The winds of change

The rules governing advice and superannuation have undergone some significant changes within the past six months. BT Financial Group head of financial literacy and advocacy Bryan Ashenden assesses the implications they will have for the sector.

The December 2024 ATO statistics showed there are now over 630,000 SMSFs in Australia. As at the June quarter of 2024 there was still a positive net growth in this number – the first time a positive net number has been recorded for this time period in the past five years. With the number of SMSF members now approaching 1.2 million, clearly SMSFs are an important part of the superannuation landscape in Australia and increasingly a choice for many Australians for structuring their current or future retirement needs. This raises an important question: will life be any easier for SMSFs, or their advisers, in 2025?

Well, the answer is perhaps and maybe, not unexpectedly, a mixture of yes, no and maybe. What causes this to be the case? With a lot of recent regulatory change, some of which came into effect in 2024 and some to be implemented in 2025, there is much for advisers to take into account and ensure their SMSF trustee clients are across. In this article, we explore some of the major changes announced and explore their impact on the SMSF environment.

Delivering Better Financial Outcomes - tranche one

While many in the advice industry may think the first tranche of the Quality of Advice Review reforms, delivered via the Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Act 2024 (DBFO), had no real consequences for the SMSF industry, some nuances still need to be considered.

The most significant of these is around the changes made to section 99A of the Supervision (Industry) Supervision (SIS) Act 1993, which deals with super trustees’ ability to deduct fees from a member’s account and pay them to a financial adviser or licensee for the provision of personal advice regarding the member’s interest in the fund.

As these changes were debated through the consultation and parliamentary processes, one of the biggest issues that emerged was the requirements a trustee would need to satisfy to facilitate the payment. Technically, this is not an issue for SMSFs as section 99A of the SIS Act does not apply to SMSFs. With over 93 per cent of all SMSFs being one or two-member funds, trustees should be aware the fees are for personal advice to the fund members, given they are generally either the same person or invariably related to them.

While the strict provisions of section 99FA don’t apply to SMSFs, it is important to remember the sole purpose test requirements in section 62 and the best financial interest requirement in section 52B(2)(c) of the SIS Act. Here it is made clear the best financial interest requirement applies to payments made by a trustee to a third party, meaning it would apply to advice fee payments made by a trustee to an adviser or their licensee.

If Section 99FA, and its DBFO changes, don’t apply, what guidance is available to SMSF trustees to meet their other requirements under the SIS Act? While again not directly applicable to SMSFs, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have previously issued joint letters to APRAregulated trustees reminding them of their obligations in considering the deduction of advice fees from a member’s account that are then paid to an adviser. Those letters advised trustees, in determining if the payment of the advice fee was appropriate, they should, among other things, consider the quantum of the fee, be satisfied the fee related to the member’s interest in the fund and that the trustees should have processes in place to monitor these considerations, but noting it would be impractical to require a trustee to sight a statement of advice (SOA) for each member every time an advice fee was payable.

It would be reasonable that SMSF trustees should undertake a similar process, although it should be easier for them to be satisfied compared to an APRA fund trustee as they would have received a copy of the relevant SOA as the member. While it may be more difficult for an SMSF trustee to determine if the advice fee only related to the member’s interest in that fund and was reasonable, they can rely on the fact their advisers are subject to the Financial Planners and Advisers Code of Ethics under which standard 7 requires advisers to ensure their fees are fair, reasonable and represent value for money.

Another area of which SMSF trustees need to be aware is the requirement to have properly executed fee consent forms, particularly in relation to ongoing fee arrangements. Where the fees are payable out of an SMSF to an adviser, the arguably stricter requirements of section 99FA do not apply. Instead, the general provisions relating to fee consents and renewals under the Corporations Act 2001 will apply.

The unique nature of how SMSFs operate may create some difficulties here as the requirements differ depending on how any relevant fee is paid. If the fee is paid from a bank account owned by the SMSF directly, which would therefore fall within the definition of a basic deposit product, the annual fee consent provisions do not apply. Such payments may have been set to recur and the obligation will remain on the SMSF trustee to ensure these are made only for the relevant duration (although of course advisers should also not knowingly accept payments where there is no commensurate service provided).

However, if the ongoing payments are made from accounts the member has within the SMSF, such as investment accounts held with a platform provider, the fee consent provisions will apply. It is important the correct account holder completes the consent forms. Even though advice may have been provided directly by an adviser to a client about their interest in an SMSF, the investment account from which the advice fees would then be paid is an account owned (or held) by the SMSF and not the member. While it may feel like semantics, it will be important to ensure any fee consents are completed by the trustees of the fund in their capacity as a trustee, or director(s) of an SMSF corporate trustee, rather than by members in their own personal capacity.

SMSF trustees will rely on their advisers to assist them through this process, so as an adviser it is important to ensure these forms are completed correctly, not only to help your clients comply, but also to ensure you can be appropriately paid for the services provided.

Delivering Better Financial Outcomes – tranche two

While we await the release the entire legislation for tranche two of the DBFO package, whether in consultation or a bill form, it is relevant to note it may contain provisions also impacting SMSFs.

On 4 December 2024, in line with previous announcements, the federal government confirmed it intends to legislate to clarify the rules on what advice topics can be paid for via a superannuation fund.

It remains to be seen if this change:

• will be tied into the existing changes made to section 99FA of the SIS Act (and therefore not relevant for SMSFs as mentioned earlier),

• tied to the areas of advice the new class of financial adviser may be restricted to advising on (which may be relevant if the new class of adviser is employed within a financial planning firm), or

• will set out a discrete list of advice topics for which payment could be made via a member’s superannuation savings, precluding any super fund from paying advice fees relating to any topic not captured by this list.

Unwinding of legacy pensions

A positive note to end 2024 and start 2025 was the passing of regulations allowing for the unwinding of legacy pension arrangements without penalty. Principally targeted at the SMSF environment, these changes will allow for the commutation of legacy pension arrangements established prior to 20 September 2007 or resulting from the commutation of one of those income streams after that date, within a five-year window from 7 December 2024. This can be done without penalty in the sense there will be no retrospective application of any tax that would otherwise have been payable if those pensions were not previously considered to have been complying income streams for taxation purposes. This is important if those pensions were originally set up to manage tax positions under the old reasonable benefits limit regime. Any associated reserves can also be allocated to the member without penalty.

However, at the time of writing, regulations have not yet been released to confirm there will be no adverse implications from a Centrelink benefits perspective, which will be relevant where the income streams provided asset test exempt benefits to a member. Regulations to confirm there will be no adverse implications are expected, but it may be prudent to exercise caution and delay unwinding these pensions for affected clients until these regulations are released.

Additionally, changes were made to provide more flexibility with allocating amounts from reserves to members, outside of the full commutation option, with excess or disproportionate allocations to be measured against a member’s nonconcessional contributions cap, rather than their concessional contributions cap as was previously the case. Caution will still need to be exercised to ensure there is no inadvertent breach of the non-concessional cap or triggering of the bring-forward cap rules where not desired.

Overall these changes may assist with the more efficient operation of SMSFs that have had these legacy products, including the potential to close down funds that have only remained active because of legacy pensions that previously could not have been unwound without potential penalty.

Additional items

During 2024 we saw some further clarification and legislative amendment to the operation of the non-arm’s-length income (NALI) and non-arm’s-length expenditure (NALE) rules that have the potential to impact SMSFs. While these changes may reduce the penalty to which an SMSF in breach of the relevant rules could be exposed (although that is not entirely certain), it doesn’t really make the operational rules for SMSFs any more or less complex. Whether or not you understand the NALI or NALE rules, or can even explain the difference between the two, it is best to remind your SMSF clients to always conduct their activities on an arm’s-length basis and to seek advice about the implications of related-party arrangements or transactions before proceeding with them. While what they intend to do may be legal and permissible, it is surely always better to be safe than sorry.

No doubt change will continue to happen throughout 2025. Changes to superannuation are almost now up there with the certainties of life being death and taxes. But regardless of whether the changes are seen as a positive or negative, the best thing you can do as an adviser is ensure you are aware of them and can appropriately educate your SMSF clients on what it means for them.