations.

Preservation and conditions of release All contributions and investment earnings in superannuation are preserved until a condition of release is satisfied. This reflects the sole purpose test that dictates superannuation is designed to provide retirement income, not serve as an early-access savings vehicle.

Preservation age A member’s preservation age depends on their date of birth, phasing from 55 for those born before 1 July 1960 to 60 for those born after 30 June 1964. Attaining preservation age alone does not provide full access to

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superannuation, it merely allows limited access through a transition-to-retirement income stream (TRIS) until a further condition is met.

Key conditions of release The most common conditions of release include: • Retirement – with definitions depending on whether the member ceased being gainfully employed before or after they turned 60. If prior to 60, the trustee must be satisfied the member intends never to be gainfully employed again for more than 10 hours a week. If over 60, ceasing a gainful employment arrangement is sufficient, without reference to future intent.

• Turning 65 – provides automatic access to benefits regardless of work status.

• Permanent incapacity – where trustees are reasonably satisfied the member is unlikely to engage in gainful employment for which they are qualified due to ill health.

• Terminal medical condition – certified by two medical practitioners (one a specialist) where ill health is likely to result in death within 24 months.

• Death – where benefits must be paid as soon as practicable to dependants or the legal personal representative.

Example — retirement after 60 Mary turned 60 in June 2025. If she ceases her Continued on next page

Continued from previous page

employment with her current employer after her birthday, she can access her benefits under the post-60 retirement definition without needing to declare her future intentions.

Other, less common conditions include compassionate grounds, for example, medical treatment, funeral costs, preventing foreclosure, severe financial hardship and ATO-issued release authorities, such as those relating to excess contributions or Division 293 tax.

Benefit types Once a member satisfies a condition of release, the trustee must determine the form of benefit payment.

Lump sum payments A lump sum is a single withdrawal of capital.

Multiple lump sums can be made, though if they are structured as periodic payments, they may be deemed an income stream.

Lump sums may be paid in cash or in specie, a transfer to the member of fund assets such as shares or property. In-specie payments require accurate valuation and documentation to ensure compliance with both super and tax law and the non-arm’s-length income rules. Lump sums from accumulation are proportioned between tax-free and taxable components immediately before they are paid.

Example Claire retires and wishes to withdraw $50,000.

Rather than selling shares, her SMSF transfers 2000 shares in ABC Ltd at $25 each directly into her personal name. This constitutes an inspecie lump sum payment and $25 represents the value on the day beneficial ownership changes hand, that is, the day the off-market transfer form is fully executed.

Income streams An income stream, or pension, is a series of periodic payments from a separate member interest. The only pensions currently permitted to be commenced from an SMSF are account-

based pensions, including TRIS. When commencing an income stream, trustees must apply the proportioning rule where the taxable and tax-free components of the pension are set at the start and remain fixed. Pension payments and commutations must follow these proportions.

Taxation of benefits The taxation of benefits depends on the member’s age, the type of benefit, lump sum or pension, and, in death benefit cases, the status of the recipient.

Lump sums – members • Age 60 and over – tax-free.

• Under preservation age – taxable component taxed at 20 per cent plus Medicare.

Income streams – members • Age 60 and over – tax-free.

• Under 60 – taxable component included in assessable income, however, a 15 per cent tax offset applies if the income stream is a disability superannuation benefit.

Disability superannuation benefit If a member ceases work due to permanent incapacity and meets strict certification requirements, the tax-free component of their benefit is modified via a statutory formula, often creating significant tax savings.

Understanding the modified tax-free component When a member is forced to cease work due to permanent incapacity, the Income Tax Assessment Act 1997 (ITAA) allows for a modification of the tax-free component of a superannuation lump sum disability benefit.

Legislative basis Section 307-145 of the ITAA sets out the formula for calculating the tax-free component of a disability lump sum benefit. The uplift only applies if: • two legally qualified medical practitioners certify that, because of ill health, it is unlikely the member can ever again engage in gainful employment for which they are

reasonably qualified by education, training or experience.

The calculation formula The modified tax-free component = Tax-free component (under normal proportioning) + (Amount of benefit × Days to retirement ÷ (Service days + Days to retirement)) Where: • Amount of benefit = total lump sum paid.

• Days to retirement = number of days from the incapacity date until the member’s ‘last retirement day’ (usually age 65).

• Service days = number of days in the service period of the benefit (from the start of eligible service to incapacity date).

The result cannot exceed the amount of the benefit.

Example - permanent incapacity Kate, age 47, suffers a serious injury and can no longer work. Two medical practitioners certify permanent incapacity. Her benefit of $160,000 is recalculated under the disability superannuation benefit formula.

Kate’s circumstances: • Date of birth: 1 July 1975.

• Commenced employment: 1 July 2000.

• Injured: 3 September 2022, permanently ceases work.

• Receives a disability lump sum on 1 March 2023 of $160,000.

• Super balance before payment: $400,000, comprised of $100,000 tax-free and $300,000 taxable components.

Step 1 – Proportioning rule Tax-free % of super interest = $100,000 ÷ $400,000 = 25%.

Tax-free portion of lump sum (under normal rules) = 25% × $160,000 = $40,000.

Step 2 – Modified tax-free uplift • Days to retirement = 6512 (from 3 September 2022 to 1 July 2040).

• Service days = 8099 (from 1 July 2000 to 3 September 2022).

• Total = 14,611 days.

• Additional tax-free component = $160,000 Continued on next page

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Continued from previous page

× (6512 ÷ 14,611) = $71,311.

Step 3 – Total components • Tax-free = $40,000 + $71,311 = $111,311.

• Taxable = $160,000 − $111,311 = $48,689.

Step 4 – Tax impact • Normal rules: taxable = $120,000 > tax @ 20% = $24,000.

• With uplift: taxable = $48,689 > tax @ 20% = $9737.

• Tax saving = $14,263 (plus Medicare levy).

Why this matters For members, this uplift can mean significant tax savings at a vulnerable time in life. For trustees, obtaining proper medical certification and documenting calculations is critical.

Without it the member loses access to the concession.

From an administrative perspective, trustees should: • retain copies of medical certificates, • record calculations in trustee minutes, • apply the formula consistently, and • ensure correct reporting to the ATO. Practical considerations • Insurance proceeds: Disability lump sums are often funded via total and permanent disablement insurance held in the SMSF. The modified tax-free uplift applies to the entire lump sum, including insured amounts.

• Timing: The ‘service period’ is often aligned with the member’s employment start date.

Where uncertain, careful review of trust deed provisions and contribution history is needed.

• Audit: Auditors routinely check whether disability superannuation benefits have been properly classified and certified.

Payment of death benefits The treatment of a death benefit is as follows: • paid to a tax dependant, such as to a spouse or child under 18 – tax-free, and • paid to a non-dependant – taxable component taxed up to 15 per cent (taxed

60 selfmanagedsuper

element) or 30 per cent (untaxed element), plus Medicare.

Early access and risks Early access to superannuation is highly restricted. SMSF trustees who release benefits before a condition of release risk: • administrative penalties – up to $6600 per trustee, at 2025, • disqualification as an SMSF trustee, and • tax consequences – payments may be included in the member’s assessable income under section 304-10 of the ITAA, overriding normal super tax treatment.

The ATO has discretion not to apply these harsh outcomes if the breach was beyond the member’s control, for example, if caused by a banking error, but deliberate or negligent early releases are rarely excused.

Trustee obligations and documentation Trustees must ensure: 1. Trust deed compliance – benefit payments must be permitted by the governing rules.

2. Evidence of condition of release – for example, retirement declarations, medical certificates.

3. Accurate calculation of tax components – applying the proportioning rule.

4. Reporting –transfer balance account reporting where pensions commence or are commuted, pay-as-you-go summaries where required and inclusion in annual returns.

5. Timing – death benefits must be paid ‘as soon as practicable’ after death; pensions must meet minimum annual drawdown requirements.

Compassionate grounds and financial hardship Although not as common in SMSFs, trustees may be asked to release benefits under compassionate or hardship grounds, the definitions being: • Compassionate grounds – include

medical treatment, mortgage foreclosure and funeral expenses, and are approved by the ATO. • Severe financial hardship – allows limited lump sums if the member has received commonwealth income support for at least 26 continuous weeks and cannot meet immediate expenses.

Trustees must be cautious as approving payments without the correct authorisations exposes them to significant penalties.

Regulatory outlook The regulation of superannuation benefit payments continues to evolve. The ATO has increased its scrutiny of SMSF benefit payments with a particular focus on illegal early access schemes and compliance with minimum pension standards. Draft rulings such as Draft Taxation Determination 2021/D6 and practice statements like Practice Statement Law Administration 2021/D3, while both still on hold, reinforce the tax commissioner’s discretion under ITAA section 304-10 and highlight the expectation for SMSF trustees to understand and apply the law correctly.

Conclusion Paying benefits from an SMSF is the ultimate test of trusteeship. While it represents a reward for members’ years of saving and investing, it also poses compliance risks. Understanding preservation rules, conditions of release, the distinction between lump sums and income streams, and the complex taxation landscape is essential.

For trustees, meticulous documentation, adherence to trust deeds and vigilance against early access breaches are non-negotiable.

For advisers, guiding clients through the retirement, incapacity or death benefit process requires not only technical expertise but also sensitivity to the financial and emotional significance of these events.

Ultimately, the key message is simple, get it right the first time. The costs of getting it wrong – financial, regulatory and reputational – are too great for SMSFs to ignore.

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COMPLIANCE

I’m a member, get me out of here

Exiting an SMSF is not necessarily a straightforward exercise when the fund services multiple members. Michael Hallinan examines the relevant processes.

MICHAEL HALLINAN is superannuation special counsel at SuperCentral.

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Portability is the right of a member of a superannuation fund to transfer their interest from one fund to another. Portability is not an inherent feature of superannuation funds. Employersponsored funds did not permit an interest to be transferred unless and until the member ceased employment.

Since 1 July 2004, Part 6.5 of the Superannuation Industry (Supervision) (SIS) Regulations has provided super members with the statutory right of portability subject to some exceptions. Initially interests in SMSFs were also excluded from portability.

However, since 1 July 2018, SMSF members have had the same portability rights as members of retail and industry funds. Portability, in the context of public offer funds, does not give rise to fund stability for various reasons. These include membership size of such funds, the large net cash inflows, the ability to finance transfers from cash flow rather than asset realisation, and the relative insignificance of even large member balances among the total value of such funds. In contrast, portability in the context of multi-member SMSFs could give rise to very material issues of fund stability as these funds do not have the

spread of members or significant cash inflows and each member may hold a significant portion of the total value of the SMSF. Additionally, multi-member SMSFs are exposed to additional stability arising from the following features: • loan liabilities arising from limited recourse borrowing arrangements (LRBA), • holding assets that are business critical in relation to the members, • holding lumpy assets, • holding illiquid assets, • having members who are business associates, • having members who are married couples, • having members who are family members, and • having members in different phases of super – some in accumulation phase and others in drawdown phase.

The stability of a multi-member SMSF could be jeopardised if a member decided to exercise their portability rights, placing the fund in the position of having to find cash to implement the transfer Continued on next page

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request.

Portability was introduced with effect on 1 July 2004. SMSFs were excluded from the portability regime and this exception lasted until 30 November 2018. Initially a 90-day implementation period applied to transfer requests. This 90-day period was replaced by a 30-day period with effect from 1 July 2007 and finally, on 1 July 2013, a threebusiness-day implementation period for transfer requests via SuperStream applied, otherwise the 30-day period stood.

Simple illustration Four partners decide to acquire commercial property from which they will conduct their legal practice and use an SMSF as the vehicle for this purpose. The SMSF is established on 1 July 2019, transfers and contributions are made, the commercial property is acquired on a geared basis using an LRBA and then leased on an arm’slength basis to the practice operating trust.

After a few years, one of the four partners, Gerald, decides to exit the practice and terminate all involvement with the other three partners. Gerald, now having lost any sense of fraternity with his former partners, gives his notice to the partnership by fax from the club lounge of an airport and also, by another fax, to the trustee of the SMSF indicating his intention to exercise his portability rights and requests his 25 per cent share of the SMSF be rolled over to another super fund.

Of course, and unfortunately, the SMSF simply does not have sufficient cash readily realisable investments to satisfy the transfer request. So what can the trustee do?

provide the request to the intended receiving fund and that trustee would then be obliged to notify the SMSF, thus avoiding any unpleasantness.

Must the SMSF comply with the request?

Yes, unless an express exception applies.

When must the SMSF comply with the request?

If Gerald had submitted his transfer request to a super fund that participates in SuperStream, this fund would have to advise the SMSF by that very same system.

In this case, the SMSF would have to effect the transfer within three business days of the receipt of the request. However, as Gerald made the request directly to the SMSF, it must implement the request as soon as practicable, but in any event within 30 days after receiving the transfer request.

Analysis

Do any express exceptions apply?

While there are exceptions, none are relevant to the current circumstances.

The SMSF could refuse the request if the receiving fund is unwilling to accept the transfer, but that is not the case here. The request could be refused if the transfer involves only a portion of Gerald’s interest, leaving the balance remaining less than $6000, but here the request was to roll over the entire interest. The request also could be refused if Gerald notified the SMSF trustees of a similar intent within the previous 12 months, but this is his first request. Finally, the request could be refused if the super interest is a death benefit income stream and the commutation of the income stream would be inconsistent with the governing rules.

Again, this is not the case.

Is Gerald within his rights to request the transfer?

Yes, as SIS Regulation 6.33 expressly provides this right. In fact, he would

What about the illiquid investment exception?

If the illiquid investment exception applies,

The stability of a multimember SMSF could be jeopardised if a member decided to exercise their portability rights, placing the fund in the position of having to find cash to implement the transfer request.

then the portability requirements do not.

The illiquid investment exception was introduced from 1 July 2007, with a less demanding version applying to investments made before 1 July 2007 compared to that applying to those made on or after 1 July 2007.

What is an illiquid investment?

The term is defined in SIS Regulation 6.31(3). Essentially an investment is illiquid if it is of a nature that produces either of the following outcomes, namely the investment cannot be converted to cash within the portability transfer period or converting the investment to cash within the portability transfer period would likely have a significant adverse impact on the realisable value of the investment.

Does the illiquid investment exception apply?

Here the SMSF is primarily invested in a lumpy asset that is geared and is also business critical to the remaining three partners. In this context, you would think Continued on next page

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Continued from previous page

this exception would apply, however, the answer is not so simple.

For the illiquid investment exception, in the case of investments made on or after 1 July 2007, the member must have made an investment choice and before this choice was made the trustee was required to give a warning as to the effect of the exception on the portability rights, the reason why the investment is illiquid and the maximum period in which the transfer must be effected. Also, the trustee must have obtained the written consent of the member to the effect they understood and accepted a longer transfer period will apply.

Finally, the investment choice must have satisfied the requirements of SIS Regulation 4.02 if made before 1 July 2013. If the investment choice was made on or after 1 July 2013, it must satisfy the requirements of SIS Regulation 4.02A or if the fund is a small Australian Prudential Regulation Authority (APRA)-regulated fund, then it must satisfy SIS Regulation 4.02AA. As the acquisition of the asset was made after 1 July 2018, the illiquid investment exception will only apply if the investment choice was made pursuant to SIS Regulation 4.02A or regulation 4.02AA. The former regulation cannot apply to a superannuation fund with six or former members, that is, SMSFs. The latter regulation can only apply to APRA-regulated funds with six or former members.

Consequently the illiquid investment exception can only apply to an investment of an SMSF acquired as part of an investment choice, being a choice satisfying the requirements of SIS Regulation 4.02, made on or after 1 July 2007 and before 1 July 2013.

64 selfmanagedsuper

This strange outcome arises because the amendments made to Part 6.5 of the SIS Regulations, intended to remove the exception for SMSFs, did not extend to making consequential amendments to SIS Regulation 6.34(6) to permit the illiquid investment exception to apply to SMSFs. How should the trustees respond to Gerald’s request?

It seems the trustees would have to act in the best financial interests of the SMSF members as imposed by SIS Act section 52B(2)(c). Additionally, the trustees may have to raise equitable defences to any action by Gerald that it is unconscionable for him to demand the immediate transfer of his interest to another superannuation fund when he actively participated in the decision to acquire the commercial real estate on a geared basis.

The argument for the trustees would be that implementing the transfer request would cause significant financial detriment to the remaining members of the SMSF and not be in the best financial interests of the members, including possibly Gerald.

Also, given Gerald’s active involvement in the investment decision to acquire the commercial premises, including using gearing to do so, his conscience is bound not to exercise his portability rights.

There would be little advantage in arguing Gerald’s involvement in the trustee’s investment decision process amounts to an informal choice as the illiquid investment exception does not apply because the decision was made after 1 July 2013.

Future action Unless and until Part 6.5 of the SIS Regulations is amended to allow the illiquid investment exception to apply to SMSFs

Portability in the context of multi-member SMSFs could give rise to very material issues of fund stability as these funds do not have the spread of members or significant cash inflows and each member may hold a significant portion of the total value of the SMSF.

for investments acquired on or after 1 July 2013, the practical response of the SMSF trustees would be to clearly document the active and knowing participation of all members in the investment decision to acquire illiquid investments and that each one acknowledges the investment is for the long term, whereby a voluntary early exit of a member may cause considerable financial stress to the SMSF. Perhaps an alternative investment structure may have to be considered for future investments. One example would be where each partner of the practice establishes a single-member SMSF where the gearing is executed at the fund level and then each SMSF purchases units in a fixed interest non-geared unit trust that only holds the commercial premises which are leased to the practice entity.

WE CAN HELP WITH CLIENT EDUCATION Advisers see client education as part of their responsibility but don’t always have the time to fulfil this obligation. A solution can be to white label smstrusteenews. Doing so will keep your clients informed on the major issues shaping the sector and ensure engagement every fortnight.

To explore this opportunity further contact us at info@bmarkmedia.com.au | d.tyson-chan@bmarkmedia.com.au

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QUARTER III 2025

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SUPER EVENTS

SMSF Association Technical Summit 2025

The SMSF Association Technical Summit 2025 was hosted at the Sydney Masonic Centre and saw around 300 specialist advisers attend the event.

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1: Peter Burgess (SMSF Association). 2:Shelley Banton (ASF Audits). 3: Craig Day (Colonial First State).

4: Jemma Sanderson (Cooper Partners). 5: Clinton Jackson (Cooper Grace Ward). 6: Julie Steed (MLC TechConnect).

7: Keddie Waller (SMSF Association). 8: Bryce Figot (DBA Lawyers). 9: Jemma Sanderson (Cooper Partners).

10: Geoff Wilson (Wilson Asset Management) and Peter Burgess (SMSF Association).

11: Scott Hay-Bartlem (Cooper Grace Ward). 12: Victoria Mercer and Neal Dallas (both BusinessDepot).

QUARTER III 2025 67

“ I NEVER THOUGHT I’D BE HOMELESS.” Like many of us, Megan* never thought it would happen to her – she never imagined she would need to escape a violent relationship; she never imagined her own family would turn their backs on her; she never imagined she and her daughter would become homeless and have to live out of their car.

Right now, there are thousands of Australians like Megan* experiencing homelessness but going unnoticed. Couch surfing, living out of cars, staying in refuges or transitional housing and sleeping rough – they are often not represented in official statistics. In fact, for every person experiencing homelessness you can see, there are 13 more that you can’t see.

Together we can help stop the rise in homelessness.

Visit salvationarmy.org.au or scan the QR code *Name changed for privacy