Strategies for success
20 23
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Cover story | 12 FEATURE
The Quality of Advice Review | 16 Industry reaction.
Investing | 20
Caution needed over US equities.
Investing | 24
Bonds making a comeback.
Compliance | 28
The proposed NALE solution.
Strategy | 34
Considerations when entering retirement.
Compliance | 38
Pension transfers from overseas part four.
Compliance | 42
Transfer balance cap indexation.
Compliance | 45
The rules governing unconventional assets.
Strategy | 48
Super wealth tax implications.
Compliance | 52
Accessing member benefits properly.
Strategy | 55
Work test rule amendment.
Compliance | 58
Observing trust allocation parameters.
Compliance | 61
Managing contribution errors.
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 | 64
Ever since the Albanese government announced its policy direction to introduce a 30 per cent tax on the superannuation balances of individuals over $3 million, it has dominated discussion in this sector. It originally sparked many concerns, but stakeholders were prepared to wait for the details of the measure to be presented.
Well we’ve got some of the detail now by way of Treasury’s fact sheet on the subject and it doesn’t seem to have quelled any of the angst.
Before even looking at the proposed tax from a more granular perspective, let’s recognise this measure for what it is – an attack on SMSFs. At the moment it is estimated only 80,000 Australians will be affected and SMSF Association chief executive Peter Burgess has noted the majority of this cohort will be SMSF members.
Unfortunately the direction follows a pattern we’ve seen before from Labor governments past, that is, not being able to hide its policy bias in favour of the industry funds and against SMSFs. And before I get accused of being a conspiracy theorist, let me join a few dots we already have.
The proposed solution to the non-arm’slength expenditure rules for general expenses applies to SMSFs but includes a carve-out for industry funds. Similarly the fiddling with franking credits has begun in earnest and we know where those roads lead. But these are items for a different conversation.
You’d have to think a policy has to be pretty bad when the only positive feedback I heard about it is how it will be administered –considered a win because it will not create a bigger administrative burden on super fund trustees. But that’s where the optimism ends.
On the negative side of the equation the proposed policy represents an approach to taxation that is diametrically opposite to the way the system has worked up to now.
The calculation of the new tax is fundamentally based upon the difference in an individual’s total super balance at the start and end of a particular financial year. As has been highlighted on many occasions already, that means taxing unrealised capital gains. This has never been a tenet of the system in this country before.
Worse still, if a person gets slugged by this tax in one year, but in subsequent years sees their total super balance fall below the magical $3 million mark without having it ever return above the threshold, the charge they paid on unrealised capital gains cannot be clawed back.
I could go on and on about this but would require many more pages in this publication to cover everything egregious about the measure.
One criticism stands out though. One of the dangers that has been flagged about this move is the ability it will have to further erode confidence in the retirement savings system and we are already seeing evidence of this.
In recent weeks a partner from PWC admitted reticence among clients to follow through with asset acquisitions and SMSF strategies had already begun to surface around a week after the policy announcement was made.
So the slippery slope has well and truly started. However, I failed to mention one other positive element and that is the measure is undergoing a consultation process and has to be passed by both houses of parliament. Fingers crossed amendments will be made and the final draft of the policy will be more reasonable. But I wouldn’t count on it.
Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au
Senior journalist Jason Spits
Sub-editor Taras Misko
Head of sales and marketing David Robertson sales@bmarkmedia.com.au
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The ATO is currently formulating new compliance guidance materials for trustees with the SMSF Association, acknowledging the initiative of most note is the one covering off its ability to issue an education direction.
“One of the powers the ATO has these days, if trustees do the wrong thing, is to issue an education direction to the trustees to say you’ve got to undertake a certain course of education. The ATO had previously approved certain courses for this purpose but those courses no longer appear on the regulator’s website. They’ve been taken down,” SMSF Association chief executive Peter Burgess told attendees at the recent Accounting Business Expo 2023 held in Melbourne.
Peter Burgess“So there are no courses there at the moment, but the ATO is now coming up with its own course. Previously it had relied on external education providers for courses of which it approved.”
It is expected the ATO’s own trustee education courses will be made available later this year.
According to Burgess, the move to
provide its own trustee courses is not the only initiative the regulator has embarked on in an effort to increase the knowledge of individuals who run their own super fund and in turn improve compliance levels within the sector.
“Also of note is a new fact sheet that the ATO has now made available for advisers and accountants to in turn make available to SMSF trustees,” he said.
“This is to help clients understand the preservation rules basically, that is, the rules around members accessing their money early.”
He suggested practitioners with SMSF clients should familiarise themselves with the fact sheet as it is a very user friendly tool for fund members.
“Make a note of that fact sheet. It’s a really easy read and something you can give out to your clients to make sure they understand the rules,” he noted.
By Darin Tyson-Chan
The chief investment officer of a funds management firm has relayed a scenario raised by a shareholder that demonstrates the severe impact the proposed 30 per cent tax to be levied on superannuation member balances above $3 million will have for individuals whose liquidity levels are low.
“I was talking to one of our shareholders a couple of weeks ago after [the measure] was announced. He’s a farmer who lives six kilometres from a regional centre that is growing very well. He fell on tough times and had to sell half the farm to an investor, with the remaining half being held in his self-managed super fund,” Wilson Asset Management chair and chief investment officer Geoff Wilson shared during a client webinar.
Stephen JonesWilson noted the farmer had benefited from the recent appreciation in property prices, which has resulted in his member balance exceeding $ 3 million.
This means he would be caught by the new charge – a situation he has already recognised he will struggle to manage due to the nature of his SMSF portfolio and is
already worried about.
“He asked: ‘How am I going to pay the tax?’ He said: ‘I’ll have to sell my farm that I’ve owned all my life because that’s the only way I’ll be able to pay the tax,’” Wilson said.
He described this scenario as an illustration the government has not thought the proposed policy through properly.
Wilson Asset Management chief financial officer Jesse Hamilton concurred that the proposed $3 million soft cap seems to have been rushed into existence.
“As everyone is digesting the proposal, everyone is starting to look at who it is going to impact and finding these unique circumstances,” Hamilton said.
“The Assistant Treasurer [Stephen Jones] and Treasurer [Jim Chalmers] have said [the measure] will only impact a few [people], but that just demonstrates it has not been thought out because I think it’s going to impact a lot of people in these situations.”
The ATO has confirmed it will not be providing specific wording for an SMSF investment strategy even though there has been high demand among trustees for it to do so.
“We’re often asked about specific wording that should be included in an investment strategy. For example, should it have percentages in terms of asset classes and should it specify certain objectives such as setting specific rates of return,” ATO superannuation and employer obligations director Paul Delahunty said.
“Our view on this is ultimately the specific wording and detail in an investment strategy will be up to the trustees and will depend on their personal circumstances.”
However, he indicated the regulator’s reluctance to provide specific wording for an investment strategy did not mean it is unwilling to give SMSF trustees assistance in complying with their legal obligation in this area regarding both what to do and what to avoid doing.
An assessment of current superannuation data performed by SuperConcepts has shown a noticeable preference that has emerged among SMSF establishments to have the fund service a smaller number of members.
“We haven’t seen much uptake or interest in six-member funds. So [the records show] four or more members [only account for] 3 per cent of our client base. The vast majority are two-member funds,” SuperConcepts SMSF support executive manager Nicholas Ali said.
“But a trend that we are seeing is [a rise in the number of] single-member funds.”
“A lot of people who are setting up selfmanaged superannuation funds are single members.”
He pointed out, situations where one member of a two-member fund passes
away leaving the SMSF to continue as a single-member fund is contributing to the shift, but not in a significant manner.
“What we see generally is [where] there is one surviving spouse [from a twomember SMSF] they tend to rotate into an industry fund rather than maintain their self-managed super fund,” he noted.
The SMSF Auditors Association of Australia (SMSFAAA) has announced it is offering a new tier of membership in response to feedback from its members.
“I’m really excited to announce today that we will be offering an associate membership and that will include allowing your staff, who aren’t registered auditors, to take part in our education programs with 20 hours of CPD (continuing professional development) included,” SMSFAAA president Lina De Marco said.
“So we really encourage you to help us educate your staff and prepare upcoming auditors for after we all retire because it’s really important to leave a legacy and improve the education of the younger people coming through the system.”
The new membership level will cost $330 annually and has been made available based on a member survey where 72 per cent of respondents suggested an initiative of this kind would be a positive development.
A specialist financial services firm offering assistance to advisers has partnered with a portfolio management company to assist SMSFs that have not meet the ATO’s investment strategy requirements by providing compliant fund-specific documentation.
The Investment Strategist service is a collaboration between Iconic Investors
and Clearwater Capital and will produce investment strategy documents, including insurance, in line with the specific retirement goals and investment objectives of the members of an SMSF and that comply with the ATO guidelines.
Iconic Investors director Tony Zulli revealed as part of the development of the service, the two firms created a set of diagnostics that measure the diversification, liquidity, cash flow, volatility and risk/return within a portfolio, which are then used as inputs into the investment strategy document.
“We ask trustees and their service providers to supply us with the actual portfolio data as a starting point. We use this data to incorporate the key components of the new ATO guidelines, including asset concentration, liquidity, risk, cash flows and insurance,” Zulli said.
“We also help trustees to look ahead at any significant events over the next 12-month period (for example, a fund member leaving) and adjust their strategy accordingly.”
The service also covers the annual review of a strategy and capital market assumptions are used for each asset class to assist trustees in evaluating the future returns and volatility of the portfolio.
The SMSF Association’s quest to remove the number of caps in superannuation is longstanding. So, the introduction of a $3 million threshold on super balances above which a higher tax rate applies was always going to find us in the opposition camp. Superannuation has contribution and transfer balance caps, so adding another layer of caps simply adds complexity.
Complexity comes at a big cost as it undermines confidence in the system. In our experience every change to the system has people asking: “What next?” – a very human response when it’s their money locked up, often for decades. This time, it’s estimated only 80,000 are affected, but that does not stop others from feeling vulnerable. And, as we are discovering with this latest change, there’s also the law of unintended consequences.
The association also argues large balances are a legacy issue that contribution caps and the transfer balance cap will address over time. They just need time to work.
But the government is set on introducing a $3 million balance cap, and if the Senate concurs, then we agree with Canberra a soft cap that taxes earnings on balances above the threshold at a reduced concessional rate is a far better option.
A hard cap would force money out of the system, potentially causing a raft of seemingly unnecessary complexities and disruption to investment markets, as well as individual retirement plans. Perhaps more importantly, it suggests the government is less concerned with large balances in the super system, implicitly conceding very large super balances are not the issue, rather the tax concessions they attract is the bugbear.
So, from our perspective, it’s a positive the policy response does not force the removal of super benefits or restrict the amount an individual is permitted to save through the system.
Within days of the government’s announcement, Treasury issued a fact sheet explaining how earnings would be calculated for the purposes of the new tax. It was like the curate’s egg, good in part. On the plus side, it stated super funds, including SMSFs, would not be required to calculate the portion of the earnings attributable to the member’s balance above $3 million.
This essentially means the ATO will leverage the existing system and reporting capabilities to undertake much of the additional work associated with this new tax so it should have minimal impact on SMSFs in terms of administration and costs. And, if an individual makes an earnings loss in a financial year, this can be carried forward to reduce the tax liability in future years, also
good news.
But on the negative side, the ATO will use an individual’s total super balance to calculate their earnings, meaning it will include all notional (unrealised) gains and losses. This is where the law of unintended consequences could come into play.
There has been no shortage of horror stories in the media since this policy announcement about how farmers and small business owners, in particular, could fall foul of this $3 million cap. Put simply, their decision to put their farms or business premises into their super fund as their retirement savings strategy could backfire if they are taxed at a higher rate on the notional earnings of these assets once their total super balance exceeds $3 million.
Often asset rich, cash poor, there is a possibility they will be forced to sell assets slated for their retirement savings to meet an immediate tax bill.
There are also questions about insurance proceeds and whether, for the purposes of this new tax, they will be excluded from the member’s total super balance. If they are not, individuals could find themselves exceeding the $3 million threshold and having to pay this new tax. If they are excluded it will mean the ATO will need to adjust the member’s total super balance and possibly maintain two total super balances for the member, that is, one for the purposes of this new tax and another to determine eligibility for a number of super-related measures for the following financial year. SMSF tax refunds are another interesting area. These amounts increase a member’s total super balance and if not excluded from the calculation of earnings, could result in members paying tax on their tax refund.
To avoid a repeat of the disastrous super surcharge, which cost more to build and run than it raised in government revenue and was subsequently abolished in 2005, it’s important all these unintended consequences are properly identified and addressed.
There is also the issue of indexing. Today’s $3 million cap looks a tidy sum. When we add in the issue of inflation and increases in the cost of living, what does $3 million look like in five, 10 or 20 years? Hopefully the government will recognise this and reconsider its decision not to index the cap.
Governments of all political persuasions have been tinkering with superannuation ever since it became compulsory in 1992. Not all changes are bad, indeed, some we have advocated, but there can be no doubt constant change does undermine confidence in the system. Which is why getting a definition of super must be a priority. It won’t prevent further change, but it might make politicians take a deep breath before embarking on it.
Debate is raging about a proposal to increase taxation for Australians with superannuation balances over $3 million. With this in mind, it’s worth taking a look at the measures that were put in place to prevent large balances arising in the first place and examine whether the policy rationale for these measures is now redundant.
Various caps and limits have been a fixture of the superannuation system for the past decade and a half. They were designed to limit the amount of money flowing into super accounts. This, in turn, was intended to prevent high-income earners from using their superannuation accounts as a tax shelter.
All of which was aimed at ensuring superannuation is used for its intended purpose – to provide benefits in retirement.
In 2007, the government introduced superannuation contribution caps as part of the Simpler Super reforms. The aim was to limit the amount of money individuals could contribute to their super accounts per year. They applied to concessional and non-concessional contributions.
Prior to the reforms, there was no limit on the amount of money that could be contributed to super. There were, however, restrictions in the form of reasonable benefit limits (RBL) on the amount able to be taken as a superannuation benefit at a concessionally taxed rate.
RBLs were introduced in the 1980s. They were designed to limit the tax concessions individuals could receive in benefits from their superannuation accounts.
Lump sums above the RBL were taxed at a higher rate, while pensions above the pension RBL did not receive the 15 per cent rebate. The Simpler Super reforms saw an end to RBLs.
The abolition of RBLs meant individuals could receive unlimited concessionally taxed lump sum payments from super. Had contribution caps not been subsequently legislated, this may have led to a huge increase in the amount of money channelled into superannuation.
The superannuation contributions caps operating on a per-year basis since 2007 vary depending on the type of contribution. For example, the 2023 financial year sees concessional and non-concessional contributions capped at $27,500 and $110,000, respectively. Additional tax applies to breaches of these caps.
Contributions caps have taken up the role of
limiting money flowing into superannuation since RBLs were abolished. This is particularly the case for highincome earners. Prior to May 2006, it was theoretically possible for individuals to contribute unlimited amounts of money to super, subject to the RBLs.
In 2017, the government introduced the transfer balance cap (TBC) and the total superannuation balance (TSB) restrict. These measures are designed to further limit the amount of money that can be held in super accounts.
The TBC curbs the amount of money that can be transferred into retirement-phase accounts. The TSB, meanwhile, controls the total amount of money that can be held in a person’s superannuation accounts by restricting additional contributions.
For 2022/23, the general TBC and the TSB limit is $1.7 million.
The introduction of the TBC and TSB limit has had a significant impact on the way individuals can use their superannuation accounts. Before the TBC it was possible for high-income earners to accumulate significant wealth in the tax-free pension phase of super.
Additionally, while contribution caps restricted the amount people could put into superannuation annually, the TSB now places an additional lifetime limit on non-concessional contributions.
The introduction of these boundaries means high-income earners would be more likely to consider alternative investment strategies to accumulate wealth.
As this summary shows, there are a variety of measures in place that limit large super balances. Hence, the proposed tax on super balances over $3 million raises difficult questions about the current restrictions on superannuation.
For example, there is now very clear messaging balances over $3 million are acceptable. This should mean the total superannuation balance limit on contributions is redundant and should be repealed.
Likewise, the role of contributions caps needs to be questioned. If high, yet still concessionally taxed, balances are allowed in superannuation, why should taxpayers be penalised for taking advantage of this?
Arguably, contributions caps are also redundant.
The $3 million super balance tax proposal is still subject to debate and discussion. However, it represents a potential shift towards a system where higher rates of taxation could be enabled. One where additional tax is the trade-off for people who wish to accumulate larger super balances.
Many have welcomed the government’s announcement to legislate an objective of superannuation, however, I question whether we really need it. Who is this potential change to super really for?
The introduction of words such as “equitable” and “sustainable” in the proposed definition have raised new questions and triggered a national debate about a broader review of the superannuation tax concessions. Shortly after releasing the consultation paper, the government also announced it will introduce an additional tax of 15 per cent on earnings for individuals whose total super balances (TSB) exceed $3 million at the end of a financial year.
If the objective is to provide stability and confidence to the Australian community and help protect superannuation from political interference, but the government then announces a new proposed tax on super, what’s the point of having an objective?
Introducing an objective will not stop the government from tinkering with the system. This is our concern. Legislating the purpose of superannuation was initially intended as a shield to protect super against tinkering, but our fear is it might be turned into a sword so that once you’ve reached the level that the government thinks is enough superannuation for a “dignified retirement”, then anything above that is fair game, as illustrated by the new tax. It seems as though the purpose is really for the policymakers, regulators and the government’s financial situation rather than focusing on members’ and their families’ needs.
So contrary to expectations that the objective of superannuation is about preserving your super until retirement, it is a strategic move by the government to restrict the tax concessions in the super environment in order to claw back some revenue to repair the current budget deficit.
I think the answer to what the purpose of superannuation is for already exists by way of the sole purpose test. This test requires super funds to be maintained for the sole purpose of providing retirement benefits to their members’ or to their dependents if a member dies before retirement.
As the sole purpose test already exists, it could be revisited to tighten up existing preservation rules if
access to superannuation is currently thought to be too easy. However, to that end, the consultation paper unfortunately states the objective of superannuation is not intended to guide the regulation of trustees’ conduct and the sole purpose test.
Turning back to the new tax proposal, is it really equitable and fair that certain members will be subject to potential double taxation as a result of having to pay tax on unrealised gains for assets that haven’t been sold, and then paying tax again at the time those assets are sold? This is not the way the Australian tax system works and this proposal goes against the general tax principle of paying tax on income that has actually been derived or on actual realised gains. This proposal will also mean those funds that have liquidity issues will need to ensure they have sufficient cash flow to pay this additional tax, particularly on unrealised gains.
Also, what if the market is volatile and crashes, causing a member’s TSB to drop to below $3 million? Well unfortunately without the loss carry-back rules being available, members won’t ever be able to recoup the additional tax already paid.
Treasury has stated the newly proposed tax is the easiest to administer under the existing superannuation fund reporting system and will “keep compliance costs low”. Should that outcome take priority over members’ best interests and the broader objective of super?
Although we want the superannuation system to be fair and equitable for all Australians, the introduction of another cap is unnecessary as there are already mechanisms in place, such as contributions caps and the transfer balance cap, to address the issue the government sees as a problem.
But if we really do need to see the tax settings change for larger balances, surely there are easier ways to do this that are more reasonable, practical and fair rather than a regime where the main driver seems to be the need for an urgent tax grab the government will not need to pay back if markets crash.
To this end, the proposed change appears to put the objective of having “a more equitable superannuation system” as a priority that runs a distant second.
Why do we have the superannuation system and what is it trying to achieve? These are good questions that successive governments have had trouble answering with any certainty.
In June 1992, the then Treasurer, John Dawkins, said the following: “We need now to start saving more for our future retirement … saving for retirement will have to be compulsory. It means that these savings will increasingly have to be ‘preserved’ for retirement purposes. Lastly, the rate of saving will have to ensure retirement incomes which are higher than that provided today through the age pension system … by requiring those who can do so to save for their retirement, better retirement incomes can be provided for those who cannot save.
“Future Australians will benefit from this requirement. Increased financial flexibility will enable future governments to increase the age pension rate to meet contemporary community expectations.
“This government sees the age pension not just as a security net for future retirees, but as the keystone of its superannuation policies. It expects that most future retirees will continue to be eligible for the age pension (for example, through a part pension), which, with self-provided and tax-assisted superannuation, will allow a higher retirement income than is now generally available.
“… implementation of the SGC (superannuation guarantee charge) implies that a privately provided retirement income of about 40 per cent of final income is a level to which the community might wish to aspire for the time being.”
Almost one year later, in June 1993, Vince Fitzgerald prepared a report for Dawkins, titled “National Savings”.
In that document, Fitzgerald said in the forward: “The ultimate aims of that [the SGC] policy should be clarified. (Is one goal to make most Australians independent of the age pension…?)”
Later in the report, he said: “… a very long transition period lies ahead before it [the SGC] is fully in place, pointing to the importance of clarifying its ultimate goals and improving the interaction between superannuation and the age pension.”
Then over 20 years after Fitzgerald’s report, the Financial System Inquiry, often called the Murray inquiry, stated, in December 2014, setting an objective for the superannuation system “is necessary to target policy settings better and make them more stable. Clearly articulated objectives that
have broad community support would help to align policy settings, industry initiatives and community expectations.”
It proposed the following objective: “To provide income in retirement to substitute or supplement the age pension.”
The Turnbull/Morrison governments unsuccessfully sought to legislate this objective.
Next came the Retirement Income Review, which said, in November 2020, we need an objective of the retirement system not just for superannuation. It proposed it should be “to deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way”.
The review said an objective is needed to “anchor the direction of policy settings, help ensure the purpose of the system is understood and provide a framework for assessing the performance of the system”.
Which brings us to the Albanese government. It presumably doesn’t believe an objective for the retirement income system is necessary because in late February it issued a consultation paper on a proposed objective of superannuation. It proposed the following wording, “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”. It then seeks to explain what some of these words mean, including it is seeking to explain three key aspects – the purpose of superannuation, how super delivers on its purpose and the place of superannuation in the broader retirement income system.
After completing this consultation process it intends to legislate an objective and all future changes to super will need to pass through the ‘objective’ filter.
It would be interesting to work out how many changes made to the super system over the past 40 years wouldn’t be deemed to fit within the proposed wording of the objective.
In any event, do we need to legislate this objective?
Typically the primary purpose of any law is to alter behaviour by often imposing penalties for noncompliance with a particular rule.
What penalties would the government impose on itself if it passed laws or put in place regulations that were inconsistent with any legislated objectives for the superannuation system?
The super wars are causing many Australians to draw a line in the sand and there is a lot of heated debate going on in the community right now.
It’s hard to defend individuals with balances in excess of $3 million on equity grounds and those people probably aren’t going to get much sympathy from everyone standing on the other side of the proverbial line.
playbook, which states: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
The proposed methodology behind the tax calculation goes against some established principles.
TONY GRECO is technical policy general manager at the Institute of Public Accountants.
However, we should also remember it is not easy to accumulate balances that large under the current rules and the caps on concessional and nonconcessional super contributions they contain. As such, funds with more than $10 million appear to be the main legacy issue.
In any case, these individuals will die and the funds they’ve accumulated will exit the super concessionary tax environment. It would be nice if people could keep their money parked in tax purgatory forever, but just like people, super isn’t immortal.
To some extent, the advent of introducing a transfer balance cap limiting the total amount of super that can be transferred into tax-free retirement has reduced this benefit, but there is no limit on the amount of money that can be held in accumulation phase, which is subject to the concessional 15 per cent tax rate.
But are we also going to start targeting taxpayers who disproportionately claim other generous tax concessions? It would probably be more palatable for the select group that will be impacted if many other excesses of our tax system were addressed at the same time, but that is a matter for the government.
For those with short memories, it wasn’t that long ago we were encouraged to add to our superannuation balances. Back in 2007 the government of the day afforded individuals a onetime opportunity to pour $1 million into their super funds if they did so before 30 June, prior to limits being imposed. It means some people are now being haunted by the Ghost of Christmas Past.
Most of the high-balance member accounts are sourced from non-concessional contributions that have already borne tax, which is something a lot of people seem to forget. Superannuants with reasonable balances will never be a drain on society because they are essentially self-funding all their future needs. The government has gone for the highest return relative to the lowest number of people impacted, which is straight out of Louis XIV’s finance minister Jean-Baptiste Colbert’s infamous
First, the total super balance includes the tax-free transfer balance cap, the lifetime limit on the total amount of super that can be transferred into tax-free retirement, as it applies to funds in pension as well as accumulation phase.
Second, it treats income and unrealised capital gains equally. Taxing unrealised gains goes against well-established tax principles.
Third, it applies no capital gains tax (CGT) discount to unrealised capital gains. When capital gains are realised, the super fund can usually take advantage of CGT discounting rules, which limits tax to 10 per cent for realised gains.
Last, and this is the worst aspect, it appears there is no refund if unrealised gains reverse as the loss needs to be carried forward. It feels like a casino where the house never loses.
This may be a common scenario if asset values rise and never recover before the member dies. Therefore, you’re paying tax on the unrealised gain first, but then in future years if the asset value goes the other way, you don’t get to claw that back.
You need to wait for the investment value to recover before you get to see the benefit of that prepayment. While there is no detail yet on how the measure will work upon the death of a member, this could potentially mean if the member dies before the asset value recovers, the tax paid is essentially lost.
The younger generation will be watching and thinking about what the future government will do with their balance, which isn’t something that promotes certainty.
Tax incentives are important to encourage individuals to lock their money away for a long time, assist funding their retirement and to reduce the number of citizens requiring access to the age pension.
Further, let’s not forget the major political parties ruled out super changes as part of the lead-up to the last election.
Super is a honeypot and it’s irresistible for most governments because honey provides a delicious sugar rush. As such, it might be wishful thinking to expect nothing further will change in the future.
It would appear the only certainties in life are death, taxes and super changes.
Louise Biti
Director, Aged Care Steps
Aged Care Steps (AFSL 486723) specialises in the development of advice strategies to support financial planners, accountants and other service providers in relation to aged care and estate planning. For further information refer to www.agedcaresteps.com.au
The government has indicated an intention to amend superannuation taxation laws to further limit the amount of money that is accumulated in the tax-effective super environment.
The argument is that balances in excess of what is needed to generate a reasonable retirement income should not be eligible for generous tax concessions.
This change is still only a proposal and legislation has not yet been introduced. But the concept proposes to tax the earnings on balances over $3 million at 30 per cent. The intention is to apply this change commencing in the 2026 financial year.
www.ato.gov.au
Clarification has been provided by the ATO on situations where a lump sum payment that has been requested by a member has not been received before that member’s death.
The guidance states that if the trustee was aware the member was deceased at the time of payment, it should be treated as a death benefit. This should usually be the case for an SMSF.
This position aligns with standard industry practice, but may contravene previous SMSF private binding rulings.
ASIC has released an information sheet with tips to help Australian financial services licensees and authorised representatives to provide advice on SMSFs.
This covers issues around understanding obligations, assessing whether an SMSF is relevant for the client, determining the appropriate trustee structure and advice on the fund’s investment strategy.
The ATO has issued a warning in relation to SMSF compliance risks for certain schemes involving asset protection strategies. These are schemes that have been used to provide protection from creditors.
These schemes use what is called a ‘vestey trust’ whereby SMSF assets are mortgaged to an asset protection trust.
The SMSF executes a promissory note and the trust lodges a caveat.
The ATO warns that these arrangements may breach superannuation laws and advises any trustees who have used such arrangements to selfdisclose.
The value of penalty units increased to $275 on 1 January 2023, as announced in the October budget. The budget also indicated a further increase will occur on 1 July 2023.
The industry may be one step closer to resolving issues around non-arm’s-length income and nonarm’s-length expenditure, with the release of a consultation paper by the government.
This paper considered measures to limit the taxation penalties for breaches that relate to general expenses. It aims to address the potential for disproportionately severe outcomes under current rules.
The consultation period ended on 21 February.
Legislation has passed to reduce the eligible age for downsizer contributions to age 55.
From 1 July, all SMSFs with members in retirement phase must report transfer balance account events quarterly through the lodgement of a transfer balance account report.
It is expected the general transfer balance cap will be indexed by $200,000 on 1 July 2023.
This increases the cap to $1.9 million. The indexation again will be applied on a proportionate basis.
However, the contribution cap limits will not increase for the 2024 financial year.
Superannuation, particularly funds with large balances, are often regarded as honey pots that can be dipped into to rebalance the system and ensure fairer outcomes for all. Jason Spits considers whether this is the case with the government’s selective super earnings tax proposal.
Coming into 2023, the government had indicated its intentions regarding superannuation, announcing before last year’s federal election it would not be making any changes to the system. However, by February this year it had started to ask questions around the objective of superannuation and the future of tax concessions currently available within super. It could be argued, as Prime Minister Anthony Albanese has, setting an objective is not a change to the operation of superannuation but rather finally settling on its purpose as proposed by the Financial System Inquiry and Retirement Income Review.
That argument was taking place as the government released a consultation paper on the objective of superannuation, however, it quickly followed it up by commencing a new discussion on tax concessions within super that lasted a week before the ALP announced it would introduce an additional 15 per cent earnings tax on the portion of any super balance above $3 million.
Presented as an equity measure that would make superannuation more sustainable over time, both aims of the proposed objective, the measure would supposedly impact only 80,000 people and not become law until after the next election, thus ensuring the government did not break its election promise regarding super. The announcement sparked a frenzy of media activity with questions around whether this was a broken election promise and an attack on superannuation.
That latter view was inadvertently given a bump by Assistant Treasurer and Financial Services Minister Stephen Jones in a speech at this year’s SMSF Association National Conference in Melbourne, where he described the $3.3 trillion in superannuation, including the $870 billion in SMSFs, as “a lot of honey” before going on to defend the need for an examination of super tax concessions.
Among the commentary, technically minded people highlighted the new earnings tax would represent the first time the system and super would include a tax on unrealised gains and the lack of
an indexation measure would potentially widen the pool of those affected over time. The government later admitted in parliament once those in defined benefit schemes were also added to the mix, the initial group of people impacted would be closer to 200,000, and indexation could be addressed by a later government.
Yet what seems to be have been overlooked is whether this new tax, and its intention to reshape the landscape for large superannuation balances, is a raid on super as presented by the opposition or was always on the cards.
SuperConcepts SMSF technical and strategic solutions executive manager Phil La Greca believes it is the latter because governments have typically placed some limits on what individuals could hold within the superannuation system.
“Prior to the reasonable benefit limits (RBL), excess superannuation benefits were taxed at 30 per cent and then RBLs introduced limits at the benefit level rather than the fund level and with compulsory cashing, which ended in 2007, whereby once someone reached age 65 they had to draw down on their superannuation,” La Greca says.
“The removal of compulsory cashing led to the growth of large balances, many of them in SMSFs, and following the introduction of the TBC (transfer balance cap) in 2017 we can see a growth in existing balances as people pushed money back into accumulation phase.”
He reveals SuperConcepts had looked at ATO figures and noted an increase from 15 per cent to 20 per cent of superannuation funds with more than $2 million during the period from 2017 to 2021.
“This was not growth in new funds but existing funds, so something was going to happen to address these larger balances,” he says.
Chartered Accountants Australia and New Zealand superannuation and financial services leader Tony Negline feels the shift from the RBL and compulsory cashing regime meant the government of the time accepted some people would be able
to accrue larger balances and the latter introduction of the TBC has paved the way for this proposed change.
“When the Labor Party was last in government they made changes to the contribution caps but not the taxation of superannuation, however, the introduction of the TBC by the Liberal Party made it acceptable to place limits on what could be held in superannuation,” Negline says.
“What we are seeing with the additional 15 per cent earnings tax is the same type of idea, but the execution is very different because it changes the point at which the tax is applied, moving it from the fund to the individual members.”
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When the Labor Party was last in government they made changes to the contribution caps but not the taxation of superannuation, however, the introduction of the TBC by the Liberal Party made it acceptable to place limits on what could be held in superannuation.”
– Tony Negline, CAANZ
However, SMSF Association chief executive Peter Burgess sees no real need to impose further change on a model that is already addressing large balances while limiting their creation in the future.
“This was not something that had to be done because we have contribution caps, a TBC which limits what can be held in the pension phase and the automatic exit from superannuation when someone dies,” Burgess explains.
“Large balances are being dealt with already, but perhaps the issue is they are not being moved out of the system quickly enough given that it is likely most of these balances are being held by people in retirement.”
Burgess is concerned about the blunt instrument the government will use to impose the new tax, basing it off a variance in an individual’s total super balance (TSB) at the start and end of a financial year.
The three-step calculation released by the government will tax unrealised gains but overlooks the impact insurance benefit payments, death benefit payments from another member and divorce settlements have on a member’s superannuation balance, while also lacking any indexation of the $3 million threshold that will be used to apply the new tax.
“We understand why the TSB was chosen as the ATO already holds that information, but there are some components of the TSB that should not be used to determine the earnings tax,” Burgess adds.
“The ATO could use a modified TSB but that would be complicated to calculate and for funds to report so the current TSB method is the simplest approach. But it does not mean it is fair given members will pay tax on unrealised gains each year and then again on the sale of an asset.”
Simplicity and fairness are also issues of concern for SMSF Alliance principal David Busoli, who takes the view that rather than use the TSB to calculate the tax on earnings, the government could adopt a deeming rate or apply the 15 per cent tax to the pre-tax
income attributable to each superannuation member’s interest.
“This could be done by adding a label to the tax return that would be captured by the ATO in its data and would create a more equitable process and produce the result the government has announced,” Busoli notes.
“It also should not be an impost for Australian Prudential Regulation Authorityregulated funds, which already calculate tax at the fund level and, rather than focusing on the cost, we should be looking at an inequitable process that will be applied.”
Given there is still a consultation period ahead, the TSB variance method may be altered to address the issue of unrealised gains. Currently, however, there seems to be less inclination to address the lack of
indexation, which could significantly expand the number of people affected by the new tax proposal.
Speaking during a press conference in Canberra in early March, Treasurer Jim Chalmers stated: “A future government may decide to change the $3 million threshold, but the way that I’ve designed it in conjunction with Treasury colleagues is for a $3 million threshold. If some future government decides that they want to lift that, then they can pay for that, but that’s not our intention.”
Heffron managing director Meg Heffron thinks Chalmers’ statement is indicative of another intention of government, that is, to bring more superannuation balances under $3 million through the new earnings tax regime.
“The lack of indexation is a feature, not a bug. It will catch more people and it is a way of introducing a cap on superannuation balances without actually saying so. It is intentional but I am unsure if it is a good policy,” Heffron says.
Two things will happen over time – large balances will drop and modest balances, such as those around $1 million, will get indexed and affected by this measure.
“Much like people now own $1 million homes due to changes in market values, superannuation fund members entering the workforce now will fall under this threshold given the ongoing rise in the superannuation guarantee (SG).”
SuperCentral SMSF executive consultant Michael Hallinan sees the lack of indexation and its potential to drag more people in as a worse issue than the taxing of unrealised gains.
“The lack of indexation will drag more people in and this was done by design. If the $3 million threshold is indexed now, it is locked in but leaving it open ended also creates a cap on contributions in a way,” Hallinan states.
“This could parallel the SG, which has become the default support level given to superannuation by many, with the $3 million becoming the default cap for superannuation and anything beyond that being held outside of superannuation.”
Continued on next page
We understand why the TSB was chosen as the ATO already holds that information, but there are some components of the TSB that should not be used to determine the earnings tax.”
–
– Peter Burgess, SMSF Association
Continued from previous page
As a cap, the $3 million threshold at which the additional 15 per cent tax on earnings will apply can be viewed as being extremely soft in that it requires no action from any member and there will be no compulsion applied by government apart from paying the additional tax.
It is a far cry from speculation last year that a $5 million hard cap would be imposed, which would have forced money out of the system, but the idea of starting to reconfigure the investment side of superannuation while promoting the occupational side, driven by the SG, is seen
to be contrary to the current rules for super.
To this end, Negline points to the sole purpose test contained within the Superannuation Industry (Supervision) Act.
“The sole purpose test contains a defined objective for superannuation, which is to provide a retirement benefit for a member or a death benefit to their dependents, which tells us retirement and estate planning within superannuation is legitimate,” he explains.
It is this intersection between what was once done, being generous super concessions in the past; what has been done, the imposition of contribution caps, the introduction of the TBC, minimum pension drawdowns; and what is proposed, that is, higher taxes on larger balances to make the system more equitable, that creates unease and concern for many in the system.
While slugging those with large balances may pass the pub test, it must be questioned whether it is fair under the government’s proposed method and is it consistent with the proposed objective of superannuation, which “is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.
“If we go with this tax and the argument behind it that it only affects those who are wealthy, we are on a slippery slope,” Heffron points out.
“Winding back tax concessions is fair, but not when we do it just because someone is rich and particularly when we no longer tax what they have but also
possible future gains.”
According to Busoli, generous tax concessions for large balances seem unfair and agrees with Burgess that current equity measures will deal with large balances over time. As such, he views the current proposal as a budget measure dressed up as a superannuation issue.
“The sum it will raise, $2 billion a year, is not a substantial filler for the current deficit, but it kicks down the road, without breaking an election promise, the idea that governments can take more from some people in superannuation,” he says.
“In this instance, large balances are a soft target, but without indexation it will be broadened over time and affect more people in the same way.”
It is this potential for creeping inequity that also concerns Hallinan and the impact it may ultimately have on the wider superannuation system.
“At present, the government’s concern is not revenue but expenditure and the $3 million threshold is still very generous. The question is whether it remains that way and if it will over time reduce the appeal of superannuation and people’s willingness to make extra contributions,” he suggests.
“The current proposal connects to the sustainable and equitable components of the proposed superannuation objective, but if further tax changes reinforce the idea that superannuation is nothing more than a place to park SG contributions, then it will become just an income management system and will fail to meet its own objective.”
The lack of indexation is a feature, not a bug. It will catch more people and it is a way of introducing a cap on superannuation balances without actually saying so. It is intentional but I am unsure if it is a good policy.”
– Meg Heffron, Heffron
The final Quality of Advice Review report was submitted to the government in December last year. Kate Cowling provides an update on where the process currently stands and industry reaction to the recommendations put forward.
The findings of the Quality of Advice Review are now in public hands, but the federal government says it has more work to do before it can implement the recommendations. While some industry groups have urged quick action, others say Treasury’s next steps are an opportunity to correct some glaring omissions.
When Assistant Treasurer and Financial Services Minister Stephen Jones publicly released the Quality of Advice Review final report last month, adviser groups hoped we’d see the swift repair of several issues plaguing the profession and curbing access to advice.
Michelle Levy’s review investigated how to improve the quality, affordability and availability of advice at a time where demand for professional financial help has skyrocketed, but fewer than 16,000 advisers remain.
The remedial blueprint lays out 22 recommendations, which include replacing the best interest duty with a statutory duty, introducing a ‘good advice’ provision and retiring the statement of advice (SOA) in favour of client records, which would be made available upon request.
The report also proposes simplifying fee consent arrangements to a single form and allowing advisers to choose to replace financial services guides (FSG) with information on their website, if they wish.
While industry groups say several of the recommendations would reduce the compliance burden faced by advisers, Levy stressed her remit was to improve access and cost for consumers.
“If implemented, the recommendations will focus the attention of the law on what consumers want and need,” she says in the report.
“It will give providers of advice greater flexibility and more room for creativity.
“More kinds of advice will be able to flourish and disclosure and reporting will turn on what consumers want and need.”
The government’s next steps “In response to the 267-page document, Jones said he plans to “consult widely” on the report’s recommendations and stressed “anyone with an interest in financial advice
should read it and make their views known”.
The government’s plan to seek more feedback provoked a mix of confusion, frustration and support. The confusion and frustration largely relate to the 10-month process and the perception that further inquiry will cover the same territory. Supporters of further review, meanwhile, say it could provide clarity about unanswered questions and potentially correct omissions.
Levy admitted to delegates at the SMSF Association National Conference she was “a bit puzzled” by the decision to conduct further consultation.
In her report, she said she had “read hundreds of submissions and spoken to as many people”.
At the time of writing, Jones has not yet shared how the next stage will work or released a timeframe.
Meanwhile, government representatives have been probed in parliament about why another round of consultation is warranted.
“I think it is useful for the government to understand the feedback on those recommendations,” Senator Katy Gallagher told the Senate Economics Legislation Committee last month.
“It would assist in decision-making in formulating our response. There are a whole range of reviews where you do that.”
Several industry groups say the next round of consultation provides an opportunity to lay out what they see as the best implementation pathway and to point out where Treasury could go further to improve advice access.
Financial Planning Association of Australia chief executive Sarah Abood says her members’ response to the final report has been “broadly positive”, with excitement about changes that could happen quickly and easily to improve both the consumer and adviser landscape.
“I think there’s a recognition [within the report] that there’s been way too much red tape,” Abood observes.
She suggests several changes could happen fairly easily and quickly, including the recommendations around SOAs,
consent forms and FSGs.
Financial Services Council chief executive Blake Briggs similarly believes there are a number of areas where change could be applied rapidly, with significant benefits for Australians.
“Quick wins like abolishing the safe harbour steps, enabling digital advice and reducing documentation requirements have broad industry support and would go a long way to reducing the cost of advice for consumers,” Briggs says.
Continued on next page
My view on it is that advisers have no shortage of clients to choose from. In many cases, advisers are needing to say ‘no’ on a regular basis to potential new clients.
– Peter Burgess, SMSF Association
Continued from previous page
In other areas of the report, Abood acknowledges more discussion and clarity is needed. For example, definitions of scoped and simple advice may take more time to work through.
“We need to know more about what exactly constitutes simple advice,” she says.
“Let’s agree on what’s simple.”
One of the more controversial proposals from the report involves ‘non-relevant providers’, that is, people who aren’t financial advisers/planners or stockbrokers being able to offer personal advice in certain circumstances.
In the final report, Levy concludes the scope for who can provide advice is currently too limited.
“If the regulatory framework continues to require all personal advice to be given by a financial adviser, where it is given by an individual, it would exacerbate the existing accessibility and affordability issues which are part of the reasons for this review,” she explains.
“Happily, I do not think it is necessary or in the interests of consumers to require all personal advice to be given by a financial adviser.”
Abood feels a bit more clarity is needed on where non-relevant providers can step in.
“People are open to it, but I think some guard rails are needed,” she says.
Association of Financial Advisers chief executive Phil Anderson indicates his members have expressed concern about non-relevant providers creating an “uneven playing field” after advisers have had to undertake extensive education and training requirements.
“It’s created angst because it’s perceived that non-relevant providers providing personal financial advice will be cutting into the market of advisers who traditionally provide advice … and there are fears it could lead to further scandals that could have blowback on the advice profession,” Anderson reveals.
However, he doesn’t believe those fears will materialise.
“My view on it is that advisers have no
shortage of clients to choose from. In many cases, advisers are needing to say ‘no’ on a regular basis to potential new clients,” he says.
“I think the level playing field issue is an important one, but to some extent is misunderstood.”
He argues we currently have a threetier regime, with general advice, personal
advice from relevant advisers and the regime applying to wholesale clients.
“What we’re now talking about is changing general advice to personal advice provided by non-relevant providers and my argument is that the standard is being significantly increased from the standard that applies to general advice providers right now,” he says.
While the final Quality of Advice Review report carves out a role for non-relevant providers, accountants have argued their potential to play a bigger part in the advice space has been largely overlooked.
The report acknowledges accountants’ tax expertise, but says SMSF matters, such as setting up and winding up these types of funds, are broader and require further regulation.
“Advice on superannuation products, including interests in SMSFs, is financial product advice and it should be regulated as financial product advice. I do not see any reason for making an exception,” Levy notes.
She suggests SMSF clients should receive the same level of protection as other advice clients, such as the good advice provision, statutory best interests and the ability to make complaints to the Australian Financial Complaints Authority.
Chartered Accountants Australia and New Zealand superannuation and financial services leader Tony Negline says Levy acknowledges the limited licensing framework was a failed model, but stopped short of recommending regulatory change in relation to accountants’ ability to advise. He labels this as disappointing.
“We would have preferred some recommendations to give certainty to licensed accountants who are going about their normal, everyday work, so they are not accidentally falling into providing unlicensed advice,” Negline says.
He points out it makes sense to give accountants more breadth because they are already qualified to a professional level
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We think it’s important that accountants are able to provide some form of limited self-managed super advice ... specifically registered tax agents who hold a certificate of public practice and who do have the competencies to provide SMSF advice, – Phil Anderson, Association of Financial Advisers
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and have an existing base of small business clients.
“It would help a lot if they could provide relatively straightforward advice, without falling foul of the law,” he says.
“We have this great unmet advice problem in the nation and are not tapping into the skills, knowledge of accountants.”
According to Negline, it is possible accountants could fall into the non-relevant provider category in some cases, but they would still need more certainty around the definitions to say that for sure.
SMSF Association chief executive Peter Burgess agrees there is a missed opportunity to allow accountants to assist consumers more, especially with some aspects of SMSFs.
“We think it’s important that accountants are able to provide some form of limited self-managed super advice ... specifically registered tax agents who hold a certificate of public practice and who do have the competencies to provide SMSF advice,” Burgess explains.
“We think there’s merit in the advice framework recognising those individuals.”
He points out the current limited licensing regime is no longer “fit for purpose”.
Most accountants who applied for limited licences have since surrendered them, with Adviser Ratings data showing there are fewer than 500 of these practitioners remaining.
“It’s expensive for accountants to hold
that licence, they have to satisfy continuing professional development obligations and the rules don’t differentiate between a limited licensee and a full licensee,” he observes.
According to Burgess, the education standards are another barrier because they relate more directly to advisers’ skill sets than accountants’ areas of practice.
“The education standards require accountants to show they’ve got competencies in a broad range of areas, many of which don’t relate to the business they’re providing,” he notes.
“In most cases, accountants are not looking to provide full advice; they’re looking to provide specific advice around SMSFs that may be integral to business structure.”
In terms of how he would like to see accountants recognised, Burgess thinks it would be logical to have a separate category of adviser who was able to give advice about SMSFs in defined circumstances, without the hurdles of limited licensing.
Burgess and Negline say they both plan to make their views known to Treasury.
While professional groups have been united in their calls for swift action on the Quality of Advice Review, they concede the government has been tight lipped about its timeline.
“We’d love to have a deadline, but we don’t know. The Minister hasn’t wanted to
be drawn on the subject,” Abood says.
“The fear is if we have too much consultation, it will take too long for the recommendations to be implemented.”
Briggs has similarly urged Canberra to move quickly for the sake of both consumers with unmet advice needs and the profession itself.
“Implementing the report’s recommendations must be the priority for the Assistant Treasurer to keep faith with the industry and deliver on the advice profession’s potential to improve the financial wellbeing of millions of Australians,” he suggests.
Anderson indicates he expects seeing some action soon.
“I think it’s going to happen relatively quickly,” he says.
“Our natural response is to say ‘let’s just get on with it’, but we are conscious that some of the decisions are important ones and there needs to consideration of whether there needs to be appropriate controls.”
While he acknowledges there have been some vocal opponents to some of the recommendations, he proposes it is still better to have an imperfect blueprint now than to wait much longer for something better.
“This is the big opportunity for financial advice as a profession to make fundamental changes to address some of the underlying issues. There’s a huge consumer benefit here... if we don’t grab this opportunity, when will the next opportunity be?” he asks.
We would have preferred some recommendations to give certainty to unlicensed accountants who are going about their normal, everyday work, so they are not accidentally falling into providing unlicensed advice.
– Tony Negline, Chartered
New Zealand
An SMSF must pay age-based minimum amounts each year to a member from their pension account. As a response to the disruption caused by COVID-19, the federal government temporarily reduced these minimums by 50 per cent.
However, on 1 July 2023 the minimums will revert to pre-pandemic levels. For example, an SMSF member aged between 65 and 74 will have to take as income a minimum of 5 per cent of their account balance, up from the current 2.5 per cent.
At all times the challenge for SMSF members is to grow or at least preserve their capital while satisfying the rules regarding withdrawals. In cases where the assets of an SMSF portfolio generate less income
than the required minimum drawdown, retirees must sell down capital to fund the shortfall. This becomes a problem if they are forced to do this at the wrong time.
For investors in global equities, this risk of being what is known as a forced seller is currently acute.
Take the United States, which is the preferred international country exposure for many investors. US shares are expensive. At 30 times, the widely referenced, cyclically adjusted Shiller Price Earnings Ratio has hardly ever been more costly. What this means for the contribution to total return from capital
Continued from previous page
growth and dividend income is telling. As Table 1 shows, at or above the current valuation, dividend income has been all the S&P 500 total return about 80 per cent of the time. It may be obvious, but when dividend income is the entire total return, capital growth is zero or negative.
In addition to valuation challenges, the equity market cycle is a problem. This cycle
is based on the lagged effects that changes in interest rates have on corporate profits and share prices.
There are precise technical definitions for each stage of this cycle, but the intuitions are simple: risk-on, the outlook for corporate profits is improving; risk-off, corporate profits are growing but at a slowing rate; risk-averse, corporate profits are falling and deteriorating.
The charts below show the US equity cycle is in the risk-averse stage. The first chart shows the close relationship between the cost of money and the level of the ISM manufacturing new orders index 18 months later. The second shows the same for the ISM manufacturing new orders index and earnings per share growth three months later. Already below zero, earnings per share are heading further south assuming the strong historical relationship between the cost of money, the business cycle and corporate profits holds.The implications for a market in the risk-averse stage of the equity market cycle are disturbing. In the past 25 years there have been three complete periods of risk-aversion for the S&P 500. In each case the return was negative and on average annualised at -21.6 per cent.
As if valuations and the equity cycle were not enough, the outlook for US corporate profitability is poor. The budget deficit and
household savings are normalising from the pandemic’s sugar rush levels. Unit labour costs are rising, perhaps structurally so. Interest costs are increasing as inflation has consigned zero and negative interest rate policies to history. Business taxes are also increasing.
After the extraordinary COVID-19-related blowouts, the budget deficit and personal savings rates are normalising. This is a negative as the bonanza they delivered helped push margins to all-time highs. Congressional forecasts say the budget deficit will move back to around 5 per cent to 6 per cent of gross domestic product (GDP) from around 15 per cent at its 2020 peak. Having hit an eye-watering 33.8 per cent in April 2020, the latest figures show the savings rate at less than 5 per cent, which is about in line with historic levels.
Unit labour costs are on the up. The US Bureau of Labor Statistics gives data on the ratio of job openings to the unemployed. This is a simple but effective measure of whether the labour market is tight or loose. Currently there are twice as many job openings as unemployed persons, which is about as high as it has been since the global financial crisis. The consequences of worker shortages are showing up in median wage growth, which has accelerated since the start of 2021.
Business taxes are also on the rise, with Continued on next page
As if valuations and the equity cycle were not enough, the outlook for US corporate profitability is poor.
Continued
the rate-cutting Trump administration’s 2017 Tax Code and Jobs Act looking like a fiscal last hurrah.
In 2022, US Federal Reserve principal economist Michael Smolyansky published a paper arguing the “very substantial contribution” lower interest rates and taxes have made to profit margins “is unlikely to continue”.
Of course, no one is forcing investors to hold US shares, but their influence goes
beyond borders. The US has the biggest savings pool, it is home to the biggest publicly listed companies and US equities have the biggest weighting in global indexes. Though it may be in poor taste to say it after the pandemic, but in financial markets when America sneezes the rest of the world catches a cold.
The understandable response to these challenges might be to focus on dividends. But investors will understand dividends are
no income cure-all. They tend to rise and fall with earnings. They tend to be cut when investors need them most and dividendchasing investors risk concentrating their holdings in certain regions and sectors. Such concentration is in direct opposition to diversification, one of investing’s fundamental principles.
In view of the above, it makes sense to look for alternative sources of return, preferably in the form of income.
One to consider is option premium. This is an income generator that not only exists outside corporate profitability, but even benefits at times of down earnings and higher volatility.
Options can worry investors, but when they are fully cash backed, that is, without leverage, listed on exchanges, of sufficient liquidity, risk reducing and in shares that represent excellent value, they are tremendously useful.
In view of the challenges facing SMSF members, accessing strategies that take advantage of option premium makes more sense than ever.
It makes sense to look for alternative sources of return, preferably in the form of income. One to consider is option premium.
Attention all tax, superannuation, and financial services professionals! Are you ready to level up your knowledge, network with like-minded individuals, and discover the latest industry trends and advancements?
Then mark your calendars for the 21 April 2023 at the Sofitel in Collins for the upcoming Institute of Financial Professionals Australia Conference and Tradeshow!
This highly anticipated event is the perfect platform for professionals in the tax, superannuation, and financial services industry to come together and share their experiences, insights, and knowledge. With a line-up of expert speakers, and Q&A’s you’ll have the opportunity to learn from the best and stay ahead of the curve in the industry.
And that’s not all! The tradeshow component of the event will allow you to explore the latest products and services from leading companies in the industry and connect with potential clients and partners. This is your chance to be at the forefront of the industry and stay ahead of the curve. With breaks, lunches, and an evening event designed to facilitate meaningful connections and collaborations, this conference is a fantastic opportunity for you to network with other professionals, build valuable connections, and expand your network.
We have gathered a remarkable line up of speakers who will cover a wide range of topics, from business succession, cryptocurrency, and tax regulations to super audit requirements just to name a few!
21 April 2023
9:00am-5:30pm (Conference)
5:30pm-7:30pm (Networking drinks)
Sofitel Melbourne –25 Collins St VIC 3000 & Virtual
Whether you’re a seasoned professional or just starting out, this conference will provide you with the knowledge, skills, and connections you need to succeed.
The level of inflation currently being seen in economies around the world has increased the appeal of fixed income as an asset class. Mihkel Kase assesses the current opportunities bonds are offering.
After an annus horribilis for fixed income markets in 2022, 2023 is shaping up as a much better year for this often-unloved asset class.
The past decade has been characterised by an environment of low inflation, low interest rates and high levels of liquidity, which propelled most asset classes to record levels, distorted risk pricing and created an unsustainable investment environment.
Now with the arrival of inflation, central banks have been forced to raise rates and drain liquidity in an attempt to reduce demand and fight inflation. This change in landscape has seen all markets, fixed income included, move through a transition phase as they adjust to rising interest rates, rebuilding of risk
premiums and a return to less distorted pricing. It’s a tough environment for investors, but once we are through this period, the outlook will be brighter.
Going forward, active management will become more important – investors will need to discriminate as to where they allocate capital and will no longer be able to rely on excess liquidity driving asset prices. This transition, and the reset in both the level of interest rates and the credit spreads for corporate issuers, means the outlook for fixed interest markets has improved considerably for 2023.
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MIHKEL KASE is fixed income and multiasset portfolio manager at Schroders.Continued from previous page
While there’s growing evidence inflation globally is peaking, it is less clear what its trajectory is from here and where it settles. A moderation in the inflation rate due to lower energy prices and easing supply chain pressures does not mean the fight against inflation has been won, particularly with labour markets globally still very tight. We do not expect a neat and linear return to the policy environment that prevailed pre-COVID and we think the market will be surprised by inflation stickiness, both in terms of the rate of inflation and the time it takes to revert to a sufficiently low level. This will present challenges to policymakers as they adjust interest rate settings and also for markets as they look to anticipate the reaction function of central banks.
There is a lot of speculation about whether there will be a hard or soft landing in 2023 as interest rates continue to rise and global economies slow. A hard landing would mean a deep recession. In such a scenario economic activity goes backwards and unemployment rises materially. In the soft-landing scenario, the outlook is not quite as grim. Growth might slow for a couple of quarters and unemployment would rise,
but ultimately not a lot of damage would be done to profits or the economy.
Given where inflation is currently sitting, it is difficult to predict a hard or soft landing. If inflation remains stubborn and does not shift in response to interest rate rises by the central bank, the end result could look a lot like what happened through the 1970s – stagflation. However, we believe a soft landing is more likely where inflation falls in response to higher interest rates. We have positioned our fixed income portfolios accordingly, but we are watching developments carefully and ready to adjust to the changing environment.
Fortunately for investors, the pain of 2022 has seen a rebasing in sovereign yields and credit spreads in early 2023. Prior to this rebasing, if an investor wanted a yield of 5 per cent or more, they would have had to extend up the risk curve and look for investments in areas like global high yield or emerging market debt. Since the reset, however, investors are now able to access a yield of close to 5 per cent in investmentgrade markets.
Not only is there more yield on offer, but there’s also more dispersion across markets, which provides more opportunity. Importantly, investors looking for defensive income now have a much broader array of choices and don’t have to go further out the risk spectrum to chase yield.
We still expect a period of volatility ahead in fixed income markets, but we believe the rebuilding of yields across most investments means these markets will be able to deliver income and expected improved returns to investors.
In terms of our portfolio positioning, we are now looking for opportunities to increase exposure to both interest rate risk and credit risk via high-quality credit.
Last year we cut most of the interest
rate risk out of our portfolios and reduced duration to close to zero. Our funds’ cash holdings moved to 50 per cent as we shifted strategy to help insulate the portfolio from rising interest rates and widening credit spreads.
But Australian 10-year yields recently approached 4 per cent, and five-year Australian bank fixed income securities can be bought at yields of close to 5 per cent. We are in the process of deploying some of that cash back into the market, and rebuilding the funds’ duration exposure, something we started doing in the fourth quarter of 2022.
The below Chart 1 highlights the differences that have emerged in yields over the past 12 months.
In addition to high-quality, investmentgrade bonds in Australia, we also like investment grade issuers in the United States where we believe investors are still being compensated for the risk of default in a recession-type scenario.
At this stage, we are avoiding noninvestment-grade credit – those issuers rated BB and below – as we feel spreads are likely not pricing in recessionary risks, therefore they carry too much risk for the credit premia on offer.
We get asked this question a lot. Term deposits may appear to be offering reasonable rates, particularly compared to what they were offering just 12 months ago, but, particularly in global markets, it is possible to find opportunities for yields that are much higher than term deposits.
Also, analysis we conducted using Reserve Bank of Australia bank data showed term deposits lag general market moves higher in rates. Therefore, if you lock into a term deposit early, you could be locked into
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In terms of our portfolio positioning, we are now looking for opportunities to increase exposure to both interest rate risk and credit risk via high-quality credit.
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unattractive rates for a term of up to three years or longer.
Cash should always represent an allocation in a broader investment portfolio, but there is a natural limit that needs to be set to avoid missing opportunities to earn higher income as we move through the next phase.
The next few months could potentially be a sweet spot for fixed income as yields in investment-grade debt continue to rise prior to any economic slowdown.
Investors may be enticed to use this period to accumulate high-quality assets at good levels and wait for better opportunities in riskier assets.
Although eventually the downside risks to growth are likely to dominate market pricing, these may not eventuate for some
time. This suggests we should embrace the good income on offer now in high-quality assets, and be flexible and prepared to firstly increase interest rate duration and later to add to riskier assets.
In our funds we see attractive opportunities to access high-quality assets with attractive yields.
At a more micro level we have been seeking out pockets of value across different regions. For example, Australian credit has lagged the rally in global credit markets and this allows us to continue adding exposure at attractive yields.
We consider the Australian banking sector to be high quality and well capitalised with a robust regulatory framework. Banks are currently issuing subordinated paper with a risk premium over cash of around 2.2 per cent a year. This can provide high-quality yield to a portfolio.
Investors may consider taking advantage of attractively priced fixed income markets over the next few months as opportunities present themselves.
The next few months could potentially be a sweet spot for fixed income as yields in investment-grade debt continue to rise prior to any economic slowdown.
FEEDBACK FROM OUR 2022 EVENT
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Treasury recently released a consultation paper covering the application of the non-arm’s-length expenditure rules pertaining to general expenses. Daniel Butler and Shaun Backhaus examine the details of the proposed framework.
Non-arm’s-length income (NALI) is currently a hot topic that impacts both large Australian Prudential Regulation Authority (APRA)-regulated superannuation funds and SMSFs.
This is largely due to the non-arm’s-length expenditure (NALE) provisions introduced from 1 July 2018 and the broad application of these changes reflected in the ATO’s Law Companion Ruling (LCR) 2021/2. In particular, the regulator considers that a lower, or nil, general fund expense has a sufficient nexus to taint all of a fund’s ordinary and statutory income, including capital gains and concessional contributions.
The regulator’s view has given rise to a need to refocus on NALI and how NALE is linked to it. Treasury
also issued a NALE consultation document on 24 January 2023 with an aim to revise the legislation in relation to a general NALE nexus.
The ATO stated in LCR 2021/2 at [91]: “… the commissioner is alive to concerns that a finding that general fund expenses are non-arm’s length is likely to have a very significant tax impact on the complying superannuation fund, even where the relevant expenses are immaterial.”
NALI is found in section 295-550 of the Income Tax Assessment Act 1997 (ITAA). All further references to legislation in this article are to this ITAA section unless otherwise stated.
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DANIEL BUTLER (pictured) is a director and Shaun Backhaus a senior associate at DBA Lawyers.Continued from previous page
Previously DBA Lawyers has expressed the opinion the NALI provisions are exceedingly broad and provide the ATO with a wide opportunity to easily apply the NALI provisions without safeguards for trustees.
The ATO view is a lower expense in relation to a specific asset gives rise to NALI in respect of all future income and capital gains derived from that asset. This view can result in innocent oversights tainting an asset for life. For instance, Trang, the plumber, in example 9 of LCR 2021/2 renovated the bathroom and kitchen in her fund’s second rental property. While Trang’s services for such work may be valued at around $30,000 if outsourced to an arm’s-length supplier today, tainting all the income and capital gain in the future produces an unfair and disproportionate outcome.
In contrast, example 1 of LCR 2021/2 is where Armin sells a commercial property to his SMSF for $200,000, which has a market value of $800,000. While in this example, NALI also applies to all future net rental income and any net capital gain, at least Armin’s SMSF obtains a market value (substituted) cost base under section 112-20 of the ITAA of $800,000 in determining his
fund’s future net capital gain.
The NALI treatment for Trang’s second property is far worse and has a retroactive application given any accrued capital gain is tainted. On the other hand, Armin at least benefits from a cost base uplift given the application of the market value substitution rule in ITAA section 112-20. Moreover, Trang’s treatment appears especially harsh given Sharon the real estate agent in example 11 of LCR 2021/2, who charges 50 per cent of her usual real estate management fee, only taints the particular financial years the 50 per cent fee is charged to her fund. There appears no logical distinction between the different treatment applied to Trang, property two tainted forever, compared to Sharon only tainting particular financial years of the fund’s revenue, given both of the expenses appear to be post-acquisition of the property. Perhaps the ATO considers Sharon’s discounted management fee is a recurrent expense, but a renovation is not. However, there is no law supporting or defined meaning of what a recurrent expense is.
A number of professional bodies submitted that NALI should not taint all future income for both general as well as specific expense purposes and a fairer, more proportionate measure should be introduced, including an ability for SMSFs to rectify for honest and inadvertent errors such as in Trang’s example.
We will examine some further issues with NALI before reviewing the Treasury consultation paper.
Employee share schemes and NALI Tax legislation has generally treated discounts on employee share scheme (ESS) shares as assessable income to the employee. Where the shares are nominated to an SMSF, the ATO has also previously treated any discount as a contribution. This is confirmed on the ATO webpage QC 26221 where it states: “A super contribution is anything of value that increases the capital
of a super fund and is provided with the purpose of benefiting one or more particular members of the fund, or all of the members in general.
“For example, when shares acquired under an ESS are transferred to an SMSF at less than market value, the acquisition results in a super contribution because the capital of the fund increases and the purpose of the acquisition is to benefit a member, or members, of the fund.”
Further, the ATO notes in LCR 2021/2: “[18] [NALE] incurred to acquire an asset (including associated financing costs) will have a sufficient nexus to all ordinary or statutory income derived by the complying superannuation fund in respect of that asset. This includes any capital gain derived on the disposal of the asset ….”
It therefore appears an SMSF that purchases an asset, like a share at a discount, will result in all future dividends and net capital gain on disposal being NALI and broadly taxed at 45 per cent. Moreover, the amendments introducing the NALE changes to ITAA section 295-550(1)(b) and (c) apply retroactively regardless of when the scheme was entered into. Thus, it appears SMSFs may be exposed to NALI on dividends and net capital gains for shares attained at a discount under an ESS despite those shares being acquired prior to 1 July 2018.
This analysis would appear to provide an adverse impact on SMSFs obtaining shares from an ESS at less than market value.
An important issue not dealt with in LCR 2021/2 is the status of an SMSF trustee/ director who provides services to a unit trust. For example, consider an SMSF that is invested in a non-geared unit trust holding a factory and the SMSF trustee/director oversaw the collection of rent and dealings with the tenant (which may be a related party where the property constitutes business real property), attended to bookkeeping
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Under the current legislation, a lowerthan-arm’s-length expense, even a $100 discount, would result in a tax of 45 per cent on a fund’s entire ordinary and statutory income.
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and instructed the accountant regarding the trust’s annual financial statements. Will the ATO apply the same distinction it applies at the SMSF level to the unit trust or is all the trust distribution received by the SMSF tainted? There is no clarity on this issue in the ATO’s ruling.
Let us now examine some cases involving NALI to see what types of arrangements have been dealt with by the courts and the tribunal.
Two notable cases where NALI was applied to dividends derived by an SMSF from private companies include Darrelen Pty Ltd v Commissioner of Taxation [2010] FCAFC 35 (Darrelen) and GYBW and Commissioner of Taxation [2019] AATA 4262 (GYBW).
Darrelen involved an SMSF that acquired shares in a private company at less than 10 per cent of their market value. The stocks were acquired for $51,218, paid in October 1995, and the investment yielded over $800,000 plus franking credits in eight years.
In GYBW, a $200 investment yielded over $1.8 million in dividends plus franking credits in three years.
Allen (Trustee), in the matter of Allen’s Asphalt Staff Superannuation Fund v FCT [2011] FCAFC 118 (Allen’s) involved a discretionary trust distribution of around a $2.5 million capital gain being made to a unit trust that was owned by a superannuation fund.
The three cases are clear examples of how advisers previously understood the NALI provisions would apply prior to the 1 July 2018 changes. Moreover, the superannuation industry is comfortable having an appropriately targeted integrity measure in place to minimise opportunities to exploit the tax concessions available to super funds. This includes introducing
suitable measures to target schemes involving low and no interest limited recourse borrowing arrangements, which was the focus of the 2018 Treasury consultation paper on NALI.
However, what came as a surprise after the mid-2018 changes was the position the ATO adopted via LCR 2021/2 to apply NALE and NALI to any discount no matter how trifling in amount.
As such, even a $1 discount can result in substantial NALI consequences. Thus, a previously considered and rarely used tax integrity measure NALI from 1 July 2018 could easily be invoked for small or trifling discounts.
Given the existing tax regime on contributions, including division 293 tax, a nominal tax rate of up to 75 per cent can apply if both NALI and the excess contribution provisions apply.
Moreover, a nominal tax rate of up to 120 per cent can apply if both NALI and excess non-concessional contributions apply. In Treasury’s 2023 consultation paper, a 225 per cent tax rate is now proposed for NALE
of a general nature with a five times multiple of any discount on a general expense being taxed at 45 per cent subject to a cap of the fund’s income for the relevant income year.
The 2023 consultation paper
Treasury’s proposed amendments are only intended to apply to general expenses that have a sufficient nexus to all ordinary and statutory income derived by an SMSF or a small APRA fund (SAF). The proposed amendments to the NALI provisions are as follows:
• SMSFs and SAFs would be subject to a factor-based approach, which would set an upper limit on the amount of fund income taxable as NALI due to a general expenses breach. The maximum amount of fund income taxable at the highest marginal rate would be five times the level of the general expenditure breach, calculated as the difference between the amount that would have been charged as an arm’s-length expense and the amount that was actually charged to the fund. Where the product of five times the breach is greater than all fund income, all fund income will be taxed at the highest marginal rate.
• Large APRA-regulated funds would be exempt from the NALI provisions for general expenses.
The 2023 consultation paper provides the following examples:
• In Example 1A, an SMSF trustee uses his brother’s accountancy services, which would usually cost $5000 if provided under an arm’s-length arrangement. As his brother does not charge the SMSF for these services, under the proposed change, the following would be tainted as NALI:
• Given there is a lower-than-arm’slength expense of $5000, this is
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There is an increasing focus on NALI and it can prove costly, time-consuming and challenging to respond to a NALI review and, if a NALI assessment results, it is even more difficult, time-consuming and costly to defend
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multiplied by five resulting in a $25,000 amount of deemed NALI which is taxed at 45 per cent with $11,250 of tax payable.
• The SMSF’s income, net of relevant expenses, for FY2023/24 is $100,000 which would usually give rise to a 15 per cent tax rate without any non-arm’s-length transactions.
• Example 1B is also given where the SMSF’s income, after relevant expenses for the 2024 financial year is only $20,000.
• Under the proposed change, the trustee would pay 45 per cent tax on all of the fund’s income, as five times the NALE breach, that is, $25,000, is greater than the fund’s total income of $20,000. That is, $20,000 x 45 per cent = $9000 of tax payable on the deemed amount of NALI.
Under the current legislation, a lower-thanarm’s-length expense, even a $100 discount, would result in a tax of 45 per cent on a fund’s entire ordinary and statutory income, including large APRA-regulated funds. Given NALI applies to statutory income, this would also tax a net capital gain and concessional contributions at 45 per cent.
Broadly, the ATO’s current administrative practice in Practical Compliance Guideline (PCG) 2020/5 is not to apply its compliance resources towards general expense NALE leading up to 30 June 2023.
However, from 1 July 2023, reasonable benchmark evidence will need to be shown for related-party services.
However, the 2023 consultation paper confirms for all funds where a NALE is related to a specific asset, the current NALI rules continue to apply.
Naturally, SMSF trustees and advisers need
to be mindful that, on closer examination, some general expenses may be challenged as not being general in nature but may relate to specific asset acquisitions such as typical adviser fees where, for example, specific investments are purchased or sold.
While the Treasury proposal is welcome, a number of professional bodies made submissions claiming the NALI provisions need a total overhaul given there are a range of other shortcomings, including a lack of flexibility to rectify honest and inadvertent errors and that the commissioner should be required to issue a NALI determination rather than it being automatically invoked.
There are also various other methods of dealing with general fund expenses rather than relying on a five times multiple.
Some commentators have suggested if Treasury does not undertake an entire overhaul of NALI, taxing the discounted amount instead and applying the existing penalty regime in the Taxation Administration Act 1953, for example, a 25 per cent primary tax uplift if the trustee has not exercised reasonable care and a 50 per cent uplift for recklessness, would provide a fairer and more proportionate outcome.
The following points should also be noted:
• The taxpayer carries the onus of disproving and challenging a NALI assessment, for example, if the ATO challenges the value paid for the asset or service, this is a difficult, costly and time-consuming task to refute.
• The ATO is in a conflicted position in relation to SMSFs as the prudential regulator and the tax collector/ administrator. In contrast, a conflict does not exist in relation to large funds that are regulated by APRA.
• There should be an incentive for voluntary
disclosure and providing a rectification system so that Trang and others like her, especially those who have made an honest and inadvertent error, can come forward and pay an appropriate and proportionate adjustment.
• NALI should be invoked by a determination issued by the tax commissioner and not automatically. The general anti-tax avoidance provision in Part IVA of the Income Tax Assessment Act 1936 is invoked by the commissioner issuing a determination. The current NALI and NALE provisions increase the overall compliance burden on SMSF auditors and registered tax agents as they need to be continuously on the lookout for NALI/E issues.
It is important to note the five times proposed penalty in the 2023 Treasury consultation paper is a potential change and the law will not be amended until legislation is passed. An extension to the ATO’s PCG 2020/5 administrative relief to 30 June 2024 may also be required if this revision to the law is not implemented by 30 June 2023.
The NALI provisions have broad application as extended considerably by the ATO’s views in LCR 2021/2 following the NALE amendments applying from mid-2018. There is an increasing focus on NALI and it can prove costly, time-consuming and challenging to respond to a NALI review and, if a NALI assessment results, it is even more difficult, time-consuming and costly to defend.
Ongoing management is needed in relation to both general and specific expenses that can trigger NALI and advisers should view every transaction involving an SMSF and a related party carefully to minimise risk.
Entering retirement brings about a completely different set of circumstances an SMSF trustee needs to manage. Andrew Yee identifies the changing circumstances of retirees as well as the plans that can help this lifestyle shift.
When Australians retire it’s relatively simple to switch from superannuation accumulation phase to pension mode, even for those who operate SMSFs.
However, commencing a pension is not the end of the story for retirees, particularly for SMSF members. There are a number of additional considerations around the investments supporting the pension that need to be addressed sooner rather than later for retirees.
Entering retirement sees objectives change and brings many lifestyle opportunities, however, conversely it can also result in a number of issues.
Superannuation benefits introduced during the final years of the Howard government encouraged Australians to put most, if not all, of their assets outside their home into super.
While taking advantage of the attractive benefits on offer at the time was a very sensible strategy, retirees still need to carefully manage their SMSF by taking into account areas such as estate planning. Further, management of the fund itself in later years, when mental capacity or interest may be waning, also requires consideration.
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ANDREW YEEfrom previous page
Running a fund is time-consuming and requires significant attention and understanding of compliance requirements, and as people get older, they may find they are less interested in taking the time to do this.
These factors, when coupled with everchanging and more complex regulatory requirements affecting the administration of an SMSF, mean trustees in retirement will need to be aware of their options and know where to go for help.
Statistics from the ATO show 41.4 per cent of all SMSF members are over the age of 64, up from 31.09 per cent in 2016 and 28.1 per cent in 2012. With an ageing population, we can expect to see a growing number of older SMSF members.
Therefore, from the retirement outset, it’s worthwhile taking into account the events likely to affect one’s SMSF and have strategies in place to deal with them.
Issues commonly faced by older-age members that need to be considered include:
• The death of a spouse who was the member primarily responsible for administering the fund and making investment decisions. If this happens without a suitable plan in place for someone else who has the required
knowledge and experience to step in as trustee, and continue meeting the fund’s investment criteria, the fund may become non-complying and lose its tax advantages. This can be a heavy price to pay and additional penalties could also be imposed by the ATO.
• Trustees increasingly losing interest in managing their fund and making the investment decisions needed. Trustees about to retire shouldn’t make the assumption they will have lots of time in this new phase of their life to look after their super fund. A common complaint of retirees is there’s not enough time in the day to do everything they want. Managing an SMSF comes a distant last after grandchildren, golf, days out and holidays.
• Coupled with the above is declining health or ongoing ailments that prevent adequate research of investments, financial considerations, general administration and decision-making, even for those who want to do it.
• Loss of mental capacity is not something anyone wants to consider, but as we age, it’s inevitable we lose the ability to do the things we were once able to do.
• Changing family or investment circumstances will also affect the way finances are structured. For example, pension payments and poor investment returns might reduce the SMSF balances and cause a re-evaluation on whether to continue with the fund. Desire to help family and possible windfall gains (many Australians now retire when their parents are still alive) are also considerations.
As a result of the above, there are a number of elements to take into account when looking at whether winding up the SMSF is the best option or whether to undertake changes to give trustees additional support. For example, there may come a time when simply winding up the fund and transferring balances to a superannaution fund run by other trustees
could be the best option.
However, this may be considered a last resort for many trustees and there are other alternatives to winding up an SMSF for members who no longer want the overall responsibility for the fund but would still like to keep it going. Some of these options include:
One alternative available to members of an SMSF is to transfer the trusteeship and convert the fund to a small Australian Prudential Regulation Authority (APRA) fund (SAF).
SAFs are similar to SMSFs, except an approved trustee is appointed to administer it and APRA replaces the ATO in its role as regulator.
The approved trustee is not a member of the fund, allowing the members to relinquish the responsibilities of the trustee role if they are becoming too onerous.
However, having an independent trustee in place comes with added costs and the investment strategy of the fund will be limited by the trustee’s investment policy, which can be restrictive.
There are a number of organisations now offering full trustee services that will undertake the role of approved trustee to run the SAF. These include organisations such as Australian Executor Trustees or Perpetual Trustees, but SMSF trustees need to compare benefits and the downside with other options.
Another option for older SMSF members is to encourage their children or grandchildren to become members/trustees of their fund as SMSFs can now have up to six members, allowing multiple generations to be involved. An SMSF can be refreshed by appointing younger trustees and members, who can over time take over the day-to-day running and administration of the fund.
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Loss of mental capacity is not something anyone wants to consider, but as we age, it’s inevitable we lose the ability to do the things we were once able to do.
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Additional members can also make super contributions and inject new capital into the fund, which can be beneficial for the fund investment strategy if the older members are no longer contributing and are entirely in drawdown phase.
SMSF members who lose interest in the day-to-day running of the fund, or become incapable of fulfilling their role as trustee due to illness, may be able to appoint another individual as an alternative director to act in their place.
This option is only available to funds with a corporate trustee structure as trust law does not allow an individual to pass these responsibilities to another individual.
However, a fund with individual trustees may be able to use an enduring power of attorney to act on behalf of the trustees.
SMSFs that have an individual trustee structure can change to a corporate trustee, but there is expense involved with this switch.
Another downside with alternative directors is they cannot step in if the primary director/fund member has lost mental capacity.
The appointment of a successor director or an enduring power of attorney as director would overcome this problem.
The SMSF trustee and member rules of the Superannuation Industry (Supervision) Act 1993 allow a person who holds an enduring power of attorney to act as a trustee, or director of the corporate trustee, of a super fund in place of the member in question without causing the SMSF to cease its operation.
Under this option, the person who holds the enduring power of attorney for
a member becomes their legal personal representative (LPR) and the member must cease to be a trustee of the SMSF, or a director of the corporate trustee, except where the LPR is appointed as an alternative director.
One of the responsibilities of having an SMSF is that an annual audit is required. There are also seemingly never-ending regulatory changes, some of which can create new opportunities for trustees or affect the way a fund is structured.
Ongoing help and advice are essential, and trustees should look at it not as a necessary evil, but a chance to ensure all investment opportunities are considered and to maintain understanding of the fund’s position.
A major benefit of involving external advisers is if one of the members has traditionally looked after the fund on behalf of their spouse, the spouse can be involved in discussions with the adviser about the fund.
By doing so, the knowledge is transferred, which can be essential if the main decision-maker in a marriage or relationship pre-deceases the other.
Having a will is essential for all adult
Australians and is even more critical for retirees.
In estate planning, it is often the case that not enough thought is given to the person appointed as executor.
Asking someone you like and trust is not enough. If they are the same age, or even older than you, it is possible they will pre-decease you. Appointing a good friend who is not financially savvy is another mistake often made. A good test is to ask yourself whether you would trust this person to run your financial affairs. If the answer is no, why would you appoint them to make decisions on your behalf as executor of your estate?
For those who haven’t already done something about estate planning, retirement should be a trigger for setting affairs in order and documenting them.
This is particularly important for SMSF trustees who have much of their personal wealth owned within the fund.
Record-keeping is essential for regulatory purposes, but having someone else knowing where all the records are, and how to access different accounts and other investments, is essential.
The importance of having a will goes without saying, but updating it to take into account changed financial circumstances and personal relations is often overlooked.
So, while there are evidently a number of considerations to be made by ageing SMSF members/trustees, the need for careful planning sooner rather than later can never be understated.
Retirement should be a trigger point for ensuring the running of an SMSF is optimal not just for now, but also in the future.
Small changes could help ensure the twilight years are spent enjoying time with children and grandchildren and not erroneously administering a lifetime’s worth of investments.
From the retirement outset, it’s worthwhile taking into account the events likely to affect one’s SMSF and have strategies in place to deal with them.
Bringing pension scheme payments back to Australia from overseas is a complex process. In part four of this multi-part feature, Jemma Sanderson dispels some of the myths associated with UK pension transfers.
Following on from part three, and the complexities of United Kingdom pension transfers, including the consideration of multiple jurisdictions, there are many inaccuracies and areas that are misunderstood.
In part four of the series, we will bust some of the myths associated with these transactions.
Some of the questions we are asked about these transfers are as follows:
1. If I have benefits in the UK greater than my non-concessional cap, do I have to transfer to Australia over multiple years?
2. I already have more than $1.7 million in total
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JEMMA SANDERSON is a director and head of SMSF and succession at Cooper PartnersContinued from previous page
superannuation in Australia, does that mean I can’t transfer any more benefits to Australia other than the growth since I became an Australian resident?
3. If I have already started implementing a strategy for a multiple-step/year transfer, am I allowed to change my strategy and transfer within a shorter period of time?
4. I am in excess of my lifetime allowance, so will I have to leave my benefits above that in the UK or pay 55 per cent tax?
5. I have a defined benefit scheme, so does that prevent me from transferring my benefits to Australia?
6. If I’m under age 55, is it not worthwhile for me to consider doing anything with my UK benefits?
7. I have multiple accounts in the UK, so do I have to consolidate them before I transfer any benefits to Australia?
8. I transferred benefits from the UK to another jurisdiction prior to April 2015. Does that mean I can’t easily transfer those amounts to Australia?
9. I’ve just turned 55 and want to transfer my benefits to Australia. Will they be trapped in the superannuation system until my preservation age of 60?
The Australian superannuation contribution provisions are a very important consideration when looking to transfer funds from a UK scheme to Australia. As outlined previously, the amount that would be assessed towards this limit is broadly the balance in the individual’s UK schemes at the time they became an Australian resident, plus the value of any contributions they made since becoming a resident. Therefore, if the balance at that time was more than $330,000, that is a consideration.
However, just because the individual had a balance in UK accounts at their date of residence of greater than $330,000 doesn’t
mean the benefits can’t be transferred to Australia in a tax-effective and timely manner.
As with myth one, the Australian superannuation provisions are a very important consideration when looking to transfer funds from a UK scheme to Australia. Where an individual has more than $1.7 million in superannuation in Australia, then their non-concessional contribution cap is likely to be nil.
As above, from a UK pension transfer perspective, the amount that would be assessed towards this limit is the balance in the individual’s UK schemes at the time they became an Australian resident. Therefore, if the individual doesn’t have any available non-concessional contribution cap as they have more than $1.7 million in superannuation in Australia, that is a consideration.
In the situation where an individual has
already commenced the implementation of a multiple-phase approach to transfer their benefits to Australia doesn’t meant they are then limited by the original timing. In such situations, where this has been undertaken such that the benefits are already split into multiple self-invested personal pensions in the UK, it can make it slightly easier to then transfer the accounts remaining in the UK.
Therefore, partial implementation of a multi-year strategy doesn’t mean a new strategy can’t be implemented to transfer the benefits to Australia more quickly.
Where an individual is in excess of their lifetime allowance (LTA) in the UK (currently £1,073,100), many believe they then can’t transfer any benefits to Australia without incurring a 55 per cent tax charge. This is not the case. If the benefits are transferred correctly, then the 25 per cent LTA charge may apply, however, there could be no further tax implications in Australia or the UK.
It is important when a member is in excess of their LTA that it is well understood how much of their LTA they may have available as they could have already used some of it by taking benefits from the UK previously. It is also important to ensure the implementation of any strategies are undertaken correctly. The incorrect implementation, including the liaison with the ATO and Her Majesty’s Revenue and Customs, could result in the 55 per cent tax charge being imposed, and no ability to claim back any credits.
One area where benefits may have already fully utilised the LTA is if an individual uses a pension commencement lump sum (PCLS) to take out a tax-free amount of up to the 25 per cent, when they had to crystallise 100 per cent. The remaining balance, or 75 per cent, would have been assessed towards their LTA. A PCLS is only available for 25 per cent up to the LTA, but there
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Where a member has a defined benefit scheme in the UK is where the most value add arises with a transfer from the UK to Australia as these schemes are resulting in quite high transfer values.
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could be uncrystallised benefits above the LTA that haven’t been dealt with due to the perceived 55 per cent tax result, as well as the crystallised amount remaining, plus any growth/earnings on that.
Where a member has a defined benefit (DB) scheme in the UK is where the most value add arises with a transfer from the UK to Australia as these schemes are resulting in quite high transfer values. However, in order to undertake any transfer, the member needs to obtain advice from a pension transfer specialist (PTS) who is accredited to provide that advice by the UK Financial Conduct Authority (FCA).
Where that advice is provided, and the PTS signs-off with the relevant UK DB scheme, then the money can be transferred out of the DB scheme to Australia, if the individual is 55 or over, or to another UK scheme that is not a DB in operation.
There are a limited number of PTSs who can provide this advice as it is a very highly regulated sector in the UK. Therefore, it is important to consider the use of a PTS that is not just familiar with the transfer of a DB scheme to another UK scheme, but one who is familiar and experienced with transfers to Australia, particularly when you want to get the best outcome for clients.
The individual’s age is very relevant to their ability to take a benefit out of a UK scheme, including transferring the benefits to an Australian superannuation account. Until the individual is age 55, they are unable to receive any benefits out of their UK scheme or undertake a transfer from the UK to Australia. However, it may still be worthwhile where the individual has a DB scheme in the UK to
consider whether it is appropriate to transfer the DB scheme to another UK scheme, subject to PTS advice (see myth five). Upon them attaining age 55, or in the lead-up to that time, they could then consider their options to transfer the money into Australia.
Over the period of time leading up to age 55, the individual would have to have the nonDB scheme managed/invested, and therefore this is a consideration for that individual.
It is important to note the current pension age in the UK is 55, however, this is likely to increase over time, with those people born between 6 April 1971 and 6 April 1973 likely to have some transitional rules apply, and those born after 6 April 1973 having an applicable pension age of 57.
Where an individual has multiple schemes in the UK, they don’t have to be consolidated prior to any transfer.
In actual fact, having separate accounts can enable a more strategic transfer of the overall benefits to Australia with ultimate consideration of the timing.
It is not necessary to consolidate the benefits, however, in some situations this may be the most appropriate course of action. It will of course depend on the individual’s circumstances.
In the lead-up to April 2015, when there were substantial changes to the pension scheme rules in the UK, many expats transferred their UK money into recognised overseas pension scheme accounts in other international jurisdictions, including Malta, Guernsey and Gibraltar.
Where this is the case, these accounts are also able to be transferred into Australia. The main consideration with respect to these accounts are:
1. any exit fees that may apply – we have experienced situations where the exit fee within a particular period of time is very cost prohibitive to the individual and therefore this may delay the ultimate transfer,
2. the tax requirements of the particular jurisdiction prior to a transfer occurring – depending on the jurisdiction, clearance is required by the local taxation authorities. This generally results in the transfer taking longer, but is not prohibitive,
3. ensuring the scheme in the foreign jurisdiction satisfies the definition under the Australian legislation of being a foreign superannuation fund. By satisfying this definition, the individual is able to use the provision in Australia where only the growth in the account since they became an Australian resident is subject to tax.
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The individual’s age is very relevant to their ability to take a benefit out of a UK scheme, including transferring the benefits to an Australian superannuation account.
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Therefore, such accounts can also be transferred into Australia.
There is a divergence between the UK pension age of 55 and the Australian preservation age of 60.
Accordingly, where UK benefits are transferred to superannuation in Australia they will be unable to be accessed until the
individual reaches age 60 in Australia and satisfies a condition of release with a nilcashing restriction.
However, several of the strategies available for the repatriation of UK pension scheme benefits may not involve the benefits being transferred entirely into superannuation in Australia, instead being transferred to the individual personally. Therefore, benefits may not all be trapped in Australia upon transfer.
With myths busted and areas to be cautious of identified, part five of this series will delve into the strategies that enable UK pension scheme members to transfer their benefits to Australia in a tax-effective and timely manner.
These strategies have enabled the above myths to be busted and provided many UK expats with the certainty that their UK benefits can be transferred to Australia and managed effectively.
Anthony Cullen provides a detailed summary of how the indexation of the transfer balance cap is determined and the implications the second implementation of it will have on pension-phase accounts and contribution thresholds.
Since 2017 we have had a transfer balance cap (TBC) regime that limits the amount that can be transferred from accumulation phase to retirement-phase pension accounts.
At the time of commencement, the cap was $1.6 million. A mechanism to index this amount in increments of $100,000 is covered in the Income Tax Assessment Act (ITAA). We saw the first increase of the general TBC to $1.7 million on 1 July 2021.
Based on recent inflation levels, an increase of $200,000 to $1.9 million is expected from 1 July 2023.
As per section 960-285 of the ITAA, the indexation factor is determined by:
quarter 2016) = 1.189 (rounded to three decimal places).
This figure is then multiplied by the base amount of $1.6 million, which produces a total of $1,902,400.
As this exceeds a multiple of $100,000, indexation will occur. This is rounded down to the nearest $100,000, being $1.9 million, representing a $200,000 increase from the current $1.7 million general TBC.
From 1 July 2023, your personal TBC (PTBC) could be anywhere from $1.6 million to $1.9 million. Proportional indexation is calculated in accordance with section 294-40 of the ITAA using the following formula:
Where index number = All groups consumer price index (being the weighted average of the eight capital cities).
Subsequently, the formula produces the following calculation:
130.8 (December quarter 2022) / 110.0 (December
As mentioned above, the indexation amount will be a multiple of $100,000. To determine the unused cap, the steps below need to be followed:
(a) identify the highest-ever balance in a person’s transfer balance account (TBA), and
(b) identify the earliest day in which it occurs, and
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(c) express the balance determined at (a) as a percentage (rounded down to the nearest whole number) of the TBC in question on the day identified in (b), and (d) subtracting (c) from 100 per cent.
Example (see Table 1)
Larry, Curly and Moe are members of an SMSF. They all retired and commenced pensions on 1 July 2017.
• Larry started his pension with $1 million and has not commenced another since.
• Curly started his pension with $1 million. He commenced a second pension on 1 July 2022 with $330,000.
• Moe started his pension with $1.6 million and has not commenced any new pensions. He took a commutation of $400,000 on 1 January 2023.
A death benefit pension will result in a credit, or increase, to the TBA of the recipient. However, there is a difference in the timing of the credit, depending on whether it results from the reverting of an existing pension or the commencement of a new death benefit pension.
Example
Mike died on 5 February 2023 with $1.9 million in an account-based pension. Carol
has $1.4 million in accumulation and has never had a retirement-phase pension.
If Mike’s pension was reversionary to Carol, she would receive the pension straightaway. However, the credit to her TBA will not occur until 5 February 2024.
On 1 July 2023, the highest-ever value in Carol’s TBA will be zero as the credit from the reverted pension is not yet included. This will give her a PTBC of $1.9 million, allowing her to retain the full reverted pension in super, should she so wish. As a side note, although not showing in Carol’s TBA, the value of the pension on 30 June will count towards her total super balance (TSB).
If Mike’s pension was non-reversionary, Carol will need to deal with the death benefit ‘as soon as practicable’. Although not legislated, it is widely accepted action taken within six months will rarely raise concerns around acting ‘as soon as practicable’.
If Carol were to start a death benefit pension prior to 1 July 2023, the credit will occur on that day. She will be limited to the current cap of $1.7 million and face the prospect of having to withdraw any excess death benefits from the superannuation system.
If the death benefit pension is not commenced until after 30 June 2023, this would delay the timing of the credit and provide Carol with access to the higher TBC.
When Carol starts the pension will also influence whether it will count towards her TSB on 30 June 2023 or not.
Indexation of the contribution cap is linked to average weekly ordinary time
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Indexation of the contribution cap is linked to average weekly ordinary time earnings. However, the required rate has not been reached this year for an increase to occur.
earnings. However, the required rate has not been reached this year for an increase to occur. On the other hand, an increase in the general TBC will see an adjustment in the thresholds for non-concessional contributions (NCC).
Based on the current contribution caps, Table 2 highlights the difference in thresholds for this year and next.
It is beyond the scope of this article to consider the implications of this further.
The government has already indicated it wants to finalise and legislate the objective of superannuation. This will then set the
tone for any future legislative changes and reforms for the super sector.
It is too early to say whether any potential changes will impact on the indexation process or consider a freezing of the cap.
As the law stands, we will see an increase in the general TBC. Any strategies linked to this should consider the current law, but be flexible enough to change, depending on the outcome of the budget.
It is not necessary to consolidate the benefits, however, in some situations this may be the most appropriate course of action. It will of course depend on the individual’s circumstances.
A death benefit pension will result in a credit, or increase, to the TBA of the recipient.
While most SMSF trustees choose to invest in traditional asset classes such as equities, property and cash, some have a taste for the exotic.
This article outlines the rules and considerations for SMSFs wishing to invest in less commonly held investments, including artwork, cryptocurrency and bullion.
The Superannuation Industry (Supervision) (SIS) Act 1993 does not explicitly prohibit an SMSF from investing in any particular asset class, however, certain types of investments are prohibited. Also, for some types of investments there are specific rules that can be onerous to follow, at times to the extent that SMSF
ownership becomes impractical. However, there are general rules and considerations that apply to all SMSF investments, including:
1. Whether the sole purpose test is satisfied, that is, the reason for the SMSF making the investment to be of benefit to members in retirement, as opposed to any other reason such as the members deriving a present-day benefit.
2. Whether holding the asset is in line with the investment strategy of the fund. If not, the SMSF trustee may change the investment strategy.
3. Whether the SMSF will be acquiring the asset from a related party. If so, this is only
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permitted for certain types of assets, most commonly business real property, listed securities and widely held trusts/ managed funds.
4. Whether the asset constitutes a loan to a member or a relative of a member, or upon acquisition whether it is an in-house asset. Section 65 of the SIS Act specifically prohibits an SMSF from making loans to a member or a relative of a member and, subject to the other requirements, in-house assets are permitted but broadly limited to 5 per cent of the fund’s total asset value.
5. Whether any dealings with a related party are done at arm’s length. Section 109 of the SIS Act prohibits an SMSF from dealing with related parties on terms less favourable to the SMSF than arm’s-length terms. Further, while technically an SMSF is permitted to deal with a related party on terms more favourable to the fund than arm’s length, this is best avoided as the non-arm’slength income provision would apply.
6. Whether the trustees considered the SMSF’s liquidity, diversification and ability to discharge existing and prospective liabilities, and whether the assets of the fund are kept separate from assets personally owned by the trustees.
7. Whether the asset is a collectable or personal-use asset. If so, there are additional restrictions.
8. Whether the SMSF is running a business.
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This is not specifically prohibited, however, the ATO has stated it will “examine the activities closely to ensure the sole purpose test is not breached”.
9. Whether the fund’s trust deed is more restrictive than the minimum standard of the law. Even if the investment is permitted under the law, an SMSF cannot make an investment that is disallowed by the trust deed.
In addition to the general rules and considerations, some exotic assets that are classified as collectables or personaluse assets are subject to additional requirements.
What are collectables and personaluse assets?
a) artwork,
b) jewellery,
c) antiques,
d) artefacts,
e) coins or medallions,
f) postage stamps or first-day covers,
g) rare folios, manuscripts or books,
h) memorabilia,
i) wine,
j) cars,
k) recreational boats,
l) memberships of sporting or social clubs, and
m) assets of a particular kind, if assets of that kind are ordinarily used or kept mainly for personal use or enjoyment (not including land).
Superannuation regulations impose the following additional restrictions where an SMSF wishes to purchase a collectable or personal-use asset:
1. The asset must not be leased to a related party.
2. The asset must not be stored in the private residence of a related party.
3. The SMSF trustees must make a decision relating to the storage of the asset and keep a written record of this decision for at least 10 years.
4. The asset must be insured in the name of the SMSF within seven days of the SMSF acquisition (except for membership of sporting or social clubs).
5. The asset must not be used by a related party.
6. If in the future the asset is transferred from the SMSF to a related party, the market price must be determined by a qualified independent valuer.
In practice, where an SMSF is intending to purchase a collectable/personal-use asset, prior to the purchase it is prudent to ensure these additional requirements can be satisfied.
For example, an insurance company willing to insure certain assets, or the cost to appropriately store an asset, may be cost prohibitive relative to the value of the asset. Where SMSF trustees are unsure if either the general rules or the collectable/ personal-use assets rules will be satisfied, it would be prudent for them to seek the fund auditor’s opinion prior to the purchase. Where there is still any doubt, the SMSF may choose to apply to the ATO for specific advice.
The following facts apply to all case studies.
• Andrew and Brooke Brown are a married couple in their 40s. They have recently established The Brown Family SMSF with Andrew and Brooke as the two members and trustees.
• The Brown Family SMSF has a current balance of $1 million, which is 100 per cent invested in the SMSF bank account.
• The Browns have a taste for the exotic and seek advice regarding various proposed investment options for their SMSF.
Case study 1 – artwork
The Brown Family SMSF is considering investing in two valuable artworks.
Artwork 1 – currently owned by Brooke The Brown Family SMSF cannot purchase
artwork 1. Artwork is not exempt from the general prohibition of assets that can be acquired from a related party and as Brooke is a related party, the transaction cannot be executed.
Artwork 2 – currently owned by an unrelated party and will be available for sale at an upcoming auction
The Brown Family SMSF may purchase artwork 2 as this is currently owned by a third party. However, in addition to the general rules and consideration, as art is considered a collectable/personal-use asset, the additional requirements relating to elements such as storage and insurance will apply.
The Brown Family SMSF is considering making the loans below.
Loan 1 – $40,000 loan to Andrew’s brother, Charles
The Brown Family SMSF cannot make this loan. Despite satisfying the in-house restriction as the value of the loan is below 5 per cent of the fund’s total assets, an SMSF is specifically prohibited from making a loan to a member or a relative of a member.
Loan 2 – $30,000 loan to a company Charles owns
Unlike loan 1, as the borrower of loan 2 is a related company rather than a related individual, this is not specifically prohibited.
In addition to ensuring the loan is always within the 5 per cent in-house assets restriction, Andrew and Brooke must ensure this loan satisfies the general rules such as the terms of the loan including having an arm’s-length interest rate.
Subject to the general rules, loan 3 is permitted. Despite the value of the loan being greater than 5 per cent of the SMSF total balance, the in-house assets restriction does not apply as the borrower is an unrelated party.
The Brown Family SMSF is considering investing in two precious metal investments.
A 10-ounce Perth mint gold bullion cast bar – 99.9 per cent pure gold
Subject to the general rules, the Brown Family SMSF may purchase this bar. This bullion will not be subject to the collectables/personal-use assets rules as the bar trades at a value close to the spot price of its precious metal content.
However, it should be noted:
• some types of bullion, for example, limited edition bars, may still be subject to the collectables/personal-use asset rules if, aside from fabrication and retail costs, the bullion trades at above the spot value of its precious metal content, and
• given the value of the bullion, a prudent trustee would likely decide to follow many or all of the collectables/personal-use assets rules to ensure the sole purpose test is satisfied.
A 0.2355 ounce sovereign gold coin –91.7 per cent gold content
Subject to the general rules, the Brown Family SMSF may purchase this coin. However, unlike standard gold bullion, the market value of this coin is more than its precious metal weight. As such, the collectables/personal-use assets additional requirements apply.
The Brown Family SMSF is considering investing in cryptocurrency and storing the crypto coin in a physical cold wallet. Subject to the general rules, the Brown Family SMSF may purchase cryptocurrency. Also, this type of asset class is not subject to the collectables/personal-use assets additional requirements.
The main consideration for an SMSF owning cryptocurrency is how to store the coins in a secure manner with the two broad options being:
• hot storage: where the crypto wallet is connected to the internet and accessed via an application or platform, or
• cold storage: where the crypto wallet is not connected to the internet and is usually held on a hardware device such as a USB stick that is designed to store cryptocurrency.
Whichever method of storage the trustees choose, they must comply with SIS regulation 4.09A, which requires that
money and assets of an SMSF must be kept separate from any other money and assets that are held by trustees personally.
If Andrew and Brooke choose the cold storage option, it would be prudent to ensure that the crypto coins owned by the SMSF:
• are stored on a cold storage device owned by the fund,
• the cold storage device only contains crypto coins owned the SMSF, and
• the cold storage wallet is stored in a very secure place.
The Brown Family SMSF is considering investing in a Millennium Falcon 10179 Star Wars Lego set.
Subject to the general rules, the Brown Family SMSF may purchase this rare and valuable Lego set. Although the collectables/personal-use assets definition does not specifically include Lego, the additional requirements would apply. This is because section 62A(m) of the SIS Act includes, as a collectable/personal-use asset, those “assets kept mainly for personal use or enjoyment”.
Where an SMSF wishes to invest in Lego, or equivalent toys, in addition to the collectables/personal-use assets additional requirements, it is important SMSF trustees also understand that in order to satisfy the sole purpose test, such assets must not be used for personal enjoyment. The trustees would also be prohibited from reducing the value of the asset. For an unopened Lego set, this would include opening the box.
In addition to the general rules and considerations, some exotic assets that are classified as collectables or personaluse assets are subject to additional requirements.
The proposed new tax on member superannuation balances above $3 million was not foreshadowed and has created a great deal of angst for the SMSF sector. Grant Abbott explains how the measure could be applied and some associated problems that have already been identified.
The government released a new superannuation policy in February calling for better targeted superannuation concessions. Under the proposal, essentially a super wealth tax, from 1 July 2025, fund members whose total superannuation balances exceed $3 million at the end of the financial year will be subject to a wealth tax of 15 per cent based on a proportional increase in member balances across all super funds.
As expected, this has created huge concerns in the SMSF industry. For the most part, it is this sector that has the bulk of the $3 million-plus member accounts, although there are a number of industry and retail superannuation fund members who will be affected as well. Defined benefit super funds for public servants are another big story.
The big concerns are:
1. The $3 million threshold is not going to be indexed and will probably go down over time –witness what has happened to Division 293, the high-income-earner super tax.
2. Members with reasonable-sized superannuation account balances will not be aggressively using super now to build wealth as a good investment or two will find them hard captured by the super wealth tax regime once they are retired.
3. Confidence in super is again the loser. With the 2017 reforms, where pension balances above $1.6 million were forced from tax-free to a 15 per cent accumulation tax regime, and now a super wealth tax, it seems to be death by a thousand cuts. Plus, with the forecast budgeted cost for super concessions to be higher than the total age pension payments in the coming years, we can expect a lot more changes at the top end of town. Who can blame Australians for not investing in super for the long term when there are so many amendments to the system?
4. The introduction of an accruals taxation
regime based on the increase in a member’s wealth is so far removed from the current personal and superannuation tax regime with its foundations on assessable income and not unrealised capital gains.
Accruals taxation is not new in Australia
I remember providing advice as a young tax consultant to a number of multinational clients that were caught up in the controlled foreign company (CFC) and controlled foreign trust (CFT) provisions introduced in Australia in 1990.
The CFC regime was designed to discourage Australian residents from shifting income or capital to low-tax or no-tax jurisdictions. The CFC regime taxes Australian shareholders on their pro rata share of accrued income and gains derived by a CFC or CFT in which they hold a controlling interest.
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wealth tax, then SMSF administration software providers, accountants and SMSF auditors will be spending the next two years dreading the day of implementation.
Prior to 1 July 2007 it was virtually impossible to build large wealth in an SMSF courtesy of reasonable benefit limits (RBL), which had been in place for many decades. RBLs were applied to limit the amount of concessional superannuation benefits individuals could receive over their lifetime. There were two types of RBLs – a lump sum RBL and a higher pension RBL that required at least 50 per cent of assets tied up in a non-commutable pension. For the financial year ending 30 June 2005, the lump sum RBL was $678,149 and the pension RBL was $1,356,291. Importantly, any excess amount was taxed at the highest marginal tax rate. In effect there was no incentive to make super contributions that might take a member above their RBLs.
The Howard government introduced the
Simpler Super regime in the 2006 budget to take effect from 1 July 2007. There were so many changes all encouraging building tax-free or concessionally taxed wealth in superannuation. It was the absolute high point of super and in the lead-up to 30 June 2007 over $50 billion was contributed to SMSFs as non-concessional contributions.
I was in the United Kingdom at the time and called Australia the world’s retiree tax haven – a country where you could live a great life, with great services and pay no tax on retirement income, and for the smart few, get a tax refund. No one outside of Australia ever believed that story.
Chart 1 shows SMSF assets and the proportion of SMSFs by asset range. Over 20 per cent of SMSFs have more than $2 million in assets and importantly 60 per cent of all SMSF assets. If that is not a target, I don’t know what is.
Let’s review some of the important changes that led us to where we are today.
1. Removal of RBLs: the Simpler Super measures abolished RBLs. This caught many by surprise because some of the older-style lifetime complying and market-linked pensions had restrictions on commuting and still do. You read often about the problems of legacy pensions. But with no RBLs there were
suddenly no limits and we can see the result in Chart 1.
2. Tax-free super: from 1 July 2007 there was a tax exemption for members receiving lump sums and pension payments over age 60. Prior to that date, lump sums were taxed at 15 per cent and pension payments were assessable income, but received a 15 per cent tax offset. This is the tax-haven side of the equation.
3. Introduction of estate planning accounts: prior to 1 July 2007 it was a mandatory requirement under Superannuation Industry (Supervision) regulation 6.21 for a member over age 65 to take all of their benefits from the fund as a lump sum or by way of a pension. On 1 July 2007, this changed so that the only mandatory requirement was to pay superannuation benefits out on death. So an SMSF member with $2 million in the fund, and plenty of income outside of super to live on, could run their super account as an estate planning vehicle and not take a pension. Hold and grow in a concessionally taxed environment.
4. Limited recourse borrowing: this was not used to a great extent but trustees of an SMSF could get instalment warrants over stocks and implement
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Members with reasonable-sized superannuation account balances will not be aggressively using super now to build wealth as a good investment or two will find them hard captured by the super wealth tax regime once they are retired.
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related-party nil interest loans over large commercial property assets. For those lucky enough to apply these strategies, SMSF balances sky-rocketed.
The Treasury paper shows how the proposed accruals system will work with the following example.
Warren is 52 with $4 million in superannuation at 30 June 2025. He makes no contributions or withdrawals. By 30 June 2026 his balance has grown to $4.5 million. This means Warren’s calculated earnings are:
$4.5 million - $4 million = $500,000
His proportion of earnings corresponding to funds above $3 million is:
($4.5 million - $3 million) ÷ $4.5 million = 33%
Therefore, his tax liability for 2025/26 is:
15% × $500,000 × 33% = $24,750
Why have they chosen the increase in member balances and not taxable income in the fund attributable to members with super balances above $3 million?
Simple, industry super funds don’t have the software to easily determine the proportion of taxable income attributed to a member’s account, but they have member balances at the start and end of the income year already in their systems.
There are a number of serious problems I can see straight off the bat and more will emerge from the darkness up until implementation date.
Already we have a 15 per cent tax on the taxable income referable to a member’s accumulation account, a nil tax on that part of the fund relative to pension income, a 15 per cent concessional contributions tax on high-income members, an add back and reassessment of a member’s personal tax
for excess concessional contributions less a 15 per cent offset, and now a 15 per cent member tax on the proportional increase in super wealth above $3 million, plus a 45 per cent tax on excess non-concessional contributions above the member’s threshold. Are you dizzy yet?
b) Valuations
One of the big issues SMSF trustees and auditors will face is getting regular valuations of all assets. Importantly, assets such as private companies and also residential and commercial properties will need to be valued at year end to determine a member’s superannuation balance.
Industry and retail superannuation funds provide for accrued capital gains and other taxes when preparing member balance statements. SMSFs do not, but I suggest that post 1 July 2025 they will as well.
A member’s death will not stop the calculation of the super wealth tax. As we saw in the recent Ellisal case, a member’s death benefits may be held within the fund for three years post death if they are subject to litigation. This means the executor of the deceased member’s estate will have to pay the super wealth tax up to the date of withdrawal from the system.
Likewise, where a reversionary pension is paid to a spouse on the death of a member, this will increase the spouse’s superannuation balance and may make them eligible for the super wealth tax. Hopefully the final legislation will include the ability to back out the capital transferred by the pension so as not include it as wealth.
Members and their advisers will be using the strategy of withdrawing member benefits once they hit the $3 million mark or alternatively on 28 June each year. How will the measure accommodate a build-up post last year’s member balance, then a withdrawal before year end?
The tax on balances over $3 million is to be levied to the member in the year after the assessment by the tax commissioner. It looks as though it is a stand-alone determination such that it is assessed and paid by the member or taken from the member’s account. If the individual in question has carry-forward capital or tax losses, then they are out of luck.
Asset markets go up and down. We know what happens under the proposed tax when superannuation assets increase in a year. But if they go down, any loss is carried forward not back, unlike eligible companies, which can carry back tax losses.
At this stage of the game, although I really don’t think there will be much change, we should all let the associations do their lobbying work. Certainly the Succession, Asset Protection and Estate Planning Advisers Association will be making a submission to government.
In the meantime, there are a range of solutions, including the use of a family protection trust. This is a multigenerational family wealth protection trust, either discretionary or fixed, that limits distributions to the lineal descendants and bloodline of the family protection appointor.
As expected, this has created huge concerns in the SMSF industry. For the most part, it is this sector that has the bulk of the $3 million-plus member accounts.
One of the core purposes of superannuation, and some say it is the end game, is the provision of benefits in retirement. However, in addition to retirement, there are several other events allowing a person to access their retirement savings. In addition, we need to consider what retirement actually means from a superannuation law perspective. This article considers when an individual can access their super and whether there are any restrictions that might apply.
Firstly, it is important to recognise the rules allowing an individual to access their superannuation are separate from the taxation implications of when super is withdrawn. The ability to access super is contained in the Superannuation Industry (Supervision) (SIS) Act and Regulations, whereas the taxation of superannuation benefits is contained in the Income Tax Assessment Act. Further, there can be similar definitions across both pieces of legislation that have different meanings or requirements. For example, the permanent incapacity condition of release under the SIS Regulations only requires trustee assessment, whereas the requirement for a benefit payment to be taxed as a ‘disability superannuation benefit’ needs assessment by two legally qualified medical practitioners.
The preserved amount of a member’s benefits is their total superannuation benefits, less their unrestricted non-preserved benefits and any restricted nonpreserved benefits. It would be rare for an SMSF member to have restricted non-preserved benefits as they generally relate to employment-related contributions, other than employer contributions, made prior to 1 July 1999.
Unrestricted non-preserved benefits can be cashed, that is, withdrawn, at any time and do not require the member to satisfy another condition of
release with a nil-cashing restriction. Further, once benefits become unrestricted non-preserved, they cannot change back to being preserved. However, future contributions and earnings will be subject to the preservation rules and may require the member to satisfy a condition of release to access those benefits.
Alison is aged 61 and ceases her current employment and starts a new job. She has satisfied the ‘retirement’ condition of release (explained later) and consequently the value of her superannuation at that time, being $685,492, becomes unrestricted non-preserved, meaning she is able to access it. However, she has no need to access her super at this time as she has continued to work and has just changed jobs.
Two years later her super is now worth $986,904 after allowing for net earnings and personal contributions of $250,000. Alison comes to you and says she’d like to pay out her mortgage, which is around $185,000. What amount of super can she access?
The amount is $685,492, the value of her super at the time she met the ‘retirement’ condition of release, being when she changed jobs.
However, did Alison tell her adviser or accountant of her SMSF she had changed jobs so the relevant amount could be determined and recorded as unrestricted
Fortunately, she remembered an article in a newsletter from her adviser about the retirement condition of release and how it works for those aged 60, informed her SMSF’s accountant about this intention, and they calculated and recorded the unrestricted non-preserved amount at the time. She can now withdraw the $185,000 from her SMSF, taxfree, and pay out her mortgage.
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non-preserved?
When looking to access their super, individuals need to consider the many rules in place to ensure these monies are used in the manner intended. Mark Ellem details the elements fund members must obey when planning to make a withdrawal from their retirement savings.
The conditions of release, outlined in Schedule 1 of the SIS Regulations, are those events that permit an individual to access their preserved benefits and any restricted preserved benefits, but may also be subject to cashing restrictions.
Table 2 summarises those conditions of release with no cashing restriction. Once the individual satisfies the condition of release, there is no restriction on their access to their benefits, that is, they have full access to those benefits that are now recorded as unrestricted non-preserved.
Whether an individual has satisfied the retirement condition of release will depend on their age. First, the individual must have
attained their preservation age, which is currently 59. Where the individual has attained their preservation age, but is not yet age 60, the retirement condition of release is satisfied where the individual has ceased an arrangement of gainful employment and the superannuation trustee(s) is reasonably satisfied they never intend to be gainfully employed in the future on either a full-time, meaning working for at least 30 hours a week, or part-time, meaning working for at least 10 hours to under 30 hours a week, basis.
Where the individual has attained age 60, they can either satisfy the requirement just outlined or they can simply cease an arrangement of gainful employment on or after their 60th birthday. In the previous case study of Alison, she satisfied the retirement condition of release as she ceased an
arrangement of employment, and it ceased after she turned 60. So, while she had not retired in her mind, as she continued in her new job, she had met the requirement of the retirement condition of release, making the value of her benefits at that time unrestricted non-preserved. This would also apply where the individual has two jobs and ceased one of them after reaching the age of 60. It is also worthy to note the requirement to first cease an arrangement of gainful employment does not require such an
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Unrestricted nonpreserved benefits can be cashed, that is, withdrawn, at any time and do not require the member to satisfy another condition of release with a nilcashing restriction.
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arrangement to have satisfied any minimum hours. The arrangement could have been for one week, one day or one hour. The part-time and full-time basis of gainful employment is only required where the individual relies on the first part of the retirement condition of release, that is, that they intend not to be gainfully employed in the future.
The preservation age has been steadily increasing over time from 55 and will reach 60 on 1 July 2024. Consequently, from 1 July 2024 most individuals can turn their preserved benefits into unrestricted non-preserved by simply ceasing an arrangement of gainful employment after they turn 60.
Other points in respect of the retirement condition of release to note include:
• the cessation of gainful employment could have occurred prior to the individual attaining their preservation age. For example, Alex is 61 and has not been gainfully employed since he ceased his job at age 51. He can satisfy the retirement condition of release provided the trustee of his fund is satisfied he never intends to be gainfully employed on either a full-time or part-time basis. He would also need to be able to substantiate the prior arrangement of gainful employment and its cessation, and
• an individual who has never been gainfully employed can never satisfy the retirement condition of release as they cannot satisfy the requirement to have ceased an arrangement of gainful employment. They will need to wait until they attain age 65 and use that condition of release to access their preserved and restricted non-preserved benefits. With the release of the draft objective of superannuation, many have questioned whether this will rule out early access. There have been further comments that super should be available to purchase a house and to stave off foreclosure by a bank.
Of course, early access, that is prior to retirement, already covers these scenarios albeit with restrictions. Something to ponder is whether an enshrined objective of superannuation rules out any further earlyaccess conditions of release or removes the current ones.
The temporary incapacity condition of release requires the individual to first cease gainful employment, albeit temporarily. There is no reference to full-time or part-time, so all arrangements of gainful employment must cease. A reduction of hours would not meet the requirement.
The form of a temporary incapacity benefit is a non-commutable income stream. This is not a superannuation pension and consequently is not taxed as such. There is no reference to the tax-free and taxable component and no 15 per cent tax offset. Further, it does not matter if the recipient is aged 60 or more. Effectively, the non-commutable income stream is a replacement of salary and wages or other personal exertion income and taxed accordingly. The SMSF will most likely be required to register as a pay-as-you-go (PAYG) withholder and withhold tax in respect of temporary incapacity payments.
The amount of a temporary incapacity
benefit is also limited to the amount of earnings the individual was receiving just prior to the temporary incapacity. Documentation should be retained by the SMSF trustee(s) to be able to demonstrate the amount of temporary incapacity benefit paid does not exceed this amount. A temporary incapacity benefit cannot be funded from a member’s ‘minimum benefits’ (refer to Division 5.2 of the SIS Regulations). For this reason, where an SMSF provides a temporary incapacity benefit, it is generally funded from an insurance policy. The SMSF trustee, however, should not simply pay out to the member the amount of the insurance proceeds received as this may not comply with the earnings restriction, previously outlined. Further, there would most likely be a PAYG withholding amount to be retained and remitted to the ATO.
Given these issues with temporary incapacity benefits, they are generally provided outside of superannuation in the form of an income protection policy. Such premiums are usually tax deductible to the individual.
Finally, where the preservation standards are contravened, the whole benefit payment is assessable, with no reference to the benefit’s tax components or the age of the benefit recipient. However, the ATO has discretion not to treat the payment as assessable. The regulator is expected to release the final version of Law Administration Practice Statement PS LA 2021/D3 in mid-2023, which will provide guidelines on the tax commissioner’s discretion where superannuation benefits are received in breach of legislative requirements.
The superannuation access rules and strategies concerning the upcoming indexation of the general transfer balance cap will be covered in detail at SMSF Professionals Day – Strategies for success, which will be held in Brisbane (25 May), Melbourne (1 June), Sydney (8 June) and online (15 June).
With the release of the draft objective of superannuation, many have questioned whether this will rule out early access.
The way in which the work test operates has changed since the beginning of the 2023 income year. Mary Simmons scrutinises the amendments and the implications for superannuation contributions.
Since 1 July 2022, anyone aged between 67 and 75 is no longer required to satisfy a work test to be able to make non-concessional superannuation contributions. However, a work test requirement still remains where an individual wants to claim a tax deduction for any personal super contributions. That means members in this age bracket looking to make this type of contribution must satisfy the work test or work test exemption.
It is important to note this work test only ever applies to contributions made by individuals on or after they turn 67. So, if you have a member turning 67 in a financial year, the work test or work test exemption only needs to be met if the personal deductible contribution they are intending to make is executed on or after the day they turn 67.
Has the work test changed?
The requirement to be gainfully employed to meet the
work test continues to be applied on a financial-year basis. Further, the work test still requires a person to have been gainfully employed at least 40 hours over a 30-consecutive-day period during the financial year in which the contribution is made.
The key change since 1 July 2022 is the work test can now be satisfied at any time during a financial year. Prior to this change, it was generally accepted the work test had to be satisfied before the fund was permitted to accept certain contributions on behalf of a member.
Has the work test exemption changed?
The work test exemption was originally introduced into the Superannuation Industry (Supervision) (SIS) Regulations with effect from 1 July 2019. This exemption was introduced to allow eligible members aged 67 to 74, who did not meet the work test in the
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financial year in which they contributed, to make contributions.
From 1 July 2022, the work test exemption has simply been transferred to the Income Tax Assessment Act (ITAA) 1997 and remains available to those who met the work test in the immediately preceding year and who have a total super balance of less than $300,000 at 30 June of the previous financial year.
Has the definition of gainfully employed changed?
Under the SIS Regulations, the definition of gainfully employed was quite broad and included any person that is “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment”. This definition has been replicated, word for word, in the ITAA
This means for many the status quo does not change. However, for others, despite no change to their employment arrangement, there could be a significantly different outcome as they may no longer be entitled to a tax deduction.
To better understand the concept of being gainfully employed, we need to explore two key concepts:
1. Employed or self-employed
These terms are not defined and therefore take their ordinary meaning. Establishing employment is straightforward where an individual has a clear relationship with an employer and there is a written employment contract. Although a written contract is much easier to establish, the courts have determined contracts can also be expressed, implied or oral.
Over the years, paying wages as well as satisfying pay-as-you-go obligations, the degree of control and evidence of regular working patterns are additional factors that the courts have considered to determine employment. None of these factors is, by itself, decisive and arrangements need to be
considered on a case-by-case basis.
For a self-employed person, it can be more complex. In many instances they will be running a business so reference to ATO Tax Ruling TR 97/11 is important as it outlines the indicators of carrying on a business the ATO considers relevant. These indicators must be considered in combination and no one indicator will be decisive.
When dealing with family members, the onus of proof of an employment arrangement is even higher given the proximity of the relationship between the parties as the courts tend to focus on the nature of the relationship.
2. Gain or reward
Gain or reward is very broad and takes its ordinary meaning as something given or received in return or recompense for service, merit, achievement, or such. Further, it is not limited to monetary remuneration. It can include any valuable consideration, including fringe benefits, bonuses, gratuities, business income or director’s fees.
However, the law does specifically require a nexus between the gain or reward and the activities being performed. This direct link can often restrict the broader definition of gain or reward and, in some instances, may make it difficult for someone to satisfy the definition of gainfully employed.
For example, it would not include a person receiving a government allowance for caring for a relative or the receipt of passive income, such as distributions from trusts, dividends or rental income.
Has anything changed for directors?
When dealing with company directors it is important to recognise it is a well-established principle that they are not considered common law employees. The only exception is where the director is also engaged under an employment contract to provide nondirector duties.
This is reinforced by the fact that both the SIS Act and the Superannuation Guarantee (Administration) Act 1992 (SGAA) provide for an extended meaning of employee to specifically include directors who are entitled to remuneration. This would ordinarily require the company’s constitution to also allow for the payment to directors or the passing of a shareholder resolution to that effect. It’s also important the payment for their services is made.
For superannuation purposes, even though directors or officeholders are not employees at common law, section 15A of the SIS Act expands the definition of employee to include them. An equivalent provision in section 12(2) of the SGAA extends the definition of an employee for super guarantee purposes.
This meant that before 1 July 2022, a director who was entitled to and paid fees for their services could be considered gainfully employed. It did not matter whether the company was running a business provided there was gain or reward for their efforts in executing their director duties and they completed the required number of hours.
However, as noted earlier, from 1 July 2022 the work test was shifted from the SIS Regulations to the ITAA and any link to an extended definition of employee in the SIS
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Because the requirement to meet either the work test, or work test exemption, is no longer a pre-cursor to making a super contribution, there is the potential for things to get messy.
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Act or SGAA has been broken. This has potentially narrowed the scope to apply the work test, with duties as a director no longer counting towards the hours required to meet the definition of gainfully employed.
As a result, individuals who may have previously been able to claim a deduction for a personal superannuation contribution due to the extended definition of employee may now be prevented from doing so, even though their employment arrangement and director duties have not changed.
In determining whether this is an unintended consequence, we refer to the explanatory material enacting this change where there is no indication of any intent to change or narrow the scope of the application of the work test. In fact, the explanatory material confirms the changes are merely relocating the existing work test from the SIS Regulations to simply remove the work test as a general condition for funds to accept personal contributions. The materials go on to state the changes are designed to effectively maintain the existing arrangements for personal deductible contributions (emphasis added).
This issue was originally raised at the SMSF Association’s National Conference and the ATO has since confirmed under the wording of section 290-165(1A) of the ITAA,
a director who was entitled to, and received, directors fees would technically not be an employee under the tax act. This means without a law fix, any work undertaken in that capacity would not count towards the 40 hours required to satisfy the work test to be eligible to claim a tax deduction for personal superannuation contributions.
Interestingly, the ITAA does apply the extended definition of employee under the SGAA in relation to the deductibility of employer contributions. This means you can end up with the situation where a company can claim a tax deduction for any employer contributions they make for a director, yet that same director would be unable to claim a tax deduction for any personal contributions based on any work they undertook in their officeholder capacity. Essentially, anyone who is not a common law employee may now be at risk of no longer being able to count their hours worked towards meeting the 40 hours work test. This could include parliamentarians, local government councillors and police officers.
The extended definition of an employee has always required some gain or reward in exchange for the execution of director duties. These arrangements contrast with members who are directors of a corporate trustee of a passive investment trust where it is unlikely they would satisfy the employment test unless the director was actively involved in producing the assessable income of the trust or the trust was conducting an active business.
Even if the trust is operating a business, receipt of trust distributions alone would not ordinarily satisfy the gainful employment test because it is a beneficiary entitlement rather than a direct result of particular duties being performed.
For members operating their business through a family trust or private company,
it is expected the ATO will continue to look closely at these arrangements to ascertain whether an employment arrangement exists.
At a minimum, we would expect the ATO to maintain its efforts in ensuring the requirements around a valid notice of intent to claim a tax deduction for personal superannuation contributions continue to be met as these requirements have not changed.
With respect to the work test changes for those between 67 and 75, it would be reasonable to expect the ATO to look at individual tax returns to data match and look for anomalies.
Whether a person is gainfully employed remains under the spotlight for anyone intending to continue contributing to super between age 67 and 75 and who wishes to claim a tax deduction for these contributions. It is particularly important to review any arrangements that previously relied on the extended definition of an employee under the SIS Act before these members make any personal deductible contributions.
Because the requirement to meet either the work test, or work test exemption, is no longer a pre-cursor to making a super contribution, there is the potential for things to get messy. Consider an individual who makes a personal super contribution during the year, only to find out at the end of the year they are ineligible to claim the contributed amount as a tax deduction because they have failed to meet the work test as they have relied on the extended definition of an employee under the SIS Act. Where this occurs, the contribution will instead be treated as a personal contribution and counted toward the member’s nonconcessional contribution cap and could give rise to an excess contribution tax assessment.
Essentially, anyone who is not a common law employee may now be at risk of no longer being able to count their hours worked towards meeting the 40 hours work test.
Every superannuation fund must have a provision that deals with the allocation of the super interest on the death of a member. This arises from the Superannuation Industry (Supervision) (SIS) Act provision that death is a mandatory cashing event. The allocation provision could be to the effect that the superannuation interest of a deceased member is allocated to the legal personal representative of the member. However, most allocation provisions confer a discretion upon the trustees as to the allocation of the superannuation interest: the discretion is to select one or more beneficiaries to receive the allocation and the proportions each receives.
Strictly, the discretion is a power of selection as the trustees have a duty to cash out the superannuation interest. The SIS Act provides the outer boundaries of the allocation power and the trust deed of a particular fund may, but need not, impose more restrictive boundaries. However, the boundaries imposed by the trust deed must be entirely within the boundaries set by the SIS Act. Essentially, the legal boundaries are that the allocation can only be made to or among the legal personal representative, the spouse and the children of the member and individuals who, at the date of death of the member, were either financially dependent on or who had an interdependent relationship with the deceased member. The trust deed of the superannuation fund could restrict
the potential beneficiaries to the legal personal representative or to the spouse.
The typical power of selection can have three elements: the selection of one or more beneficiaries for the allocation; if two or more beneficiaries are selected, then the proportions are to be allocated to each beneficiary; finally, if a selected beneficiary can receive the allocation as an income stream whether the allocation should be made as a lump sum or income stream, or a combination of both. Only the first two elements are presently relevant.
Why confer a discretion on the trustee as to the allocation of the superannuation interest of the deceased member? Most likely this practice arose from the time when death and succession duties were in force. Conferring a discretion on the trustee as to the allocation meant the superannuation interest could not be treated as forming part of the dutiable estate of the deceased member and therefore no death/succession duties would arise on the super balance. It seems the SIS Act simply accepted this prior practice.
When reviewing an allocation decision, the court is not concerned with either a merits review, that is, whether the decision was the best possible decision, or even whether the decision is unreasonable or unfair. The review is concerned with whether the Continued on next page
MICHAEL HALLINAN is self-managed superannuation executive consultant at SuperCentral.A recent decision handed down by the Victorian Court of Appeal has emphasised the importance of respecting proper process when making trust allocations and has significant implications for SMSFs, writes Michael Hallinan.
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decision is defective from a legal standpoint.
In reviewing whether an allocation is legally defective, the commonly applied rules are:
• whether the decision is one the trustee is authorised to make,
• whether a decision has actually been made by the trustee,
• whether the decision has been made in good faith,
• whether the decision has been made for a proper purpose, and
• whether the decision has been made with adequate deliberation (sometimes described as whether the trustee has given real and genuine consideration).
The focus of this article is on the last rule, the adequate deliberation rule, as a recent decision of the Victorian Court of Appeal in the Owies Family Trust Case [2022] VSCA 142 considered this rule in some depth, albeit in the context of a family discretionary trust. However, the other rules will be briefly discussed.
Authorised decision – a decision will not be authorised if the trustee does not have the legal power to make the decision. For instance, if the trustee has the power to select one or more or all of person A, person B or person C as the recipient of
the superannuation interest of a deceased member, but is not authorised to select person D, the decision would be defective and invalid if the trustee did select person D.
Actual decision – if the trustee simply adopts someone else’s decision or makes a decision as directed by a third party, meaning the decision is not in fact the trustee’s own decision, then the decision will be defective.
Good faith – this rule is not about honesty, as the trustee must in any event act honestly, it is concerned with the trustee having an unbiased mind when making the allocation decision or making the decision in a disinterested manner, having a willingness to be engaged with and consider the relevant information.
Proper purpose – this rule requires the trustee to make a decision that is consistent with and furthers the purpose for which the allocation power was granted.
Adequate deliberation – this rule involves the trustee having the information relevant to the exercise of the power and not having regard to irrelevant information.
The trustee decision-making process as to the allocation of superannuation interests can be considered as having three components: the inputs, the black box and the outcome.
The first is the information the trustee has in making its allocation decision. The second is the actual process, thoughts, deliberations, assessment of factors and weighing of factors in the trustee reaching its decision. The third is the allocation decision of the trustee. The first and third components are visible to the court, while the second is invisible to the court, unless either the trustee is required to disclose its reasons or the trustee has disclosed its reasons.
Unless the court is entitled to open the black box, it is restricted to reviewing the inputs and the outcome in applying the various rules to determine whether the decision is legally defective.
The parents established a family discretionary trust. The parents were directors of the corporate trustee and the father was also the appointor and guardian of the trust. The three children of the parents were expressly identified as the primary beneficiaries. The parents were also beneficiaries as the parents of the primary beneficiaries. Over a number of financial years, the distributable income of the trust was allocated in the proportions of 80 per cent to the parents in equal proportions and 20 per cent to one of the primary beneficiaries, although in one year it was allocated 100 per cent to the father. The other two primary beneficiaries received no allocations of distributable income. The dissatisfied and excluded primary beneficiaries challenged the allocations on the basis that the trustee had failed to properly exercise its discretion as to the allocation of the distributable income. This challenge was upheld on appeal to the Victorian Court of Appeal.
The relevance of the case is the court’s analysis of the requirement for adequate deliberation referred to in the case as “real and genuine consideration”. For relevant purposes the issue on appeal was whether there was adequate deliberation by the trustee. The court held, among other things, there was inadequate deliberation as the trustee did not have sufficient information as to the circumstances and needs of two of the three children. The trustee did not seek information about the excluded beneficiaries and any information they had was obtained informally, sporadically and was by no means complete and often from indirect sources.
Additionally, the income distributions were defective on the basis the trustee did not make the decisions in good faith as the allocations were made to the parents who were very well off and had no need for the income distributions (in fact most of the distributions were loaned back to the trust),
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The SIS Act provides the outer boundaries of the allocation power and the trust deed of a particular fund may, but need not, impose more restrictive boundaries.
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when one of the excluded beneficiaries was in continuing poor health, had consequently much reduced earning capacity and lived a very modest and frugal life.
The implication for all superannuation fund trustees is that when exercising the power of selection the trustee must obtain relevant information about each individual and obtain that information in an organised manner. Further, the allocation decision
must be correctly worded to ensure that the resolution on its face demonstrates compliance with the five listed rules without disclosing the internal decision-making of the trustee.
While a checklist (see below) is not a substitute for a decision, it is an excellent aid to making a properly informed and legally effective decision that will assist in making the allocation decision less open to legal challenge.
The following is a recommended checklist:
Identification of the allocation provision
• Upon whom is the allocation power conferred?
• Is consent of a third party required?
1
• Has any precondition for the exercise of the allocation power been satisfied (for example, no binding nomination made by the member)?
• Is the discretion to select beneficiaries or select both beneficiaries and quantum of benefit? This could be summarised in a short advice to the trustees that is tabled at the meeting.
Nature of the allocation power
• Who are the objects of the allocation power?
2
• All objects should be identified. This could be included in the short advice prepared for the trustee.
Purpose of the allocation power
3
• Providing financial support to the dependants currently being supported by the deceased at date of death.
• Secondary purpose – if no dependants financially supported by the deceased member at time of death for general support of dependants of the deceased.
Obtaining relevant information
• How to obtain?
4
• Currency of information
• Completeness of information
• Inconsistency of information
This assists in establishing that the decision made by the trustee is an authorised decision.
This assists in establishing that the decision made by the trustee is an authorised decision.
Identifying the purpose also assists in determining what information is relevant and what information is irrelevant.
While large funds where the trustee is unrelated to the beneficiaries an application form/questionnaire is usually requested to be completed by each beneficiary.
In the context of SMSFs, this formality need not be used if the number of beneficiaries is small and relevant details are known to the trustees/directors.
5 Internal trustee deliberation – no details should be recorded in the resolution. Ideally, the decision should be made at meeting of the trustees or directors rather than as a written resolution.
Minute/resolution of decision
• State relevant details of allocation rule
• List each beneficiary – whether list complete or have undertaken sufficient investigations to identify objects
6
• Note information obtaining process
• Note proper purpose
• Note particular difficulties (if any in obtaining information and how resolved)
The trustee decisionmaking process as to the allocation of superannuation interests can be considered as having three components: the inputs, the black box and the outcome.
Since the 2017 reforms, the superannuation industry has experienced contribution changes at the commencement of each financial year, as well as part way through the year as is the recent case with the downsizer rules.
With no less than 25 changes in that timeframe, including indexation, it is little wonder people make contribution errors. This article takes an in-depth look at some of the critical elements to avoiding making such mistakes.
The Superannuation Industry Supervision (SIS) Regulations outline the requirements for the acceptance of contributions, whereas the Income Tax Assessment Act 1997 (ITAA) primarily defines the types of contributions, any notice requirements and any penalties/liabilities linked to various contribution types. Table 1 summarises the trustee acceptance capabilities from SIS regulation 7.04.
In addition to mandated employer contributions and downsizer contributions, a fund may also accept contributions made in respect of a member received on or before the day that is 28 days after the end of the month in which the member turns 75, due to a recent amendment to the work test.
The work test previously formed part of the trustee
assessment process to determine whether or not a fund could accept a contribution for a member aged 67 and over. From 1 July 2022, it is no longer a trustee requirement to assess the employment status of the member.
This requirement now sits with the member and is contained within the ITAA where eligibility to claim a personal tax deduction now includes enhanced agerelated conditions.
In essence what this means is all non-employer contributions received into an SMSF are nonconcessional contributions until such time as the member lodges a notice of intention to claim a personal deduction. Further, if a member makes a contribution under the assumption they will claim a deduction and then doesn’t, or isn’t eligible to do so, this may result in excess non-concessional contributions (NCC).
When considering the use of various contributions strategies, the first step is determining whether the fund is eligible to accept a contribution, using Table 1 as a reference.
Once it is determined a fund can accept a contribution, it is necessary to know whether or not any restrictions apply to the types of contributions in question or the strategy itself. The most common deterrents to contributions strategies are:
• member/spouse age and income levels,
Item If a member is:
then the fund may accept contributions made in respect of the member that are:
Table 1: Acceptance of contributionsThe treatment of contributions made in error is now less straightforward since the last round of amendments to the superannuation rules. Tim Miller details the current boundaries regarding the ability to allocate money to a fund and what happens when an error occurs.
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• the general transfer balance cap,
• the member/spouse total superannuation balance, and
• contribution election requirements.
There are a number of election/notification requirements a member/fund must satisfy either directly before the contribution is made, at the time it is made, or after it has been made. These notices serve a purpose of assisting to identify certain contributions, but also serve a greater purpose of helping individuals to avoid exceeding their contributions caps.
The following Table 2 provides a list of contribution strategies/events that require an election or notification of some description and who the election/notice must be provided to.
When contemplating these election/notice requirements, a matter of most significance between the prior and current regulations is the capacity to return contributions via SIS regulation 7.04(4).
The rules dictate where a contribution is received that is inconsistent with the
regulations, it must be returned within 30 days of the trustees becoming aware of the situation. The removal of the work test from the regulations has a significant impact, ultimately limiting the return of contributions in most instances to only apply to those made post age 75, with the exception of genuine errors. Proving a genuine error has been made to the ATO could be a significant challenge.
Prior to 1 July 2022, there was capacity for the fund to return member and nonmandated employer contributions where the individual was over 67 and did not meet the work test requirements or work test exemption. It meant many of the contributions using strategies and elections identified above could in certain instances be returned by the fund. For example, if the
member was over 67 and made a downsizer contribution when ineligible to do so, and was also not eligible to make an NCC, then the amount would need to be returned.
Now, by using the downsizer concept, if a member is 70 and uses the strategy but it is determined they do not qualify for that type of contribution, then while that contribution is in essence a mistake, it is now considered an NCC and measured against the individual’s cap to determine if it is an excess NCC. It cannot, however, be directly returned to the member.
As such it is important to understand what is and is not a concessional contribution and NCC and the impact of making either.
Excess contribution rules
Divisions 291 and 292 of the ITAA provide for determining those contributions that will count towards the concessional and NCC Table 2: Elections contribution
The rules around NCCs are more comprehensive than those for concessional contributions as there are far more moving parts in determining whether an individual has exceeded their NCC cap.
caps. They also provide for exceptions to the standard caps such as carry-forward concessional contributions and bringforward NCC.
The rules around NCCs are more comprehensive than those for concessional contributions as there are far more moving parts in determining whether an individual has exceeded their NCC cap.
If a person has breached their NCC cap, then the choice the individual makes as to what to do subsequent to this occurring has different implications, with some courses of action offering better outcomes than others.
The non-concessional cap is directly linked to the concessional contribution cap. For instance, the general NCC cap is four times the concessional cap. However, this link does not include the increase to the concessional cap attributable to the carryforward rules.
Further, a member’s NCC is nil if their total superannuation balance at the previous 30 June is equal to or greater than the general transfer balance cap, currently $1.7 million.
The cap in no way prohibits the trustees of the fund from accepting contributions, nor does it intimate contributions made in excess of the cap are subject to the SIS refunding rules. It merely dictates that any NCC above it will be excess NCC.
Therefore it is critical to know what is considered an NCC so individuals can determine whether their contributions are subject to the cap.
Excess concessional contributions not released from the superannuation system count towards the NCC cap.
The following are also considered NCC:
• personal contributions not subject to a valid ITAA section 290-170 notice of intention,
• contributions made by the member’s spouse on the member’s behalf, and
• all transfers from foreign superannuation funds where the amount is not subject to an election to tax the applicable fund earnings in the superannuation fund. While some contributions are specifically excluded from the NCC cap, they will count if the conditions as stipulated in the ITAA are not met.
Those sections and the various exceptions are as follows and were all identified previously as contributions that require an election/notice:
• section 292.95 – contributions arising from structured settlements or orders for personal injuries,
• section 292.100 – contributions relating to some capital gains tax small business concessions,
• section 292.102 – downsizer contributions, and
• section 292.103 – COVID-19 recontributions.
Needless to say the size of these contributions could cause major NCC cap issues if the conditions are not met and the amounts involved are significant.
When an individual exceeds either of their contributions caps, it results in the ATO issuing a determination outlining the options available to them.
The concessional contribution determination will advise how much of the contribution will be included in the individual’s assessable income, subject to a 15 per cent tax offset.
Individuals will also be provided with the option to release the excess amount from the superannuation environment,
which constitutes 85 per cent of the amount allowing for tax, or to leave the money in super. As alluded to above, leaving it in super means the amount will count towards the NCC cap. Electing to release the amount will result in the ATO issuing the nominated fund with a release authority. Individuals have 60 days to make their election.
The NCC determination will outline the excess amount and the amount of associated earnings attributable to the monies above the cap.
Individuals will be provided with two options and again the election must be made within 60 days.
Failure to make an election will result in the ATO adopting option 1 as it results in the lowest tax liability.
Release the excess NCC and 85 per cent of the associated earnings. If this option is selected, the associated earnings in total will be added to the individual’s assessable income and they will receive an amended notice of assessment incorporating this amount and a 15 per cent tax offset. The entire amount in question must be released by the ATO and not the fund member. The regulator will issue a release authority to the nominated fund, and the fund has 10 days in which to release the money.
Option 2 is to elect to leave the excess NCC in the fund. This will result in the amount being assessed for excess NCC tax, which is currently 47 per cent. This tax must be paid by the fund and the ATO will issue the fund with a release authority.
While the consequence of making contribution errors is not as dire as it once was, it can still be a painful exercise for individuals and SMSF trustees. Best to understand the rules and get it right the first time.
The SMSF National Conference 2023 returned to its usual place on the industry events calendar – February. Over 1000 delegates descended upon Melbourne to enjoy a variety of technical presentations and networking opportunities.
Like many of us, Megan* never thought it would happen to her – she never imagined she would need to escape a violent relationship; she never imagined her own family would turn their backs on her; she never imagined she and her daughter would become homeless and have to live out of their car.
Right now, there are thousands of Australians like Megan* experiencing homelessness but going unnoticed. Couch surfing, living out of cars, staying in refuges or transitional housing and sleeping rough – they are often not represented in official statistics. In fact, for every person experiencing homelessness you can see, there are 13 more that you can’t see.
Together we can help stop the rise in homelessness.
