Self Managed Super Issue 49

QUARTER I 2025 | ISSUE 049 | THE PREMIER SELF-MANAGED SUPER MAGAZINE

ILLEGAL EARLY ACCESS Finding a practical solution

FEATURE

COMPLIANCE

STRATEGY

COMPLIANCE

Illegal early access Addressing the problem

ATO guidance Regulator assistance

Legacy pensions The preferred path

Merchant’s case Key learnings

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COLUMNS Investing | 20 A different source for consistent income.

Investing | 24 Opportunities in small-cap buyouts.

Strategy | 28 Whether to use the legacy pension amnesty.

Compliance | 32 ATO guidance materials on offer.

Compliance | 38 What 2025 holds for the sector.

Compliance | 42 Obligations associated with SMSF pensions.

Strategy | 46 Conditions of the residency test.

Compliance | 50 Lessons from the Merchant case.

Strategy | 54 Ensuring correct death benefit allocations to family members.

Compliance | 58 Transfer duties for farm land divestitures.

REGULARS ILLEGAL EARLY ACCESS FINDING A SOLUTION Cover story | 12

FEATURE

What’s on | 3 News | 4 News in brief | 5 SMSFA | 6 CPA | 7 IFPA | 8 CAANZ | 9 IPA | 10 Regulation round-up | 11 Super events | 62

Compensation Scheme of Last Resort | 16 Industry calls for change.

QUARTER I 2025 1

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

A regulation sandwich The main event for the sector, the SMSF Association National Conference, has been completed for another year and one of the main talking points to emerge from it in 2025 was the uncertain predicament of some trustees as to whether they have to date illegitimately been operating as wholesale investors.

The conundrum has resulted from an Australian Financial Complaints Authority (AFCA) determination that applied the strict interpretation of section 761G(6)(b) of the Corporations Act 2001 whereby a financial service provided that relates to a superannuation fund means the individual involved must be considered to be a retail investor.

As such, any SMSF trustee or member must have assets totalling at least $10 million before they can be treated as a wholesale investor.

Hard to argue with seeing the stance is pretty black and white from a legal perspective.

But the Corporations Act contains a lower threshold whereby an individual with net assets of $2.5 million and a certificate from an accountant confirming this fact could be considered as a wholesale investor.

However, an announcement from the Australian Securities and Investments Commission (ASIC) in 2014 is really what has thrown a spanner in the works. At that time, the regulator stated while it acknowledged SMSF trustees should strictly not be using this lower wholesale qualification parameter, it would not be allocating any enforcement resources to stamp out the practice.

Naturally many SMSF trustees saw this as the green light for them to use the lower wholesale investor qualification mark, but now the AFCA decision has put them in uncertain territory.

You might be asking why many trustees

would be so keen to be treated as wholesale investors and that is because it gives them the ability to access certain asset classes, such as infrastructure, not widely offered to retail investors.

But now they find themselves basically pieces of meat in a regulation sandwich due to the fact two government bodies don’t seem to be on the same page.

Worst-case scenario is if these trustees are not granted relief, they will have to divest the holdings they secured as wholesale investors and this of course will trigger capital gains tax liabilities. These won’t be insignificant if you consider a minimum investment for a retail managed fund might be $5000, whereas the qualifying amount for a wholesale fund could be $500,000.

Further, while this is obviously an SMSF problem, the impact of what comes next will not be confined to this sector. Consider what will happen to the fund managers themselves if large amounts of money are having to be exited from their products pretty much all at once. How many of them will have the liquidity to facilitate this and will the offering actually be able to survive this scenario?

If there is a positive note, it might be that the government will have to review the wholesale investor thresholds in the Corporations Act that have remained unchanged as they have no indexation measure built into them. The situation should also confirm, once and for all, how the wholesale investor rules apply to SMSF trustees.

The SMSF Association is on the case and is already urging Canberra to come up with a legislative amendment to fix the problem.

Hopefully the politicians will apply some common sense when formulating a solution as the stakes here are pretty high.

Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au Senior journalist Jason Spits Journalist Penny Pryor 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 Design Services

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QUARTER I 2025 3

NEWS

ATO won’t provide guidance distinguishing breaches

By Darin Tyson-Chan

The ATO has specifically stated it will not be looking to provide any guidance for practitioners with regard to the interaction and delineation between illegal early access of superannuation benefits and loans made from an SMSF to its members.

“We’re not looking to issue guidance to distinguish between [illegal early access and loans to members].

My message is neither of them are okay. They’re both a breach [of the

superannuation legislation],” ATO superannuation and employer obligations deputy commissioner Emma Rosenzweig told delegates during a session at the SMSF Association National Conference 2025 held in Melbourne recently.

“So no, we’re not looking at guidance to distinguish between them. We’re really advising people that both are a breach of the payment standards and so shouldn’t be encouraged.”

She also took the opportunity to update advisers and accountants on the status of a couple of draft

publications, being Practice Statement Law Administration (PSLA) 2021/D3 and Draft Taxation Determination (TD) 2021/D6, which both deal with the discretionary powers of the regulator in situations where a member receives a superannuation benefit in breach of legislative requirements.

According to Rosenzweig, the finalisation of these draft instruments has not come to fruition yet due to the ATO having to prioritise other matters.

“We definitely want to move to finalise those [products].

We have to prioritise the work

Parliament expected to address financial abuse

By Darin Tyson-Chan

The SMSF Association is expecting the next parliament to introduce measures to address the issue of financial abuse and coercive control in relation to superannuation, regardless of which party wins the coming federal election.

“Given the bipartisan support that we’ve seen in the parliament and throughout [the Parliamentary Joint Committee] inquiry, I think, regardless of which way the election goes, this would appear to be a policy priority for both sides of [politics],” SMSF Association head of policy and advocacy Tracey Scotchbrook said.

“And so we will expect to see something fairly soonish in the new parliament.”

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Scotchbrook acknowledged SMSF advisers have a role to play in combatting these issues, but identified one segment of the sector that might prove more problematic in the process and demands a greater degree of urgency.

“Our concern is [around] the unadvised [trustees]. How can we come up with a solution to help that cohort of people when they don’t have that touchpoint with a professional?” she told delegates at the recent SMSF Association National Conference 2025 held in Melbourne.

According to Scotchbrook, all practitioners involved in finding a solution for the issue must avoid any preconceived ideas as to who the victims of coercive control and financial abuse might typically be.

“Now importantly too is that we don’t make any assumptions as well about our clients and what’s happening. It was

we do in all our guidance products [and there are many of these],” she explained.

“One of the things we’ve tried to do is work with [the SMSF Association] and a number of other bodies to really help us prioritise what advice needs to go out first.

“We know NALI (non-arm’slength income) has been a very hot topic and we’ve needed to put effort into that [and] the legacy pensions work [has been the same].

“So yes, we do want to finalise those [draft products], it’s just been a matter of us prioritising some other things.”

evident from a number of people who gave evidence [at the Parliamentary Joint Committee inquiry] how highly educated some of [the victims] were. It [predominantly happens] to women and often highly educated women,” she noted.

“In fact, in one case a person’s SMSF proceeds were stolen [and they were] a financial services executive [who] was postgraduate qualified.”

She identified one area of concern the SMSF Association has stemming from recommendation nine from the inquiry. “[This recommendation is for] the government to undertake a review of the intersection between financial abuse and the superannuation system with a particular focus on SMSFs and the role that they play,” she revealed.

“It was noted in the commentary around the recommendation that SMSFs are vulnerable to manipulation by perpetrators due to their lower levels of regulatory oversight, which is based on the premise of individuals’ self-protection that gives rise to a greater risk that SMSFs can be used as vehicles for financial abuse.”

NEWS IN BRIEF

SMSFs not a problem The Australian Financial Complaints Authority (AFCA) has indicated SMSFs do not pose a regulatory problem themselves even though a significant number of the body’s Compensation Scheme of Last Resort (CSLR) and business as usual (BAU) grievances involve these types of retirement savings vehicles.

“The big thing that we’re seeing in both the CSLR complaints and BAU complaints is conflicted advice models and SMSFs. That is absolutely the main driver of our complaint volume,” AFCA senior ombudsman investment and advice Alexandra Sidoti revealed.

“We’re really observing in these situations [there is a] primary focus on trying to find clients for a product, a conflicted product, rather than the other way around where we really expect to see advisers trying to find suitable products for a particular client.

“SMSFs themselves aren’t the problem. SMSFs as a superannuation vehicle are appropriate for a lot of consumers but we really expect that when SMSFs are recommended to clients it’s very much based on their individual circumstances and considers what that particular vehicle is going to provide for those people.”

More auditors sanctioned The Australian Securities and Investments Commission (ASIC) took compliance action against 17 SMSF auditors in the latter half of 2024, removing 15 of them from operating in the sector following referrals by the ATO. The corporate regulator stated it disqualified four auditors, imposed conditions on two more and deregistered 11 others between July

and December 2024 after it identified breaches of professional obligations.

The breaches include noncompliance with auditing standards, auditor independence requirements and continuing professional development obligations, not holding a current professional indemnity insurance policy, annual statement non-compliance and ceasing to have the practical experience necessary for carrying out SMSF audits.

The specific individuals disqualified from acting as SMSF auditors were Joseph Badawy, Gareth Evans, Vjekoslav Fak and Ryan McGrath. Badawy and Fak requested ASIC reconsider its disqualification decisions, but the sanctions in both cases were confirmed.

Brent Connor and Sam Danieli had additional conditions imposed on their SMSF auditor registrations.

ASIC cancelled the SMSF auditor registrations of Evan Bekiaris, David Bromet, Judy Chu, Denis Ford, Bruce Mackley, Michael Mazza, Geoffrey Page, Anthony Richards, Michel Schoers, Wayne Tilley and Grace Wong in connection with an ATO project that identified auditors who did not have sufficient practical experience.

Legacy pension hub launched Smarter SMSF has released a number of tools and documents to assist practitioners and trustees in exiting from legacy pensions following the government’s announcement of a five-year window in which to take action.

The Legacy Pension Hub will form part of the Smarter SMSF document platform and include educational tools, calculators and documents that can be used in the commutation of market-linked pensions (MLP), lifetime complying pensions and life expectancy complying pensions, and for making reserve allocations.

New MLP commutation documents are available to order, either manually

or through a form that connects with software from administration firms BGL, Class and SuperMate.

Smarter SMSF chief executive Aaron Dunn said: “We understand that this is a complex area to navigate for professionals who may only have a few of these clients around. That’s why we’ve built a range of checklists, fact sheets and calculators to ensure that the documentation being prepared complies with the new regulations and fund’s governing rules.”

Class adds functionality Class has enhanced its software for SMSF practitioners with the addition of a title search tool and access to historical valuations and comparable sales information, which will receive input from three property data providers.

The cloud-based software provider stated it was now working with InfoTrack to provide nationwide property title searches and certificates, which would reduce the time taken to verify ownership.

At the same time, it has expanded the valuation capabilities of its software beyond CoreLogic and would now also integrate data from PropTrack to provide residential property valuations, including retrospective figures, directly from the Class platform.

Class noted its recent “Benchmark Report 2024” found direct property accounts for 21 per cent of SMSF assets on its platform and 30.2 per cent of funds, as at 30 June 2024, invested in direct property, with around two-thirds holding commercial assets and about a third holding residential property.

Class chief executive Tim Steele said the new property-focused capabilities will boost productivity by reducing the manual processes involved in searching for this information and replace it with real-time access to trusted data.

QUARTER I 2025 5

SMSFA

An optimistic future

PETER BURGESS is chief executive of the SMSF Association.

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There was a palpable mood of optimism at this year’s SMSF Association National Conference – a sense the times will suit our superannuation sector and the specialists who advise it.

To begin with there are the tell-tale statistics that reveal our super sector is in rude health, with more than $1 trillion in funds under management and growing, and near record numbers of new fund establishments, with many increasingly coming from younger individuals.

It’s not just the number of establishments. As Heffron managing director Meg Heffron reminded us at the thought-provoking Thought Leadership Breakfast, not only have wind-up rates been falling in recent years, but the age of the fund at wind-up time has been increasing.

These are all positive signs. It is little wonder delegates had an extra spring in their step over the three-day event. When coupled with the technological advancements that are helping bring down costs and making it easier for people to set up and manage their own fund, it suggests this optimism is well founded.

Their collective mood was enhanced by what happened with regulation and legislation in the past year both in terms of what was achieved and, just as importantly, what failed to pass muster.

On the latter front, no one I spoke to at the conference was grieving the fact the proposed Division 296 tax change had failed, at this stage, to get sufficient numbers on the Senate crossbench to become law.

This proposal to impose a higher tax on the earnings of super balances exceeding $3 million would have had dire consequences for the SMSF sector and the broader community. Hopefully, it will not be resurrected after the upcoming federal election.

By contrast, newly registered legacy pension amnesty regulations and the non-arm’s-length income (NALI) legislation have been two positive outcomes. With legacy pensions it highlighted how meaningful reform can be achieved when government and the industry work together. With NALI work remains to be done. But the legislation was a step in the right direction.

These factors are specifically germane to SMSFs. But there are broader themes at play that have the potential to put wind into the sails of our super sector.

As has been oft quoted, the Productivity Commission estimates $3.5 trillion will be transferred to the younger generations by 2050. It would seem to me, with their flexibility and control benefits, SMSFs are well placed to benefit from this enormous wealth transfer and specialist professionals are uniquely equipped to assist. At the very least it is an opportunity waiting to be seized.

What enhances the argument for SMSFs to be an active participant in this wealth transfer is the fact many large Australian Prudential Regulation Authorityregulated funds will face new challenges as they come to grips with this wealth transfer and member demands in retirement phase.

Retirement is a milestone event with members increasingly seeking tailored advice, whether it be estate planning, insurance, investment options or retirement income strategies – the list is endless.

Personalised retirement support can make a meaningful difference and for SMSF specialists as this is their bread and butter. They have always had a solid cohort of members in the retirement phase, seeing about half of all SMSFs are in full or part pension phase, and have thrived on delivering bespoke retirement solutions. This deep expertise, at the very least, suggests the coming wealth transfer presents a commercial opportunity for SMSF specialists.

Indeed, one of the conundrums facing our super sector is the growing demand for specialist advice, which is in inverse proportion to the number of professionals that can service it.

While some might consider this a nice problem to have, what we must be cognisant of is the fact an increasing number of SMSF trustees are going solo when setting up and operating their funds. While some trustees will have the expertise and time to do so, this trend poses a challenge for our industry on how best to bridge this unadvised trustee gap.

But while it’s an issue, it is not cause for despair. The SMSF Association’s mantra has always been that trustees better optimise their superannuation in partnership with an adviser and the fact individuals are finding their own way to our sector is positive. And I suspect many will opt to get an adviser at a later stage.

In my opinion, of greater concern is the number of disqualified trustees remaining stubbornly high, illegal early access and the fact there are still too many instances of inappropriate SMSF advice as evidenced

by Compensation Scheme of Last Resort claims. We are also seeing a resurgence in cold calling urging people to set up an SMSF with the sole purpose of acquiring a financial product.

None of these problems are insurmountable. What the SMSF sector has demonstrated over the years is its capacity to innovate, improve and, most importantly, professionally service its clients – the foundation stones explaining the optimism pervading our national conference.

CPA

Indexation in the spotlight

RICHARD WEBB is superannuation lead, policy, standards and external affairs at CPA Australia.

Superannuation is the fundamental building block of retirement planning for most Australians, representing a long-term investment that is mandated to be set aside for around 40 years. This is a long time and therefore the importance of maintaining the value of superannuation savings against the eroding effects of inflation and taxes is paramount.

The principal device to manage this is the use of indexation. However, the government’s proposal to tax earnings on total superannuation balances over $3 million has thrown the arbitrary application of indexation into stark relief. These inconsistencies in the indexation of super thresholds have raised concerns about the future financial security of retirees.

To understand the impact of inflation on superannuation, consider the spending power of a dollar today compared to 40 years ago. The cumulative effect of inflation means a dollar today has the same purchasing power as approximately $0.34 in 1985. This reduction highlights the necessity of preserving the spending power of super savings over one’s working life.

Preservation dictates members of Australian superannuation funds cannot ordinarily access the funds invested on their behalf until they reach the age of 60, or 65 if they are not retired. This mandatory preservation ensures individuals have a dedicated pool of savings for their retirement years. However, Australians are also compulsorily required to participate in the super system with limited flexibility regarding their contributions and withdrawals. This means Australians are also effectively captive to sovereign risk, with very little way to avoid legislated traps, such as taxation thresholds that have failed to be indexed.

Given this compulsion, there is arguably a duty owed by today’s policymakers to ensure the spending power of future retirement savings is preserved. Maintaining the trust and confidence of superannuation fund members will become harder as the benefits of today’s super system are whittled away for tomorrow’s participants.

This is why the introduction of the proposed Division 296 tax, which imposes an additional 15 per cent tax on the earnings of individual superannuation balances exceeding $3 million, has sparked the debate it has. While ostensibly aimed at targeting larger super accounts, the fact the threshold is not indexed exposes Australians who invest over the span

of their working lives to increased inflation and tax risk. The fact this measure was designed primarily for the collection of revenue engenders further cynicism.

To be clear, most superannuation thresholds are indexed to inflation or wages growth, ensuring they keep pace with the cost of living. For example, the concessional contributions cap is indexed to average weekly ordinary time earnings and the transfer balance cap is indexed to the Consumer Price Index.

This helps ensure contributions to super can rise with inflation.

However, not all thresholds are indexed. Ones applying to the division 293 tax, the carrying forward of unused concessional contributions, and the work test exemption are notable exceptions that have been routinely cherry-picked by politicians to justify the lack of indexation in the proposed Division 296 tax measure.

The lack of consistency in the application of indexation is often spectacularly obvious. For instance, while co-contribution thresholds designed to assist lower-income Australians to contribute more to super are indexed, the Low Income Superannuation Tax Offset (LISTO) threshold is not.

Moreover, the LISTO itself is not even aligned with the current superannuation guarantee (SG) rate of 11.5 per cent, but is instead locked to the outdated SG rate of 9 per cent. These inconsistencies raise questions about the rationale behind the selective indexation of certain thresholds and, in this case, penalise lower-income Australians.

For certain thresholds this lack of indexation will have significant intergenerational implications.

Younger Australians, who will rely on superannuation for their retirement to a significantly greater degree than older generations, are particularly vulnerable to the long-term effects of inflation risk. For example, $3 million will not represent anywhere near the spending power it has today. As awareness of this issue grows, there is a growing realisation addressing these anomalies will ensure a fairer system for future generations.

Correcting these inconsistencies by indexing all thresholds and related rates impacting the superannuation sector would add much-needed certainty to the retirement savings system. This consistency would help protect the real value of super savings, ensuring future retirees can rely on their funds for a secure and dignified retirement. It is a responsibility we owe to future working Australians to safeguard the sustainability of Australia’s world-class retirement system.

QUARTER I 2025 7

IFPA

An unfair burden on financial advisers

NATASHA PANAGIS is head of superannuation and financial services at the Institute of Financial Professionals Australia.

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When Treasury first introduced the Compensation Scheme of Last Resort (CSLR) Proposal Paper in July 2021, financial advisers were led to believe the scheme would be both fair and manageable. Treasury estimated advisers would pay an annual levy of $291, potentially rising to $458 in years when the sector cap was fully utilised. This was widely accepted as a reasonable cost to support consumer protection.

Fast forward to 2025 and the outcome is a far cry from what was promised. The anticipated fairness and manageability of the CSLR have given way to an alarming financial burden. Reports indicate the CSLR levy for financial advisers will skyrocket from $1186 in 2024/25 to over $4500 in 2025/26 – a staggering increase of over 280 per cent in just one year. Worse still, projections suggest the levy for 2026/27 will climb even higher. This overwhelming financial strain could drive many small firms to the verge of closure or even bankruptcy.

As many would know, the CSLR was designed to compensate consumers when they suffered losses due to poor or negligent financial advice. However, its flawed structure disproportionately impacts financial advisers, many of whom would have had no role in the misconduct being compensated.

Alarmingly, 92 per cent of the expected $70.1 million in claims for the third levy period stem from just two firms: Dixon Advisory Superannuation Services Limited and United Global Capital Pty Ltd. These organisations collapsed due to the failure of in-house investment products, yet financial advisers, who had no involvement, are being forced to pay the price.

Making matters worse, the government reduced its initial funding commitment from 12 months to just three, April to June 2024, further shifting the financial responsibility onto advisers. This decision was unjustified, particularly since no claims were paid during that period.

The financial advice profession has been shrinking for years and the CSLR’s escalating costs will only accelerate this trend. If advisers are forced to absorb these unsustainable levies, the consequences will be severe. Small firms will close as many advisers simply won’t be able to afford the rising costs. There will be fewer new entrants as the financial burden will discourage people from entering the profession.

And lastly, there is also the chance of higher costs for consumers as the increased cost of compliance will be passed on to clients, making financial advice even less accessible.

These outcomes directly contradict the government’s Delivering Better Financial Outcomes reforms, which aim to make financial advice more affordable. Instead of protecting consumers, the current CSLR model risks turning financial advice into a luxury service available only to the wealthy.

The government must act now to prevent further harm to financial advisers and consumers. The Institute of Financial Professionals Australia has outlined urgent reforms, starting with the government honouring its original commitment to fund the scheme’s first 12 months instead of shifting costs onto advisers.

The CSLR must not apply retrospectively to legacy complaints, like those linked to Dixon Advisory and United Global Capital, and the financial advice sector cap should be restored to $10 million, reversing its unjustified increase to $20 million. Furthermore, compensation should be limited strictly to actual financial losses and not hypothetical investment gains.

Importantly, CSLR funding must also be expanded to include managed investment schemes and other product issuers, ensuring they bear responsibility for their own product failures rather than passing the cost onto advisers. Similarly financial advisers should not be forced to cover claims from general or wholesale advice failures that fall outside their scope. We also believe stronger protections are essential, including reforms to insolvency laws to prevent corporations from liquidating subsidiaries to avoid fulfilling compensation obligations. Finally, it is crucial the Australian Securities and Investments Commission enhances its oversight and intervenes more quickly to prevent financial losses from escalating.

Without these critical changes, the CSLR will drive financial advisers out of business, limit access to financial advice and ultimately fail to serve the consumers it was meant to protect. The government must intervene to ensure it does not become a mechanism that punishes ethical financial advisers for the failures of others. If we want a strong, accessible and consumer-focused financial advice sector, we need a funding model that is reasonable, proportionate and built for long-term viability. The time for change is now.

CAANZ

A significant amount of grey

TONY NEGLINE is superannuation and financial services leader at Chartered Accountants Australia and New Zealand.

The designation as a wholesale or sophisticated investor has been a controversial topic for more than two decades.

There are many strands to this issue, including legal complexity, retail investor protections and the significant costs of providing them, the role of the Australian Securities and Investments Commission (ASIC) and that of the Australian Financial Complaints Authority (AFCA).

In terms of legal complexity, it is well recognised this area of the law is difficult to understand. There are four different financial thresholds: $500,000, $250,000 of income, $2.5 million in net assets and $10 million in assets. Each threshold applies to the same individuals or investors in different ways depending on the circumstances.

The $500,000 threshold has remained unchanged since the late 1980s, while the others have remained unchanged since early 2001.

From the time these thresholds were put in place, the economy, consumer inflation, average employee wages, median residential property prices and financial markets in general have all increased substantially.

In mid-February 2025, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) released a report into this area that did not make any specific recommendations these thresholds should be increased. Instead the committee recommended the government establish a “periodic review of the operation of the wholesale investor and client tests, and that any such mechanism include mandatory requirements for engagement and consultation with Australia’s investment industry”.

It is still early days and the government is yet to formally respond to this recommendation, but presumably any review would include an examination of these thresholds.

If an investor appropriately satisfies one of these thresholds, then, depending on what threshold applies, that individual is classed as either sophisticated or wholesale. In effect this means many of the retail investor protections cease to apply for the product they are seeking to use.

On behalf of Chartered Accountants Australia and New Zealand, I presented to the PJC last year a lengthy list of Corporations Act financial services law requirements that no longer apply when an investor is deemed to be a wholesale or sophisticated client.

In other words, product providers and advisers

who offer products to non-retail clients have a much simpler regulatory regime compared to that which applies to those servicing retail clients.

Moreover, each year it appears ASIC allocates considerably fewer resources to oversee the wholesale financial services sector than it does to supervising retail advisers (who may also be permitted to provide advice to wholesale/ sophisticated clients via their Australian financial services licence (AFSL) authorisations). For example, the 2023/24 estimated industry fund levy for retail advice licences was about $48.4 million, but only $1.9 million for licensees providing advice to wholesale clients only.

It is reasonable to conclude a smaller regulatory compliance burden almost certainly means lower operating costs and potentially lower fees for investors.

So when is an SMSF a wholesale client? It is quite clear recommending a person establish an SMSF and roll money into it is providing retail financial services.

But what about the status of the SMSF trustee as an investor in their own right? The law is far from crystal clear in these circumstances.

For many years, ASIC said in its view an SMSF had to have at least $10 million in assets to be considered a wholesale investor. However, in late 2014 it admitted the law was unclear with regard to this matter and confirmed it would not take compliance action if a product provider or adviser relied on the $250,000 income and/or $2.5 million in net assets thresholds to determine an SMSF was a wholesale client for a non-superannuation product.

ASIC did confirm, even with this revised approach, it would still be open to an SMSF trustee who had been deemed to be a wholesale investor using the lower thresholds to argue before a court they did not have $10 million in assets and therefore should have received all retail client protections and suitable products. This view remains unchanged.

AFCA has taken a different view. It says the law is clear and that is the $10 million rule applies to SMSF trustees.

The authority can review complaints from investors who are retail clients or are classed as wholesale clients for advice or financial products provided by AFSL holders that provide services to retail or wholesale clients as such licensees must be AFCA members. It can also review decisions of wholesale licensees who voluntarily elect to be AFCA members.

QUARTER I 2025 9

IPA

The Div 296 controversy continues

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

Since late 2023, the federal government has been relentless in its quest to legislate its controversial Division 296 tax on individuals’ super fund earnings on total superannuation balances of $3 million or more. However, the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 has had a tumultuous journey through parliament. It took more than 10 months to pass the House of Representatives and it has now been stalled in the Senate since last October. The opposition and the tax industry have objected to the measures as a whole, especially the government’s refusal to budge on particularly unfair elements.

Taxing unrealised gains a dangerous precedent One fundamental tenet of Australian taxation law is income and capital gains should only be taxed once ‘earned’ or realised in some form. Limited exceptions to combat tax mischief generally require a change in ownership.

The Division 296 tax calculation methodology is intrinsically unfair for several reasons.

An individual’s taxable superannuation earnings represents the excess of their total year-end super balances over the $3 million threshold. Thereby the taxable amount captures increases in the value of assets of which the fund has not disposed and, even worse, also assets that decreased in value.

Taxable amounts are calculated on a pointin-time, being 30 June, basis with no averaging mechanism to recognise market movements during the year. This may be particularly punitive for those with aggressive investment strategies as short-term volatility may mean the 30 June total balance is unrepresentative of the year. While realised gains are also calculated on a point-in-time basis, the taxpayer has generally received consideration for a transfer of ownership – receipt from which capital gains tax can be paid, which leads to the next point.

The payment conundrum The individual will be liable for the tax. If they have insufficient cash, they may be forced to sell assets quickly to pay the liability. If they do not hold enough liquid assets, then they may be forced to sell illiquid and valuable assets, such as the family farm, investment property or business assets. A

10 selfmanagedsuper

high superannuation balance does not equate to a large holding of liquid assets or disposable income outside of super and certainly not on short notice.

If the individual cannot, or chooses not to, pay the tax from other sources, the law will allow them to withdraw the amount from their superannuation accounts. While this may solve the immediate tax payment problem, doing so would be contrary and detrimental to their lawful efforts to save for retirement through super. The restrictive conditions of release rules exist to protect these retirement savings from being raided for other purposes, which may on their own be necessities. Yet the payment of a poorly designed tax will be considered to be an appropriate use of superannuation savings.

In addition, the taxpayer or fund may be forced to sell an asset at a time of depressed market values to meet payment deadlines. More broadly, this taxation of unrealised gains may disincentivise individuals from directing savings into superannuation at a time when the government should be encouraging Australians to prepare to self-fund their retirement.

In fact, parliament very recently legislated that the objective of superannuation is to “preserve savings to deliver income for a dignified retirement … in an equitable and sustainable way”.

Bracket creep: the threshold indexation After all of the government’s hard work in legislating changes to individual tax rates to combat bracket creep for salaries and wages, its refusal to index the threshold will create a bracket creep issue whereby over time taxpayers will become subject to the impost due to inflation even if their total super balance is not worth $3 million in today’s money.

The Reserve Bank of Australia’s inflation calculator shows a 71.4 per cent inflationary change in the 20 years to 2023/24. For someone in their 20s, 30s or 40s today, $3 million when they near retirement might be equal to $1 million, $1.5 million or $1.75 million now. The threshold should be indexed.

Superannuation is designed for long-term saving and policy should reflect long-term impacts.

Where to from here?

The bill will lapse when the election is called. It will remain in political limbo for a while with both sides unlikely to budge on their respective position. If a re-elected Labor government reintroduces the bill, it needs to at a minimum remove taxation of unrealised gains and allow for indexation.

REGULATION ROUND-UP

NICHOLAS ALI is SMSF technical services director at NEO Super.

AAT replaced by ART The Administrative Appeals Tribunal (AAT) has been replaced by a new federal administrative review body, the Administrative Review Tribunal (ART), effective 14 October 2024.

The AAT reviewed decisions made by government agencies and played an important role in the SMSF space, with such decisions as Merchant v Commissioner of Taxation [2024] AATA 1102, where trustee disqualification by the ATO was set aside while upholding contraventions of the Superannuation Industry (Supervision) Act. The reasoning for the overhaul was to make the administrative review process more transparent, efficient and user-friendly.

Changes include the introduction of a merit-based system for appointing ART members aimed at boosting the tribunal’s independence and decision-making quality. Additional funding and appointments will also be made to reduce the current backlog of cases.

Penalty unit increase As of 7 November 2024, the commonwealth penalty unit has increased from $313 to $330.

A penalty unit is used to decide the amount a fine will be for certain compliance breaches. The ATO levies administrative penalties on trustees (individual and corporate) if they contravene provisions of the Superannuation Industry (Supervision) Act.

Updated NALI and contribution guidance The ATO released two updated pieces of draft guidance regarding non-arm’s-length income (NALI) and non-arm’s-length expenditure (NALE) for industry consultation in late November 2024: • Law Companion Ruling (LCR) 2021/2DC – Nonarm’s-length income – expenditure incurred under a non-arm’s-length arrangement, and • Draft Taxation Ruling (TR) 2010/1DC2 – Income tax: superannuation contributions.

While these drafts take account of industry feedback, issues remain, including the nexus between specific NALE and the tainting of an asset with NALI disproportionate to the indiscretion.

Feedback on the draft LCR and TR closed on 24 January.

Objective of superannuation bill passed The Superannuation (Objective) Bill 2023 has finally passed, receiving royal assent on 10 December 2024.

The law now defines the objective of superannuation as being “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.

The intent of the bill is to require policymakers to demonstrate to the parliament, and Australians, how future changes to superannuation law are consistent with this legislated objective.

The hope is that with the objective enshrined in law, superannuation legislation will no longer be an ideological football to be punted in line with the political party in power.

Interestingly, the bill reinforces the notion held by the

Labor Party that superannuation should be preserved for retirement and any future policies that undermine this preservation goal, such as the coalition policy of allowing access to super for first-home buyers, are contrary to the purpose of super.

Legacy pension changes become law Effective 7 December 2024, the Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024 have now become law.

These regulations mean: • individuals can exit legacy retirement income streams for a five-year amnesty period, • reserves associated with the above-mentioned income streams can be allocated to the recipient’s member balance without counting against the contributions caps, and • reserves in an SMSF created for other reasons can be allocated to a member and will count against their non-concessional contributions cap, rather than their concessional cap. This includes the ability to use the bring-forward non-concessional provisions.

However, the total super balance rules still apply in relation to the ability to make non-concessional contributions.

Reforms to adviser education pathway The government has proposed reforms to the educational pathway to become a financial adviser.

Under the measure, the proposed education standard will centre on a new requirement to hold a bachelor’s degree or higher in any discipline, with prospective advisers needing to meet minimum study requirements in relevant financial concepts such as finance, economics or accounting. Prospective advisers will also need to complete financial advice subjects covering ethics, legal and regulatory obligations, consumer behaviour and the financial advice process.

The amendments attempt to address the decline in financial adviser numbers, particularly new entrants, in part due to the current system used to recognise existing qualifications and experience.

Division 296 bill fizzles in the Senate The controversial Division 296 tax is set to be taken to the federal election, given the limited sitting days before the poll and the fact the government does not have the numbers in the upper chamber to pass the bill.

An election must be held no later than 17 May and there must be least 33 days from the date the election is called until polling day. That means the latest the election can be called is mid-April. Once Prime Minister Anthony Albanese calls an election, the House of Representatives is dissolved and bills before both houses expire. This means any remaining sitting days for parliament are terminated.

The only other sitting days before the election are seven days in May, which will terminate given election campaigning. So, in all likelihood, the Division 296 tax will not be put to the Senate this parliamentary session and will be a policy initiative the current government will take to the election.

QUARTER I 2025 11

FEATURE

ILLEGAL EARLY ACCESS Finding a practical solution

The problem of illegal early access to retirement savings via SMSFs has the potential to paint a target on the sector that will attract undeserved attention.

Currently, few are willing to blame it for the actions of those on the fringes and Jason Spits writes now is the time to get on the front foot to tackle the problem.

12 selfmanagedsuper

FEATURE ILLEGAL EARLY ACCESS

At this year’s SMSF Association National Conference, ATO superannuation and employer obligations deputy commissioner Emma Rosenzweig released the latest set of figures gathered by the regulator in relation to the problem of illegal early access of super involving the sector.

The numbers are not inconsequential, with the regulator estimating $251.1 million left the super system via illegal early access in the 2022 financial year and a further $231.7 million was accessed through loans to members from an SMSF. During the same event last year, Rosenzweig revealed for the 2021 financial year, $256 million had been accessed illegally, while prohibited loans for the same period totalled $200 million, although 75 per cent of those were repaid. Further, she noted $381 million had been exited illegitimately in the 2020 income year.

These figures would have been higher had it not been for the ATO’s proactive new registrant program, which started in 2019 and prevented a further $295 million illegally exiting the super system during the 2020 and 2021 financial years.

The regulator indicated in late 2023 it would be releasing these estimates as part of a new emphasis on the problem of illegal early access, stating at the time this form of release was the leading area of concern in its oversight of the SMSF sector and the number of funds at risk of breaching access rules was growing.

ATO SMSF risk and safety assistant commissioner Justin Micale said at that time: “When someone does something wrong with their SMSF, it invariably

involves them accessing some or all their retirement savings before meeting a condition of release.

“Far too regularly, we identify new trustees who enter the system with the sole intent of taking all their retirement savings before they’re entitled to.”

Yet it is not a recent phenomenon. Past selfmanagedsuper coverage of this issue shows it has been an ongoing problem for many years.

For example, in 2019, the ATO prevented $125 million from exiting super via SMSFs, as well as halting the movement of $126 million in 2020 and $170 million in 2021.

From this ATO data it is clear an alarming trend has emerged and is being perpetuated. As such, the regulator’s concerns are shared by the SMSF sector, which does not want to see it painted with a broad brush for the failings of a few.

Defining the issue Heffron managing director Meg Heffron says there needs to be a clear definition of what is illegal early access as there are other events and triggers that also result in money leaving the super system early via an SMSF. “There is a tendency to lump illegal early access into one basket when there are actually four issues taking place.

The first is scams where dodgy people use SMSFs to steal super. They can’t steal someone’s house, but they can get them to access their retirement savings,” Heffron notes.

“The second is ill-advised products with conflicts of interest that should not

exist but use SMSFs as a vehicle. The third is dishonest people who know they can use their fund for illegal access and the last is people who engage in it accidentally.

“The ATO’s estimates exclude scams because they are theft and not illegal early access, as well as product failure because the underlying assets are still in the system but may have just been reduced to zero. Its focus is on dishonest and accidental access and the solutions for these problems differ.”

SMSF Association head of policy and advocacy Tracey Scotchbrook suggests further context should be overlaid on illegal early access breaches given the ATO has routinely stated around 97 per cent of funds are compliant each year.

“We don’t have much visibility of how much of illegal early access is dishonest, but we suspect most of it is inadvertent and stems from not understanding the rules or the individuals involved have been given some misinformation they have acted on,” Scotchbrook points out.

“The biggest problem is the lack of access individuals have to advice. We are hearing of people with concerns around the lack of service or want more transparency around how their retirement savings are being invested than they are getting from their APRA (Australian Prudential Regulation Authority)regulated fund. Some establish an SMSF with a false confidence.

“It’s a classic case of people not knowing what they don’t know and so they set up an SMSF not thinking they Continued on next page

“We don’t have much visibility of how much of illegal early access is dishonest, but we suspect most of it is inadvertent and stems from not understanding the rules or the individuals involved have been given some misinformation they have acted on.”

–Tracey Scotchbrook, SMSF Association

QUARTER I 2025 13

FEATURE ILLEGAL EARLY ACCESS

“We know there are two types of intentional behaviour with illegal early access: people who are strapped for cash and wanting money to improve their lifestyle and dishonest people are helping individuals go through the wrong door.”

– Shelley Banton, ASF Audits Continued from previous page

need advice.

“Alongside this there seems to be a cottage industry emerging that is specifically targeting SMSFs in order to sell their financial products and they are separate issues, but causing a similar problem.”

Low barriers to exit Despite the sophistication and complexity of SMSFs, the barriers to entry are at the same level as those with regard to retirement savings withdrawals, notes Super Sphere director Belinda Aisbett.

“SMSFs present an easier target compared to APRA-regulated funds and with an SMSF the only obstacle for a trustee or a promoter is their ethics or conscience because the trustees control the purse strings,” Aisbett explains, adding this is why loans are part of the wider illegal early access picture.

“We saw loans to members used to prop up a business when interest rates went up. Was there mischief? Yes, because it was a prohibited loan even though it was paid back and there were no dishonest intentions.

“There are deliberate loans as well we have seen in the past where the money is used for personal needs and promoters are successful because the trustees see the SMSF balance as ‘my money’.”

Heffron observes this mindset may have been lurking in the background, but the release of superannuation money for hardship purposes during the COVID-19 pandemic brought it to the fore, where it still remains for some people.

14 selfmanagedsuper

“Perhaps the release of super during COVID-19 created a germ of an idea that people can access their super early. Did it shift their mindset enough that they now see SMSFs as a way to access their savings in this manner?” she asks.

“If you look at some of the reasons for people accessing their super on compassionate grounds, some are absolutely genuine, but in others you could argue it is illegal early access by another name. You can also access super to buy a first residence, but it is very hard to do if you are at risk of losing your home.

“Are our policy settings on this part of super wrong and you have to question whether they dangle a carrot in front of people.”

Raising the bar If the low barrier to exit is an issue, should there be more hurdles for trustees to jump over or should some form of mandatory advice be inserted into any process where money is leaving a fund?

ASF Audits head of education Shelley Banton says changing the dynamics of the control trustees have over their SMSFs may be a “throwing the baby out with the bathwater” solution that could create more problems.

“SMSFs are a tool and any regulated environment will always attract elements of nefarious behaviour. We know there are two types of intentional behaviour with illegal early access: people who are strapped for cash and wanting money to improve their lifestyle and dishonest people are helping individuals go through the wrong door,” Banton

suggests.

“In trying to stop this with more regulation there is the danger for people who are doing the right thing under the superannuation laws being prevented from acting in a particular way.”

According to Banton, the ATO already emphasises the obligation of trustees to obey the law, but she questions whether adding education courses or requirements to seek advice when setting up an SMSF would prevent illegal early access.

“These things are doable, but would the ATO be risk-rating those who provide the advice? What about SMSF trustees who don’t want or need advice and what additional time would these measures add to the establishment process?” she says.

“Advisers are already complaining that it can take up to 56 days to have an SMSF registered on Super Fund Lookup and as auditors we know illegal early access happens after the set-up is complete.”

Pushing the responsibility to prevent illegal early access onto advisers may go some way to dealing with it, Scotchbrook notes, but they already operate under a strict code of ethics.

“Financial advisers have already got a code of ethics enshrined in law where they have obligations to a client to make sure they meet a legislative best interest duty, but also an ethical best interest duty. There are obligations to make sure any strategy or advice they are giving is appropriate to clients and they understand it,” she says.

Continued on next page

FEATURE

Continued from previous page

“Tax agents are also in the front line and have a great level of responsibility with clients. They can state while they can’t provide advice, they could perhaps refuse to establish a fund where it’s not appropriate and make the clients aware of their obligations.”

Heffron says if the problem occurs under the trustee’s watch, then instead of more education about what their obligations are, they should be made very aware of what happens to those who succumb to non-compliant behaviour.

“Communicating all the negative consequences to trustees when they set up a fund would have an impact.

One of the things we do is slow down trustees during the application process so we have an opportunity to give the information that if they take money out illegally, they will be found, and severely punished,” she reveals.

“Slowing the process down and making sure clients get that message, if done well and consistently, will have an impact in weeding out the people who are inclined to be dishonest.

“It won’t stop the people who are really committed to taking their money out illegally, but it might also educate the people who may do it accidentally.”

A talking point at the industry body’s conference was the fact illegal early access is not just an SMSF issue, but a wider financial services problem and APRA-regulated funds, with their scale and reach, should also be working to prevent the early exit of money from superannuation.

“APRA-regulated funds can educate members about promoters working to get people to roll out to an SMSF to engage in early access,” Aisbett acknowledges.

“People targeted by promoters are usually not on the ATO website checking for alerts and education by large funds may give them a reason to pause and question why they have been approached by these people.”

The structure is not the problem While it might sound strange asking APRA-regulated funds to join in an awareness program for an issue predominantly affecting SMSFs, a good reason for their involvement is the prevention of high member balance leakage.

Scotchbrook believes the superannuation sector is aware of the dangers of illegal early access and the ATO is conducting in-depth reviews of every new fund and its trustees before approving its establishment. Work is also being undertaken by the Australian Banking Association to identify and prevent fraudulent transactions involving superannuation.

Banton points out these collective actions push back against the view SMSFs are inherently risky and recognise illegal early access is a whole-of-industry issue.

“If you flip the argument over, we have recently seen some APRA-regulated funds in trouble for not paying death benefits, but no one is saying they are all doing that and there is a widespread problem.

The same can be said about SMSFs because the ATO has told us most do the right thing,” she highlights.

“Everyone wants to see this behaviour stamped out, but it is not reflective of the SMSF landscape.”

This fact was confirmed by Australian Financial Complaints Authority investment and advice senior ombudsman Alexandra Sidoti during a recent member forum.

“The problem we’re really seeing is the intersection between the use of SMSFs to get people in superannuation funds invested in a conflicted product of the financial firm,” Sidoti said.

“What we’re seeing here is advice models where they recommend people establish an SMSF so that those superannuation monies become available for investment in their conflicted in-house products.”

Heffron agrees while illegal early access may not be the fault of the SMSFs, it is still a sector problem and there is a need to acknowledge the risk that comes when trustees and members control their own superannuation fund.

“While we are not responsible for it, we need to care about it and do everything we can to work with other parts of the industry now to solve the problem,” she recommends.

“As such, we should be the cheerleaders for better control of dodgy products which exploit SMSFs and we should be supportive of the ATO slowing down the process of setting up a new fund because it is using that time to weed out people who are establishing it for the wrong reasons.

“While we may hate it personally in our businesses, we should be the cheerleaders for that type of preventative action.”

One of the things we do is slow down trustees during the application process so we have an opportunity to give the information that if they take money out illegally,they will be found, and severely punished.”

– Meg Heffron, Heffron

QUARTER I 2025 15

FEATURE

In January, the levy advisers will have to pay for the Compensation Scheme of Last Resort for the 2026 financial year was announced and it highlighted one of the many problems identified with the measure. Penny Pryor examines the associated industry concerns and the changes needed to make the framework workable.

16 selfmanagedsuper

FEATURE AN UNWORKABLE SCHEME

The Compensation Scheme of Last Resort (CSLR) levy for the 2026 financial year was announced a few months ago, coming in at $77.98 million in total, of which $70.1 million is for financial advice. The amount may not have been a surprise, given expectations recent high-profile collapses had pushed the levy well over the $20 million cap, but it is still shocking.

No one in the industry disputes the existence or the unfortunate necessity of a compensation scheme for investors, however, many in the advice profession have understandable concerns around how the levy will be paid and what this will mean for the industry.

When announcing the estimate, the CSLR reiterated the amount above $20 million for the financial advice sub-sector required funding via a special levy, with formal notification of this requirement to be made to the financial services minister early in the 2026 financial year.

Consistent with the legislation, the CSLR will complete a revised levy estimate for 2025/26.

The direct costs In its initial estimate for 2025/26, the CSLR outlines that 92 per cent of the expected claims paid for that year are from two failed firms – Dixon Advisory Superannuation Services and United Global Capital (UGC).

More than half of the $70.1 million estimate for the 2026 income year, or $45.6 million, is related to claims expected against UGC, with an average selected outcome amount of $145,000 after applying the $150,000 cap.

The Financial Advice Association Australia

Table 1 $

2024/25

2025/26

2025/27

Total

Total cost

18,562,190

70,110,280

123,329,811

212,002,281

Standard levy

1186

1295

1295

3776

Potential special levy

-

3275

6765

10,040

Total levy

1186

4470

8060

13,816

(FAAA) in its submission to Treasury on the “Consultation – Post-Implementation Review: Compensation Scheme of Last Resort”noted the large scale of the expected UGC claims may have been somewhat unexpected, while the Dixon Advisory cases were less than predicted.

The total expected cost of the UGC claims is $48.5 million, meaning the majority of it will be born in 2025/26.

The FAAA has anticipated a potential cost in 2026/27 of $123.3 million based on careful analysis of the number of Dixon Advisory cases to be dealt with and the expected ramp up in the 2027 financial year. Its submission also points out “a further financial firm collapse could lead to a substantial increase in costs in the 2025/26 and 2026/27 years”.

FAAA policy, advocacy and standards general manager Phil Anderson says the estimate per adviser (not advice business) outlined in Table 1 is based on the 15,300

advisers who have been used for the purposes of the Australian Securities and Investments Commission funding levy.

“If you’ve got six or seven advisers, you’re talking about over $100,000,” Anderson notes.

“If you’ve employed a few younger advisers, including professional-year students that are on the financial adviser register, as well as a business owner, you can be facing a very, very large bill for this.”

“We are talking about $212 million across the first three years, $193 million for the next two years and an overall cost of more than $13,500 for each financial adviser. This is an unreasonable, unsustainable amount and the scheme has to be fixed. It has to be fixed, not just to deal with what happens in 25/26 and 26/27, it has to be fixed in a way that ensures it’s sustainable in the future.

“There’s nothing stopping further collapses happening in the future and it’s all Continued on next page

“We already know there are issues with the cost of advice and the government is trying looking at that and at measures to reduce the cost of advice. And this is going the other way. This is a measure that will increase the cost of advice.”

– Peter Burgess, SMSF Association

QUARTER I 2025 17

FEATURE AN UNWORKABLE SCHEME Continued from previous page

going to flow to financial advice unless there is an adequate solution.”

The financial services industry is mostly united in its condemnation of the scheme and is hopeful the reviews will result in some important changes.

Financial Services Council (FSC) chief executive Blake Briggs also believes the scheme is unsustainable in its current form.

“For a significant proportion of existing cases the compensation being paid by the scheme is for hypothetical capital gains, not just the losses a consumer has incurred. In addition, the existing scheme also carries disproportionately high administration costs and includes legacy cases,” Briggs points out.

The indirect costs Unfortunately, the flow-on effects of the levy will be an increase in the cost of financial advice for Australians as advisers and their businesses will be required to raise their fees.

“We already know there are issues with the cost of advice and the government is trying looking at that and at measures to reduce the cost of advice. And this is going the other way. This is a measure that will increase the cost of advice,” SMSF Association chief executive Peter Burgess suggests.

Sonas Wealth director Liam Shorte estimates it currently costs close to $120,000 just to open the door to see a financial planner with a decent licensee.

“We are being crippled by additional costs like this. I am now turning people away that I would have helped over the last 20 years because I know I cannot charge them

enough to cover my basic costs. I work in the suburbs and these mum and dads were my best clients in the past where I could make a big difference and charge a fair fee acceptable to all, but that time has gone,” Shorte notes.

He is directly assisting at least two clients that were caught up in the UGC failure.

Here clients were urged to establish an SMSF and then invest as much as possible of the rolled over funds into the related Global Capital Property Fund. That fund, at the time of being placed in liquidation, had 15 individual property development investments, only one of which had been completed.

“The two people I am helping have invested over $400,000 (90 per cent of their super) and $200,000 (40 per cent of their super) respectively via UGC in this one fund,” Shorte reveals.

Advice accountability versus product liability Burgess says it’s important any changes to the system apportion fault to the right parties and that involves looking at the insolvency laws and making sure companies can’t walk away from their liability.

“We’ve seen situations where parent companies have just closed down their subsidiaries, put them into administration and then they’ve avoided any liability. And that’s not right either,” he stresses.

“Advisers are being asked to compensate clients when there’s been a product failure.

We’ve always maintained that managed investment schemes should be part of this.

So they should be a sub-sector, meaning if there is a failure of the managed investment scheme, that sector is called on to compensate victims. It shouldn’t be left with

the financial advice sector to fund damages for those situations.”

Managed investments are not part of the CSLR so there is little point in pursuing any product responsibility as these structures cannot be drawn into the scheme’s regime.

“Where advice is involved and there’s a breach of the best interest duty, the law, according to the Australian Financial Complaints Authority (AFCA), says everything will be attributed to the financial advice business and there’s no mechanism to share that or apportion it to the product provider. So we’ve got some fundamental underlying legal issues that do not allow for the fair sharing of costs,” Anderson warns.

The FSC, which includes product providers in its membership, is a little more cautious around apportioning blame to product providers.

“Efforts to expand the CSLR to products would have the effect of underwriting investment losses. This would cause greater cost for the industry and financial advisers over time, establish unacceptable moral hazard and ignore that in every CSLR claim there was an existing advice relationship,” Briggs explains.

There are also other issues that the current system does not take into account.

For example, Shorte highlights the Dixon scenario saw over 30 advisers moved to E&P Financial.

“Many clients burnt by them moved with them as the blame was put on Dixons the company and not on the individual advisers who made large sums recommending those in-house products. No adviser who knowingly recommends collapsed products should be able to walk away with such ease and no firm should be able to abandon its Continued on next page

“We are being crippled by additional costs like this. I am now turning people away that I would have helped over the last 20 years because I know I cannot charge them enough to cover my basic costs.”

– Liam Shorte, Sonas Wealth

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FEATURE

responsibilities morally, even if it is legally possible,” he says.

He knows of one paraplanner who had worked with UGC, but as he progressed through his studies, began to have serious doubts about the offer and left the company despite the difficulty of finding work during the COVID pandemic in Melbourne.

“We are all now picking up the CSLR levy and increased professional indemnity insurance costs, while the advisers and firms involved in the phoenix schemes are without any care in the world,” he points out.

poor financial advice,” Briggs says.

Shorte suggests removing the ‘but for’ provisions may help, but until the promoters are prevented from walking away without recompense, the burden will always fall on the rest of the industry.

“I am now seeing the rise in private credit funds which are very similar to the UGC Global Capital Property Fund in terms of being property development funding vehicles and fear this will be a neverending circle of risky investments failing – investments that would never be on our approved product list, but still we pick up the cost of their failure,” he says.

The unfair ‘but for’ provisions Another egregious element of the scheme raising questions around fairness is the ‘but for’ provisions, which allow for compensation for investors who may not have incurred a capital loss, but who would have been better off in another investment if they had not received inappropriate advice.

A benchmark industry return is used to calculate what is essentially the opportunity cost related to the investment in the failed product.

“Under the scheme, even though you may not have incurred a loss, you were compensated for the fact your return was not as good as what it should have been without the advice involved. Now that to us is not a scheme of last resort,” Burgess stipulates.

The FSC agrees a scheme that compensates unrealised capital gains and is subject to disproportionately high administrative costs is not the one for which industry signed up.

“The CSLR should be true to label and genuinely a ‘last resort’ option for consumers who have lost money due to

Where to from here?

The FAAA is seeking to amend the ‘nonapportionable claims’ classification under the proportionate liability statutes to allow AFCA to differentiate between the liability of complaints involving financial product failures and those regarding financial advice matters. This would include circumstances involving potential breaches of the best interest duty and failure to give appropriate advice obligations.

The industry body also wants greater certainty on what the minister will do in the event of a special levy being required and is also calling to limit the exposure of the financial sector to the original sector cap of $10 million instead of the revised $20 million. As it stands, the financial services minister has ultimate discretion in how a special levy is apportioned and will announce this come July.

According to Burgess, the SMSF Association’s biggest issue with the scheme is the ‘but for’ provisions, a view shared by most of the industry, and he is optimistic the government has been listening to its complaints.

Continued from previous page

“It was encouraging to hear both the minister, the shadow minister and the assistant shadow minister agree on that point – that they felt this ‘but for’ approach needed to be looked at. So it looks as if we’ve got bipartisan support for a change in that area,” he recognises.

The FSC also has the ‘but for’ provisions, as well as the scheme’s high administration costs, on its radar.

“There are practical avenues the Treasury review of the CSLR can explore to put the scheme on a more sustainable footing.

These include ensuring compensation is strictly by reference to a consumer’s actual capital losses adjusted for the consumer price index, and reducing the scheme’s high administrative costs,” Briggs suggests.

Perhaps the last word should go to Shorte, who is also chair of the SMSF Association’s national membership committee. He proposes some simple but concrete measures that would have the effect of nipping these kinds of disasters in the bud.

These include the prevention of onestop shops of related parties providing cold calling, limited advice, fund setup, accounting admin and investment management. In addition, he is calling for having the ATO question every new SMSF trustee on why their fund is being set up and who recommended it.

He also suggests making all new offers report on the inflows to their funds and sample some of the investors on a quarterly basis to identify potential product collapses before they happen.

The responsibilities for these measures would run across different regulators, but if they can protect the retirement savings of Australians, they should be worth examining.

“If you’ve employed a few younger advisers, including professional-year students that are on the financial adviser register, as well as a business owner, you can be facing a very, very large bill for this.”

– Phil Anderson, Financial Advice Association Australia

QUARTER I 2025 19

INVESTING

Prime time for listed alternatives

Investors requiring a consistent source of income may no longer be served well by traditional asset classes. Irene Goh argues the inclusion of listed alternatives in a portfolio could provide a solution in a changing investment landscape.

IRENE GOH is deputy head of multiasset investment solutions at abrdn.

As we look at 2025, SMSF members face a challenging macroeconomic landscape. Rising inflation, geopolitical tensions and the lingering effects of global monetary tightening have created an environment of heightened volatility and uncertainty. For retirees, this poses a critical challenge: how to generate stable and repeatable income in a world where traditional assets like bonds and equities may not deliver as they once did.

In this context, a diversified, multi-asset approach to income generation is no longer a luxury – it’s a necessity.

By combining traditional and liquid alternative assets, investors can navigate market volatility and deliver consistent returns. There are real challenges facing Australian retirees and listed alternative assets should be considered for income generation purposes.

The challenges for retirees Australia’s retirement system is one of the best in the world, but it is not immune to global economic headwinds. Retirees today face three key challenges: 1. Market volatility: The post-pandemic era has been marked by unpredictable markets, with equities and bonds experiencing sharp swings. In 2025, this volatility is expected to persist as central banks grapple with inflation and global growth remains uneven.

2. Low yields on traditional assets: With interest rates likely to remain elevated but volatile, traditional fixed-income investments may not provide the income levels retirees need. Equities, while offering growth potential, come with higher risk and uncertainty.

20 selfmanagedsuper

3. Longevity risk: Australians are living longer, which means retirement savings must last longer. This places greater pressure on SMSF trustees and members to generate sustainable income without eroding their capital.

For retirees, the stakes are high. Without a reliable income stream, they risk outliving their savings or being forced to make significant lifestyle compromises.

The need for stable income Stable income is the lifeblood of any retirement portfolio. It provides the cash flow needed to cover living expenses, reduces the need to sell assets during market downturns and offers peace of mind in uncertain times. However, generating stable income in a volatile environment requires a departure from traditional asset allocation strategies.

This is where a multi-asset approach shines. By diversifying across a range of income-generating assets, investors can reduce reliance on any single source of income and mitigate the risks associated with market volatility.

The changing investment landscape For most of the past decade, markets have been operating alongside falling interest rates and low inflation. This environment favoured the traditional 60/40 portfolio, which is a 60 per cent allocation to Continued on next page

Australians are living longer, which means retirement savings must last longer. This places greater pressure on SMSF trustees and members to generate sustainable income without eroding their capital.

Continued from previous page

equities for growth and a 40 per cent allocation to bonds for diversification. Bonds typically acted as a hedge during periods of market stress as they tended to move inversely to equities.

However, this dynamic changed dramatically in 2022. Central banks rapidly raised interest rates to combat soaring inflation, leading to a rare scenario where both equities and bonds fell simultaneously. This breakdown in the traditional negative correlation between equities and bonds left investors exposed to significant losses, challenging the efficacy of the 60/40 portfolio.

In this new era of volatility, investors are seeking better ways to construct resilient portfolios, ones that can generate attractive long-term returns while providing stability during periods of market or economic upheaval. Diversifying across a broad range of assets, including traditional and alternative classes, is key to achieving this goal.

Graph 1 shows how listed alternative assets have performed compared to more traditional asset classes over a five-year period.

Graph 2 illustrates the effectiveness of

Graph 1: Five-year return estimates (% pa) 14% 12.0% 12% 10.3% 10% 8.4%

8.4%

8.2%

7.6%

8%

6.4%

6.1%

6%

5.0%

4.6% 3.3%

4%

2%

0%

In

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ru ct

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al

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et

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Source: abrdn, December 2024.

Graph 2 Average income level from traditional assets over past 5 years

%

Average income level from listed alternative over past 5 years

8

6

4

2

0 Australian Dividend Equity

Investment Grade

High Yield

EMD

Renewable Infrastructure

Social Infrastructure

Social Housing

Shipping

Healthcare Royalties

Source: abrdn, December 2024.

Continued on next page

QUARTER I 2025 21

INVESTING

Figure 1 Providers of capital

Fund managers and specialist asset operator

End users

Assets Dividens

Lease payments

Equity investment via closed end fund

Power purchase agreement

Interest

Lease payments

Project debt

e-commerce platform

Energy company

Train operator

Lease payments

Continued from previous page

listed alternatives for income generation in comparison to traditional asset classes.

The case for listed alternatives We believe investors can enhance their portfolios by including fundamentally attractive long-term investments with differentiated risk and return drivers. Over the past decade, we’ve seen significant growth in the availability of alternative assets in liquid, daily-traded forms. These listed alternative assets provide retail investors with access to incomegenerating assets like real estate, infrastructure and private debt without the need for direct ownership. Through pooled investments run by fund managers and specialist operators, these assets generate income via dividends, interest payments and lease agreements with end users. This approach offers diversification and stable income streams, particularly in volatile market conditions (see Figure 1).

Diversifying into such assets offers several benefits for SMSFs: 1. Diversification across asset classes – investing not only in traditional stocks and bonds, but also in listed alternatives such as real estate, infrastructure, private equity, private debt and special opportunities like royalties and asset-backed securities can help reduce risk and enhance returns.

2. Stable income generation – by tapping into a range of income sources, retirees can

22 selfmanagedsuper

benefit from more consistent cash flow, even in volatile markets.

3. Risk management – a more diversified approach helps mitigate the impact of market downturns, providing a smoother investment journey for retirees.

4. Access to alternative assets – many alternative assets, such as infrastructure and private debt, can be accessed in liquid fashion nowadays. This provides a convenient way for investors to gain exposure to these assets, which can offer attractive risk-adjusted returns.

Assets set to perform well in 2025 Looking ahead, we believe several asset classes are expected to perform well and can complement investors’ asset allocation in an effort to deliver more stable income. These include: 1. Infrastructure – assets, such as toll roads, utilities and renewable infrastructure, offer stable, inflation-linked income streams. They are particularly attractive in an environment of moderate inflation and economic uncertainty.

2. Real estate – listed real estate investments can provide steady income and potential capital appreciation, especially in sectors like healthcare and logistics.

3. Private debt – with banks reducing lending activity, private debt has emerged as a key source of financing for businesses. It offers higher yields than traditional fixed income

In this new era of volatility, investors are seeking better ways to construct resilient portfolios, ones that can generate attractive long-term returns while providing stability during periods of market or economic upheaval. with lower volatility.

4. Asset-backed securities – these securities, backed by tangible assets like mortgages or receivables, provide attractive risk-adjusted returns and diversification benefits.

5. Royalties and special opportunities – investments in royalties, such as from intellectual property, and other niche opportunities can deliver uncorrelated returns, enhancing portfolio resilience.

Final thoughts Australian retirees must confront a challenging investment landscape. Market volatility, low yields and longevity risk demand a new approach to income generation, one that goes beyond traditional assets and embraces diversification.

We believe investors can enhance their portfolios by adopting a multi-asset approach that includes listed alternative assets. By doing so, SMSFs can navigate the uncertainties of 2025 with confidence, ensuring their retirement savings last as long as they do.

In a world of uncertainty, one thing is clear and that is diversification is key. By broadening your investment horizons, you can achieve your financial goals with greater resilience and stability.

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INVESTING

Leveraging small-cap buyouts

The European market is offering valuable opportunities in the small-cap buyout space, writes Philippe Poggioli.

PHILIPPE POGGIOLI is managing partner at Access Capital Partners.

24 selfmanagedsuper

Small-cap companies form the backbone of Europe’s economy. Many are founder-led or family-owned businesses, and even sometimes small divisions of large corporates spinning off. Often these companies reach a point in the business life cycle where they are looking for additional funding in order to expand global market share, access new technologies, improve and diversify operations or provide an exit strategy for the existing ownership. One approach is a buyout – a private equity transaction that involves acquiring a controlling stake in a company.

The small-cap buyout market in Europe presents attractive opportunities for investors, given the depth and breadth of the market.

The market is characterised by a substantial pool of investment opportunities in both funds and companies.

Small caps make up the bulk of the private equity space, accounting for around 90 per cent of all buyout deal volumes in Europe, highlighting the market’s dynamism.

As Chart 1 demonstrates, Europe has consistently outpaced the United States in the number of buyout deals.

Small-company buyout transactions generally occur at lower purchase multiples than large buyout investments.

The primary factor for these relative discounts is that there are fewer financial intermediaries that serve smaller companies, rather than the limited historical financial data.

The resilience of the small-cap buyout segment is further reinforced by its conservative approach to deal

structuring. Unlike larger buyout transactions, which often rely on significant leverage, small-cap buyouts adopt a more conservative approach to deal structuring, often with modest debt packages. This makes financing more accessible, with fewer risks linked to interest rate fluctuations, and thus enables investors to continue deploying capital when the debt markets are tight.

In addition, smaller buyouts tend to have a wider range of exit options compared to their larger counterparts. In particular, larger buyout funds have been longstanding buyers of small private equity-owned companies either as new investments or as add-on acquisitions to existing platforms.

Across Europe, there are many regions with favourable deal dynamics that investors should consider. These include the United Kingdom and Ireland, Benelux, German-speaking countries, France and the Nordic countries, with consideration also given to southern Europe.

Generally speaking, these countries have been the leading destinations for private equity investments in Europe, offering a favourable regulatory environment, developed financial sector and thriving entrepreneurial ecosystem. Additionally, the number of fund managers targeting investments in these countries have expanded, leading to increased specialisation and expertise to accompany small-to-medium enterprise expansion.

Continued on next page

The small-cap buyout market in Europe presents attractive opportunities for investors, given the depth and breadth of the market. The market is characterised by a substantial pool of investment opportunities in both funds and companies.

Chart 1 1200

1200

800

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200

0 2018

2019

2020

No. Buy-out deals in Europe

Continued from previous page

In terms of industries, the information technology and digitalisation, healthcare and essential business services sectors offer strong resilience and significant growth opportunities, aligning with long-term trends. These sectors benefit from fundamental economic and societal shifts, making them less vulnerable to economic downturns and more likely to achieve sustained growth.

In particular, the digitalisation and techenabled services sector benefits from significant tailwinds, driven not only by the digital transformation across industries in Europe, but also by the increasing need for outsourced IT solutions. These include outsourced GRC (governance, risk and compliance), research and intelligence, energy and sustainability consulting, and TICC (testing, inspection, certification and compliance). In these subsectors, companies often operate in fragmented markets where consolidation strategies across borders can be pursued to accelerate growth.

Expected returns For investors such as fund managers, the

2021

2022

2023

2024

No. Buy-out deals in N. America

European small-cap buyout market has the potential to outperform larger buyouts due to access to a wider investment opportunity set, lower entry valuations, more levers for value creation and potential for higher earnings multiple expansion upon exit.

The performance analysis illustrated in Chart 2 (based on Preqin data as of December 2024) shows that upper-quartile small-cap buyout funds (with a size of less than €1 billion) have outperformed upper-quartile mid and upper mid-cap as well as large and mega funds on a net total value to paid-in (TVPI).

secure communication software vendor, which through multiple add-on acquisitions became a pan-European market leader. Today the company is the market leader in electronic administration registration and online healthcare prescription. During the holding period the fund guided the company’s management team in an ambitious growth strategy, including an active buy-and-build approach that successfully completed eight add-on acquisitions, growing the company’s revenues from €25 million with €8 million in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2018 to €71 million in revenues and €30 million EBITDA in 2024.

Value creation for investors

Successful exits to reap rewards

Value in small-cap buyouts is often created through a ‘buy-and-build’ approach and implementation of operational improvements.

Fund managers who buy out these small companies provide merger and acquisition (M&A) execution expertise to support market consolidation and buy-and-build strategies.

These fund managers help companies reap the benefits of scale and growth resulting from their more dominant industry position.

An example of a successful investment in our fund portfolio is a Dutch healthcare-focused

Most successful exits in this market share key attributes regardless of the macroeconomic environment. These include conservative entry valuation, mostly at single-digit EBITDA multiples, thanks to proprietary investment origination, low leverage (typically less than three times EBITDA) and strong operational value creation, including well-processed M&A build-up program strategies to consolidate fragmented sectors across borders.

Continued on next page

QUARTER I 2025 25

INVESTING

Continued from previous page

Another important factor driving successful exits is a rigorous and methodical sale preparation process. Successful exits are planned well in advance, sometimes two years ahead, and are driven by robust strategic plans supported by a wide set of operational and trading key performance indicators. In 2024 we exited 60 companies, returning an aggregate 3.7 times cost multiple.

One example of a successful exit was that of a UK-based provider of public cloud migration and IT services. This exit generated a 3.5 times gross money multiple, returning around €32 million. The company grew its revenue by five times, built out the product and service proposition across the Microsoft stack and successfully completed four add-on acquisitions that expanded its product offerings to customers.

Careful manager selection and due diligence needed Outperformance in smaller buyouts is a result of a fund manager’s access to a wider investment opportunity set, lower valuations at entry, more levers for value creation and potential for higher EBITDA multiple expansion upon exit. However,

with around 500 managers in the segment, the dispersion of returns is higher among small and mid-cap funds than among their larger counterparts.

As a result, investors need to apply a disciplined and rigorous due diligence process when selecting small-cap funds in order to generate superior performance.

When co-investing directly in businesses alongside a fund manager, the due diligence process involves testing and evaluating findings from underlying fund managers. We form opinions on target companies’ strengths and weaknesses based on commercial, financial, legal and regulatory due diligence documents.

Lead sponsor findings are challenged using our independent experience and industry-specific insights from 27 years of investing in European small-cap buyouts. Onsite visits, meetings with management teams and reference calls are conducted as applicable.

When assessing businesses in which to invest, investors should identify those with a well-established market position, allowing for both organic growth and that through external acquisitions, in addition to the implementation of operational improvements. Other factors to take into consideration include a strong and

Chart 2: Upper quartile Net TVPI Q4 2024 2,5x

2,40x

2,33x 2,22x 2,04x

1,97x

2,0x

1,87x

1,47x

1,5x 1,0x

1,43x 1,29x

1,77x

2,02x

2,15x 2,07x

1,81x

1,73x

2,02x

1,97x

1,70x 1,31x

1,92x 1,61x

1,62x

1,42x

0,5x 0,0x

2014

2015

2016

Small cap buy-out funds (<€1bn)

26 selfmanagedsuper

2017

2018

2019

Mid & Upper mid cap buy-out funds (<€-4bn)

2020

1,36x 1,08x 1,23x

2021

1,10x

2022

Large & Mega buy-out funds (>€4bn)

When assessing businesses in which to invest, investors should identify those with a well-established market position, allowing for both organic growth and that through external acquisitions, in addition to the implementation of operational improvements. experienced management team.

How to access the small-cap buyout market Access Capital Partners invests in the smallcap buyout market indirectly through primary funds, secondary transactions or directly via co-investments. It is important to look for fund managers that have demonstrated proprietary sourcing and focus on primary deals where vendors are typically founding families or corporates rather than financial players. Added to this is the conservative approach to debt.

When seeking promising deals, fund managers should be able to source off-market investment opportunities in businesses with high profit margins, structural growth potential and strong sustainability profiles, operating in fast-growing and resilient sectors, such as healthcare, essential business services, IT and digitalisation.

The European small-cap buyout market is a vast investment pool offering attractive opportunities for investors, but given all the factors to consider, ongoing screening and being selective when deploying capital in this segment is critical to enjoy superior returns.

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I 2025 27 We eagerly await to welcome you to this elite tier of membership andQUARTER to further support your professional growth with the utmost convenience and excellence.

STRATEGY

To commute or not

The legacy pension amnesty was officially confirmed and approved late last year. Meg Heffron analyses whether trustees should actually make use of the measure.

MEG HEFFRON is managing director of Heffron.

28 selfmanagedsuper

New regulations introducing a five-year amnesty allowing members with legacy pensions to wind them up was a welcome piece of news just before Christmas last year.

It’s difficult to get precise figures, but it seems there are still thousands of these income streams in place and I suspect many will be unwound in the next few years. Most will be market-linked pensions, also known as term-allocated pensions or TAPs. So is there anything we should watch out for as we’re happily commuting these? As always, yes.

First we need to make a quick distinction.

Most market-linked pensions started before 1 July 2017 and they’re known as capped defined benefit pensions. (As an aside, I do wonder who comes up with this terminology. Defined benefit has a specific meaning in superannuation circles and no market-linked pension is one of those. But I digress – capped defined benefit it is.)

Some people, however, have market-linked pensions that started on or after 1 July 2017. These are the people who used to have a pre-2017 market-linked pension, or certain other types of legacy pension, but have since stopped them and started a new market-linked pension.

There are some important differences between the two that impact how easy they are to unwind today (see Table 1).

Can the full balance end up back in pension phase?

When it comes to capped defined benefit marketlinked pensions, the answer is often no.

It’s because of the special treatment, as explained above, these pensions receive for transfer balance cap purposes.

For example, Cliff, 82, has a capped defined benefit pension that started in 2006. Currently, the balance is $2.9 million and there are 19 years of his term left.

Back in 2017, the special value used for transfer balance cap purposes was $2.65 million. This was calculated using a formula at the time and didn’t have anything to do with his account balance.

If he fully commutes this pension today, the debit to his transfer balance account is not $2.9 million – his current account balance. Instead it is $2.65 million (the special value calculated at 1 July 2017) less all pension payments since then.

Let’s imagine Cliff has received $990,000 in pension payments between 1 July 2017 and today, including the full payment required for 2024/25.

His commutation value would be $1.66 million.

That means, even if he commutes his marketlinked pension, he has still used up $990,000 of his transfer balance cap ($2.65 million less $1.66 Continued on next page

Continued from previous page

million).

Unfortunately, his cap is only $1.6 million. That’s because he used it all back in 2017, albeit he was allowed to go over it without consequence, so it hasn’t been indexed in the meantime.

So if he fully commuted his marketlinked pension, only $610,000 could be turned into a new account-based

pension.

His SMSF would go from having $2.9 million in pension phase to only $610,000. That would make a big dent in the actuarial percentage used to work out how much of his fund’s income is exempt from tax.

A side note – you may have noticed the amount of Cliff’s transfer balance cap remaining ‘used up’, even after he fully commutes his pension, is exactly the

Table 1 Pension started before 1 July 2017 (capped defined benefit)

Pension started on or after 1 July 2017 (not capped defined benefit)

A formula amount

Account balance

A formula amount

Issued for a specific taxpayer and a register of PBRs is available. A taxpayer cannot rely on another’s PBR.

What happens to people who go over the transfer balance cap?

Account balance

Same rules as for everyone else – excesses over the cap have to be commuted. But partial commutations from a market linked pension, even under the amnesty, require direction from the ATO. This is because the amnesty only applies to full commutations.

Tax treatment of the pension payments themselves during a particular financial year

If their only pension is a capped defined benefit pension, they’re allowed to exceed their $1.6 million cap with no consequences.

No tax

Initial amount checked against the transfer balance cap when the pension started (or 1 July 2017) Reduction in transfer balance account when the pension is fully commuted

same as the pension payments he’s taken since 2017. And in fact that’s a good rule of thumb to use for everyone – the amount of transfer balance cap used up by their (ex)-market-linked pension will be equal to the pension payments they’ve taken since 1 July 2017. This highlights another problem – people with very large market-linked pensions have often taken more than $1.6 million in pension payments in the last eight years.

If they fully commute their market-linked pension, it won’t be possible to convert any of their super to a new account-based pension.

Would you still do it?

Maybe. Cliff’s market-linked pension payments, for example, in 2025/26, would be around $200,000. At that level the personal tax on his pension payments will be quite high if he’s paying tax at high marginal rates outside super. He might conclude it’s better to lose some of the tax exemption in his SMSF in return for lower personal taxes.

It’s interesting to model this over time to see which approach results in more tax.

For example, if Cliff is already in the 30 per cent (plus Medicare) tax bracket outside super, the comparison looks as in Graph 1.

All the figures in Graph 1 are based on a yearly fund return of 7.5 per cent of which 5 per cent is income and therefore taxed each year. They have also been adjusted for inflation so the amounts shown at the end of the term are comparable to the amounts shown at the start. And finally, for now, we’ve completely ignored any capital gains tax that would be incurred if assets were sold.

The graph is showing what happens if Cliff fully commutes his market-linked Continued on next page

QUARTER I 2025 29

STRATEGY

It’s difficult to get precise figures, but it seems there are still thousands of these income streams in place and I suspect many will be unwound in the next few years.

Graph 1: Taxes saved/extra tax paid if market-linked pension is commuted and Cliff’s income is taxed at 30% (+ Medicare) $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 19

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Continued from previous page

pension and converts the proceeds to an account-based pension, valued at $610,000, and an accumulation account. To compare like with like, I have assumed that even if he does this, he will still withdraw the same amount from super each year made up of pension payments and withdrawals from his new accumulation account.

If Cliff does this, he will save a lot of tax personally, reflected in the graph as ‘personal tax saved (30% rate)’.

But his SMSF will pay more tax as per ‘extra fund tax (lost ECPI)’ (exempt current pension income).

If the personal tax saving was always much higher, this would be an easy

30 selfmanagedsuper

decision – give up the tax break in the fund in order to reduce personal taxes, that is, commute the pension.

In this case that picture only starts to be clear later in the term. It’s because market-linked pension payments really tend to skyrocket as the pension nears the end of its term, at which point personal taxes are far more problematic than losing ECPI. In fact, at that point, even allowing for a large capital gain might not change the equation.

Cliff, of course, would find commuting his market-linked pension attractive for a host of other reasons. In particular, he would have a lot more flexibility. Not only would he have more freedom when it comes to choosing his pension payment amounts, but he would also be able to fully cash out his super if he got to the point where he was worried about death benefit taxes. In my experience, this is actually often the biggest motivator for people looking to exit their marketlinked pension, which makes sense as

Scenario 2 (Commute market linked pensionz)

the people who have these pensions are often in their 80s.

But that begs the question: if commuting Cliff’s pension gives him more flexibility to draw more or less in pension payments, why have we assumed he won’t change anything on that front? In fact, with only $610,000 in pension phase, he could choose to withdraw far less from super.

If we allow for this extra factor, we can adjust the modelling a little. This time, we’ll have to think more carefully about what Cliff does with his pension payments. If different amounts are coming out of super, the simplest thing to assume is that he saves them all, effectively building up a non-super portfolio. A larger non-super portfolio will mean more personal tax, so this time we didn’t assume his tax rate stayed fixed at 30 per cent. Instead we assumed he had non-super yearly income of $30,000 and Continued on next page

Continued from previous page

if he kept his market-linked pension, it would mean he would progress through the tax brackets as his pension income pushed his assessable income higher.

Graph 2 compares all the taxes each year under the two scenarios: 1. Keeping the market-linked pension (in which case he will have nothing left in super at the end of the term as all of his $2.9 million will have been transitioned out via pension payments), versus 2.Commuting the market-linked pension (in which case, the vast majority of his $2.9 million will actually still be in super by the nineteenth year. This is because most will be in an accumulation account and account-based pension payments tend to allow lower pension payments than market-linked pensions towards the end of the term).

Note, the tax amounts are each year rather than a total over time.

This time it feels a little simpler to make a decision. If Cliff really will leave as much as he can in super, commuting looks more attractive quite early on.

But bear in mind: • there’s no allowance for capital gains tax. If Cliff realised a very large capital gain, say three years in, the total taxes paid under ‘Scenario 2 (commute market-linked pension)’ would jump, and • it’s unlikely Cliff would really leave his super intact all the way up to age 100.

He’d be worried about death benefit taxes.

Is it the same for everyone with a capped defined benefit marketlinked pension?

No. Cliff’s situation is extreme because he has a very long term remaining. If the term was much shorter, the ‘commute

Graph 2: Total taxes paid (within and outside superannuation) under two scenarios $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 19

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market-linked pension’ option would look much more attractive.

Things would also be different if Cliff’s SMSF was earning investment returns that involved more income and less capital growth as a greater level of income means additional tax now, so losing some of the fund’s tax exemption would cost more.

Cliff’s situation would also be quite different if he’d inherited this marketlinked pension when his spouse died a few years ago. Even if he inherited it after 1 July 2017, it remains a capped defined benefit pension because the pension itself started before that date.

Remember inherited super can’t be left in accumulation phase. So commuting the market-linked pension under that scenario wouldn’t just mean Cliff had much less in pension phase, it would mean he had much less in super. Only $610,000 could remain in his SMSF and the rest would need to be paid out as a lump sum.

Extra fund tax (lost ECPI)

What about non-capped defined benefit market-linked pensions?

These are easy. All the complexity of formulae, et cetera, happened back when the original legacy pension was stopped and turned into a new post-2017 market-linked pension.

Today, fully commuting under the amnesty would allow any balance left in the non-capped defined benefit marketlinked pension to be converted to an account-based pension.

Conclusion I still expect most clients, even those in Cliff’s situation, will commute their market-linked pension, but perhaps they will take it slowly. The amnesty lasts for five years and not everything needs to be done right now. If Cliff’s main driver for changing is that he wants to withdraw some but not all of his super entirely, perhaps he will look to sell down assets in 2024/25 and then commute the pension under the amnesty in 2025/26.

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COMPLIANCE

The gamut of regulatory material

The ATO issues a wide range of guidance materials in its role as the regulator of SMSFs. Daniel Butler and William Fettes detail the implication each product has for trustees.

DANIEL BUTLER (pictured) and WILLIAM FETTES are directors at DBA Lawyers.

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The ATO is a large bureaucracy and produces a lot of guidance material. Thus it is important advisers and taxpayers understand the range of materials or products published by the regulator and the level of protection each provides.

Generally, the ATO feels bound by its published material from an administrative viewpoint. However, only certain publications, such as tax rulings, are binding. While the ATO generally feels bound to follow its own written materials, in the event it is wrong, the tax still remains payable, but penalties may be remitted.

In particular, only certain documents provide a ‘precedential ATO view’. This is the regulator’s documented view about the application of any of the law administered by it in relation to a particular interpretative issue. The ATO has precedential views to ensure its decisions on interpretative issues are accurate and consistent. Practice Statement Law Administration (PSLA) 2003/3 states precedential ATO

views are set out in the following documents: • public rulings (including draft public rulings), • ATO interpretative decisions (ID), • decision impact statements (DIS), and • documents listed in the schedule of documents containing precedential ATO views (attached to PSLA 2003/3).

We discuss the main types of ATO publications below.

Public rulings Public rulings are binding advice that express the ATO’s interpretation of the law. The regulator publishes different types of public rulings, including: • TR – taxation rulings, • TD – taxation determinations (short-form • ruling), Continued on next page

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• GSTR – goods and services tax rulings, • MT – miscellaneous taxation rulings, • SGR – superannuation guarantee rulings, • CR – class rulings, and • PR – product rulings.

Where a taxpayer follows a public, private or oral ruling that applies to them, the ATO is bound to assess them as set out in the ruling.

If the correct application of the law is less favourable to a taxpayer than the ruling, it protects them from the law being applied in the less favourable way.

A public ruling usually applies to both past and future years and protects a taxpayer from the date of its application, which is usually the date of effect of the relevant legislative provision. In addition, a withdrawn public ruling continues to apply to schemes that had begun to be carried out before the withdrawal.

TR 2006/10 is an ATO public ruling that provides details on the protection offered by such items as public rulings.

The ATO’s ‘advice under development program’ tracks the development of rulings, determinations and significant addenda, including topics that have been added or withdrawn, and rulings and determinations that have been finalised.

Note that an ATO ruling, either public or private, may include parts that are binding on the ATO, and ones that are not. The regulator identifies the elements that are binding. Care is therefore needed when reviewing rulings to determine whether the part you wish to rely on is in fact binding.

Administratively binding advice The ATO provides administratively binding advice to assist taxpayers in certain limited circumstances.

A PBR only provides protection to the particular taxpayer involved. Thus, the register of PBRs does not provide protection to anyone else who may seek to rely on another taxpayer’s ruling.

Some laws the ATO administers do not enable it to provide advice in a legally binding form. But in the interest of assisting taxpayers, it provides administratively binding advice in limited circumstances.

The ATO considers it is administratively bound by its advice and an early engagement (for advice) request can be lodged with the regulator to discuss the matter before applying for such advice.

Generally, the ATO stands by its advice and will not depart from it unless: • there have been legislative changes since the advice was given, • a tribunal or court decision has affected the ATO’s interpretation of the law since the advice was given, and • the advice is no longer appropriate for other reasons.

If a taxpayer follows the advice and the ATO later finds out it has not applied the law correctly, and none of the points above apply, you will be protected from having to repay amounts of tax that would otherwise

be payable and any penalties and interest on those amounts.

You can apply for administratively binding advice via a private binding ruling (PBR) application form.

Private binding rulings A PBR on a tax query is binding on the ATO. Note, this is the information provided at the start of most PBRs: • You cannot rely on the rulings in the register of PBRs in relation to your tax affairs. You can only rely on a private ruling the ATO has given to the particular taxpayer or to someone acting on their behalf.

• The register of PBRs is a public record of edited private rulings the ATO has issued.

The register is a historical record of rulings that is not updated to reflect changes in the law or ATO policies.

• The rulings in the register have been edited and may not contain all the factual details relevant to each decision. The register should not be used to predict ATO policy or decisions.

The ATO aims to provide a private ruling within 28 calendar days of receiving all the necessary information. In our experience, some rulings are not finalised before six months and sometimes it takes up to 12 months. If the request is complex, the ATO may seek further time. If the regulator has not made a private ruling within 60 days of receiving all the necessary information, a taxpayer may request a ruling to be made.

The ATO has 30 days from such a written request to either provide the private ruling or decline to rule on the matter.

As noted above, a PBR only provides protection to the particular taxpayer involved.

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Thus, the register of PBRs does not provide protection to anyone else who may seek to rely on another taxpayer’s ruling.

Taxation determinations A TD provides similar protection to a public ruling. The protection a TD provides is described in TD 2013/22 as follows: “This publication provides you with the following level of protection: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953.

A public ruling is an expression of the commissioner’s opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes.

If you rely on this ruling, the commissioner must apply the law to you in the way set out in the ruling (unless the commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you – provided the commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.”

Interpretative decisions An ID is a summary of a decision on an interpretative issue and is indicative of the ATO’s view on the interpretation of the law on that particular issue. IDs are produced to assist ATO officers to apply the law consistently and accurately to particular factual situations. An ID sets out

34 selfmanagedsuper

the precedential ATO view that applies in resolving an interpretative issue. It therefore differs from a ruling or a TD. The last ID was released on 1 March 2017. The ATO issued an update to PSLA 2001/8 announcing it would no longer be preparing IDs and that it will only make minor adjustments to prior IDs. Where a material or major adjustment is needed, the ID will be replaced by a different ATO product covering the revised ATO position.

An example of the level of protection provided by ATO ID 2015/10: “This ATO ID provides you with the following level of protection: If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect, you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the tax office or from a professional adviser.”

Practice statement law administration A PSLA provides direction and assistance to ATO staff on the approach to be taken in performing duties involving the application of the laws administered by the tax commissioner. Practice statements are policy documents, providing mandatory instructions and guidance to ATO staff on how they should undertake technical work, assisting them to perform their duties and make decisions about the laws they administer.

While they may discuss technical issues, practice statements do so in a way to give sense to the instructions they are providing. They are not intended to provide interpretative advice and do not express precedential ATO views.

Even though ATO staff are the primary audience for a practice statement, in the interest of open tax administration, they are published externally and to inform taxpayers what to expect.

If a taxpayer relies on a particular practice statement that is incorrect or misleading and makes a mistake as a result, they will remain liable for any resulting tax shortfall, but will be protected against: • any shortfall penalty that would otherwise arise, and • interest charges on the shortfall, provided the particular practice statement was reasonably relied on in good faith.

For more information see PSLA 1998/1.

Practical compliance guidelines Practical compliance guidelines (PCG) provide broad law administration guidance, addressing the practical implications of tax laws and outlining the regulator’s administrative approach. For example, they might set out: • how the ATO assesses tax compliance risk across a range of activities or arrangements in relation to a certain area of the law – where it would consider an activity or arrangement low risk, unlikely to require scrutiny and where an activity or arrangement might be considered high risk and likely to attract scrutiny, or • a practical compliance solution where tax laws are creating a heavy administrative or compliance burden, or where the tax law might be uncertain in its application.

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These guidelines can provide taxpayers with additional certainty and compliance savings, and allow the ATO to direct its compliance resources to higher risk areas of the law.

From 2016, PCGs have largely overtaken PSLAs as the appropriate communication product providing broad law administration guidance to taxpayers. PCGs generally contain guidance on how they can be relied upon by taxpayers and descriptions of relevant classes of taxpayer to which they apply (refer to PCG 2016/1).

Provided a taxpayer follows a PCG, the ATO will administer the law in accordance with the approach reflected in that guideline.

PCGs are not binding on the regulator and are used as safe harbours to provide an indication of how it will apply its compliance resources. For example, PCG 2016/5 provides safe harbour terms for related-party limited recourse borrowing arrangements (LRBA) that, if satisfied, will not result in the ATO applying resources to review and audit LRBAs prior to 31 January 2017.

Note that a PCG covering a matter where the ATO is not dedicating its compliance resources will not provide protection to taxpayer wrongdoing detected under normal regulatory review or audit activities.

application of the new law, or • where taxpayers need to take additional action to comply with the law to provide certainty about what needs to be done.

An LCR will not usually be issued where the new law is straightforward, is limited in its application or does not relate to an obligation to pay tax, penalties or interest.

For example, LCR 2019/D3 was issued in relation to the 2019 amendment to the Income Tax Assessment Act 1997 on nonarm’s-length income and expenditure (NALI/ NALE) incurred under a non-commercial arrangement. This draft was finalised as LCR 2021/2.

Issues arising during the consultation period for a bill can prevent an LCR from being finalised and also if the bill is significantly amended in its passage through parliament. The NALI/NALE legislation was ultimately finalised in June 2024.

Because LCRs are prepared at such an early time, they will not be informed by experience of the new law operating in practice. Therefore, while they offer the same protection in relation to underpaid tax, penalties or interest as a normal public ruling, this will only apply if a taxpayer relies on an LCR in good faith.

LCR 2015/1 covers the purpose, nature and role of LCRs in the ATO’s public advice and guidance.

Law companion rulings Law companion rulings (LCR), formerly known as law companion guidelines, provide the ATO view on how recently enacted law applies and are usually developed at the same time as the drafting of bills.

An LCR will normally be published: • in draft form for comment when the bill is introduced into parliament and will be finalised soon after it receives royal assent.

It provides early certainty in relation to the

SMSF-specific advice The ATO, as the regulator of SMSFs, has no power to make a binding ruling in relation to the Superannuation Industry (Supervision) (SIS) Act 1993 or the SIS Regulations 1994.

Typically, SMSF-specific advice is sought in relation to how super law applies to a particular transaction or arrangement for the following topics: • investment rules, including: o acquisition of assets from related parties,

While the AT O generally feels bound to follow its own written materials, in the event it is wrong, the tax still remains payable, but penalties may be remitted. o borrowing and charges, o in-house assets, or o business real property, • in-specie contributions/payments, and • payment of benefits under a condition of release.

In certain cases, if taxpayers request a PBR and SMSF-specific advice, the ATO generally asks these be separated into different requests. However, we have noticed the regulator has combined these two forms of guidance in a number of PBRs where it has expressly set out where the two instruments start and finish in the combined response so there is no confusion as to what part is binding, under the PBR, and what is not, under the SMSF-specific advice.

Taxpayer alerts Taxpayer alerts (TA) are intended to be an early warning of the ATO’s concerns about significant and emerging potentially aggressive tax planning issues or arrangements it has under risk assessment.

Moreover, the regulator usually develops its views more comprehensively following the issue of a TA on a topic and prior TAs can be superseded shortly after being issued.

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The comment at the beginning of a TA is: “Taxpayer alerts are intended to be an early warning of our concerns about significant or emerging higher risk planning issues or arrangements that the ATO has under risk assessment, or where there are recurrences of arrangements that have been previously risk assessed.”

PSLA 2008/15 outlines among other things: • the TA framework, including why they are issued, • factors the ATO considers when deciding whether a TA is appropriate, and • key activities in developing and issuing a TA. Decision impact statements DIS are succinct statements of the ATO’s response to significant cases decided by the courts or tribunals. They provide the details of the case, including the implications of the decision and whether any rulings or the like need to be amended.

Invariably, the ATO seeks to distinguish a decision based on the facts and circumstances of the case where it does not succeed. For example, the DIS on Greig v Commissioner of Taxation [2020] FCAFC 25 states: “The commissioner considers that this case does not change the principle in Myer Emporium and, in particular, does not disturb the commissioner’s understanding of the factors that will be relevant in determining whether an acquisition of shares is made in carrying out a ‘business operation or commercial transaction’.”

SMSF regulator’s bulletins SMSF regulator’s bulletins (SMSFRB) outline the ATO’s concerns about new and emerging arrangements that pose potential risks to trustees and their members from a superannuation regulatory and/or income tax perspective.

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The ATO’s aim is to share its concerns early to help trustees make informed decisions about their SMSF. For example, SMSFRB 2020/1 examines the regulator’s position on SMSFs and property development and the common mistakes that arise in these types of arrangements.

ATO web page and fact sheets The ATO web page and fact sheets can be useful, but cannot be relied on as binding on the commissioner in a legal sense.

The general administrative practice is the ATO feels bound to follow its own written materials, but in the event it is wrong, the tax is still generally payable, but penalties may be reduced or may not be imposed.

PSLA 2008/3 explains, in the interests of sound administration, ATO practice has been to provide administratively binding advice in a limited range of circumstances.

For example, the regulator provides administratively binding advice on matters under the Superannuation Guarantee (Administration) Act 1992. There is no legislative framework for the provision of public, private or oral advice in relation to matters under this piece of legislation.

Media releases and speeches Media releases are brief announcements used to deliver ATO messages on topics and to communicate its intentions in relation to certain issues. A media release reflects the regulator’s position at the time of its publication, which may subsequently be updated.

Speeches by senior ATO officers reflect the body’s thinking on particular issues and are published for transparency reasons.

Oral rulings An oral ruling is a form of legally binding advice the ATO gives over the phone to individuals in relation to their specific circumstances; typically in relation to

SMSF regulator’s bulletins outline the AT O’s concerns about new and emerging arrangements that pose potential risks to trustees and their members from a superannuation regulatory and/or income tax perspective.

personal income tax or the Medicare levy.

If an individual relies on an oral ruling, the ATO is bound to assess their liability in accordance with the ruling.

If the oral ruling is incorrect and disadvantages an individual, the ATO may apply the law in a way that is more favourable to that person provided there is no time limit in doing so.

Tailored technical assistance The ATO provides tailored technical assistance in some circumstances, orally or in writing, depending on the nature and complexity of the query. This type of guidance can be provided where: • a taxpayer is unable to find an ATO view of how the law applies to a particular technical issue, • a taxpayer is uncertain how the ATO view of the law applies to their circumstances, and • a taxpayer is seeking greater certainty or protection than what ATO published products provide.

Typically this is best managed by a tax agent or a tax expert.

Summary of ATO materials There is a vast array of information the ATO issues. Advisers should be aware of each type of product and understand how it applies to taxpayers.

Product

Binding on ATO

Comments

Public rulings

Yes

Issued by the ATO for all taxpayers to rely on.

Administratively binding advice

No

Designed to assist taxpayers. While not binding, the ATO will generally not depart from its advice unless there is an appropriate reason, legislative change or new information affecting interpretation.

PBR

Yes

Issued for a specific taxpayer and a register of PBRs is available. A taxpayer cannot rely on another’s PBR.

TD

Yes

Similar to a public ruling.

ID

No

ATO view on a technical issue.

PSLA

No

Practical guidance to ATO staff.

PCG

No

Practical guidance to taxpayers.

LCR

Yes

Practical guidance on new laws.

SMSF-specific advice

No

ATO advice on SIS Act and Regulations queries.

TA

No

ATO warnings on new or emerging aggressive tax planning concerns.

DIS

No

Succinct statements of the ATO's response to significant cases decided by the courts or tribunals.

SMSFRB

No

Explains ATO’s regulatory and/or income tax concerns about risks to SMSFs from new or emerging arrangements.

ATO fact sheets

No

Practical guidance on tax and super matters.

Media releases/speeches

No

Brief ATO announcements to the media on topics and speeches to be transparent.

Oral rulings – for individuals

Yes

Oral phone advice on personal income tax and Medicare levy queries for individual.

Tailored technical assistance

No

To provide an ATO view of how the law applies to a particular technical issue.

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STRATEGY

The winds of change

The rules governing advice and superannuation have undergone some significant changes within the past six months. Bryan Ashenden assesses the implications they will have for the sector.

BRYAN ASHENDEN is head of financial literacy and advocacy at BT Financial Group.

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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 Continued on next page

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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

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.

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 Continued on next page

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STRATEGY

A positive note to end 2024 and start 2025 was the passing of regulations allowing for the unwinding of legacy pension arrangements without penalty.

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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,

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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.

COMPLIANCE

Being pension wise

Enjoying the significant advantages of having a pension interest inside an SMSF involves adherence to many rules and regulations. Mark Ellem and Anthony Cullen examine the requirements trustees must satisfy.

MARK ELLEM (pictured) is head of SMSF education and ANTHONY CULLEN is senior SMSF educator at Accurium.

SMSFs provide individuals with greater control over their retirement savings, allowing them to tailor investment strategies to meet their long-term financial goals. However, with this flexibility comes significant responsibility, such as ensuring compliance with strict pension rules set out by the Superannuation Industry (Supervision) (SIS) Regulations and regulated by the ATO. When it comes to SMSF pensions, trustees and members must navigate various requirements, including pension commencement, minimum payments, taxation, transfer balance caps and reporting obligations.

Failing to adhere to these rules can lead to compliance breaches, loss of tax concessions and potential financial penalties. This article explores the key aspects of SMSF pensions, highlighting what to look out for and common pitfalls to avoid.

Understanding pension types SMSF pensions fall into two primary categories: accountbased pensions (ABP) and transition-to-retirement income streams (TRIS).

• ABP: These pensions require minimum annual withdrawals based on the recipient’s age and account balance. The capital supporting the pension remains invested and subject to market fluctuations. These pensions are in the retirement phase and qualify for tax concessions, including exempt current pension income (ECPI).

• TRIS: A TRIS allows a member to access their super

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while still working, provided they have reached their preservation age (now age 60). However, since 1 July 2017, a TRIS is not a retirement-phase income stream and not eligible for ECPI unless the member has met a condition of release with a nil cashing restriction, such as reaching age 65 or retiring permanently.

Additionally, withdrawals from a TRIS are capped at 10 per cent of the account balance per financial year.

While defined benefit pensions and market-linked pensions still exist within some SMSFs, they are largely legacy products and cannot be newly established.

These pensions have complex rules and reporting obligations, and recent changes allow for a five-year exit measure to unwind some legacy pensions.

Understanding the differences between these pension types is crucial for ensuring compliance with regulations and optimising retirement outcomes.

Key considerations at commencement 1. The eligibility criteria To commence a pension, a member must have met a condition of release, such as: • retirement after reaching preservation age, • reaching age 65, regardless of work status, and • permanent incapacity or terminal illness.

Members must also check the preservation status of their superannuation benefits before commencing Continued on next page

Continued from previous page

a pension. Preserved benefits cannot be accessed unless the member satisfies a condition of release or where the condition of release is ‘attaining preservation age’, that is, the TRIS condition of release.

2. The trust deed The trust deed is the governing document of an SMSF. Before commencing a pension, trustees should ensure that: • the deed allows for the payment of pensions in accordance with the superannuation rules. SIS Regulation 1.06(1) sets out when a benefit is a pension and requires certain rules to be included in the governing rules of the fund, that is, either the trust deed or the pension documents, and • where the trust deed of an SMSF paying legacy pensions is updated that the amendment accommodates them, that is, does not remove the ability of the fund to continue to pay them to the member(s).

3. Timing and valuation The valuation of the pension commencement balance is critical for transfer balance cap reporting. Trustees should ensure: • accurate and timely valuation of fund assets to avoid administrative complications and reporting discrepancies, • all capital intended to be included in the commencement value of the pension has been received by the fund, and • where a member intends to claim a tax deduction for a personal contribution to be included in the commencement value of the pension that the relevant notice has been provided and trustee acknowledgement given.

4. Sufficient liquidity Once a pension starts, the SMSF must ensure it has enough liquid assets to meet ongoing pension payments. Trustees should review the fund’s investment strategy to confirm: • cash-flow projections can sustain pension withdrawals, • investments are appropriately diversified, and • the strategy is updated to reflect the fund’s new status.

Common mistakes and pitfalls 1. Failure to meet minimum pension Each year, an SMSF must pay at least the minimum pension amount calculated as: The percentage is based on the member’s

age, with older members required to withdraw a larger proportion.

Failure to meet the minimum pension payment results in: • the pension ceasing for tax purposes, meaning the fund cannot claim ECPI, • payments being treated as lump sum withdrawals, which may be taxable. This is of particular concern for a TRIS as this will likely result in a breach of the preservation rules and may result in the amount(s) paid being fully assessable, notwithstanding the member is at least age 60, and • a transfer balance account (TBA) adjustment, potentially affecting the member’s transfer balance cap (TBC).

The update to Taxation Ruling (TR) 2013/5 in June 2024 means the period that the fund cannot claim ECPI is likely to extend beyond the financial year in which the minimum pension failed to be paid. Further, there are likely to be implications for the tax components of the member’s benefits, as well as for their TBA. 2. Inaccurate TBC event reporting Since 1 July 2017, SMSF pensions have been subject to the TBC, which limits the amount an individual can shift into retirement-phase pensions. Each pension commencement, commutation or modification must be reported to the ATO within 28 days after the end of the quarter in which the TBA event occurred.

Common reporting mistakes include: • failing to report pension commencements or commutations, • failing to report a TBA event by the due date, • confusing the 12-month deferral to the TBA credit for a reversionary pension and the due date for reporting the TBA event, and • not correcting a previously reported

Given the size of the total claim for ECPI

by SMSFs, this is an obvious target area for the AT O and it would be prudent for practitioners to run self-checks or peer reviews to ensure their understanding and approach is correct.

TBA event by cancelling it and submitting a new one.

While the ATO will maintain the TBA transactions and TBC for the member, it would be prudent for the member’s accountant or adviser to have their own record for their TBA and TBC-related information as a source of truth. This can then be compared to the ATO records with any discrepancies investigated and corrected.

3. Incorrect commutation procedure A commutation occurs when a member converts their pension into a lump sum. While full and partial commutations are permitted, trustees must ensure: • partial commutations do not count toward the minimum pension payment, • minimum pension payments are made before full commutations, and • TBA event reporting has been accurate and complete to ensure any entitlement to the indexation of the general TBC. Incorrectly reported commutations may lead to tax penalties and time spent to correct Continued on next page

QUARTER I 2025 43

COMPLIANCE

Continued from previous page

the reporting errors.

The role of ECPI ECPI allows SMSFs to reduce their taxable income on assets supporting retirement-phase pensions. However, trustees must ensure: • the correct method is used, either the segregated or proportionate. This will require determination of whether the SMSF has disregarded small fund assets for a financial year, • an actuarial certificate is obtained where the proportionate method is used, and • ECPI is not claimed incorrectly, particularly if the pension has ceased. Also, trustees need to ensure ECPI cannot be claimed against fund assessable income that has been determined as non-arm’s-length income.

Given the size of the total claim for ECPI

by SMSFs, this is an obvious target area for the ATO and it would be prudent for practitioners to run self-checks or peer reviews to ensure their understanding and approach is correct. In addition to claiming ECPI when not entitled, or over-claiming, funds failing to claim ECPI correctly may pay unnecessary tax. This could come about by incorrectly apportioning fund deductions, that is, under-claiming. Practitioners need to have a good understanding of how ECPI affects fund deductions and how their SMSF administration platform deals with them.

Pensions and death benefits When an SMSF member dies, their pension ceases unless it is reversionary. The fund must then comply with SIS Regulation 6.21, requiring benefits to be cashed as soon as practicable.

Reversionary versus non-reversionary • Reversionary pensions automatically transfer to a nominated beneficiary (for example, a spouse). The transfer balance credit occurs 12 months after death, preserving the member’s TBC space until this time. There is no requirement to commute the reversioner’s own pension on

44 selfmanagedsuper

date of death, even where the TBA credit will cause the reversionary recipient to exceed their TBC. Commuting early could cost the SMSF valuable ECPI, particularly if fund assets are sold in the 12 months after death.

• Non-reversionary pensions must be paid out as a lump sum or used to start a new death benefit pension. However, it will be subject to the reversionary pensioner’s TBC and they must be an eligible recipient of a death benefit income stream. Generally a deceased member’s super cannot be cashed to an adult child, notwithstanding they may qualify as a death benefits dependant for tax.

Impact on ECPI While a non-reversionary pension ceases on the date of death, ECPI can continue to be claimed in respect of that interest provided it is cashed as soon as practicable. There is also no requirement to pay a minimum pension in the financial year of death. This also applies to any subsequent financial year, but, again, provided it is paid as soon as practicable. Reversionary pensions, however, continue uninterrupted, preserving ECPI benefits. The death of the primary pensioner does not affect the calculation of the required minimum pension in the financial year of death. It is determined based on the account balance and age of the pension recipient on 1 July.

The legacy pension amnesty Since 7 December 2024, SMSF members with legacy pensions, such as lifetime and life expectancy complying pensions and marketlinked pensions, have been given a five-year window in which to fully commute these income streams. This allows: • greater flexibility in estate planning, • the ability to consolidate superannuation assets, and • potential tax efficiencies, depending on how the commutation is structured.

However, trustees must carefully assess the tax implications before exiting a legacy pension. Social security entitlements may also be a factor to consider.

When it comes to SMSF pensions, trustees and members must navigate various requirements, including pension commencement, minimum payments, taxation, transfer balance caps and reporting obligations.

Best pension management practices To maintain compliance and optimise retirement outcomes, SMSF trustees should: • ensure pensions meet all SIS and tax requirements, • review the trust deed and update it if necessary, • pay the minimum pension amounts each year. With the update to TR 2013/5 and the potential adverse consequences of failing to pay the minimum pension, a review of practice procedures and client education is a must, • accurately report all TBA transactions, • regularly review the investment strategy to ensure liquidity, • consider tax implications, especially regarding ECPI and commutations, and • seek professional advice for complex pension strategies.

By staying informed and avoiding common pitfalls, SMSF trustees can ensure their retirement income streams remain compliant, tax-efficient and sustainable. SMSF advisers and service providers can greatly assist their clients to avoid the pitfalls and enjoy a compliant retirement.

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STRATEGY

The remaining measure

The 2021/22 budget put forward proposed changes to the defining conditions for an Australian super fund, but to date no further action has been taken regarding the issue. Tim Miller revisits the situation.

TIM MILLER is education and technical manager at Smarter SMSF.

Recent ATO establishment statistics indicate a continued popularity and growth within the SMSF market, particularly among younger superannuants.

How much more popular would SMSFs become if the government finally put to bed the last of the SMSF legacy items – amendments to the definition of an Australian superannuation fund to make it easier for members to contribute and run their fund while overseas.

Left hanging In May 2021, the federal government delivered the 2021/22 budget and included two measures specifically targeted towards SMSFs. The first was the introduction of a legacy pension amnesty to allow existing SMSF members with certain types of these income streams to exit them during a defined amnesty period. It took some time, but Canberra finally delivered on that measure, and it delivered a much better outcome than was proposed back in 2021.

Measure two was to provide greater flexibility for SMSF members by removing the active member test from the definition of an Australian superannuation

46 selfmanagedsuper

fund and extending the central management and control test for a temporary absence of two years to five years. This proposal was not expressed as a revenue-based measure, but rather an equalitybased one to ensure members of an SMSF or a small Australian Prudential Regulation Authority (APRA) fund were extended the same opportunity as members of public offer funds, particularly with reference to making contributions. No additional progress was made during that parliamentary term, but successive governments made a further commitment to pick up this measure. However, we’ve had nothing since.

Interestingly, this wasn’t the first time the removal of the active member test had been mooted.

In 2007, the Parliamentary Joint Committee on Corporations and Financial Services delivered a report following its inquiry into the structure and operation of the superannuation industry, with one of its recommendations being the removal of the active member test. I know this because it was my submission and subsequent meeting with the chair of Continued on next page

Continued from previous page

the committee that led to the inclusion of the recommendation. Unfortunately, that report was delivered immediately prior to the 2007 federal election and a change in government saw a diminished appetite to review the recommendations.

SMSFs and travelling members There will always be a significant number of SMSF trustees/members, both actual and potential, travelling at any given time. The definition of an Australian superannuation fund can be a complex issue for SMSFs with members abroad, but members must stay on top of their trustee obligations, including whether they have the capacity to act as trustee.

Based on the current definition of an Australian super fund, there are a number of issues trustees of an SMSF must take into consideration if they plan on travelling abroad and the consequences for getting it wrong can be dire.

Australian superannuation fund For an SMSF to be entitled to the taxation concessions afforded to retirement savings vehicles, it must meet the definition of being an Australian superannuation fund. Taxation Ruling (TR) 2008/09 provides a great source of information on the residency issues for SMSFs and expands the definition of what constitutes an Australian super fund, providing further clarity for trustees and advisers on the three tests needing to be addressed to determine whether an SMSF satisfies that definition.

Test 1 – Fund establishment and fund assets The first test refers to the fund being established in Australia or the assets of the fund being held there. While it is generally accepted the majority of funds satisfy this test, the ATO has provided further clarity on when a fund is considered to have been established.

Based on the current definition of an Australian super fund, there are a number of issues trustees of an SMSF must take into consideration if they plan on travelling abroad and the consequences for getting it wrong can be dire.

To establish a fund a trust deed must be executed. In addition, either a cash or inspecie contribution must be received by the fund, including rollovers. For the purposes of when a fund is established the ATO is only concerned with the contribution and this must be “paid to and accepted by the trustees in Australia”. The execution of the deed does not need to occur in Australia. If a fund satisfies this first test, it will satisfy it for all time.

Test 2 – Central management and control The second test relates to the central management and control of the fund.

Here the SMSF must ensure the central management and control is ordinarily in Australia. TR 2008/9 focuses on what constitutes central management and control, who exercises it, when are they doing it and where are they located at the time. It also defines the terms ‘ordinarily’ and ‘temporary absence’.

Central management and control relates to the strategic and high-level decision-making processes and activities of the fund, such as: • formulating the investment strategy, • reviewing, updating or varying the investment strategy, as well as monitoring and reviewing the performance of the

fund’s investments, • the formulation of a strategy for the prudential management of any reserves, and • determining how the assets are to be used to fund member benefits.

According to the ATO, day-to-day operations of the fund are not considered part of the central management and control as they are regarded as being administrative in nature. Operational activities include, but are not limited to, acceptance of contributions, payment of benefits and purchasing or redeeming fund investments.

In the ruling, the regulator has expanded on the definition of central management and control being ordinarily in Australia. It has determined there must be some continuity or permanence about where the management and control is exercised to satisfy the ‘ordinarily’ requirement. The ATO will look at the facts to see if the central management and control is usually, regularly or customarily exercised in Australia.

Two-year absence – safety net, but not the only rule The legislation states the central management and control is ordinarily in Australia even if it is temporarily outside the country for not more than two years. This provides a safety net, particularly for SMSFs, giving them comfort that if their temporary absence is for a period not exceeding two years, then they will not fail the test. The ruling expands the definition of ‘temporarily’ and establishes that the nature, rather than the time, is the main factor when determining whether the absence is indeed temporary. A fund can still satisfy the test if the duration is defined in advance or is related to the fulfillment of a specific, passing purpose such as an overseas employment contract.

Test 3 – Active member test The active member test is the third test. A Continued on next page

QUARTER I 2025 47

STRATEGY

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fund with no active members need only satisfy the first two tests. Retired members in receipt of a pension who do not intend or have the capability to contribute will satisfy the active member test. Of course, the extension of the contribution age to 75 provides greater scope for people to contribute for longer without any relation to work.

An active member is one who is a contributor to the fund at the particular time or on whose behalf another person has made a contribution.

To satisfy the active member test, at least 50 per cent of the assets must be held by active members who are Australian residents.

Alternatively, at least 50 per cent of the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members is attributable to members who are Australian residents.

For the purposes of this definition, contributions include rollovers. Interestingly, there was a decision made by the ATO in a private case in 2011 concluding a rollover did not result in the individuals involved becoming active members at the point in time it was received because it had been received by a fund when the two members were residing overseas and related to contributions made to another fund when the members were Australian residents. Given the timeframe involved and the lack of detail provided in that case, it would be appropriate to seek advice if contemplating making a rollover while overseas.

Overseas travel – length and intention As stated above, part of the definition of an Australian superannuation fund is its central management and control is ordinarily in Australia, requiring the high-level strategic decisions of an SMSF be made while the trustees are in Australia or are made while the 48 selfmanagedsuper

trustees are temporarily outside of Australia for a period no longer than two years.

As such, an open-ended overseas holiday may not satisfy the requirements as the trustees’ intention may be to return, but the period of absence is not defined in advance.

In the instance of overseas travel, it is necessary for the trustees to determine upfront what their intentions are as they may be required to make alternative arrangements prior to their departure.

A fund with equal trustee representation in Australia and overseas would satisfy the ATO’s requirements that the control of the fund is in Australia, therefore a mum and dad SMSF with two Australian resident children as members and trustees would meet its obligations of being an Australian superannuation fund.

A fund that doesn’t have an equal number of trustees in Australia as overseas, or no Australian-domiciled trustee, will need to look at alternative arrangements. Rather than winding up or converting to a small APRA fund, an alternative could be for at least 50 per cent of the travelling trustees to resign and appoint an Australian resident who holds an enduring power of attorney on their behalf to replace them as trustee. This arrangement would result in the appointed person(s) having the same trustee power afforded to the member if they were trustee, so the decision must not be taken lightly.

Of note there are many private binding rulings available on the ATO’s website offering different examples of where the regulator is satisfied that the central management and control remains in Australia when a person’s absence exceeds two years. There are also examples of appointing other parties.

Consequence of getting it wrong If an SMSF fails the Australian superannuation fund definition, it will not be considered a resident-regulated super fund at all times during the year and will be non-complying for

If an SMSF fails the Australian superannuation fund definition, it will not be considered a residentregulated super fund at all times during the year and will be non-complying for tax purposes, forgoing the tax concessions otherwise afforded.

tax purposes, forgoing the tax concessions otherwise afforded. The tax rate applicable to a non-complying super fund is 45 per cent on its assessable income. In the first year, the assessable income extends beyond the ordinary income to include the assets of the fund less any tax-free component. That’s quite a sting.

The only time the ATO has officially offered relief to this tax was during the COVID-19 pandemic.

Conclusion The current definition of an Australian superannuation fund substantially disadvantages SMSFs. Based on the rhetoric of Treasury over the past few years, they want super to be an even playing field. Removing the active member test would go a long way to providing equality to all contributors.

Changing the central management and control temporary absence rule from two to five years would provide practical relief, but to date that hasn’t been the bigger issue.

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COMPLIANCE

When a proper diagnosis is needed

A recent legal case and its subsequent appeal highlight the importance of many SMSF compliance requirements. Mary Simmons acknowledges the lessons learned from this episode.

MARY SIMMONS is head of technical at the SMSF Association.

50 selfmanagedsuper

Tax planning for interrelated family structures often requires the same precision and planning as a medical procedure.

Just as one wouldn’t expect a surgeon to operate without first conducting the necessary tests and thoroughly reviewing a patient’s file, tax planning similarly requires an understanding of the tax affairs of the broader family group and each of the steps of a transaction where an SMSF is involved. Otherwise there is a risk a routine procedure, or transaction in this case, could turn into a compliance nightmare.

Before a surgeon picks up a scalpel, we’d expect that they need to know a patient’s medical history and have a clear diagnosis and a treatment plan in place.

Similarly, SMSF trustees must ensure every transaction is well documented and aligns with superannuation law, the fund’s investment strategy and the sole purpose test.

Jumping in without due diligence can lead to regulatory complications, financial penalties and potentially trustee disqualification.

When it comes to structuring tax-effective transactions for interrelated entities, the case of Merchant and Commissioner of Taxation [2024]

AATA 1102 is a stark reminder: jumping in without a full diagnosis can be disastrous.

This case is an example of what can happen when a trustee undertakes a transaction without properly assessing the broader interrelated family group.

The case involved a seemingly simple share transfer, but beneath the surface it raised issues concerning investment strategy compliance, the sole purpose test and the provision of financial assistance to a member.

The result was a tribunal decision that reaffirmed the fundamental obligations of SMSF trustees and provides a strong warning against structuring transactions for tax benefits without due consideration of the superannuation law.

The transaction: a high-risk operation?

Gordon Merchant, the founder of Billabong, entered a transaction where his SMSF bought $5.8 million worth of Billabong Limited shares (the company is no longer listed on the Australian Securities Exchange) from his family trust (MFT) in 2014 at market value.

Continued on next page

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At first glance the standalone transaction complied with section 66(2) of the Superannuation Industry (Supervision) (SIS) Act, which allows SMSFs to acquire listed shares from a related party at market value.

So why did the scalpel slip? The real issue lay beneath the surface. It was held the transaction was strategically designed to crystallise a capital loss in the family trust to offset the expected gain from the impending sale of another investment, Plantic Technologies Ltd, while retaining ownership of Billabong shares in the broader Merchant group – which raised immediate red flags.

Much like a patient concealing a preexisting medical condition before surgery, the broader tax strategy was not aligned with the SMSF’s core obligations. The commissioner of taxation argued the transaction was primarily undertaken to benefit the family trust, not the SMSF – an assertion that ultimately led to a breach of multiple SIS provisions and the ruling was subsequently contested via the Administrative Appeals Tribunal (AAT).

Investment strategy: the missing medical chart A properly documented and implemented investment strategy is as essential to an SMSF as a patient’s pre-operation instructions are to their procedure. It provides the framework for investment decisions, ensuring trustees act prudently and in the best interests of members.

In this case, the AAT heavily scrutinised the SMSF’s investment strategy. Under section 52B(2) of the SIS Act and SIS Regulation 4.09, SMSFs must have an investment strategy that considers diversification, liquidity, risk and the ability to meet member benefits.

While Merchant’s SMSF did have an investment strategy in place, the tribunal identified significant flaws.

Firstly, the strategy was signed by Merchant’s assistant under a power of attorney.

Merchant could not recall approving the investment strategy.

Secondly, the strategy inaccurately reflected

the fund’s asset allocation, listing property holdings at 0 per cent when, in fact, the fund owned direct property.

Finally, the share purchase caused a concentration risk with 74 per cent of SMSF assets invested in a single listed company, which was far outside the investment strategy’s prescribed limit of a maximum of 40 per cent to be held across multiple listed companies.

Merchant argued the SMSF’s investment strategy did not require every individual investment to adhere to its stated parameters.

He also contended purchasing the shares was itself a de facto revision of the investment strategy.

The AAT rejected these claims, stating an SMSF trustee must “give effect to” its investment strategy, meaning investment decisions must align with a pre-existing, wellconsidered strategy rather than retrospectively adjusting it to justify decisions.

Notably, the AAT found no evidence Merchant or his representatives sought investment advice on the purchase from an SMSF compliance perspective. The lack of documentation about how this acquisition served the SMSF’s best interests contributed to the finding there had been a breach of section 34(1) of the SIS Act. This case serves as a reminder that an investment strategy is not just a box-ticking exercise. It must be well documented, tailored to the fund’s objectives, regularly reviewed and consistently followed when making investment decisions.

In medical terms, this is akin to a surgeon operating without reviewing a patient’s charts.

The AAT concluded that failure to formally assess the risks, diversification and liquidity implications of the Billabong share purchase was a key concern.

The sole purpose test: treating the wrong condition At the heart of SMSF compliance is the sole purpose test under section 62 of the SIS Act, which broadly requires the fund exists solely to provide retirement benefits to its members or provide benefits to dependants in the event of

When it comes to structuring taxeffective transactions for interrelated entities, the case of Merchant and Commissioner of Taxation [2024] AATA 1102 is a stark reminder: jumping in without a full diagnosis can be disastrous. a member’s death.

The ATO’s view on the sole purpose test is detailed in SMSF Taxation Ruling (TR) 2008/2, which confirms the test requires exclusivity of purpose, a higher standard than the maintenance of an SMSF for a dominant or principal purpose.

Essentially, where transactions provide a current-day financial benefit to a member or related party, the fund is at risk of failing the sole purpose test even if the transaction is executed at market value.

Transactions can become problematic when SMSF trustees also hold other roles within the family group, such as in businesses or other controlled entities. If they cannot demonstrate their investment decisions are made solely to serve the fund’s retirement purpose, and not influenced by other business or personal objectives, compliance risks arise.

In the Merchant case, due to the lack of evidence at the time of the transaction, the AAT determined the dominant purpose of the share acquisition was to generate a capital loss in the family trust and to enable the Merchant group to retain a significant shareholding in Billabong.

Neither of these reasons aligned to the core purpose of providing retirement benefits to the fund member.

Continued on next page

QUARTER I 2025 51

COMPLIANCE

Continued from previous page

Merchant’s justifications, such as his belief in Billabong’s recovery and his desire to show confidence in the company, did not change the underlying intent.

The transaction resulted in a situation where MFT reduced its tax liability, while the SMSF took on significant concentration risk and encountered difficulty with cash flow and its ability to maintain the payment of a pension to Merchant, forcing the fund to commute the income stream.

The sole purpose test is not concerned with whether a particular transaction is permissible in isolation, but rather why it was undertaken.

In this case, the AAT concluded the SMSF was effectively used as a vehicle to facilitate a broader tax strategy for MFT, that is, the SMSF was used to solve MFT’s tax problem rather than fulfilling its duty to the fund’s member.

This serves as another important lesson.

Just because an investment is made at market value does not automatically mean it is in the best interests of a fund’s members. Trustees must be able to demonstrate, with objective evidence, SMSF assets are not being misused for personal or business purposes unrelated to the provision of retirement benefits.

Financial assistance to members: a risky side effect Under section 65 of the SIS Act, an SMSF must not provide financial assistance to its members or their relatives. This prohibition extends beyond direct loans to indirect benefits derived through related-party transactions.

The ATO successfully argued that by acquiring the shares the SMSF indirectly provided financial assistance to Merchant. The purchase enabled MFT to realise a tax-saving capital loss – an advantage that would not have existed but for the SMSF’s involvement.

Merchant claimed any financial benefit to MFT was incidental rather than intentional. The AAT disagreed, ruling the transaction provided

52 selfmanagedsuper

a clear, measurable benefit to MFT, bringing it within the scope of section 65.

The AAT decision was not negated by the fact the ATO was successful in applying Part IVA of the Income Tax Assessment Act to deny MFT the capital loss, which ultimately resulted in no financial assistance being provided. The tribunal was of the view the later cancellation of the tax benefit did not undo the breach, stating the breach had already occurred at the time of the transaction.

Just as doctors must consider side effects when prescribing medication, SMSF trustees must evaluate whether a transaction directly or indirectly benefits fund members or relatives.

In this case, the SMSF bore all the risk while the family trust, and its beneficiaries, stood to reap the rewards. A clear regulatory breach.

Trustee disqualification: the risk of permanent suspension In 2020, the commissioner disqualified Merchant from acting as an SMSF trustee under section 126A(2) of the SIS Act, citing serious compliance breaches.

However, although the tribunal acknowledged the seriousness of the contraventions, it determined Merchant was a fit and proper person to continue as a trustee, overturning the disqualification.

In making the decision, the AAT considered his reliance on professional advice, the fact the breaches arose from a single transaction and his commitment to appointing an independent director to strengthen future SMSF governance.

While Merchant avoided permanent trustee disqualification, the case demonstrates trustees who fail to exercise independent judgment and due diligence are at serious risk of regulatory action.

By contrast, Coronica and Commissioner of Taxation [2024] AATA 2592 reinforces the AAT’s willingness to uphold trustee disqualifications where there is a pattern of non-compliance and a failure to acknowledge

Just as doctors must consider side effects when prescribing medication, SMSF trustees must evaluate whether a transaction directly or indirectly benefits fund members or relatives. serious breaches.

Coronica’s persistent contraventions, including unauthorised loans to members and in-house asset breaches, demonstrated an ongoing disregard for SMSF obligations. The tribunal ultimately ruled Coronica was not a fit and proper person to act as an SMSF trustee and disqualification was necessary to protect the integrity of the SMSF system, highlighting that individuals who repeatedly fail to meet compliance standards risk permanent removal.

Conclusion: the right diagnosis saves lives and SMSFs The Merchant case is a timely warning for trustees and SMSF professionals alike.

Just like surgery, tax planning requires precision. There is no room for trial and error. A misstep, whether from poor documentation, non-compliance with SIS rules or a failure to prioritise retirement benefits over taxdriven motives, can prove fatal for an SMSF’s compliance status.

Poor trustee decisions can also have far-reaching personal consequences. Trustee disqualification by the ATO is publicly available information and can result in irreparable damage to one’s reputation, professional standing or business.

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STRATEGY

Effective death benefit protection

SMSF members always want their death benefits to be distributed to the people they nominate and even often want to prevent certain individuals from receiving them. Grant Abbott examines the strategic options that can facilitate the desired outcome.

GRANT ABBOTT is director and founder of LightYear Docs.

54 selfmanagedsuper

Legal challenges over death benefits are only increasing in number, making it more important for advisers to be able to formulate strategies ensuring the end recipient is the person the deceased member chose. The following scenario explores the options available to practitioners and their efficacy.

Introduction: A grandfather’s last stand John Hamilton, an 82-year-old retiree from Melbourne, is facing the fight of his life. Not against cancer, though the doctors have given him less than a year to live, but against a system that could strip his grandson, Liam, of his rightful inheritance. His superannuation fund, built over decades of hard work, stands at $1 million and John has promised it all to Liam.

But there’s a problem. His two adult children, Ben and Sandra, want it all, despite, according to John’s words, “being hopeless with money”. Here’s why.

Ben, once a promising lawyer, spiralled into a gambling addiction burning through his father’s generosity over the years. Sandra, struggling with bipolar disorder, has been in and out of psychiatric facilities. Both have been draining John dry financially for decades and he wants no more of it.

In contrast, Liam is different. At just 14, he has been living with his mother, John’s daughter-in-law, Kate, ever since Ben abandoned them. John has been quietly paying for Liam’s private school fees, costing $1500 a month, to ensure he gets the best education possible.

Now, as the final curtain closes, John wants only one thing – to ensure every dollar of his SMSF wealth goes to Liam and not his children.

What is your advice to John on how to look after Liam? How many strategies can you think of? You would be surprised to know there are at least 10.

Typically, an expensive and well-reputed estate planning lawyer has recommended a testamentary trust (TT) to cover the super and the family home for $25,000 in fees, but John isn’t convinced. He has heard SMSFs offer powerful wealth-protection tools if used correctly.

This is not just an estate planning issue, but a battle for family SMSF wealth protection.

Strategies to secure Liam’s benefits Below are my top strategies to ensure the SMSF death benefits are allocated to Liam.

1. A TT via John’s will – receiving the SMSF death benefits in line with the estate planning lawyer’s advice and partitioning for Liam in a super proceeds trust.

2. A family protection trust (FPT) – withdrawing John’s benefits from his SMSF now and gifting them to a newly established FPT for Liam.

3. A strategic SMSF will – this will direct his SMSF benefits into a special purpose SMSF death benefits trust (DBT) for Liam.

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4. A pension SMSF will – this will establish an account-based pension (ABP) for Liam and will last until the funds run out.

5. A reversionary pension – commencing an SMSF pension for John with a reversion to be paid to Liam on his death.

As we will see, while a testamentary trust is a common legal tool, it is not the strategy for John due to a guaranteed family provisions claim. As such, the FPT and the SMSF route offer a far superior wealth-protection strategy.

However, before embarking on any of these strategies, the following element must be determined.

Liam’s dependant status The Superannuation Industry (Supervision) (SIS) Act 1993 and the Income Tax Assessment Act (ITAA) 1936 determine who qualifies as a dependant for the purpose of receiving taxfree super death benefits.

Both the SIS Act and ITAA deal specifically with spouses and children, but not grandchildren. To determine if the SIS Act allows a payment from the fund directly to Liam tax-free, we must establish that Liam is a financial dependant of John.

What is financial dependency?

One of the critical issues when structuring SMSF death benefit strategies is whether the intended recipient qualifies as a dependant under the SIS Act and ITAA. Two landmark cases, Malek v FC of T and Faull v Superannuation Complaints Tribunal, have helped shape the understanding of financial dependence, which is crucial in determining whether death benefits can be received taxfree.

Financial dependence through regular contributions The Malek case revolved around Antoine Malek, a young adult who passed away with superannuation benefits. He was single, had no children and lived with his widowed mother, Mrs Malek. The key facts of the case were: • Mrs Malek was receiving a disability support pension of $153 a week, and

• Antoine regularly contributed $258 a week to support her living expenses, including food, mortgage payments, taxi fares, medical expenses and bills.

The legal argument witnessed the following: • the Administrative Appeals Tribunal (AAT) considered the regularity and necessity of Antoine’s contributions to his mother in determining dependence, and • the AAT reviewed case law on financial dependence and cited Gibbs J in Kauri Timber Co (Tas) Pty Ltd v Reeman (1973) 128 CLR 177: “One person is dependent on another for support if they rely on that person to maintain their normal standard of living, even if they could have supported themselves from another source.”

In the decision handed down, the AAT ruled Mrs Malek was financially dependent on her son, Antoine, because she relied on his continuous and regular contributions to maintain her lifestyle. As a result, she was entitled to receive his superannuation death benefits tax-free.

The decision had significant SMSF implications, such as determining: • a person receiving regular and ongoing financial support from a parent, grandparent, aunt, uncle or friend may be considered, depending on the facts, to be a financial dependant of the provider, and • ongoing and substantial contributions, such as school fees, rent, a family allowance or other living expenses, may establish dependency under both the SIS Act and ITAA. Partial financial dependence counts The Faull case extended the principle by confirming even partial financial dependence is enough to qualify as a superannuation dependant. The key facts of the case were: • Llewellyn Faull, a 19-year-old, died unexpectedly, • his mother, Mrs Faull, was employed and earning $30,000 a year, and • Llewellyn contributed $30 a week to her as board and lodging.

The legal issues were: • whether $30 a week was enough to

One of the critical issues when structuring SMSF death benefit strategies is whether the intended recipient qualifies as a dependant under the SIS Act and ITAA. establish financial dependence, and • whether Mrs Faull was relying on this payment for her standard of living.

The decision for this case saw the AAT rule financial dependence does not require total reliance. Since Llewellyn’s contributions augmented his mother’s income, she was deemed financially dependent. As a result, she was entitled to his superannuation benefits tax-free.

The implications for SMSFs were: • even small, consistent payments can establish dependency, and • if a grandparent provides regular school fee payments, medical costs or allowances to a grandchild, that individual may qualify as a financial dependant.

Application to John’s case Applying Malek’s and Faull’s cases to John and Liam’s case, we can argue: • John has been paying $1500 a month for Liam’s private school fees. This is a substantial and ongoing contribution, and • Liam’s mother earns an income, but Liam relies on John’s financial support for education and living standards. Therefore, Liam should qualify as a financial dependant under the SIS Act and ITAA. Given this status, John can: 1. Directly pay a pension or lump sum to Liam via an SMSF will.

2. Provide for Liam as a reversionary pension beneficiary.

3. Bypass the estate completely, avoiding family provision claims from his father and Continued on next page

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aunt.

4. Prevent his children from accessing Liam’s SMSF inheritance.

5. By leveraging these landmark cases, John’s SMSF strategy shields his wealth from legal challenges and ensures it remains within his bloodline.

6. Of course, it would be safer for John to seek a private binding ruling (PBR) from the ATO to confirm his available actions.

Let’s now assess the five strategies suggested above and their efficacy for John’s predicament.

Option 1: TT A TT is one created under John’s will that would hold his SMSF proceeds for Liam. The arguments for using one would be: • it provides control over how the funds are spent, • it ensures asset protection against creditors or future family disputes, and • Liam, as a minor, benefits from adult tax rates on trust distributions.

But there are drawbacks such as: 1. The SMSF death benefits must first go to John’s estate: o this means they can be contested by Ben and Sandra under Victoria’s family provision laws, and o Ben and Sandra as children could argue for a fair share of the estate.

2. Probate and delays: o the final payouts could take months, even years, if contested, delaying Liam’s access to funds and will cost in the hundreds of thousands of dollars in legal fees.

Clearly the TT exposes John’s wealth to unnecessary risk and is the least attractive option.

Option 2: setting up an FPT The second option is for John, while he is in his final year of life, to withdraw his benefits from his SMSF and gift it to an FPT that has himself and then Liam as family protection appointors. Unlike most discretionary trusts,

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an FPT does not have named beneficiaries due to the inherent trustee removal issues by beneficiaries. Upon John’s death, Liam and his bloodline children will be beneficiaries of the trust with exclusions for spouses or stepchildren. It extends to bloodline relatives as well.

The benefits in this strategy are the gift

by John prior to his death ensures the super benefits are tax-free and a PBR confirming Liam is a dependant does not have to be sought.

Also, as the gift happens prior to John’s death, it is not caught up in any family provision claim.

The downsides are any distribution from the FPT to Liam prior to age 18 will be assessed at the penalty tax rates for trust distributions to minors. Further, as Liam is under 18, he cannot be a director of the corporate trustee, raising the issue of who will hold that role until he becomes an adult. Liam, however, can be the family protection appointor as a minor.

Option 3: death benefit pension An SMSF will is a set of strategic directions encapsulated in the governing rules of the fund that go beyond standard binding death benefit nominations essentially built for industry and retail superannuation funds.

Further, section 102AG of the ITAA enables the creation of a DBT when John dies where his death benefits will be channelled into that trust. The beneficiary will be Liam and his bloodline children.

The advantages of this strategy are Liam will be taxed at adult tax rates, the DBT is protected from any family provision claim and his benefits will be protected from any future litigation or family law action against him.

However, Liam will be subject to tax on distributions and he cannot be a trustee or a director of a corporate trustee until age 18.

Option 4: account-based pension The SMSF will can provide that, on John’s death, his benefits are to be paid as a pension to Liam. Since Liam qualifies as a financial dependant, he can receive a pension from the SMSF and, as he is not John’s child, the commutation rule at age 25 does not apply.

The advantages of this course of action

Two landmark cases, Malek v FC of T and Faull v Superannuation Complaints Tribunal, have helped shape the understanding of financial dependence, which is crucial in determining whether death benefits can be received tax-free. are the pension is assessable income, but Liam will receive a 15 per cent tax offset and the underlying income and capital gains in the fund are tax-exempt. In addition, the benefits will not be caught up in any family provision claim and Liam will be provided with a constant income stream and may be tailored with limited commutations written into the SMSF will and pension documents.

Unfortunately, if this strategy is used, the death benefit is not protected from litigation or any family law or de-facto separation agreement and the ABP will be tested against Liam’s transfer balance cap, which may limit future super contributions.

Option 5: reversionary pension In this case, John can commence an ABP now and have Liam as a reversionary beneficiary.

This approach produces the same outcomes as option 4, however, as the pension is from John, who was receiving it tax-free, it will also be tax-free to Liam. All other advantages and disadvantages from option 4 apply.

Conclusion There are another five strategies that can be brought to bear for John and Liam. The most important thing is to remember to take into account the SMSF, estate planning and asset protection elements.

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COMPLIANCE

Selling the farm

The proposed Division 296 tax put SMSFs holding farm land in focus. Michael Hallinan examines the application of transfer duty should trustees decide to divest in these assets.

MICHAEL HALLINAN is superannuation special counsel at Super Central.

Many SMSFs have primary production land, or the farm, as a fund asset. Many trustees though are now reviewing whether their fund should retain the farm in the fund or if it should be held in another associated entity. This review of the investment strategy of the SMSF could be prompted for many reasons, including the: • suitability of the farm as a retirement-phase asset, • inability to borrow for capital improvements while the farm is in the SMSF, • need for diversification and to remove a lumpy asset from the fund’s asset pool, and • likely enactment of the Division 296 tax.

Extracting the farm Extraction could be achieved simply by selling the primary production land, whether to a related party or a third party. The extraction could also be achieved by an in-specie distribution as a benefit payment.

Additionally, there may be a strong desire to retain the farm within the family of the investor or under the control of the investor. Unfortunately, the sale of the farm to a family member or entity or the in-specie distribution as a benefit payment will normally give rise to a liability for transfer duty. Fortunately, if the asset is situated in New

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South Wales, there may be transfer duty relief on the extraction, whether it is a sale or in-specie transfer. This relief is provided by section 274 of the NSW Duties Act 1997. Recent amendments, that took effect from 19 May 2022, have considerably expanded the application of the section.

In respect of extraction of the farm from the SMSF, the transaction may be free of transfer duty where the purchaser or recipient of the in-specie benefit payment is a discretionary trust, private unit trust or a private proprietary company that is associated with the investor who is a member of the SMSF. Naturally there are fine details to understand and satisfy before the transfer of title to the farm is marked exempt by the NSW Office of State Revenue.

This article will illustrate the application of the amended section 274 of the NSW Duties Act by use of this simple scenario. Bill and his spouse, Bernie, are members of the B&B Super Fund, an SMSF with a corporate trustee. Both Bill and Bernie are currently in retirement phase with current balances of $1.6 million and $2.8 million respectively.

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The farm is leased to the Big Bill Pastoral Company Pty Ltd controlled by Bill, who is the entity’s sole director and majority shareholder.

The proposal is for Bill to commute 80 per cent of his pension of $1.6 million, resulting in a lump sum benefit entitlement of $1.28 million, which is to be discharged by a cash payment of $80,000 and the transfer of the title to the farm, which has a market value of $1.2 million.

What is the transfer duty on the transfer of title?

If section 274 does not apply, the duty would be $48,529. If section 274 does apply, the duty would be nil.

For reasons buried in the depths of the text of section 274, the section will only apply if Bill is not the transferee of the title even though he is the relevant member. However, the section will apply if the transferee is the Big Bill Pastoral Company Pty Ltd. Two issues need to be considered.

Firstly, why does section 274 apply?

Secondly, how, consistently with the benefit payments standards of the Superannuation Industry (Supervision) (SIS) Regulations, is it possible to pay the in-specie benefit payment of Bill to another entity?

Section 274 issue The transaction will be eligible for nil transfer duty if four requirements are satisfied. The first is the land must qualify as “primary production land” as defined in section 10AA of the Land Tax Management Act 1956. Essentially, if the farm is exempt from land tax, this requirement will be satisfied.

The second requirement relates to the relationship between the transferor, in this case the SMSF, and the transferee, in this case Big Bill Pastoral Company. This requirement will be satisfied if “the person directing the transferor”, as defined in section 274, is a family member of the “person directing the transfer”.

Notwithstanding that the expression “the person directing” the transferor or transferee, as the case may be, may have the meaning of the controller of the relevant entity, the expression is defined and it only takes its defined meaning.

The words “person directing” must be treated merely as a label that has no other than

the defined meaning and the words of the label do not influence or colour the defined meaning. Applying the defined meaning when the transferor is an SMSF, it simply means “a member of the fund”. There is no textual reason to read into the definition any requirement that the member must be the controller or controlling member or the member who is at the centre of the transaction.

In this case Bernie would qualify as “the person directing the transferor” even though the transaction does not involve her superannuation interest and she has not requested the benefit payment and that the benefit payment is not payable to her. Bill is the person directing the transferee as he satisfies the definition when the transferee is a private proprietary company because he beneficially owns shares of Big Bill Pastoral and his shares confer voting rights, and he has an entitlement of having a 25 per cent or more entitlement on any winding up of the company.

Once two natural persons have been identified who respectively satisfy the definition of “person directing the transferor” and “person directing the transferee”, the first requirement will be satisfied as the former is a family member of the latter. Family member is defined and includes a spouse. As Bill, the person directing the transferee, is the spouse of Bernie, the person directing the transferor, then the first element will be satisfied. Interestingly, if Bill was the sole member of the SMSF, this requirement would not be satisfied as he cannot be a family member of himself.

Both the third and fourth requirements concern the issue of whether the primary production business is a family business both before the transfer (third requirement) and after the transaction (fourth requirement).

The third requirement is that the primary production business being carried on before the transfer must be carried on by the transferee or a family member of the transferee or by the person directing the transferee or a member of the family of the person directing the transferee.

In relation to the scenario, this requirement is satisfied as the transferee is Big Bill Pastoral, which is carrying on the primary production business before the transfer.

The fourth requirement is the primary

Extraction could be achieved simply by selling the primary production land, whether to a related party or a third party. The extraction could also be achieved by an in-specie distribution as a benefit payment. production business will continue to be carried on by the transferee after the transfer. In relation to the scenario, this requirement is satisfied as the transferee is Big Bill Pastoral, which is carrying on the primary production business after the transfer.

Consequently, the requirements of section 274 will be satisfied and the duty on the transfer will be nil and not $48,529.

It must be noted the section expressly requires the chief commissioner to be satisfied as to each requirement. Consequently, sufficient supporting information and documents and a detailed explanation as to how the circumstances of the particular transaction satisfy all of the relevant requirements are needed. Also, applications for assessment under section 274 will be assessed by the NSW Office of State Revenue and not by an authorised agent.

SIS payment standards In the case of an in-specie benefit payment, if the member directs the trustee to transfer title to an associated entity of the member, does this contravene the SIS benefit payment standards and in particular SIS Regulation 6.22?

This issue was considered in Asgard Capital Management Limited v Maher [2003] FCAFC 156. This case considered the text “a member’s benefits in a regulated superannuation fund Continued on next page

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must not be cashed in favour of a person other than the member”. The full court held the phrase “in favour of” was held to mean “payable to or to the order of” the member.

So long as the member has in fact correctly instructed the trustees to pay the benefit to an associated entity, and the trustees act on that instruction, there is no breach of SIS Regulation 6.22.

Applying the reasoning of the full Federal Court in the Asgard Capital case to the scenario above, if Bill makes a formal request for the partial commutation of his pension and expressly directs the SMSF to transfer the title to an entity, Big Bill Pastoral, and provides the SMSF with a release that transfers title to the farm to Big Bill Pastoral, he will be deemed to have discharged, to the extent of $1.2 million, the trustee’s liability to pay $1.28 million.

Bill, for taxation purposes, will be treated as having constructively received $1.28 million and any tax consequences arising from that constructive receipt will be borne by him.

Fortunately, the tax consequences are that Bill has received $1.28 million of non-assessable non-exempt income. As the payment by the SMSF is a payment of a non-assessable nonexempt amount, the SMSF has no obligation to withhold taxation instalment deductions from the payment.

Other possible objections There are a number of objections to the transaction.

• No power in trust deed or governing rules – There must be express power in the trust deed or governing rules to permit an in-specie benefit payment or sale to a party associated with a member. If such an amendment were required, it would be an uncontroversial one to implement. This objection is easily resolved.

• No occurrence of an unrestricted release condition – The payment cannot be made as Bill has not satisfied a release 60 selfmanagedsuper

condition. In this case Bill has attained age 65 and thereby satisfied a release condition.

• Breach of sole purpose requirement – If the farm is transferred as an in-specie benefit payment, there would be no breach of the sole purpose test, section 62 of the SIS Act, assuming the member is entitled to a benefit payment and the market value of the farm does not exceed the value of the member’s entitlement. In the case of a sale to the member, with a special condition to transfer title to an entity associated with the member, there would be no breach of section 62 if the sale was for market value.

As the transfer is for market value, there is no value stripping from the SMSF. Also the full or partial commutation of a retirement-phase pension is not a breach of the sole purpose test as this test does not require benefits to be only taken as income streams.

• Breach of financial assistance prohibition (section 65 of the SIS Act) or the statutory covenants – If the member has a right to be paid $1.28 million by reason of the partial commutation of the pension and the trustee transfers an asset or assets that have a market value of $1.2 million, where is the financial assistance? While Big Bill Pastoral has received financial assistance, this assistance is from Bill and it has arisen by reason of the direction he has given to the fund trustee, which discharges the SMSF’s liability to Bill arising from his exercise of his right to commute his pension. While the SMSF has chosen to transfer a particular asset rather than other assets of equal value, there are sound reasons for such a choice, such as to dispose of a low-yield, illiquid, highly concentrated asset that will ultimately give rise to liquidity and concentration risks as Bill and Bernie’s minimum pension drawdown rate increases.

• Breach of the best financial duty (section 52B(2)(c) of the SIS Act) – Is the decision of the trustee to pay a benefit by way of an in-specie transfer or the payment of a benefit by way of the in-specie transfer

Many trustees though are now reviewing whether their fund should retain the farm in the fund or if it should be held in another associated entity.

of a particular asset in the best financial interests of the members? The decision to discharge a debt owed to a member by the in-specie transfer of a particular asset has not affected Bernie’s interest in the fund.

The value of her superannuation interest is unchanged. The removal of a lumpy, lowyielding asset has improved the likelihood that her pension payments will be made in cash as and when due.

• Is the in-specie benefit payment consistent with the investment strategy? – As previously mentioned, there could be sound investment reasons for the exit of a low-yielding lumpy asset from a fund that is in retirement phase. Investment strategies are not set in stone and can and should change over time as the conditions of the fund change. An investment strategy cannot prevent a member from exercising his pension commutation rights. The terms of the pension may, however, restrict those rights, but the pension is a commutable account-based pension.

Section 274 concession is difficult to determine Whether a particular transaction is one to which the section 274 concession applies can be difficult to determine. However, the successful application of the concession will provide a significant financial benefit.

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SUPER EVENTS

SMSF NATIONAL CONFERENCE 2025

The SMSF Association National Conference returned to Melbourne for 2025. Around 1600 delegates travelled to the Victorian capital to consolidate their technical knowledge and network with their peers.

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1: Peter Burgess (SMSF Association). 2: Tim Steele (Class), Meg Heffron (Heffron), Jon Howie (Stake), Sarah Abood (Financial Advice Association Australia) and Peter Burgess (SMSF Association). 3: Katie Timms (Finchley and Kent). 4: Bryce Figot (DBA Lawyers). 5: Scott Hay-Bartlem (Cooper Grace Ward).

6: Victoria Mercer and Neal Dallas (both businessDepot). 7: Melanie Dunn (Accurium). 8: Meg Heffron (Heffron). 9: Craig Day (Colonial First State).

10: Tracey Scotchbrook (SMSF Association). 11: Cameron Gleeson (Betashares). 12: Julie Steed (MLC TechConnect). 13: Fabian Bussoletti (SMSF Association).

14: Kath Bowler (Holley Nethercote) and Keddie Waller (SMSF Association). 15: Emma Rosenzweig (ATO), Leah Sciacca (Australian Securities and Investments Commission) and Tracey Scotchbrook (SMSF Association). 16: Peter Burgess (SMSF Association).

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