- SAVE THE DATE -
SMSF Professionals Day 2024 is coming soon. This essential event for SMSF professionals will explore rule changes from the federal budget, tax-efficient investment structure alternatives, ways to minimise taxes on superannuation death benefits and expert insights on SMSF investment strategies. Plus, dive into real case studies that have been submitted to the Accurium Helpdesk and get all your burning questions answered in each session’s Q&A. Mark your calendar and don’t miss out on this knowledge-packed day. Registrations opening soon.
‘The content of the event was great - relevant and relatable topics’
‘Well done. Great program with excellent speakers’
‘Great content, good presenters. Great work and thank you!’
‘Well selected content and the event was well presented’
2023 SMSF ROUNDTABLE INDUSTRY’S VIEWS ON THE MOST PRESSING ISSUES
Cover story | 12
Investing | 28
The role of infrastructure in portfolios.
Investing | 32
The case to consider options.
Compliance | 34
Preparation of financial statements.
Strategy | 38
Reversionary pensions and the soft cap.
Compliance | 42
Issues with property development investment.
Strategy | 46
The timing of member benefit payments.
Strategy | 49
SMSFs forging the way ahead.
Strategy | 52
Use of small business CGT concessions.
Compliance | 56
Current economic considerations for LRBAs.
Strategy | 59
Investment strategy traps.
Compliance | 62
NALE effect of staff discounts.
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
Last word | 66
There can be absolutely no doubt the Albanese government is at war with the SMSF sector. You only need to look at the policy measures it has proposed since being in power to recognise this situation. The concrete evidence confirming its approach to the superannuation sector has to be the non-arm’s-length expenditure bill, which includes a carve-out for Australian Prudential Regulation Authority (APRA)regulated funds, and the 15 per cent tax on total super balances over $3 million, likely to affect SMSF members more than any others.
But time and time again we see proof why the SMSF sector should be celebrated as the success story of the retirement savings system brought in by the Keating government in the early 1990s.
The recently released Class “2023 Annual Benchmark Report” revealed SMSFs are leading the way when it comes to pension transition. The research showed 90 per cent of SMSF members had moved their accumulation balances into pension phase, while only 50 per cent of APRA-regulated fund members had taken the same course of action.
This reflects a few things of which critics of the sector should sit up and take notice. The first is the level of member engagement for SMSFs is pretty much where the government would like it to be across the superannuation spectrum.
The second is while the APRA-regulated fund sector continues to fumble around in providing adequate income solutions for its members entering retirement, an issue that attracted a rebuke from the Australian Securities and Investments Commission recently, SMSFs are going about the business
of providing the desired options for senior Australians in an unencumbered manner.
And if anyone needed further evidence to convince them SMSFs are absolutely knocking it out of the park, the sector is continually topping the satisfaction ratings conducted by research house Roy Morgan and did so again in September.
All this while concerns are being raised over the administration of the large funds for services such as processing rollovers or consolidating member balances. To this end, AustralianSuper was put under the microscope by the mainstream media about these issue after member complaints – a scenario that must be Canberra’s worst nightmare.
As we know, no problems here for SMSFs apart from having to bed down the SuperStream system pushed upon it as a result of changes to the operation of the retirement savings framework.
These achievements are not insignificant and, to be honest, are exactly what the government should be lauding as the absolute superannuation success story and holding out as the poster child for the system.
Sadly, not only can the ALP not even muster a congratulatory acknowledgement even through tightly gritted teeth, it just continues to punch down on the sector.
This antagonistic attitude made me take note of something former Labor Party member and opposition financial services and superannuation spokesman Bernie Ripoll, and now SMSF Association board member, said at the industry body’s Technical Summit 2023.
He noted for the SMSF sector to really take flight it requires a “right wing and a left wing”. I think we’d all appreciate it if that sentiment was communicated to the present government and recognised by 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
Publisher Benchmark Media info@bmarkmedia.com.au
Design and production
AJRM Graphic Design Services
INAUGURAL SMSF ASSOCIATION TRADE MEDIA JOURNALIST OF THE YEARAccurium
Inquiries:
1800 203 123 or email enquiries@accurium.com.au
ECPI and Segregation –What You Need To Know
10 October 2023
2.00pm–3.00pm AEDT
Webinar
Quarterly Tax Update
17 October 2023
2.00pm–3.00pm AEDT
Webinar
SMSF Technical Update
9 November 2023
2.00pm–3.00pm AEDT
Webinar
SMSF Live Q&A
14 November 2023
2.00pm–3.00pm AEDT
Webinar
Changing Residency
21 November 2023
2.00pm–3.00pm AEDT
Webinar
Trust Distributions –
The Practical Aspects
12 December 2023
2.00pm–3.00pm AEDT
Webinar
Chartered Accountants
Australia & New Zealand
Inquiries:
1300 137 322 or email service@charteredaccountantsanz.com
National SMSF & Financial Advice Conference 2023
NSW
9-10 November 2023
Rydges Resort Hunter Valley
430 Wine Country Drive, Lovedale
To have an upcoming event featured on the What’s On page, please contact darin.tyson-chan@bmarkmedia.com.au.
To have an upcoming event featured on the What’s On page, please contact darin.tyson-chan@bmarkmedia.com.au.
DBA Lawyers Inquiries: dba@dbanetwork.com.au
SMSF Online Updates
6 October 2023
12.00pm–1.30pm AEDT
17 November 2023
12.00pm–1.30pm AEDT
Institute of Public Accountants
Inquiries: Liz Vella (07) 3034 0903 or email qlddivn@publicaccountants.org.au
IPA National Congress 2023
NSW
29 November – 1 December
Four Seasons Hotel
199 George Street, Sydney Heffron
Inquiries: 1300 Heffron
GST & SMSFs
9 November 2023
11.30am–1.00pm AEDT Webinar
SMSF Clinic
14 November 2023 1.30pm–2.30pm AEDT Webinar
Quarterly Technical Webinar
7 December 2023
Accountants
11.00am–12.30pm AEDT Advisers
1.30pm–3.00pm AEDT Webinar
The Auditors Institute
Inquiries: (02) 8315 7796
SMSF Auditors Day VIC
17 November 2023
Pullman & Mercure Albert Park
65 Queens Road, Albert Park
Maximising In-Specie Super Contributions & Benefits
10 October 2023
1.00pm–2.00pm AEDT Webinar
Sole Purpose Test
24 October 2023
1.00pm–2.00pm AEDT Webinar
SMSF Trust Deed Disasters
21 November 2023
1.00pm–2.00pm AEDT Webinar
Related Party LRBA – TSB Issues
5 December 2023
1.00pm–2.00pm AEDT Webinar
SuperGuardian
Inquiries: 1300 787 576
SMSF Expenses Under The Microscope
12 October 2023
12.30pm–1.30pm AEDT Webinar
The Tax Institute
Inquiries: 1300 829 338
National Superannuation Conference 2023
VIC
1-2 November 2023
Crown Melbourne
8 Whiteman Street, Melbourne
SMSF Association
Inquiries: events@smsfassociation.com
SMSF Specialist Auditor Discussion Group
19 October 2023
10.30am–11.30am AEDT Webinar
16 November 2023
10.30am–11.30am AEDT Webinar
SMSF Industry Update –Legislation, Policy & Trends
7 December 2023
11.00am–12.00pm AEDT Webinar
SMSFA National Conference 2024
21-23 February 2024
Brisbane Convention and Exhibition Centre
Glenelg Street, South Brisbane Institute of Financial Professionals Australia Inquiries: 1800 203 123 or email info@ifpa.com.au
Superannuation Quarterly Update
QLD
7 December 2023
12.30pm–1.30pm AEDT Webinar
New research commissioned by the SMSF Association has quantified the extent of potential liquidity issues the proposed tax on total super balances in excess of $3 million is likely to cause those funds the measure captures.
The analysis was performed by the University of Adelaide and used data from the 2021 and 2022 financial years to determine the impact the new tax would have if it had been applied over this two-year period to the estimated 50,000 SMSFs it would affect.
“The university used data from a very, very large sample of SMSFs, almost 70 per cent of the entire populations of [these types of funds] … and what we were particularly interested in was the number of funds that would
have faced liquidity issues if this tax had been introduced [for the 2021 and 2022 income years],” SMSF Association chief executive Peter Burgess explained to delegates at the recent ASF Audits Technical Seminar 2023.
“And while the number of funds are in the minority, which would have had liquidity issues, there were still quite a few thousand that would not have had enough cash to cover the tax liability [they would have been facing].”
Specifically, the study found 13 per cent of the funds captured by the measure would have incurred an estimated tax liability in excess of the cash balances they held over the two income years in question.
The SMSF Association attributes this result purely to the fact the proposed calculation method for the tax liability includes unrealised capital gains.
According to Burgess, the seriousness of the situation for SMSFs has also been highlighted by the Class “2023 Annual Benchmark Report”, which found 25 per cent of the individuals with a total super balance of over $3 million, and therefore will be impacted by the new tax, hold a property in their SMSF.
“This is going to be quite disruptive to the self-managed super fund sector. It’s going to flow through to small business owners and to the community in general. That’s another reason why we are fighting so hard to ensure unrealised gains are not included in the calculations [for this new tax] – that liquidity issue,” he said.
Further, he pointed out any attempts to use a fund’s investment strategy as the reason an SMSF is having liquidity issues with regard to paying the liability
from the proposed tax should be rejected outright.
“And I don’t think it’s fair to turn it back onto the SMSF trustees and say ‘that’s an example that you haven’t done your investment strategy [correctly] if you don’t have [the required] liquidity’,” he noted.
“You can’t expect SMSF trustees, when they’re formulating their investment strategy, to anticipate future tax laws.”
Peter BurgessSuperStream has reduced the barriers to making SMSF rollovers, but practitioners should be prepared to receive minimal feedback on the process.
The Class “2023 Annual Benchmark Report” found that while rollovers into an SMSF were smaller than rollovers out, reflecting the establishment and wind-up points of a fund, these amounts have fallen.
“Since the introduction of SuperStream [on 1 october 2021], the average rollover in amounts and average rollover out amounts have been significantly lower than in the previous three financial years,” the report stated.
Data included with the report showed rollovers into SMSFs fell from $150,000 to
$200,000 during the 2019 to 2021 financial years to around $130,000 for the 2022 and 2023 financial years.
At the same time, average rollovers out of SMSFs decreased from between $350,000 to $400,000 during the 2019 to 2021 financial years to around $220,000 for the 2022 and 2023 financial years.
“This may indicate that SuperStream has brought down the transactional cost associated with rollovers, making smaller rollovers cost effective,” the report stated.
It also showed total estimated release authority counts had declined by 29.1 per cent after peaking at nearly 50,000 in the 2021 financial year and falling to 35,000 in the 2023 financial year, noting digital release authorities via SuperStream had reduced errors and duplication that occurred with previous manual paper processes.
Speaking at the recent Class Ignite conference, Chartered Accountants Australia and New Zealand superannuation and financial services leader Tony Negline said despite the improvements, SMSF practitioners who were not used to SuperStream should be careful when starting to use it.
“If you are involved in rollovers on an ongoing basis, you will be used to SuperStream and getting rollovers under control,” Negline said.
“For those of you who do rollovers irregularly, it’s like cooking dinner at Christmas time and you forget what you did last year so you have to look at the recipe to know where the problems are.
“However, sometimes you won’t be able to tell where the problems are because SuperStream is like those old computers that were known as dumb terminals.”
The ATO will not conduct an SMSF auditor number (SAN) misuse mailout this year, but instead engage in targeted action in key risk areas.
ATO superannuation and employer obligations director Paul Delahunty said in recognition of shifts in compliance behaviour and how the regulator was addressing risks identified in previous years, it was changing its approach to examining SAN misuse in the current financial year.
“We will look at other options around more targeted compliance campaigns and focus on behavioural areas where we know risk is more prevalent, such as where late lodgement has occurred or where multiple late SMSF annual returns are being lodged,” Delahunty noted.
“We know they are areas where there is heightened risk and are more likely to draw our attention in relation to where we need to conduct investigations.”
He revealed the ATO still had ongoing compliance cases from the 2022 mail-out, but noted there had been a decline in intentional SAN misuse in the findings of that exercise, which covered 3800 auditors and 430,000 funds with lodgment dates between 1 July 2021 and 30 June 2022.
The ATO has already given an indication of how the non-arm’slength expenditure (NALE) rules will be applied to general expenses through two separate private binding rulings (PBR) it has issued recently and how potentially difficult it is to anticipate when these provisions will actually be triggered.
In one of the PBRs an accountant used the equipment of their practice,
used their tax agent registration and lodged the annual return for their SMSF without charge. The work performed was done out of office hours and the individual considered it was done in their capacity as the fund trustee.
Here the ATO ruled the NALE provisions were not triggered.
The second PBR involved an accountant who exclusively prepared and lodged tax returns for his family and the family entity. He also prepared and filed the annual return for his own SMSF. In addition, he performed the required annual return work for another family member’s SMSF without charging a fee for those services.
For this situation the regulator stated the NALE rules did apply.
Smarter SMSF technical and education manager Tim Miller suggested the level of documentation associated with each scenario was pivotal.
Analysis performed earlier this year by Investment Trends has shown the release of Australian Securities and Investments Commission (ASIC) Information Sheet 274 (INFO 274), entitled “Tips for giving self-managed superannuation fund advice”, has already had an impact on SMSF establishments.
“[Our research shows a good proportion of] SMSF advisers have said as a result of the change in the [ASIC] guidance, they’ve actually already seen [or made] some change either by themselves, so they’ve made changes to the way they approach their SMSF advice and perhaps focusing on it a little bit more, or they’ve actually seen clients come to them [to talk about establishing an SMSF] a bit more than in previous years,” Investment Trends head of research Dr Irene Guiamatsia said.
“[So] 16 per cent [of] advisers in
the space of four months alone [have indicated this is the case] and we think this is significant.”
The noticeable change contained in INFO 274 was to eliminate a recommended minimum balance for fund establishments, previously $500,000, instead encouraging advisers to use their own professional judgment on what a suitable initial asset balance for an SMSF might be.
The government has released draft legislation to enshrine the objective of the Australian superannuation system into law, which remains unchanged from its original proposal but has added a requirement to ensure future super policy is consistent with it.
The draft Superannuation (Objective) Bill 2023, which is available from the Treasury website, states the proposed definition will be “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.
“Legislating an objective of superannuation will provide stability and confidence to policymakers, regulators, industry and the community that changes to superannuation policy will be aligned with the purpose of the superannuation system,” the bill’s explanatory memorandum said.
“It will also ensure members and funds have more certainty over any future changes to the superannuation system throughout both the accumulation and retirement phases.”
To that end, the explanatory memorandum specified an additional requirement for policymakers to prepare a “compatibility statement” demonstrating how any future legislative changes to the superannuation system align with the proposed aim.
From the moment the federal government announced its decision earlier this year to introduce a higher tax rate for total superannuation balances exceeding $3 million, we have not wavered in our opposition to this proposal. There are many specific reasons for this, but there are three underlying themes – it is iniquitous, adds complexity and, most importantly, is addressing an issue that will recede with time.
Indeed, the more we examine this issue the more unintended consequences we discover. The University of Adelaide, which pulled together the groundbreaking research demonstrating SMSFs with balances of $200,000 had comparable investment returns to Australian Prudential Regulation Authority (APRA) funds, has also looked at the numbers.
Although it does not dispute Treasury’s claim the likely number of affected people will be about 80,000, it concludes several thousand SMSF members may struggle to meet their tax obligations under the proposed tax reform. This burden is associated with both the risk of a liquidity shock, because their cash balances are insufficient to meet the new tax liability, and the possibility these funds will incur more transaction and other costs.
The university’s analysis examined the potential liquidity impact of the tax on SMSF members had the tax applied in the 2021 and 2022 income years. Using data from over two-thirds of the entire SMSF population, the results suggest that, of the about 50,000 SMSF members impacted by this new tax, up to 13 per cent would have had an estimated tax liability that exceeded their cash balance within the first two years. As the report bluntly says, “this suggests an additional, potentially cumulative, adverse effect of the new tax on SMSF liquidity over time”.
No doubt a major contributing factor to this result is the inclusion of unrealised capital gains in the calculation of earnings. The impact of including unrealised earnings is laid bare in the comparison of the 2021 and 2022 income years. In 2021/22, capital markets performed poorly, resulting in more than 70 per cent fewer illiquid SMSFs in comparison to the previous year.
Although the report notes over the medium to long term the ratio of illiquid SMSF members would be expected to reach some equilibrium, whereby most members meet the additional tax burden by liquidating assets to cover cash shortfalls on a needs basis, this process could have “negative implications” for the financial performance of these funds.
In making this point, the report reinforces an
argument the association has been making since this proposal was first mooted. It assumes a high super balance denotes significant personal wealth. This is often not the case. Many small businesses and farmers with SMSFs cannot access their fund, having their ‘wealth’ tied up in line with the preservation age rules. Taxing them on unrealised capital gains is not only iniquitous, but, in some instances, could be very disruptive to the day-to-day running of their businesses or farms.
Anecdotally, we know many of these ‘wealthy’ people often take pay cuts – and miss superannuation payments – when times are tough and their businesses or farms are struggling. For businesses, this certainly happened in the wake of the global financial crisis and during the COVID-19 pandemic, and for farms, well, drought, floods and fires are potentially just a season away. For these people, it’s the unrealised value in their business premises or farm that is sitting in their SMSF, in many instances providing their only security for retirement.
But the bigger issue here is complexity. Once again, the system is being unnecessarily complicated and, in doing so, chips away at people’s confidence in superannuation. Every report into super calls for greater simplicity, yet every change simply makes it more complex.
Let me make one final point for which I am indebted to the Class “2023 Annual Benchmark Report”. When its numbers are distilled in terms of those affected by the $3 million threshold, it emerges about 35 per cent are 75 or older and nearly 80 per cent are 65 and over. This is hardly surprising, with older Australians having benefited from the much more generous contribution limits that applied before 2007. This door was well and truly closed with the 2016 changes.
Although these people cannot be forced under the current legislative regime to take their money out of superannuation, the reality is their numbers will decline. Very large super balances, which were further encouraged in 2007 by abolishing the rules requiring everyone to start taking their money out of super, either as a pension or lump sum, by 75, will become a historical relic.
What it means is the government is addressing a problem that will disappear in time. No one, not least the association, believes a system that allows people with eight-figure super balances to get tax breaks, is equitable. But that’s a far cry from increasing the tax burden on those presumed to be wealthy simply because their balance exceeds $3 million. It’s iniquitous, especially when it’s a tax on unrealised capital gains, and the association will continue to say so.
The superannuation sector is eagerly anticipating the clarity promised by the legally enshrined objective of superannuation, first proposed in 2015. More importantly, it will give the Australian public certainty about the role super is intended to play in our retirement income system.
It is anticipated the objective will delineate the purpose of superannuation and its role in the retirement income framework. It is also intended to limit frequent alterations made by successive governments.
The objective followed the earlier proposed Charter of Superannuation Adequacy and Sustainability, which did not reach fruition. However, the recent release of exposure draft legislation in September this year by Treasury has been met with general positivity within the sector.
CPA Australia has been a strong proponent of the government setting out a long-term vision for Australia’s retirement savings system and has contributed robustly to the debate over the years. The heart of the proposed objective is to “preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”. This is a commendable goal, aligning with the aspirations of all Australians for a secure and comfortable retirement.
Rather than supplanting existing key requirements for all super funds, the objective complements them. Fundamentals like the best financial interests duty, sole purpose test and retirement income covenant will continue to play pivotal roles. This integration ensures the superannuation sector retains its commitment to accountability and transparency.
An integral component of the objective is the emphasis on superannuation’s role in delivering income for a dignified retirement. This deserves special attention because it addresses a long-standing issue. A collective failure in aiding customers during the transition to retirement, resulting in unnecessary financial strain for retirees, has been a key finding of recent government reviews of the financial sector. This must be rectified to ensure a ‘dignified’ retirement –ultimately, the financial security of retirees.
A dignified retirement is intended to be considered in a multifaceted way, encompassing elements of both objective standards and subjective judgments, as well as community expectations. This inherent complexity is bound to pose a challenge for future policymakers as the term allows for a degree of interpretation and adaptation. Striking a balance between these perspectives will be crucial in ensuring the objective remains relevant and effective in the years to come.
The uncertainty surrounding life expectancy presents a significant challenge. Individuals grapple
with the dilemma of whether to spend conservatively in anticipation of a long life or be more liberal with their expenditure. The introduction of the retirement income covenant is a positive step towards addressing this issue, compelling trustees of Australian Prudential Regulation Authority-regulated funds to delve deeper into members’ needs and tailor their products and advice accordingly.
A notable concern raised by several commentators is the tendency of retirees to leave untouched superannuation savings for family members to inherit, the idea being the tax concessions in the super system are supposed to fund retirement rather than estates. This underscores the need for comprehensive education and planning to ensure retirees make informed decisions about their superannuation assets.
In addition, the objective serves as a clarion call for innovation in retirement income product design. It underscores the imperative for forward-thinking solutions that empower fund members to draw a sufficient income, thereby averting the spectre of poverty in their twilight years. At the same time, this innovation must be underpinned by a degree of flexibility to accommodate the uncertainties that inevitably accompany reaching retirement. By marrying these essential components, we can construct retirement products that not only uphold dignity, but also offer individuals the agency to plan for their financial futures with confidence.
However, the conversation must extend beyond those fortunate enough to experience a long and comfortable retirement – or even reaching retirement at all. The objective must also consider those who may predecease retirement or face circumstances preventing them from working until retirement due to illness or injury. Despite the inclusion of life insurance within super, many Australians remain underinsured, relying on superannuation to bridge this gap. This brings forth a crucial question: does the new objective actively undermine the importance of insurance in super?
As we embark on this new era of superannuation governance, it is imperative the objective strikes a delicate balance. While solidifying super’s status as the primary retirement savings vehicle for Australians, it must also be attuned to the diverse needs of the population. This includes providing comprehensive support for those who may not experience a traditional retirement.
The objective should be a beacon of assurance and inclusivity, reflecting a commitment to the financial security and dignity of all Australians. Anything less would be a disservice to the very people it seeks to protect.
The proposed new tax on superannuation balances over $3 million has got many clients thinking about withdrawing amounts from their fund before the tax is likely to take effect on 1 July 2025. Putting aside the pros and cons of withdrawing funds now versus leaving amounts in superannuation despite the new tax comes down to personal preference. At the end of the day, some people will want to withdraw excess amounts to avoid paying tax on unrealised gains on principle, and that’s their prerogative.
We know the great intergenerational wealth transfer is looming and is expected to be the largest wealth transfer in history. The 2021 Productivity Commission report projected that Australian baby boomers will transfer $3.5 trillion in wealth by way of inheritance over the next 20 years (by 2050). The majority of this wealth is made up of residential property, unused superannuation benefits and other investment assets bequeathed to family beneficiaries. Although this transfer is slated to occur over the next two decades, the wealth transfer has well and truly already begun. Many of today’s older Australians are choosing to leave their wealth to their children and grandchildren during their lifetime, which is much earlier than previous generations and generally when younger people need it most as they are typically paying off their mortgage and raising their own children. This is one of the key reasons for this move to gift assets while still alive – to help children get a foothold in the property market as real estate price rises combined with interest rate hikes and the rising cost of living have made it hard for the younger generation to purchase a property.
The intergenerational wealth transfer conversation is also accelerating with higher net worth clients due to the proposed new tax. This proposal has also prompted more open discussions about the option of withdrawing funds from superannuation to give their children an early helping hand. The benefits of this strategy are threefold. Clients are able to get their total super balance below the $3 million threshold and avoid paying the extra tax in the future (assuming low or no tax is paid to sell assets while in pension phase), it enables clients to understand how their bequest will
be used by their children, and lastly, superannuation death benefits tax paid need not be paid by adult children.
Over the past 30 years Australia’s compulsory superannuation framework has seen the industry grow to $3.5 trillion, and it will only continue this trajectory as this pool of savings is expected to double over the next 40 years. Interestingly, the most recent intergenerational report forecasts the cost of the aged pension will fall from 2.3 per cent to 2 per cent of gross domestic product over the next 40 years due to compulsory superannuation reducing the proportion of older Australians relying on either a part or full pension. That said, the report also states, although the government will spend less on the age pension over time despite the rapid ageing of the population, the burden on the budget will be overtaken by the “cost of superannuation tax breaks”, which leads us to today’s debate about reducing tax concessions on large superannuation balances.
However, a client’s wish to pass the estate planning baton is their choice, and it is vitally important they have a plan in place to ensure any early gifts are not split in the event of their child going through a divorce or relationship breakdown.
There are various strategies that can be employed to help protect such gifts, such as a binding financial agreement which can address how a gift will be treated if the child separates from their partner. Alternatively, clients may wish to lend money to their children, which may be a better option as a loan can give parents greater security against a claim by their children’s future or former partners. The benefit of this strategy is that parents can establish their own terms when drawing up the loan agreement. For example, parents may reserve the right to charge interest from when the child first borrowed the money and if the child’s relationship ends, the parents can invoke the loan where the loan must be repaid. Either way, clients should obtain legal advice with the view of drawing up a binding financial agreement or loan agreement before handing over any funds to their children during their lifetime. This will help eliminate any financial risk and further enhance their children’s future financial security.
The release of the sixth edition of the federal government’s Intergenerational Report (IGR) has generated more commentary this year than previously.
We have had IGRs in 2002 and 2007 (under then treasurer Peter Costello), 2010 (Wayne Swan), 2015 (Joe Hockey) and 2021 (Josh Frydenberg).
An IGR is required by Howard-era legislation. The explanatory memorandum (EM) for that legislation says an IGR’s purpose is to “assess the sustainability of current government policies” with the content and format of the report to be determined by the treasurer.
Originally IGRs were to be published every five years. This requirement was adjusted by the Morrison government’s response to COVID-19.
It is notable governments of both persuasions released new IGRs not long after taking office having been in opposition for a period of time.
Comparisons between the documents can be tricky as different calculation methods and assumptions have been used. For example, except for the 2015 IGR, most have determined life expectancies using the period method. The 2015 IGR used the cohort method, which considers likely mortality improvements whereas the period method does not. Further, the 2015 IGR predicted females born in 2045 can expect to live 96.0 years. The 2023 IGR expects females born in 2043 to live 87.9 years.
All IGRs published to date have made assumptions that have been more conservative than reality.
This applies to:
• future life expectancies – in 2002 it was assumed that by 2022 new born males would have a life expectancy of 80.7 years and females 86.1 years.
The 2023 IGR provided updated statistics of 81.3 years and 85.2 years respectively,
• health, age pension and aged care (as a percentage of gross domestic product (GDP)) –in 2002 it was predicted that by 2022, 9.8 per cent of GDP would be swallowed up in these areas, but the actual number was 7.6 per cent of GDP. Age pension expenditure, as a percentage of GDP, was 36 per cent lower than expected,
• population – in 2002, Treasury thought by 2022 there would be 23.2 million Australians. By
2021, we had 25.7 million people living here.
The 2023 IGR assumes we will have almost 2 million more people living in Australia by the mid2060s than was assumed for the 2021 IGR (40.5 million compared with 38.8 million).
By 2045, very few of the first post-WWII baby boomers will still be alive and by 2065 almost all that generation will be deceased.
The 2015 IGR was the first document to show a fall in age pension expenditure from the mid2030s onwards. It is unclear why the earlier IGRs missed this aspect. The 2002 IGR said by 2042 age pension expenditure would be 4.2 per cent of GDP. The 2023 IGR predicted this would fall to 2.2 per cent of GDP for the 2041 year – a decrease of about 50 per cent. Most of this drop is due to changing demographics; some policy changes and superannuation savings also help.
For some time there has been an expectation aged care will become a major budgetary problem. The numbers do not show this. The 2023 IGR predicts other expenditure on programs such as the National Disability Insurance Scheme (NDIS) will be growing faster.
For example, in the 2002 IGR it was predicted by 2022, 1 per cent of GDP would be spent on aged care. The 2023 IGR says we currently spend 1.1 per cent of GDP. The current IGR forecasts aged care will increase to 2.5 per cent of GDP by 2063. While this is a more than 100 per cent increase, it is a lower jump than had been originally predicted.The NDIS first appeared in the 2015 IGR. At the time it was expected to have expenditure of 0.9 per cent of GDP in 2055. The 2023 IGR expects this to have increased by over 100 per cent to 2 per cent of GDP by 2053.
As with Treasury Tax Expenditure Statements released earlier this year, the current IGR claims superannuation tax concessions are expensive when expressed as a percentage of GDP.
The Treasury analysis that produced these statistics assumes all investments in superannuation would be owned in an individual’s name and face the full force of marginal tax rates. How many people behave this way? Do we need to ask this question?
The Parliamentary Joint Committee on Corporations and Financial Services is currently conducting an inquiry on Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry. It follows the recent allegations of and responses to misconduct in the Australian operations of the major accounting, audit and consultancy firms, including, but not exclusive to, the Big Four. The committee intends to report to parliament by the middle of 2024.
In its submission to the inquiry, the Institute of Public Accountants (IPA) sought to identify opportunities to rebuild trust through appropriate regulatory frameworks. It requires greater transparency from professional services firms to improve probity standards. This approach would be less disruptive and more effective than any proposed structural change separating audit and non-audit functions.
The IPA’s position is that large professional firms should be subject to clear and more comprehensive governance standards – the same standards that are applied to Australian Securities Exchange-listed companies, modified as necessary to reflect the absence of a need to protect shareholders and capital markets. It would also be possible to mandate requirements for disclosure of partner remuneration and reports of serious misconduct.
While internal governance standards and cultural norms within a company are important, the government’s responsibility in defining and consistently enforcing criminal and civil penalties plays a vital role in promoting a good corporate culture and deterring illegal activities. Therefore, having a well-funded and efficient regulator is crucial. The IPA has frequently voiced concerns about the Australian Securities and Investments Commission’s (ASIC) performance and lack of transparency.
Despite lacking the legislative enforcement powers of ASIC, the Tax Practitioners Board and other regulators and standard setters, the three professional accounting bodies share common goals of regulating, enhancing behaviour and culture, promoting professionalism (including integrity and competence) and serving the public interest. Essentially, this constitutes a co-regulatory model that deserves recognition. However, our members often face overlapping and occasionally contradictory obligations, resulting in extra compliance expenses.
A stronger accountability and disciplinary framework could build community trust and improve the quality of services. The existing accountability
frameworks are complex, largely ‘soft’ or ‘quasiregulatory’ and provide significant opportunities for refinement and improvement.
One option to improve the effectiveness of the overall framework would be to give legislative force to codes of conduct applicable to members of the three professional accounting bodies.
Under this model, the accounting bodies could report directly to the Financial Reporting Council (FRC), which would monitor, regulate and improve conduct. This could improve overall regulatory efficiency as the professional accounting bodies are already reporting in this manner, including lodging quarterly, annual and ad hoc reports on our quality assurance of members, disciplinary function, audit and other relevant initiatives.
Currently, the standards promulgated by the Accounting Professional and Ethical Standards Board do not have the force of law. They are derived from the International Federation of Accountants (IFAC) and its standard-setting bodies, including the International Ethics Standards Board for Accountants (IESBA). Standards issued by IESBA, including the Code of Ethics, are applied worldwide by member bodies of IFAC.
This approach is consistent with that in the United Kingdom, where its equivalent, the FRC, sets accounting standards for the UK and Ireland.
The IPA believes this proposed model could involve the establishment of the FRC as the single regulatory clearing house for the accounting profession, with compulsory information gathering and information sharing powers and the power to sanction noncompliance with information gathering.
The FRC could delegate complaint handling to each of the professional accounting bodies, to be undertaken either in compliance with their individual by-laws or a joint approach or joint framework could be considered.
Public faith in the profession could be restored and misconduct deterred by subjecting professional services to more effective regulatory scrutiny. Even if we can never eradicate bad behaviour, we can try and make it less likely. However, it should be highlighted the egregious actions of a few should not taint the majority of those who uphold the highest professional and ethical standards.
The inquiry webpage, with all submissions, including the IPA’s (number 15) can be found at Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry –Parliament of Australia (aph.gov.au).
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
ATO Practical Compliance Guideline 2016/5
Rising interest rates over the past year have caught up with SMSFs through the updated limited recourse borrowing arrangement (LRBA) safeharbour interest rate.
The interest rate used to meet safe-harbour terms for an LRBA has experienced a significant jump for the 2024 financial year.
The legislated annual rates applying from 1 July 2023 are:
• funding of real property – 8.85 per cent, and
• funding of listed shares or units – 10.85 per cent.
This represents a 3.5 per cent increase from the previous year.
The increased rates will result in higher monthly repayments for current loan arrangements for SMSFs.
The federal government is working towards enshrining the objective of superannuation in legislation, with the release of draft legislation.
The draft legislation expresses the purpose of superannuation as “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.
This is not aimed at changing the legal or regulatory environment, but just to set a clear objective and agreed purpose for trustees and regulators to measure against.
The consultation process closed on 29 September and final legislation is still to be introduced into parliament.
ATO Draft Taxation Determination 2023/D1
A draft tax determination has outlined the ATO’s
view on how to calculate the amount of statutory income that is taxed as non-arm’s length income (NALI) if the SMSF makes a capital gain due to a non-arm’s-length interaction.
In this draft, the ATO has indicated NALI is to be calculated as the lesser of non-arm’s-length capital gain, without applying capital gains tax discounts or losses, and net capital gain.
A concern expressed by industry is that rules outlined in the draft would allow non-arm’s-length capital gain to taint an arm’s-length gain.
The consultation process closed on 28 July and this determination is still to be finalised.
QC 73195
Illegal early access to superannuation benefits continues to be a problem within the SMSF sector, with these breaches identified by the ATO as the most common reason for applying sanctions.
During the 2023 financial year, the ATO issued an additional $29 million in income tax liabilities, administration penalties and interest charges. It also disqualified 753 trustees. This is around twice the amount of tax and penalties levied in the previous year and more than three times the number of disqualifications
The registration process for new SMSFs changed from 1 July in relation to the notification of the fund’s bank account.
Previously this could be done on the Australian business number application form with 60 days from establishment to register.
This function has been removed and trustees will need to provide bank account details directly to the ATO after registration via the online portal for businesses, via phone or through a registered tax agent.
Superannuation in 2023 has been too big to ignore with the government putting a proposed objective and new targeted tax on the table, setting the scene for the selfmanagedsuper annual SMSF roundtable, which considered how these changes will progress and what happens next in regards to non-arm’s-length arrangements.
In February, the government announced it would put in place an objective for the superannuation system, but its terms are open to interpretation with the panel questioning whose definitions will be implemented and how they will be applied to calls to use super for infrastructure and aged-care investing.
DTC: The draft bill for the objective of super was recently released. What did we think of the proposed legislation at this point in time?
PB: We are supportive of the objective of super and think it’s a good idea that everyone has an understanding as to the purpose of the superannuation system. It can only enhance consumer confidence in the system, which is a big thing when it comes to people making voluntary super contributions. The draft bill is unchanged from what we saw earlier in the year in the consultation paper and it will be a separate act that won’t override any of the Superannuation Industry (Supervision) (SIS) Act or Regulations provisions. This means it won’t impact things like preservation rules and cashing requirements.
CD: There’s been a number of reviews over the years and they have all pointed out we’re dealing with quite a complex system. We need to be clear about the purpose of superannuation because that drives policy settings, so we are supportive of the idea of an objective for the simple fact that it provides stability for those policy settings and we don’t get people moving the goalposts because of budgetary requirements. We are also supportive of the government continuing to consult as the objective is implemented because it does have potential to make a big difference.
BA: From a personal observation on how it would impact my work, if it doesn’t change the SIS requirements, then the overall auditing requirements and obligations aren’t going to change.
I like the idea there is an approach to super so that if there are any proposed changes, it has to be married up to what has been set down as the objective and that gives us confidence that things aren’t going to be just changed for the sake of change; they have to align with the purpose and that is a good thing. JSa: I agree with what everyone has said, but there will need to be consideration for the many different types of super in Australia. The objective is great in terms of sustainability and being equitable, but it is very difficult to get sector neutrality. If the government does legislate this objective of super, how can we achieve that neutrality across the board between the historical legacy accounts and defined benefits in comparison to a self-managed superannuation fund? It will be interesting to see if the draft bill gets legislated, then how it is applied when people are looking to make these changes from that perspective. DTC: There are concerns about the definition for an equitable and sustainable system as being fairly broad terms. Have they been sufficiently clarified so that we can say they are going to be interpreted in a way that is not counter to the objective?
CD: The concept of the policy is to set the objective so we all know what we’re trying to achieve and then if the policy setting is done through that lens, I’m not worried about the wording. If we’ve got a clear objective that sets the framework through which future policy is set, the
Continued on next page
Darin Tyson-Chan (DTC) selfmanagedsuper editor Jason Spits (JSp) selfmanagedsuper senior journalist. Moderators Jemma Sanderson (JSa) Cooper Partners director and head of SMSF and succession. Craig Day (CD) Colonial First State head of technical services. Peter Burgess (PB) SMSF Association chief executive. Belinda Aisbett (BA) Super Sphere director.Continued from previous page
outcome that we’re getting is stability. In terms of the particular words used, I don’t have much of an issue with them and it’s not something that we’re concerned with.
PB: There’s some wriggle room there, but it is still an extra step the government and future governments are going to have to go through if they’re looking to make changes to the superannuation laws. There is a statement of compatibility that’s referred to in the explanatory materials, which means the government has to explain that if they do want to make a change to a superannuation law, how that is consistent with the objective. There are some funds which will be carved out of this which are constitutionally protected funds and they are not subject to this objective. Whether that statement is going to change anything is the question, but it gives more certainty and an extra step that any particular government has to go through to justify whatever changes they’re making to the superannuation rules. In regards to some of the specific terms such as sustainability, we’ve argued changes like the $3 million cap add complexity to the system and the more complexity we have, the less sustainable the system is.
DTC: Can you briefly describe the constitutionally protected funds that you referred to?:
PB: Most of the state government funds and federal or commonwealth government schemes are not covered by this objective, which has got to do with the structural base of the funds being defined benefit interests.
CD: Some are state based because under the constitution, the federal government can’t raise taxes on the state, so as soon as you’ve got a superannuation fund set up under some sort of state act, the federal government can’t tax it.
JSp: We’ve been talking about the definitions of equitable and sustainable, but the other one is a dignified retirement. Is that a definition we’re comfortable with or is it too broad?
JSa: It is broad because a dignified retirement for me might be different to anyone else and it’s a bit like the phrase ‘the lifestyle to which you are accustomed’. For a high-flyer, a dignified retirement might be substantially more from an income-generation perspective than someone who hasn’t had that lifestyle. Then you’ve got to overlay different healthcare requirements and everyone will have a different concept. It’s really hard to put a benchmark on what that looks like, which is an area that the age pension is trying to do in supporting people towards that dignified retirement. It’s one of those terms where everyone will have a different definition of what that looks like for them.
DTC: Within the draft bill there are references to how superannuation could support national economic priorities if they were in the members’ best financial interests. Is this a way to allow the government to use our retirement savings for their purposes, such as affordable housing or infrastructure?
PB: It’s a carefully worded statement which they are linking to the financial best interest of the member and we wouldn’t support the mandating of superannuation to be used for nationbuilding projects because you’ve got to be able to show that it actually is in the financial best interest of the member. You need to make sure that whatever investments are being made are in the best interests of the members and it’s consistent with the sole purpose test and we wouldn’t like to see that watered down in any way, shape or form.
DTC: Does anybody know what the parameters of financial best interest actually means because that opens the floodgates to further discussions as to how you can make this sort of thing work for your own purpose?
JSa: You could probably justify anything and that’s where the challenge lies if I’m taking on all this risk, but the returns are going to be substantial. Where we don’t want to get to is having mandated requirements for how you invest
Continued on next page
We are supportive of the idea of an objective for the simple fact that it provides stability for those policy settings and we don’t get people moving the goalposts because of budgetary requirements.
– Craig Day, Colonial First State
money and this was brought to the fore a couple of years ago when the ATO sent notices to people who had limited recourse borrowing arrangements (LRBA) and said they should consider if it’s a breach of the investment provisions. It’s not their role to determine how people invest their money, so it’s a similar sort of thing if you force an investment and there are certain people that don’t want to take on any more risk than a term deposit. If they had to invest their money in superannuation in a prescribed way in an infrastructure project or something like that, a behavioural change would kick in and they would just rip it all out.
BA: Spot on. We don’t want to be dictating where people invest their money. It’s a self-managed superannuation fund for a reason, they want control. If something like that was introduced, there would be so many funds impacted because their money is already tied up in investment choices that they’ve made quite legitimately. To be told you must invest a certain percentage, even if it’s a low percentage, in a particular area is not going to be well received. What does the audit look like for those types of funds? What are the consequences for trustees that decide to vote with their feet arguing they have been investing their way all this time and they can’t be told where to put their money?
JSa: If there was a requirement it would likely just give rise to some investment arbitrage system where people say you can satisfy the requirement by doing certain things, which then allows scam type arrangements to come through. People are opportunistic when those sorts of measures are put in place and so I would be cautious in prescribing those sorts of requirements. Is it also in the best financial interests of the member if you’ve got a prescription because it might not be a good return-generating asset?
CD: It could potentially just begin to apply to large superannuation funds because for SMSFs it might be like herding cats to try and get them to do that. In which case you might see some different behaviour as well because if people don’t want their money invested in some sort of government-prescribed investment, will we see a movement to SMSFs because of that, which would be counterintuitive to what you’re trying to do.
DTC: If you’re looking at adhering to the legislation, in the context of that objective, does that rule out something like using super to fund aged care as was proposed in a recent issues paper?
PB: If the objective of super is in play, there will be an obligation for the government to show that whatever changes they are making are consistent with that objective and whether those terms are sufficiently broad to accommodate that type of thing. We wouldn’t support that. It’s up to the members to decide where they invest their money and how they spend that money in retirement. We are very prochoice, being in the SMSF sector, so we wouldn’t support measures which look to restrict how people in retirement or the pension phase are required to draw down that money.
CD: We’re all supportive of the objective of super because it brings certainty and stability to the policy settings, but then if governments go on to say, “well we can contort our reason for this into anything”, then it just completely undoes the whole purpose of the objective.
JSa: The proof will be in the pudding in terms of whether there is something like that. It’s a fantastic example to see how that might get tested. If it’s going through the gauntlet of the objective of super and someone justifying the introduction of a law that might prescribe that, it would be interesting to see the debate that goes on.
BA: These types of calls imply there’s a one-size-fits-all to this approach and we’ve got to have a portion of our funds dedicated to that end goal. This is a relevant issue for any number of members of SMSFs, especially with the age demographic that have got an SMSF. Also, now we can have up to six members, we’ve got some old and some younger members and that alone makes it challenging to say to younger members they have got to have a certain per cent of their investments earmarked for aged care as it’s not going to be on their agenda for some time.
JSa: This ties into the issue of what is equitable. Let’s say you have a requirement to fund something like aged care, but you’ve got all those defined benefit interests. How does that fit into a requirement that you fund your own aged care? They really can’t do that due to how that super is invested because it’s been invested by the federal government. So again, sector neutrality may be an issue and how is that equitable? Is it equitable that a 21 year old who has their superannuation guarantee go into their fund having part of that now going to fund aged care that they might not need for 60 to 70 years?
CD: How does all this interact with the sole purpose test? We’ve got things such as the First Home Super Saver Scheme, and life insurance and income protection insurance within superannuation and that all works from a sole purpose perspective. Do we have to start to think about changing sole purpose because we’ve got so many things that superannuation is now being used for that’s not about retirement? Is aged care about retirement or post-retirement? We seem to be opening up superannuation to more and more things that takes away from its ability to achieve that one goal that we really want it to achieve and makes it harder to actually achieve that by trying to make it do more and more things.
Put forward within days of the proposed objective of superannuation, the $3 million soft cap has the potential to seriously impact SMSFs ahead of any other form of super, a point not lost on the panel, which noted if the tax must be applied, there were better ways to do it than those put forward by the government.
JSp: In regards to the $3 million soft cap, we’ve seen issues arise, such as the lack of indexation and the taxation of unrealised capital gains, but has there been any change in the government’s attitude from what they stated on day one in regards to this proposal?
PB: The short answer is no. We’re still waiting for draft legislation to be released. At the moment it’s just the consultation paper that we’re all working from. We’ve had no indication from government that they’re looking to change the broad concept of what they’ve already announced. We will see some adjustments made to things which will be included in the $3 million threshold. There were plenty of submissions that went in on the back of that consultation paper, pointing out some of the inequities that will arise if you don’t exclude certain things from that threshold, and also from the definition of earnings. I expect we’ll see some tinkering around that, but for the broad concept of the $3 million threshold we’re not aware of any
movement from government in terms of the way they’re going to calculate earnings by using the movement in a member’s total super balance. We’ve had quite a bit to say about the inequities of that approach, including unrealised capital gains is grossly unfair, and we’ve been doing what we can to convince the government to take a different approach when it comes to calculating earnings. We understand that it’s highly unlikely at this point the government is not going to proceed with the $3 million threshold, but we remain optimistic that they will use a different approach to calculating earnings to what we saw in the consultation paper. I have nothing to really base that on, but hope they see sense in the fact that it’s not equitable to include unrealised capital gains in their calculation and they should base the calculation on actual taxable earnings, which is not a difficult thing for the SMSF sector to report. The objective of this tax is to claw back some of the tax concessions that people with very large balances get from the superannuation system, but there’s plenty of scenarios
where that won’t be achieved. That’s something we need to look into more because if you look at some situations people will end up paying a lot more tax if they keep their money in the superannuation environment than they would if they took it out and invested it outside of super. If the intent is to claw back some of those concessions, I understand that, but we have a situation with what they’re proposing where someone could pay a lot more because they’ll be subject to additional tax. Unrealised capital gains is a new concept of earnings. We’ve got the tried and tested, accepted definition of taxable earnings and what they’re doing is bringing in another definition of earnings with unintended consequences.
DTC: Lack of an indexation component was one of the early criticisms of the measure, with suggestions this aspect will affect more than the estimated 80,000 superannuants because by the time 1 July 2025 comes around, the buying power of $3 million will not be at that level. Has anything changed on this front?
PB: No indication of change on that picture. Some of the figures we’ve seen show there is a significant number of individuals in that $2 million to $3 million range, so they’re going to tip
Continued on next page
We wouldn’t support the mandating of superannuation to be used for nation-building projects because you’ve got to be able to show that it actually is in the financial best interest of the member.
– Peter Burgess, SMSF Association
over that $3 million threshold pretty soon. We’re going to see more and more of that over time if this threshold is not indexed, but nothing that we’ve heard from government indicates they’re looking to change their position on not indexing that threshold.
DTC: We have mentioned changes in behaviour in the context of the objective of super, but in this context have you noticed any sort of change in attitudes towards investing and saving and investing outside of super among clients concerned about breaching this threshold?
JSa: We are seeing people look far more critically at the best entity to invest in and during my conversations with people who are retired, they are considering their succession and looking if they should use superannuation money to buy an asset like property. Some of these are farming families and looking if they should buy farming land in the superannuation fund or pull the money out of super and put it in a different entity for ease of what’s going to happen later from a succession perspective, and not having to think about it within the context of the $3 million threshold. I’ve had some clients say they want to benchmark down to $3 million and don’t want the hassle at all so they’re talking about pulling
substantial amounts of money out of super. I’ve told them not to panic but wait a little bit, but it’s definitely front of mind for a lot of people just wanting to know how it works. The other thing is there are people that have taken the risks and have got some substantial amounts in super, but they’re young – in their 40s and early 50s – and they’re going to be hit with this and can’t do anything about it. They’re very annoyed and frustrated with this proposal because there’s no way for them to try and manage their position as they are not eligible to take lump sum withdrawals and those sorts of things. It’s having unintended consequences and I absolutely see people changing their behaviours.
DTC: Have we got any information on when we might get some further draft legislation?
PB: We haven’t heard anything further. We did hear a couple of months ago now that it was expected out in a few months, but there’s been nothing, so you would expect it’s imminent, but we haven’t been advised and are still waiting like everyone else. We expect we will see something soon because there will be another consultation phase and expect the standard phase this time of about five weeks. What we had earlier in the year was something ridiculous, but they did make it clear to us at the time there will be another consultation phase once the exposure
draft legislation is out. That will take us up to the end of Christmas and we won’t see a bill introduced into parliament until early next year is how we expect it’s going to play out. Working back, if they do want to get that bill into parliament early next year, it means we need to see some draft legislation pretty soon to give the industry sufficient time to go through that consultation phase before we break for Christmas.
JSp: There’s been a lot of scrutiny regarding asset valuations in the past 12 months from the ATO. Is the introduction of the soft cap going to intensify the focus on asset valuations, possibly as a means of getting under the $3 million threshold?
BA: Every auditor that I speak to can see the pain on the horizon. We have enough challenges now with getting sufficient audit evidence on asset valuations and if you’ve got trustees that are motivated to stay under a particular cap, that risk escalates. It is going to be problematic, we’re going to have clients who do their damnedest to keep it down, which makes the audit process more complicated and challenging. The end result is we’re going to see more qualified audit reports and more ATO reporting, but where does that leave us as an industry or the ATO as a regulator?
Continued on next page
Every auditor that I speak to can see the pain on the horizon. We have enough challenges now with getting sufficient audit evidence on asset valuations and if you’ve got trustees that are motivated to stay under a particular cap, that risk escalates.
– Belinda Aisbett, Super Sphere
Continued from previous page
How are they going to manage and how are they going to catch up with those funds that are understating their asset values to keep under that cap and how are they going to be dealt with? It is going to be problematic and auditors are bracing for that. If you’ve got clients that are relatively young, and they’ve got lucky in the SMSF and now have some big gains in there, they don’t have the option to restructure their funds by taking money out. They’re going to be problem funds as well for auditors for the simple fact that they’re going to get taxed on these unrealised gains and have no means of paying the tax. I have got a couple of clients in that exact boat who invested in property that has kicked goals for them, but have no real money in the bank. They didn’t need money in the bank because they had their assets in property, but how are they going to pay these tax bills?
JSp: Is this going to lead to more administration costs just to run a fund because you’ve got to know about the fund holdings under $3 million and then the separate calculations and valuations for everything over that figure as well?
BA: From the auditors’ perspective, you might find they are going to say if you’ve got property or other assets that might be challenging to value and you’re close to those caps, or may be pushed over them, they will want more quality audit evidence. There might be an expectation from some auditors for a sworn valuation every year, which is a huge cost to SMSF trustees that have property. Having to get it done annually to make sure they’re complying with the caps and paying the tax that might be
levied on the fund with any increases in those property values is likely to make those administration costs go up. Who knows whether trustees will try and manage that by finding an auditor that won’t require more detailed information is hard to say.
JSa: There’s many unlisted shares and unlisted unit trusts that might be an active business and have property underpinning them. If it’s an active business in which a super fund is a passive investor and not heavily involved in the business, there will be pushback if they say they need a valuation done for the fund audit. To value a business costs tens of thousands of dollars every year in the absence of a capital raising, so the audit evidence to justify those sorts of things is going to increase. Auditors’ fees are quite low for what their requirements and obligations are and it’s becoming more rigorous for auditors who are left holding the baby in a lot of situations. So it’s justified when we’re doing the financials for a super fund to say to clients upfront we need a valuation of this, so you have to go off and do that because for audit we’re going to need that valuation. There’s no point in us even doing the financials until we have that valuation because we don’t want the back and forth as it just ends up costing everyone more time and money.
BA: We have a number of clients that have unlisted investments and it’s not been possible to get sufficient audit evidence for those so it becomes a qualification scenario. If you’ve got a cap that has a tax consequence, will everyone want that audit report qualified to stay under the $3 million threshold? That’s not practical or sustainable or going to achieve the
objective that they want to achieve?
Everyone’s just going to take an audit qualification instead of going over the $3 million cap and be reported to the ATO, and how will it test the valuation. If we say we can’t verify the investments at market value and the trustee says they can’t do it either and that’s convenient because they stay under the $3 million cap, how are the ATO going to determine the valuations if none of us can?
PB: This is part of the reason we opposed this tax from day one because it’s complex, costly and everyone’s going to pay for it, not just those that are over $3 million. I saw some statistics the other day that a significant portion of members who have got more than $3 million are over the age of 75. So this is very much a legacy issue and these large amounts will be removed from the system over time, but all we’re doing here is making what is already a complex system even more complex. BA: If older accounts are the problem, the solution is just handing the next generation an inflexible limit that doesn’t seem to be overly fair or equitable.
PB: It has the hallmarks of the super surcharge regime, which cost more than it raised in revenue for the government.
DTC: The issue with regard to illiquid assets has been identified and highlighted through situations such as including or excluding a farm from an SMSF and the farmers’ plight has been argued quite well around the potential and unintended consequences of this bill. The SMSF Association has been
Continued on next page
in discussions with other industry bodies like the National Farmers’ Federation and the Pharmacy Guild to further draw the government’s attention to this issue. Has this made any difference?
PB: We were very surprised with the proportion of farms that are owned by self-managed super funds in our discussions with the Farmers’ Federation. There’s no question some of those funds will have liquidity issues if this tax comes in. If they’re required to sell that property, it’s going to be disruptive to the broader community. We held discussions with small business associations to make sure they were aware of the potential impact that this new tax could have on their members. We know that there are a lot of small business owners who hold their business premises in their self-managed super fund, and you would expect many of those to probably be over that $3 million threshold. This tax is coming their way, so we wanted to make sure they were aware of that. We have provided them with fact sheets which explain what we know about how this tax is going to work, which they have used to educate their members as well.
DTC: Were they surprised or shocked?
PB: No, they were familiar with the $3
million proposal, but some weren’t aware of the technicalities of it. I have spoken to some small business owners myself who think this is a new tax that’s only going to affect people after a certain age and after a certain time. So it’s that type of education out there that we’ve got to be concerned about as well because that’s not the way this tax is intended to work and it will apply to everyone that has a business premises in their SMSF.
JSa: The other thing with farmers and small businesses is they are the backbone of the Australian economy and the biggest employer of people. It’s feast and famine for a lot of those businesses there. I was at a conference a couple of years ago and a chap who was part of the small business council said small business owners are exhausted, they can’t find staff, are working seven days a week, and then you throw in this as a consideration for them. No doubt they’re probably dismissing it or thinking I’ll deal with that later, but it will start to impact them where they’re over the $3 million threshold. Like the farms, the value of the land has gone through the roof but the rentals aren’t there to fund the tax. Will it be a debt account, like the super surcharge? Will you only be eligible if you have illiquid assets in the fund or if it’s a defined benefit? There’s so many quirky little bits and pieces that need to
be ironed out before anything like that can come through.
BA: The fact that gains are incorporated but unrealised losses are not factored in, how is that fair and reasonable? It’s just a one-way street and you’ve got people who have unlisted investments that one year they’re up and the next year they’re down. It seems so unreasonable that they’re trapped in that situation through no fault of their own.
PB: The knock-on effect to the small business sector has not been properly considered in all of this and it’s not just the SMSF community, but the tax has a knock-on effect to the broader community when a lot of small business owners will have to pay more tax as a result of this measure. I don’t think it’s going to achieve its purpose either. We saw another example of this during the week with a very large fund of $20 million, which is clearly in the sights of the government in terms of where this tax is directed. If the tax had been introduced in the last financial year, they wouldn’t have paid any tax because while the fund earned quite a lot of income from bank interest in dividends and distributions, the asset value actually dropped. So the calculation of earnings would have meant no earnings under this new definition of earnings,
Continued on next page
It’s a real concern how retrospective the enforcement of NALE might be and I think the draft bill is quite vague from that perspective. The law might say one thing, but the interpretation of the law might be totally different.
– Jemma Sanderson, Cooper Partners.
Continued from previous page
even though under the traditional taxable earnings approach, they did have taxable earnings. I don’t think that’s an intended outcome where a fund of that size will pay no tax under this new threshold approach. So there will be plenty of scenarios where it’s just not going to achieve its intended outcome.
BA: It’s really quite a simple solution. If you’ve got a fund in that asset value, you could just tax its income at a slightly higher rate and there’s the equalisation and redistribution of benefits to those that can perhaps afford it more without having all of these unintended consequences. It’s quite a simple answer, the tax rate for those funds goes from 15 to 20, or even to 30 per cent. DTC: It begs the question as to what the real purpose of this is and not the stated purpose, but that’s a discussion for another day.
JSp: Darin mentioned the intent versus the state of intent and one of the things we saw with this was a very limited consultation period. Should we be concerned this is an indication industry consultation is becoming less valuable or meaningless?
CD: From my perspective, if I look at
the $3 million consultation, it was my understanding that the government was looking to announce that in the federal budget or to reconfirm it in the federal budget. With the budget being in early May, there was limited time to get that consultation in and it had to be squeezed into a short period of time. I don’t see that they’re not interested in listening to consultation. I participated in some of the consultation with Treasury and they were not open to some things. There was absolutely no point, they made it clear, in discussing the indexation issue. In terms of other issues around the meaning of contributions and earnings we had a quite detailed discussion about insurance policies, and what happens if an insurance policy triggers and pushes someone over $3 million. Would that look like earnings that’s going to be subject to tax for a 45-year-old person that’s been involved in a car accident and is disabled for the rest of their life?
Treasury absolutely took that on. There were a couple of things put through by industry that Treasury hadn’t thought through or had not thought through to the extent that maybe industry had with the experience that we have dealing with clients and real-life situations. They were certainly taking all those factors into account and when we saw
subsequent clarification, a lot of those issues had been picked up, so clearly they are listening.
PB: I agree with Craig. In terms of that short consultation phase we had around the $3 million cap, it was explained to us they wanted to get it in the budget papers so we had a very short consultation phase. It can be frustrating in the consultation phase as we don’t always get what we want, and we saw that through the nonarm’s-length expenditure consultation. It was a long extended process of working with government. We would have liked a different outcome and we didn’t get everything that we asked for. We are hoping when we see the draft legislation coming out for the $3 million cap that we will get a decent period of consultation because we are going to need it. This is not a simple tax and it’s going to need quite a lot of consultation. We haven’t seen anything and the way this tax is going to work for defined benefit interests, you would expect that to be addressed in the draft legislation. It will be the first time the broader community will get an understanding as to how it’s going to apply to those type of funds, and we’ll be disappointed if we don’t see at least that traditional six-week period we normally expect for a consultation.
I just find it frustrating after all of us around the table have spent hours and hours lobbying Canberra, lodging submissions and reviewing legislation, to get to the two-times multiple that might not even matter in the end.
– Jemma Sanderson, Cooper Partners
Unlike the recent proposals of the objective of super and the $3 million earnings tax, non-arm’s-length expenditure (NALE) for general expenses has been a lingering issue which appears to have been solved and while the solution is workable, the panel noted it would not be evenly applied across all funds.
DTC: What does everyone think of the proposed NALE legislation with regard to general expenses?
PB: Well, it’s certainly a lot better than what was first proposed. We started with all the income of the fund potentially being taxed as NALE if general expenses were not on arm’slength terms. Then Treasury took the position the discounted amount would be multiplied by five times as part of the calculation of the nonarm’s-length income (NALI) penalty. That has been reduced to a two-times multiple now and it certainly is a big improvement. The piece that remains a concern for us is the way the rules are applied to specific investments so we still face the prospect there of all the income that the fund derives from a particular asset being taxed as NALI and we think it needs to be addressed. We’re trying to get Treasury back to the table to have those conversations because the job is not done.
JSa: How the NALE rules will be applied retrospectively is also a worry because there hasn’t been enough clarity on this issue. There has been an incorrect assumption any expenditure incurred or not incurred prior to 1 July 2018 will be disregarded, but the ATO said it was not allocating enforcement resources to NALE regarding general expenses, not those relating to specific assets. As a result, a lot of people have kicked that can, NALE relating to specific investments, down the road. So it’s a real concern how retrospective the enforcement of NALE might be and I think the draft bill is quite vague from that perspective. The law might say one thing, but the interpretation of the law might be totally different.
JSp: So does the situation place more onus on auditors to detect situations that might trigger the NALE and NALI rules?
BA: It certainly feels that way. Sometimes it’s very challenging for
auditors to be able to spot whether there should be an expense, but there isn’t one. It’s just not something we’ve turned our attention to in the past. So it takes a little bit of retraining the brain to be looking for those types of things. And then obviously, as auditors, we run the risk of being sued if we don’t spot situations where an expense should have been incurred but wasn’t, when it triggers the NALE rules with an associated penalty. It also means the annual audit will require some extra work to mitigate our risk and that will drive fees up. Accordingly we are currently reminding our clients for the 2022/23 audit season appropriate expenses need to be charged to the fund so when the audit for the 2023/24 year comes around there should be no NALE issues involving general expenses, so even if there will be a two-times multiple applied to the shortfall, it won’t matter. But of course there will still be some problem ones.
JSp: So what impact will it have on the cost of the annual fund audit?
BA: That’s a hard one to answer because it really does depend on the nature of the fund and what sort of scenario we’re talking about. Things
Continued on next page
It remains a mystery to us and no one at Treasury or the ATO has been able to explain to us why we actually need the 2019 amendments. Our preferred position is for a complete repeal of these provisions, not just for APRA funds, but also for SMSFs.
– Peter Burgess, SMSF Association
Continued from previous page
we’ll need to consider is whether the underpayment of an expense is easy to spot as well as the ease by which we can determine what is an arm’slength amount for that expense. So it will be a little like knowing how long a piece of string is, but there is clearly going to be more audit time needed to evaluate these situations.
DTC: How realistic is it to expect auditors to pick up NALE when a trustee performs work on an asset in their SMSF? Does it mean you have to know about every single thing your client does with regard to their super fund?
BA: It’s not something we’ve remotely been interested in in the past and I’ve never asked whether the trustee has made improvements to their property they might have done themselves. Even when I see a Bunnings receipt come through the file as a repairs and maintenance expense, I don’t sit there and ask whether the trustee performed the associated work themselves and what their day job is in that context. However, now we probably do need to start thinking about whether that’s an issue. It could just be a point to be raised in the management letter telling clients it is something they may need to evaluate and consider. I certainly updated my representation letters for the 2023 audit specifying if the fund members or trustees are providing services to the fund, they need to have an arm’s-length expense arrangement in place for them. So I’ve got a little of the issue covered, but as auditors we know our representation letter isn’t the solution to a lot of our problems, but if the matter is mentioned, hopefully trustees will read it and get a sense this is an area that is changing. I think an even bigger risk
for my clients is the number of SMSFs neglecting to pay the annual ASIC (Australian Securities and Investments Commission) fee. There is a more obvious nexus between the ASIC fee and the entire income of the fund compared to the situation where an accountant is performing the bookkeeping services for their SMSF. There’s only a small portion of SMSFs where the trustees are qualified accountants doing the bookkeeping for the fund for free in their trustee capacity compared to the number of funds with a corporate trustee structure that doesn’t pay the ASIC fee.
DTC: When looking at the NALE rules dealing with general expenses and taking the concept of materiality into account, can the draft proposal actually be seen as a good result?
PB: In terms of the general expenses, where we’ve landed at two times a shortfall, I would imagine in most cases the amount is going to be immaterial. So again, it will land in the auditor’s lap to determine what action if anything is going to happen. The real concern we have is around the specific investment issue and the situation in example nine of Law Companion Ruling 2021/2 regarding Trang the plumber, where some modifications were made to an SMSF property by the trustee without charging an arm’s-length expense to the fund. The result is for all the income from that property to be forever tainted as NALI, including the capital gain when the property is sold and there is currently nothing the trustees can do about it. We don’t think that’s right and we think it’s very harsh. We’re asking for amendments to be made to at least give the trustees the ability to make good that situation. So there are some
loose ends with these NALI and NALE rules that still need to be tightened up. But with regard to the two-times multiple on the expense shortfall, it’s where we’ve landed, we’re going to accept it, but it’s not what we asked for. We still don’t understand why we had to have the 2019 amendments to NALE in the first place. Clearly the mischief these amendments were trying to address were addressed by previous ATO rulings and the like. So it remains a mystery to us and no one at Treasury or the ATO has been able to explain to us why we actually need the 2019 amendments. Our preferred position is for a complete repeal of these provisions, not just for APRA (Australian Prudential Regulation Authority) funds, but also for SMSFs. BA: I think the two-times multiple is really easy to resolve. All you’ve got to do is accrue the expense at the market value at 30 June. You might need to update the accounts, but it’s a nice, easy solution. I think it is dreadfully unfair, as you mentioned Peter, if you’ve got a fund that has a specific nexus issue regarding NALE, that it taints the asset for good. I had a client just recently that had a non-arm’s-length LRBA for a whole two months and the ATO has said that taints the asset forever. So the fund has just acquired the asset, for two months the trustees didn’t meet the LRBA safe-harbour provisions, and the ATO has ruled the asset is tainted for the entire time it is held by the fund, including when they sell the property. That means because they didn’t pay interest and capital repayments to the related-party lender for two months, the NALI penalty tax will apply, including to the capital gain and all the income the fund receives from the property on the way through. I
Continued on next page
Continued from previous page
just think it’s not workable and it’s not reasonable.
PB: The most disappointing aspect of all this is we’re going to have a different set of tax rules for SMSFs versus APRA funds. We’ve never seen this before, but I think that seems to be the track we’re going down. We don’t think that’s the right approach to have SMSFs subject to different types of tax rules than what other funds are. In some cases SMSF members end up paying higher rates of tax. We don’t think that’s sending the right message to the community to those who want to be more engaged with their savings and who are more aspirational.
BA: Absolutely. It’s not fair and it’s not logical either. When you’ve got a situation where a client like mine did mess up for a two-month period, they should be able to make good and they should be able to get that asset off the NALI train to have it just taxed as ordinary income because there was no mischief involved. It’s not like they were trying to avoid caps or avoid anything else. They just simply messed up for two months because they didn’t get their paperwork done in time. Yet they’ve got this lifetime tax consequence with this asset that just seems unreasonably absurd.
JSa: It’s in a similar sort of vein to
Superannuation Industry Supervision (SIS) Regulation 13.22D provisions where if you fail them and your investment in a unit trust is no longer valid.
BA: At least in those situations you can go to the ATO and say I’ve had a slight hiccup in my SIS Regulation 13.22 structure so will you allow me to still be exempt from the in-house asset rules and the regulator in a lot of instances is agreeable to that. But this NALI situation is a tax position, it’s not a SIS compliance issue. So it seems grossly unfair clients like I’ve got, who make a mistake for a short period of time, have an asset that otherwise has no mischief attached to it whatsoever is forever tainted. If it was tainted for just the two months, I wouldn’t have a problem with it and I even suggested to allow my client to pay NALI for the rent for the two months.
JSa: It comes back to the interpretation side of things as well. You might have been talking to one ATO representative that would allow you to make good for the two months, while a different officer may not sanction this course of action. So this type of consistency is a real challenge.
CD: If you ask me, this whole saga has its genesis with the old LRBAs where people were putting in place basically what was a contribution and dressing it up as a loan with 50-year repayment terms and zero interest rates through
that whole period. Basically people took undue advantage of the situation and as a result the ATO has reacted and this is what we’ve ended up with. So unfortunately, Belinda, your poor client is being treated in the same manner as those same people who put in place 50-year loan arrangements with zero interest rates. One of the learnings we get out of this is don’t push the rules too far because then we get people coming down with law and regulations and we end up in this mess.
BA: It’s particularly unfair now because those people who implemented related-party loans with 50-year repayment terms and a zero interest rate are now sorted because they fall under Practical Compliance Guideline 2016/5 and the income on the particular asset is being taxed at ordinary rates. But then you’ve got clients who inadvertently mess up for a couple of months and their asset is tainted with penalty tax rates applying forever. It’s obvious the wrong people are being penalised here.
JSp: So should the sector let the NALE general expenses issue go now and concentrate on some of the other elements of these penalty provisions?
PB: That’s a fair comment. Our focus is now very much on that specific
Continued on next page
One of the learnings we get out of this is don’t push the rules too far because then we get people coming down with law and regulations and we end up in this mess.
– Craig Day, Colonial First State
Continued from previous page
expense issue. I think we’ve pushed it as far as we can on the general expense issue and we’ve got as good as what we’re going to get. So we’re laying down our weapons on that, if you like, and then focusing our attention on the specific expense issue.
BA: I think that makes sense. Like we mentioned, the situation of the nexus for general expenses is easily resolved
– just accrue the expense amount it should have been, which means the fund will have the commercial costs that should be reported and there’s no consequence from a tax perspective. It’s the NALE nexus regarding particular assets that changes the tax treatment of the asset forever. That is really problematic.
JSa: Like you said, Peter, NALE with regard to general expenses is now pretty much immaterial. So I feel like we’ve landed where we started
to a certain extent. There is still going to be the compliance issue to determine the commercial value of a service and that’s going to be inconvenient, mainly for auditors. I feel like we’ve gone through this whole rollercoaster ride to be back to a situation where NALE on general expenses doesn’t matter, like it’s nothing. I just find it frustrating after all of us around the table have spent hours and hours lobbying Canberra, lodging submissions and reviewing legislation, to get to the two-times multiple that might not even matter in the end.
While the overall number of SMSFs and members within them continues to increase, that growth is not being matched by upward movements in the number of SMSF practitioners, placing pressure on those currently working to do more to grow and promote the sector.
JSp: How strong is the sector currently? Is it a concern growth looks like it is beginning to slow a little?
PB: As far as we’re concerned the growth is still quite strong. We would be more concerned if it was spiralling out of control, so we’d much prefer to see the growth as it is currently. We continue to see a lot of younger members setting up SMSFs. The ATO stats show over 40 per cent of SMSFs are being established nowadays by people under the age of 45 and I think that shows the real health of the sector that we’ve got younger individuals now turning to selfmanaged super funds. The sector is not without its challenges, though. We are seeing a significant increase in the number of trustees who are being disqualified. Looking at some of the figures, there were some 764 trustees disqualified in the last financial year compared to only 251 in the previous financial year, so that is a significant increase. The major cause of the jump was illegal early access and the nonlodgement of returns. So obviously the sector still has work to do in educating those members who do decide to set up a self-managed super fund to ensure they do understand their obligations. And I think it’s incumbent on all of us to do what we can to make sure SMSF members are aware of the preservation rules and the like. One of the things we do at the SMSF Association is to make sure our members have the materials they need to educate their trustee members on the rules and so forth. JSa: I agree 100 per cent with what
Peter said, that the education piece is huge. You’ve got the general super rules and then the SMSF overlay on top of them means the sector is becoming more and more specialised. In addition to the number of people wanting to engage with their retirement savings and set up a self-managed super fund, there is an equal number who are establishing an SMSF under the wrong pretence. That in itself is a challenge because they think “oh great I can invest in crypto or other exotic investments” and they go off and do that, but then it costs a small fortune to make sure the fund is complying. So part of the education piece is to bridge the gap in making people understand what it means to be a trustee and the responsibilities associated with it. There is a real danger people are not aware of the scams they’re susceptible to or of the costs involved in running their own fund or of the obligations present, such as having the annual accounts prepared. Also the potential loss of insurance if you switch to an SMSF is an issue. So I feel like there might be a gap there in terms of the education covering that side of things. Further, there is a challenge in the financial advisory space and even the accounting sector with fewer people entering the industry. It makes trying to keep up with the demand for SMSF advice difficult as well. Trying to get kids through the door and then having them do their professional year in the accounting, financial advisory and legal fraternities in general is not easy and then to encourage them to specialise in self-managed super
funds is even harder.
CD: We’ve talked about younger people coming into the sector, but I think there’s another serious issue going on in the industry at the moment in relation to SMSFs and that’s just simply the proportion of members over age 75 is growing rapidly. If you look at the period from March 2019 to March 2023, there was a 6.4 per cent increase in the members who are over 75. And so you then have to start thinking about the relevant issues there, such as where advice is going to come from for these people who start to have capacity issues. There are going to be questions about winding up and rolling over back to a large fund potentially, or all of the advice around death benefits and we’ve seen all of the legal cases in this area. There seems to be another one every six months or so where people are fighting over payouts on the death of a member. This is a really growing issue and there is a real advice need to enable people to address it. I’m just wondering where this required special advice and support is likely to come from.
DTC: There has also been a drop in SMSF auditor numbers. How much of a worry is this development and will we end up seeing capacity constraints hamper the annual audit?
BA: It sounds like it should be a problem and a concern, but from my understanding the auditors who have handed in their ASIC ticket allowing
Continued on next page
them to conduct SMSF audits did not do very many of them. In reality the auditors exiting the sector service around 5 or 10 per cent of the SMSF market so I don’t think in practice it’s overly concerning. I think the bigger challenge is not dissimilar to what Jemma mentioned and that is getting the new entrants into the
sector. We’re all going to want to retire at some point so we’re going to need those new entrants. But we must figure out how to entice them into an area that many see as being overly challenging and not overly rewarding. You know the SMSF auditor does cop a lot of flack and does have some challenges on a day-to-day basis. We need to find a solution to overcoming those realities
and so when new entrants emerge they’re enthusiastic to take over the job. Even the independence issues for new entrants as to how they attract their initial clients with regard to the fee referral percentages is problematic. These practical issues are more concerning than the number of practitioners who have removed themselves or have been removed by ASIC from this space.
The SMSF auditor does cop a lot of flack and does have some challenges on a day-to-day basis. We need to find a solution to overcoming those realities and so when new entrants emerge they’re enthusiastic to take over the job.
– Belinda Aisbett, Super Sphere
Barriers have been removed allowing SMSF investors access to institutionalgrade infrastructure assets and returns, supporting economic growth and Australians in retirement, Michael Cummings writes.
Unlisted infrastructure assets are some of the bestperforming, most regulated, inflation-protected and least volatile assets capable of investment, and yet it has been difficult for SMSF trustees to access the asset class. This is to their detriment and the infrastructure sector, which needs a constant inflow of capital.
As a nation grappling with high population growth, a need to reduce reliance on fossil fuels for both electricity generation and transport, and a need to grow digital capabilities, Australia requires capital investment and the support of the $1 trillion held in the SMSF sector.
SMSFs, which are increasingly popular with Australians seeking greater control over their
retirement savings, have historically shied away from or have had their access restricted to unlisted infrastructure investments. This has left the asset class largely in the domain of traditional industry super funds and other large institutional investors.
The rationale is not new, nor unique to infrastructure. Investors have long held valid concerns about asset illiquidity, ongoing management fees and high entry costs. However, times have changed. Many of the barriers that once existed have been removed in an effort to democratise the asset class and make it one from which we can all benefit. In turn the process can also strengthen SMSF portfolios.
Continued on next page
Continued from previous page
Contrary to the perception of high entry costs, it is possible for SMSFs to invest in unlisted infrastructure with as little as $10,000.
This democratisation of infrastructure investment allows SMSF members to dip their toes into this asset class without requiring significant capital outlay.
In recent times, new unlisted infrastructure funds have come to the market offering both a level of liquidity and flexibility not typically available to institutional investors. This means SMSFs can adjust their investments more readily in response to changing market conditions or trustees’ own individual financial needs.
Data from the ATO indicates a higher growth rate in new SMSFs among those aged 35 to 44. This new generation of members more than ever not only value control, but also seek clear visibility into how their superannuation is invested.
Ethical, impact and sustainable investing have become paramount investment considerations for this demographic and SMSFs allow them to fulfil their investment preferences while securing their financial futures.
The International Energy Agency forecasts annual investments globally in energy sector infrastructure and technologies will need to exceed $4 trillion by 2030 to achieve net-zero emissions by 2050. When aligned
with the Australian government’s Rewiring the Nation policy, under which $20 billion has been allocated to modernising the country’s electricity grid and infrastructure, the scale of investment is easily recognised.
Legislation changes effective from 1 July 2021 permit SMSFs to service up to six members. This enables large families to consolidate family wealth and allow younger family members to leverage more substantial investments and achieve economies of scale, while creating opportunity for portfolio allocations to infrastructure assets that will underpin the lives of future generations.
As this group of SMSF members matures, they are poised to benefit from the unparalleled advantages of infrastructure investments as a dependable anchor in navigating turbulent economic environments and supporting societal advancement and growth. At a state and federal level, infrastructure, be it clean energy, digital security or transport, advancement is critical and crosses party lines.
In 2021, the Australian Infrastructure Plan laid out a comprehensive roadmap for infrastructure reform. The reforms necessitate more than $100 billion in investment to support the nation’s recovery from the COVID-19 pandemic, as well as climaterelated challenges posed by bushfires, droughts, floods and the energy transition. These issues, coupled with more social and macro-centric changes like cyberattacks and population growth, continue to test the resilience of critical infrastructure.
Suffice to say, the global infrastructure landscape is undergoing a seismic transformation. The “Intergenerational Report: Australia’s Future to 2063” outlines a substantial investable market, with $2 trillion of opportunities across Australian real estate and infrastructure by 2040. This transformation ushers in both challenges and opportunities for businesses and investors in Australia.
In this regard, SMSF members find themselves at a crossroads. They must ask
themselves: What are the government’s infrastructure priorities for the next five years? How can cash-strapped governments pioneer innovative transport hubs? How will the private sector pivot towards greater use of renewable energy? Amidst this backdrop, SMSF investors might wonder how they can exert influence over these monumental decisions that shape the nation’s future.
These macro and socioeconomic drivers are inextricably linked to infrastructure investment. The global shift towards energy transition is still in its early stages and the existing renewable infrastructure struggles to keep pace with the transition and the growing demand for clean energy.
An ageing population is placing significant demands on high-quality healthcare, necessitating the development of new and expanded healthcare infrastructure. With immigration returning to pre-COVID-19 levels, with a substantial influx of international students, there is a pressing need for supporting infrastructure such as on-campus accommodation.
Meanwhile, ongoing urbanisation in developing markets is driving social infrastructure development as transport and utilities require substantial investment to replace existing assets.
The ongoing digitisation of the economy is reliant on robust infrastructure, including the servers powering cloud services and the proliferation of 5G towers ensuring mobile connectivity. These interconnected factors play a crucial role in shaping economic prosperity, all of which rely on significant investment in critical infrastructure.
An upgraded electricity grid and expanded energy distribution network is the backbone of the energy transition and with the demand, state and federal governments will need to invest alongside the private sector, providing an opening for SMSFs.
In this sector, the concept of decoupling investment from the traditional economic cycle has been an exciting topic of
Continued on next page
Many of the barriers that once existed have been removed in an effort to democratise the asset class and make it one from which we can all benefit.
Continued from previous page
discussion. Decoupling does not mean to invest in obscure or irrelevant assets; quite the opposite. At its core, decoupling investments from the hyper-volatility of the market hinges on an element that binds these assets to every individual on a daily basis – the indispensable infrastructure sustaining our way of life.
This very characteristic acts as a shield against the often unpredictable cycles of the market and can be found in electricity distribution networks and airports, for example. They epitomise what we refer to as essential services – resources that people rely upon every single day or are essential for our economy to carry on. It is this intrinsic and unwavering necessity that insulates such infrastructure from precocious economic factors.
This is underpinned by contractual agreements and the irreplaceable nature of the services they provide. For investors seeking diversification or a reliable income stream, the alluring stability and attractive yields of such assets make them a compelling choice. In essence, they can represent a dependable avenue for financial gain in an ever-changing investment landscape.
Infrastructure is evolving and investors have the ability to adapt to this dynamic landscape. Investors now consider technologies they would not have touched or contemplated a decade ago. This evolution is not unprecedented; during previous recessions and challenging market periods, many investors turned to infrastructure for its defensive characteristics.
Notwithstanding the negative effects of travel restrictions imposed by the COVID-19 pandemic on domestic and international travel, the right airports epitomise the resilient characteristics of infrastructure.
Airports are regulated assets, meaning they have protections through cycles and
hold long-term value. Australia’s population growth and the associated increase in passenger numbers, as well as benefits of dual till models (revenue drawn from property business and retail and food and beverage) see airports operate in a largely competitor-free environment, allowing investors to draw down significant long-term returns. These sub-classes offer discrete benefits depending on an SMSF’s needs and bring the advantage of diversification to manage overall portfolio risk levels.
Given technological innovation, the global energy transition and concerns about inflation, the next two decades of infrastructure investment will look markedly different from the past two. Yet, amidst this change, one certainty remains—the superannuation sector, bolstered by Australia’s status as the possessor of the fifth-largest retirement funds pool globally (approximately $3.4 trillion in funds), will wield significant influence over the trajectory of these interconnected infrastructure trends.
By 2029, an estimated $850 billion will be housed within SMSFs, offering members of these funds a unique opportunity to actively participate in the unfolding infrastructure narrative.
Within the vast realm of unlisted infrastructure investment, SMSF investors can discover a diverse array of return profiles. Whether they seek growth-focused assets, regulated utilities or partnerships with governments through public-private partnerships, often referred to as PPPs, opportunities abound. Despite variations in sector, asset class or return profile, one consistent thread runs through them, that is, the prospect of access to long-term, revenue-generating assets.
Building a new airport, constructing a data centre or distributing renewable energy are endeavours beyond the scope of spontaneity. These ventures entail significant expenditure, intricate regulations and governance structures. Yet, they offer
investors the prospect of exposure to assets that underpin fundamental societal trends and contribute to the fabric of our society.
The opportunity can now sit with SMSF investors who not only have the ability to capitalise on macro trends and invest in core infrastructure assets, but can do so with an element of liquidity and control.
Investing in unlisted infrastructure aligns seamlessly with the core principles of SMSFs – control and opportunity. Beyond the allure of control, infrastructure investments generally offer SMSF investors an opportunity to diversify portfolios, generate stable returns and contribute to the development of essential national infrastructure.
In essence, unlisted infrastructure investment represents the great relatively untapped resource of self-managed super investment. As SMSFs evolve to meet the needs and values of a new generation of members, the sector will recognise infrastructure offers a compelling opportunity to not only achieve their financial goals, but also contribute to the development of critical, sustainable infrastructure.
Infrastructure is evolving and investors have the ability to adapt to this dynamic landscape.
Investors now consider technologies they would not have touched or contemplated a decade ago.
The use of options as an investment instrument can reduce portfolio risk and provide an additional source of revenue, Te Okeroa writes.
Given the uncertain outlook for local and global markets, SMSF investors and managers are seeking ways to reduce risk while at the same time maintaining above average returns.
This could explain the increased use of options by SMSFs of late.
Australian Securities Exchange (ASX)-traded options have been around for decades and some brokers, advisers and investors make good use of them. Others are less aware of the wide range of uses for these tools.
For example, with global equities continuing to be the largest asset allocation of many investors, more options are being made available to protect holdings.
International shares are the largest single asset allocation for AustralianSuper in its balanced portfolio, accounting for 28.5 per cent of it and similarly for the Future Fund, accounting for an allocation of 22.9 per cent. The recent technology
stock revival has also seen other investors boost their allocations to United States stocks.
Some of these investors and their advisers are recognising global equities can also be a volatile asset class and are seeking ways to better protect these investments.
To this end, the ASX has recently added options over international exchange-traded funds (ETF) that invest in sectors not heavily represented by local indices, such as technology.
There are now three global ETFs with options available on them:
• iShares S&P500 ETF,
• Betashares Nasdaq 100 Index ETF, and
• Vanguard MSCI International Shares ETF.
International growth stocks, in particular US technology stocks, are known for their price volatility. This was evident in the significant pullback in January to February 2022 and the significant downside
Continued on next page
Continued from previous page
price movements experienced by some of the technology household names such as Amazon, Netflix and Tesla.
The new instruments allow investors to combine the diversification benefits of ETFs with the use of options to potentially reduce volatility. They can be used not only to potentially protect investment portfolios, but they can also amplify bets as well as generate additional income. If you expect a stock or index to rise, you can potentially strengthen returns through lower-cost options rather than buying the whole index.
The ASX has also just listed a range of options on local stocks, such as Carsales. com (ASX: CAR), Corporate Travel Management (ASX: CTD), Fisher & Paykel (ASX: FPH), JB Hi-Fi (ASX: JBH), Reece (ASX: REH), Sandfire Resources (ASX: SFR) and Soul Pattinson (ASX: SOL) on a trial basis.
There are also weekly options, which provide clients with more precise timing for their investment strategies.
The versatility of options trading provides advisers with new ways to engage clients across the spectrum of requirements and start the deeper, more strategic conversations that can add real value to their relationships.
Savvy advisers and brokers are also tapping the local ASX options market for a supplementary source of income to share dividends and fixed income.
For example, writing covered call options can potentially provide income from the premiums received from writing these contracts.
This type of strategy consists of buying a stock or basket of stocks and selling a call option on those same securities. The sale of the option contract provides the writer with a premium, which helps to lower the breakeven point on the underlying investment.
As market volatility rises, the premium received upon writing a contract typically increases as well.
This adds to the benefit of helping investors diversify their portfolios, as well as potentially enhancing their total returns while reducing risks.
Advisers need to have a Level 1 accreditation for options trading. This accreditation is granted by the ASX in association with the Stockbrokers and Investment Advisers Association.
As for risks, removing some of the upside potential can reduce gains if the stock rallies well above the option strike price.
Most investors have got stocks in their portfolio that would be rated as a buy with significant upside potential, though there may be some external factors in the not-toodistant future that could change that positive outlook, or which may not eventuate at all.
If investors are concerned about the future performance of a stock, they can hedge their exposure by buying a security with inversely correlated returns. So, if the value of your stock goes down, all other things being equal, your hedge potentially will go up.
Investors can potentially achieve this by using futures or warrants with the objective of directly offsetting a loss on a stock.
Alternatively, investors can buy a put option to lock in a future price for the sale of the stock. Buying a put has the added benefit of being at the buyer’s discretion, so if the stock remains above the agreed (strike) price, the put will expire worthless with the stock holding potentially unimpacted.
Each of these strategies, however, has its own pitfalls. Futures or warrants will typically provide a like-for-like hedge entirely offsetting any upside, so while you’re hedged to the downside, you’re also not going to see any upside should the stock unexpectedly rally.
With a bought put, while you keep the upside, the cost of buying the put can be significant over time. This is dependent on
the volatility of the stock and is potentially cost-prohibitive in practice.
As with any option position, there’s always a trade-off. In this case, the trade-off comes from funding the purchase of the put by selling an out-of-the-money call, effectively foregoing any upside beyond the strike price.
When employing options strategies over a portfolio, it’s essential to understand the risk and trade-offs involved and ensure you are comfortable with them.
When employing a ‘cost-less’ protective collar, for example, it is important to consider how much of the share’s value you are looking to hedge versus what you are willing to deliver the stock for if it performs strongly.
If you are looking to keep outlay to a minimum, the higher you set the strike for your puts, the more expensive they will be to purchase. This means your calls will need to have a lower strike to offset the more costly put hedge. The lower your call strike price, the more upside you potentially forgo should the stock outperform.
Options are often misunderstood, though are simply a tool that, when understood, can allow you to better trade in line with your view as an investor.
The versatility of options trading provides advisers with new ways to engage clients across the spectrum of requirements and start the deeper, more strategic conversations that can add real value to their relationships.
When preparing the financial statements for an SMSF, many different factors must be considered. Mark Ellem notes the actions to be taken to ensure the fund accounts reflect the relevant information correctly.
As another compliance season ramps up and the focus turns to preparing financial statements, the SMSF annual return and arranging the audit in respect of the 2023 financial year, one factor for consideration is the disclosure of the income from both an accounting and tax perspective. Generally, the way income is treated for tax purposes will influence how it is disclosed in the annual financial statements. However, there will be certain types of income that will be treated differently in the annual financial statements to the way they are disclosed in the annual return. Consequently, an important
report to be included in an annual report pack for an SMSF is a reconciliation of the operating statement, formerly known as a profit and loss statement, from the annual financial statements to the assessable income and deductions disclosed in the annual return.
When preparing the annual financial statements for an SMSF, the following items need to be considered carefully:
Continued on next page
MARK ELLEM is head of education at Accurium.Get to know the SMSF accounting and administration compliance platform that you use to prepare annual financial statements. Understand how, for example, net earnings are allocated among members, how tax is allocated among members, particularly where the fund claims
exempt current pension income as to whether the allocation of tax is different where the segregated method is applied compared to the proportionate method, and if the processing by the platform reflects the requirements of the SMSF’s trust deed.
The SMSF’s approach to accounting for transactions, including any accounting standards that have been adopted, should be outlined in the summary of significant accounting policies in the notes to the financial statements. It should also be confirmed these adopted accounting policies are reflected in the way the SMSF accounting or administration platform treats transactions and does not breach any requirements in the SMSF trust deed.
New accounting standard AASB 20202 came into effect on 1 July 2021. This new accounting standard changed the reporting requirements for certain for-profit private sector entities and may require them to prepare general purpose financial statements, rather than special purpose financial statements.
This will only have application to
an SMSF where either the fund was established on or after 1 July 2021 or an existing SMSF had its trust deed amended on or after 1 July 2021. To ensure the SMSF can continue to prepare special purpose financial statements and not have to apply the accounting standards and prepare general purpose financial statements, ensure the fund’s trust deed does not have a clause or provision requiring the financial statements to be prepared in accordance with Australian Accounting Standards. It would be uncommon for an SMSF trust deed to require its financial statements to be prepared in accordance with Australian Accounting Standards. Usually an SMSF trust deed would simply require the financial statements to be prepared as required under the superannuation law, however, it would be prudent to ensure this is the case and confirm the fund can continue to put together special purpose financial statements.
Continued from previous page
• provisions or clauses in the SMSF trust deed that may prescribe what reports are to be prepared and how such reports are prepared,
• the Superannuation Industry (Supervision) (SIS) Act and Regulations that prescribe which reports must be prepared and how fund assets are to be disclosed. Further, there are provisions concerning the allocation of income and expenses among members,
• whether any of the accounting standards are to be applied when preparing the financial statements, and
• how the SMSF accounting or administration compliance platform processes transactions and what reports it produces as part of the annual financial statements.
An SMSF is not a reporting entity and consequently the accounting standards do not apply. An SMSF can prepare special purpose financial statements, rather than general purpose financial statements, and only needs to comply with the requirements of the SIS law and its trust deed.
Continued on next page
Continued from previous page
Subsection 35B(1) of the SIS Act requires the SMSF trustee to prepare the following:
• statement of financial position,
• operating statement, and
• accounts and statements specified in the regulations.
Currently, there are no accounts or statements that are specified in the regulations.
Subsection 35B(2) of the SIS Act states the regulations may provide for or have an effect in relation to the preparation of accounts and statements. In this respect, the relevant regulation is 8.02B, which requires the assets of the SMSF to be disclosed in the annual financial statements at market value. The term ‘market value’ is defined in subsection 10(1) of the SIS Act and in relation to an asset means the amount a willing buyer of the asset could reasonably be expected to pay to acquire
the asset from a willing seller if the following assumptions were made:
a) that the buyer and the seller dealt with each other at arm’s length in relation to the sale,
b) that the sale occurred after proper marketing of the asset, and
c) that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.
Other requirements for annual financial statements include:
• Section 35B(4) of the SIS Act requires an SMSF’s accounts and statements to be retained for five years. Section 35B is one of the reportable sections included in the audit report and can attract 10 penalty points per trustee for non-compliance – a current monetary penalty of $3130.
To this end, it would be prudent to consider whether you have outlined in your engagement letter or your administration agreement who is responsible for retaining the fund’s accounts and statements for the five years.
• Section 35B(3) of the SIS Act outlines how the annual financial statements are to be signed. Since the increase to the maximum number of members of an SMSF to six, the signing requirements stipulate:
- if there is a single corporate trustee these documents need to be signed by:
O each director if the corporate trustee has one or two directors, or
O otherwise at least half of the
directors, or
- if there is a group of individual trustees, these documents need to be signed by:
O both trustees if there are only two of them, or
O otherwise at least half of the trustees.
• SIS Regulation 5.03(2) requires the trustee(s) to allocate investment returns to members on a fair and reasonable basis. It would be prudent to review the SMSF trust deed for any provisions concerning how the fund’s net income is to be allocated to members and ensure this aligns with how the administration and compliance platform being used allocates net income and reflects this in the accounting notes.
• Another consideration is the scenario where the SMSF has reserves and whether net income is or should be allocated to reserves. SIS Regulation 5.03(2) only requires the net income to be allocated to members, but does not include reserves. Where an SMSF has reserves or unallocated amounts as part of a strategy to allocate reserves to members, not having to allocate a portion of net income to reserves would assist with such a strategy. Have a review of the administration and compliance platform in play to ascertain whether the platform automatically allocates a portion of net income to the reserve.
• SIS Regulations 5.02(1) and 5.02(2)
Continued on next page
Where a contribution reserving strategy is implemented, you need to ensure the reserved contribution, received by the fund in year one, is counted against the individual’s concessional cap in year two, otherwise the individual is likely to be issued an excess concessional contribution assessment.
outline how costs can be charged to members. The common cost that will be charged direct to a member will be insurance premiums.
• SIS Regulation 5.02(3) states costs, which do not directly relate to a member, are to be allocated among members on a fair and reasonable basis. Again, it would be wise to review the fund’s trust deed for any provisions relating to the allocation of costs and how the relevant SMSF administration and compliance platform deals with the allocating costs.
As with the allocation of net income, where an SMSF has a reserve or unallocated amount, consider whether non-member expenses that do not relate to a specific fund asset, for example, accounting fees, can be deducted from the reserve rather than effectively being deducted proportionately from member accounts. This would also aid a strategy to reduce a fund reserve or unallocated amount.
SMSF members often use what is referred to as a contribution reserving strategy. The premise of this approach is basically to make a contribution in one income year, but have it count against the member’s relevant contribution cap in the following income year. In relation to concessional contributions, this strategy allows for a double deduction in year one, effectively bringing forward a deduction from year two to year one (reference can be made to Taxation Determination TD 2013/22 in relation to a contribution reserving strategy for concessional contributions).
There are several issues for consideration here, such as:
• SIS Regulation 7.08 requires the
trustee of an SMSF to allocate a contribution within 28 days after the end of the month it was accepted. The contribution to be allocated in year two must be made in June of year one.
• The member must have assessable income to use the deduction; otherwise, it will not be considered a personal deductible contribution. Section 26.55 of the Income Tax Assessment Act 1997 (ITAA) limits a deduction for personal superannuation contributions. Effectively, a deduction for a personal superannuation contribution cannot create a tax loss for an individual taxpayer.
• The fund’s governing rules, defined by the trust deed in most instances, must allow for the strategy.
• This strategy effectively brings forward the individual’s concessional cap from the next income year. That is, they will use their concessional cap for the following year. Therefore, care needs to be taken to ensure they do not breach their cap in the subsequent income year.
• The correct paperwork must be lodged with the SMSF to ensure the deductible contribution is recognised and acknowledged, that is, the notice of intent to claim and acknowledgement from the fund trustee(s), in accordance with section 290.170 of the ITAA Where a contribution reserving strategy is implemented, you need to ensure the reserved contribution, received by the fund in year one, is counted against the individual’s concessional cap in year two, otherwise the individual is likely to be issued an excess concessional contribution assessment. To ensure the reserved contribution is assessed against the individual’s concessional cap for the correct year, the SMSF must prepare and
lodge a “Request to adjust concessional contributions” form (NAT 74851) with the ATO as the fund annual return does not make provisions for a concessional contribution reserving strategy. Just note this form cannot be used by an SMSF member using the reserve strategy for non-concessional contributions. In these circumstances, the relevant member will need to contact the ATO.
The information provided in this form allows the ATO to adjust the contributions information provided in the SMSF annual return to correctly apply the concessional contributions cap for both years included in the strategy. The instructions for this form also provide guidance on how the SMSF trustee(s) completes the annual return to correctly account for the contributions reported on it. This may require manual adjustments to the return labels automatically populated by the administration platform as the return instructions require the reserved contribution to be reported as allocated to the member.
its potential impact on the treatment of pensions upon death.
A long time ago, in a galaxy far, far away, some Australian pensioners had reversionary pensions in place to ensure their accounts continued to be paid to their spouses (or children when that was allowed a long time ago) when they died. They did so at a cost, whereby the annual taxation treatment of the pension was based on the life expectancy of the youngest of the pensioner or the reversion.
When the rules were changed in 2007, such that the reversion of a pension had no impact on the personal taxation of a pension payment because if you were over 60 it was all tax-free, there was contentiousness regarding the operation of the exempt current pension income (ECPI) provisions when a member died without reversion, resulting in more and more taxpayers making their pensions reversionary purely for tax reasons.
The other substantial change to super in 2017 then turned that decision on its head, with additional considerations when a member dies depending on whether the pension is reversionary or not.
This author’s view is not to make a pension reversionary due to the administrative and compliance requirements, and the consideration that a preferential outcome can be achieved with less ‘faffing around’.
The introduction of the $3 million soft cap may also
tip the scales in favour of the non-reversionary option, given the expected operation of the net earnings calculation.
Now let’s overlay a reversionary example with a side of $3 million soft cap with the following example.
Han is 72 and in retirement phase at 30 June 2017 and has used $1.6 million of his transfer balance cap (TBC), and Leia is 68, has been in retirement phase since 1 July 2023 and has used $1.9 million of her TBC. The benefits they have in superannuation at 30 June 2025 are contained in Table 2.
If Han were to pass away on 1 September 2025, his total pension benefits are approximately worth $2,143,290 (based on 30 June 2025).
With automatic reversions to Leia, the following would occur:
• Both Han’s pensions and Leia’s pension would continue to be exempt on the earnings within the fund throughout 2025/26,
• The value of Han’s pension accounts on 1 September 2025 needs to be reported to the ATO by 28 October 2025, even though the transfer balance account (TBA) credit won’t arise until 1 September 2026,
• This requires either interim financial statements
Continued on next page
Pros
Automatically continues to be paid to the beneficiary – estate planning certainty.
Reversion generally takes precedence over binding death benefit nominations (depends on the deed), so more certainty regarding who receives benefits.
TBC benefit – value at the date of death is the transfer TBA credit, even though it doesn’t occur for 12 months from the date of death.
Retain ECPI for 12-month period of time until credit arises in the reversionary beneficiary’s TBC.
Cons
Minimum
Is the intention the beneficiary actually gets the money? Reversionary beneficiary may not be the intended recipient.
Administratively more cumbersome upon death re TBC and reporting of the value – interim financial statements to report to the ATO within 28 days after the end of the relevant quarter of member passing.
Administratively cumbersome to restructure mid-year after the 12 months, depending on the circumstances of the individuals.
ECPI could be available for longer than 12 months for non-reversionary, to be dealt with as soon as practicably (within reason).
Could be easier to restructure effective at the next 30 June/1 July after the date of death.
The proposed additional tax on total super balances above $3 million will have far-ranging ramifications, including affecting situations when a fund member dies. Jemma Sanderson outlinespension payment must be made in the year of reversion (otherwise no ECPI). Table 1: The pros and cons of making a pension reversionary
Continued from previous page
to be prepared or very accurate calculations of the two accounts at that time,
• The value of Han’s accumulation account needs to be paid out of superannuation as soon as practicably under Superannuation Industry Supervision (SIS) Regulation 6.21,
• Leia’s total super balance (TSB) would include the $2,143,290 immediately upon Han’s death, which would be relevant for the purposes of the $3 million threshold,
• Leia would have to take the minimum pension with respect to her own benefits, $95,000, plus Han’s benefits, $107,170, during 2025/26 if not already taken out prior to Han’s passing, and
• In the lead-up to September 2026, Leia needs to restructure. Let’s assume 30 June 2026 looks as in Table 3, incorporating a 7 per cent return.
O The value of Han’s two pensions at his date of death ($2,143,290 –assuming the same value as at 30 June 2025, for this purpose) will become a credit on 1 September 2026 to Leia’s TBA.
O Leia already has $1.9 millon assessed towards her TBC, so she would then have an excess.
O She is able to commute her own
pension back to accumulation, but will still be in excess by $110,290.
O Leia will then have to commute $110,290 from Han’s pension accounts as a lump sum from superannuation in order to remain within her TBC.
O Her TBA would be as in Table 4.
• Therefore, it is Leia’s TBC that is relevant, not Han’s. Accordingly, the value of Leia’s benefit at the date that is 12 months after Han’s death is important also.
• If, for example, over the period Leia’s benefits increased to $2,100,000, then she would only have to commute $43,290 from Han’s pension accounts as a lump sum. Even if Han’s benefits have increased similarly, with the reversionary pensions it is the value at his date of death that is recorded as a TBA credit, so his pensions benefits could be worth $2,350,000 (where Leia’s were $2,100,000 in the lead-up to 31 August 2026), but only $43,290 needs to be paid out as a lump-sum benefit.
• Conversely, if Leia’s benefits reduced down to $1,750,000 over the period, and Han’s likewise to $1,900,000, then a higher amount would need to be paid out of Han’s pension benefits ($393,290, being $2,143,290 less $1,750,000) to fall within Leia’s TBC.
• Any amount that needs to be withdrawn
from Han’s account and paid out as a lump sum to accord with the TBC requirements would then be a lump sum payment added back to the earnings calculation for the $3 million tax purposes.
• Leia’s position for the $3 million cap purposes is estimated as in Table 5, as per the government’s consultation paper and based on the 7 per cent return:
• Therefore, the reversion itself could be treated as ‘earnings’ and subject to tax.
As part of the above process of Han’s death, the following is also of relevance:
• Reporting required by 28 October 2025 – difficult to ascertain the balance in Han’s accounts at his date of death without interim financials. Although the ATO is taking a practical approach regarding the timeframes for TBA reporting at present, once this system has been in place for a number of years, that approach is likely to become stronger with respect to late lodgments.
• Minimum pension payments are required to be made to get the pension exemption on Han’s pension accounts.
• Two additional sets of financials may be needed over the period, adding a substantial cost:
O Han’s date of death, and
O 12 months after Han’s date of death
Continued on next page
Continued from previous page
(to value Leia’s pension account).
• If there is time, strategically it is worthwhile paying out Han’s minimum pension before he dies, both reducing his benefit value at his date of death, and means Leia doesn’t have to pay out the minimum after his death to receive the exemption. Further, that withdrawal will be before the reversion, so won’t be added back to Leia’s ‘earnings’ for the $3 million soft cap purposes.
Taking the above example, if Han’s pensions were not reversionary, and Leia was the sole beneficiary, then the following would occur:
• Both Han’s pensions and Leia’s pension would continue to be exempt on the earnings within the fund throughout 2025/26,
• Han’s pensions can receive the exemption provided they are dealt with as soon as practicably (ASAP). But what does that mean?
O Leia needs to either take out a lump sum with respect to Han’s pension accounts ASAP or commence a new pension for herself ASAP (on the basis she is the nominated beneficiary, or after consideration by the trustee she is the most appropriate beneficiary to receive the benefits).
O Rule of thumb is between six and 12 months.
O Would 1 July 2026 suffice? Likely yes as it is a very practical time to look to resolve Han’s pensions, as 30 June 2026 is the one time during a financial year that the benefits are known.
O The value of Han’s accumulation account needs to be paid out of superannuation ASAP also, so all of this timing lines up if Leia deals with Han’s pensions at 30 June 2026, as
well as the accumulation account.
• Over 2025/26 Leia only needs to take out her minimum pension payment. If she takes our more than her minimum, the amounts would need to be either lump-sum payments from her own accumulation or partial commutations from her pension account. She should not have any lump sums paid from Han’s accounts as SIS Regulation 6.21 only technically allows a maximum of two lump sums, interim and final, so it would be preferable to not touch his account.
• In the lead-up to 1 July 2026, Leia needs to consider the options available to restructure her account. Again, let’s assume the accounts are as in Table 6 at 30 June 2026:
O Leia can commute her $2,033,000 pension,
O She is then able to commence new pensions with Han’s benefits up to the $2,033,000 amount:
- Pension #1 of $701,920,
- Pension #2 of $1,331,080,
O These would be TBA credits at 1 July 2026,
O Reporting required by 28 October 2026.
• Although the above amounts won’t be known with certainty at 30 June 2026, the relevant paperwork can be drafted to reflect the intention, with the balance withdrawn once the 2025/26 accounts have been completed.
• Leia’s TBA would be as as in Table 7.
• Where Han’s accounts are per the previous table, then with the new
Continued on next page
The introduction of the $3 million soft cap may also tip the scales in favour of the nonreversionary option, given the expected operation of the net earnings calculation.
Continued from previous page
pensions there would be $1,597,820 remaining in Han’s accumulation and pension that would need to be paid out as soon as practicably as a lump sum.
The above can be a more practical approach and saves some additional requirements, such as interim financials, minimum payment requirements and reporting just after the date of death.
In light of the above, it may therefore be appropriate to consider whether clients’ pensions should be non-reversionary.
The only downside of a non-reversionary pension from a TBC perspective is it is the value of the benefits at the date they are dealt with that form the TBA credit, as opposed to the situation where the pension is reversionary, where it is the value at the date of death. Where assets have substantially appreciated in value, there would be a negative impact. However, the loss of some pension exemption on the assets could be offset by the cost of the two sets of interim financials and additional administration and advice costs.
Further to the above, the interaction of a non-reversionary pension with the $3 million provisions is also of relevance for Leia:
• At 30 June 2026 the accounts that would form part of Leia’s TSB are only her own pension account and accumulation account – a total of $2,942,500. Therefore, there would be no $3 million soft cap consideration in 2025/26.
• In 2026/27, the commencement of the new pensions, valued at $2,033,000, would add to her TSB, but likely then would be a net contribution for the ‘earnings’ purposes, and therefore it would be the pension withdrawal for the two new pensions that would be considered, plus the actual rate of return
on the assets (see Table 8).
• The lump sum payment of Han’s #2 pension to Leia would not be included in any of the above, nor would Han’s accumulation account needing to be paid out.
• When compared to the reversionary option, there is less tax payable, although less that is able to be retained
in pension phase in this scenario (see Table 9.)
The $3 million soft cap may be another catalyst for pensions being nonreversionary and should be a conversation beforepensions commence regarding the impact of being reversionary or not.
The ATO has sharpened its focus on SMSFs investing in property developments. Shelley Banton details the concerns of the regulator with regard to this issue.
The ATO has increased its focus on non-complying property development arrangements owned directly and indirectly through SMSFs.
More specifically, it is looking at property development arrangements that divert profits to an SMSF using a special purpose vehicle (SPV). These arrangements are complex and contraventions can quickly occur.
SMSF Regulator’s Bulletin (SMSFRB) 2020/1 initially outlined the ATO’s concerns centred on an SMSF entering a scheme with either a related or unrelated party involved with purchasing and developing property to sell or lease.
Since then, the regulator has acknowledged SMSFs are entering into new arrangements outside the scope of SMSFRB 2020/1 and has responded by setting a new high bar as outlined in Taxpayer Alert (TA) 2023/2.
The starting point: SMSFRB 2020/1
The ATO’s initial concern was SMSFs investing in property development arrangements to divert income into super, creating potential breaches of the sole purpose test and other Superannuation Industry (Supervision) (SIS) issues (refer to checklist).
The problem is specific related and unrelatedparty property development arrangements, such as
joint ventures (JV), partnerships and ungeared related entities, can fail and may lead to the investment ending up as an in-house asset (IHA).
The ATO has also warned SMSF trustees about other SIS compliance issues, including the following questions:
1. Does the investment meet the requirements to provide retirement benefits for members and beneficiaries under section 62 of the SIS Act?
2. Are fund assets valued at market value under SIS Regulation 8.02B and are SMSF assets kept separate from the trustee’s assets personally as SIS Regulation 4.09 requires?
3. Is there an IHA issue and does it exceed the 5 per cent limit set by SIS Act section 71?
4. Does the limited recourse borrowing arrangement (LRBA) fail to meet the exemptions in section 67A and section 67B of the SIS Act?
5. Does the arrangement result in a loan or financial assistance to a member or relative covered by SIS Act section 65?
6. Does the arrangement include the fund acquiring assets from a related party addressed by SIS Act section 66?
7. Has SIS Regulation 6.21 been satisfied whereby payments have been made under the arrangement
Continued on next page
Continued from previous page
where the member does not meet a condition of release in contravention of the payment standards?
8. Are all the terms and conditions of the arrangement on commercial terms as per section 109 of the SIS Act or do they benefit the other party?
One of the problems with property development is SMSF trustees’ understanding of whether other entities involved in the arrangement are related parties.
The reason is it could taint the project from the beginning. Where the property development investment is an IHA of the fund, trustees must calculate the proportion of the SMSF’s total assets that is attributed to this investment on 30 June each year.
If the IHA in the SMSF exceeds 5 per cent of the fund’s total assets, trustees must prepare a written plan to divest the asset, bringing it below this limit by the end of the next financial year.
SIS Regulation 13.22C allows an SMSF to invest in a related ungeared entity, making them a popular option for property development investments.
SMSF trustees must ensure the asset meets the conditions of this regulation when it is acquired and continuously while the fund holds it, including that:
1. The only assets in the entity are cash and property.
2. The entity cannot borrow or give a charge over its assets.
3. The entity can only lease out business real property to a related party.
4. The related party lease must be legally binding and enforceable at all times.
5. All related-party transactions must be at market value.
6. Once the entity meets the SIS Regulation 13.22C conditions, it must comply with the requirements in SIS Regulation 13.22D in that:
a. it must meet Regulation 13.22C at all times,
b. it cannot operate a business through the trust, and
c. all transactions must be at arm’s length.
It can be challenging for SMSFs to meet and maintain these conditions while undertaking property development investments.
Where the exceptions available under SIS Regulation 13.22C cease to exist, all investments held by the SMSF in that related entity, including all future investments, become an IHA of the fund.
The fund must prepare a plan and reduce the IHA level to 5 per cent or less within 12 months because the asset can never be returned to its former exempted status, even if the trustee fixes the issue.
Where the SMSF cannot reduce the asset to below the required 5 per cent limit, the property may have to be sold and the entity wound up.
The ATO will consider all the facts and circumstances to determine whether an ungeared related entity is running a business and fails to meet SIS Regulation 13.22D.
There is a difference between an ungeared related entity involved in a one-off property development venture and the same entity holding several property development ventures operating simultaneously.
Again, where SIS Regulation 13.22C
ceases to apply, the investment will forever lose its exempt status from being an IHA.
An SMSF can borrow to fund the purchase of real property, shares or units in a property development entity through a limited recourse borrowing arrangement (LRBA) allowed under section 67A and section 67B of the SIS Act
The rules state the acquirable asset must be an asset allowed under SIS and:
1. The property development entity is not a related party or,
2. If it is a related party:
a. It must be acquired at market value and covered by one of the in-house asset exceptions or
b. The asset is acquired at market value and would not result in the SMSF exceeding the 5 per cent limit on inhouse assets.
Where there is an LRBA over shares or units and an event causes the 5 per cent IHA exception to cease, such as not purchasing the units or shares at market value, the SMSF will also be in breach of section 67 of the SIS Act
The reason is that while the nature of the shares or units does not change, they are no longer considered a single acquirable asset if not purchased at market value.
The benchmark for an LRBA not at arm’slength terms is a hypothetical borrowing arrangement at arm’s length, which can be almost impossible to obtain.
Several other risk factors give rise to non-arm’s-length income (NALI) where the arrangement is not on commercial terms and they are:
1. Making repayments and the ability to repay.
2. Arrangements that provide security to a lender.
3. Related-party fees outside the ordinary course of commercial arrangements.
Continued on next page
The ATO’s focus on SMSF investments in property development schemes has resulted in new obligations and responsibilities for fund trustees.
Continued from previous page
Firstly, SMSFs must ensure that property development via a JV is not an investment in a related party but an investment in the property being developed. Otherwise, it becomes an IHA.
Next, where an SMSF receives income above its input into the arrangement, the income from the JV may be classified as NALI.
Lastly, the ATO has further concerns surrounding SIS Act section 65 breaches and has said the following situations would cause them concern:
1. The fund invests in the related-party property development because of a cashflow issue.
2. The JV employs a related party to provide services as a means of ensuring employment or the remuneration is more than the market value.
3. The fund finances elements of the property development on non-arm’s-length terms.
The ATO released TA 2023/2 because trustees used SMSFRB 2020/1 as a property development investment guideline and then developed new arrangements outside the
scope of that bulletin.
As a result, the ATO no longer reviews these arrangements in terms of specific structures, with the new focus on SPVs owned directly or indirectly by the SMSF.
The target is now the “controlling mind” that makes the decisions for one or more property development groups, such as deciding on the project and establishing an SPV for that purpose.
While there is no explicit definition of a controlling mind in TA 2023/2 or the SIS rules, a controlling mind is typically the members of their respective SMSFs.
It means the definition of a related party or a Part 8 associate of the SIS Act is no longer the rigid criteria for identifying potential compliance breaches in property development schemes.
The ATO dealt with related-party rules in SMSRB 2020/1 and has now introduced the concept of a controlling mind with a broader application.
Where the controlling mind is the members of their SMSFs, the SPV contracts with related entities are owned by the controlling minds.
TA 2023/2 clarifies that any non-arm’slength dealings by any party regarding any step in relation to a scheme can give rise to NALI.
Regardless of how the entity is structured or the transactions undertaken, not only are the income and franking credits considered NALI, but also, depending on the facts, any capital gain on disposal of the property.
The tax commissioner may also “make a determination under Part IVA of the Income Tax Assessment Act 1936 in relation to the imputation benefit or tax benefit arising under the arrangement”.
The types of arrangements the ATO is concerned about regarding NALI include:
1. The fund may acquire shares in an interposed entity at an arm’s-length price, but the interposed entity may not have acquired shares of another entity at an arm’slength price.
2. The interposed entity could arrange to sub-contract the property development on non-arm’s-length terms to increase profits and ultimately benefit the fund.
3. The interposed entity borrows money from another entity on non-arm’s-length terms with a nil interest rate.
The ATO clearly warns that any scheme will be subject to scrutiny, not just those identified under TA 2023/2.
Where a trustee is involved in non-complying property development schemes, the commissioner can disqualify them from acting as a trustee or a director of a corporate trustee under section 126A of the SIS Act or issue a notice of non-compliance under SIS Act subsection (40)(1) to the fund.
Promoters of these arrangements can also be subject to severe penalties under Division
Continued on next page
As long as property remains a soughtafter investment, SMSF professionals must keep ahead of the legislation to ensure funds with property development investments continue operating compliantly.
290 of the Tax Administration Act. Tax agents involved in these schemes will be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009
The ATO has also identified that where the SPV is a company, the SMSF may receive tax offset refunds concerning the dividends received under the tax offset rules in the Income Tax Assessment Act 1997
Documentation is essential Documentation becomes an essential source of evidence to prove transactions are on commercial terms.
It becomes more complicated when many related parties are involved in a property development venture, especially where one is the controlling mind.
The alternative, however, is the inference the parties are not dealing with each other at arm’s length.
Ensure all records are kept and made available in case the ATO comes knocking, which could be as simple as obtaining a similar quote provided to an unrelated third party showing the rates charged for all services and works are on commercial terms. Conclusion
The ATO’s focus on SMSF investments in property development schemes has resulted in new obligations and responsibilities for fund trustees.
As long as property remains a soughtafter investment, SMSF professionals must keep ahead of the legislation to ensure funds with property development investments continue operating compliantly.
On the other hand, it will be up to SMSF trustees to determine whether property development is a good idea or a compliance nightmare.
The purpose of this checklist is to assist SMSF practitioners in identifying SIS issues relating to property development arrangements. The list is not exhaustive and adapting it to each property development’s structure, type and specific risks is strongly recommended. Reference to other SMSF audit checklists, such as property, ungeared unit trusts and LRBAs, should also be made. Issue
Trust deed s52 Review the trust deed to ensure it explicitly allows the fund to run a business and/or property development.
Review the investment strategy to see if property development is allowed:
• Is the investment in accordance with the risk profile of the fund?
• Have all other definitional elements of SIS r4.09 been considered in relation to the investment as required?
• Does it benefit all the members?
Legal advice s52
Arm's-length transactions s109
Have the trustees sought professional or legal advice about entering into a property development structure?
• Request copies of all documents
Have all transactions been undertaken on an arm’s-length basis?
Market value r8.02B Is the property valued at market value?
Is a related-party builder being used?
• Is the SMSF or unit trust purchasing materials directly from the related builder?
Related-party builder s71, s82, s66
• Has the fund acquired assets from a related party?
• Is an agreement in place specifying the related builder is buying on behalf of the SMSF or the unit trust?
• Are all transactions undertaken on an arm’s-length basis?
Is there an LRBA in place to purchase the property?
LRBA s67A, s67B
Related entity r13.22C
• Review all agreements, personal guarantees and holding trust deed concerning borrowing
Has the fund invested in a related-party property development structure complying with the requirements under SIS r13.22C?
A very interesting and surprising private binding ruling (PBR) has been recently released by the ATO (reference 1052123084697 –released on 31 July 2023). In short, because an SMSF trustee took over 28 weeks to pay a commutation lump sum and in the meantime the member making the request passed away, the amount was considered to be a death benefit and not a member benefit.
Gleaned from the abbreviated and redacted version of the PBR, which has been publicly released, the essential facts are as follows:
• An SMSF was paying an account-based pension to a member.
• The member lacked legal capacity and
the member’s brother was appointed the administrator of the member’s estate. This was an appointment by a government tribunal.
• The brother as administrator had power to make decisions for the member in relation to their financial matters, including the individual’s superannuation benefits.
• The administrator decided to fully cash out the member’s account-based pension and completed the relevant forms to fully commute the pension and to instruct the trustee to pay the commutation amount to the bank account of the member.
• The duly completed pension commutation and payment instructions were received by
Continued on next page
MICHAEL HALLINAN is superannuation special counsel at SuperCentral.A recent ATO private binding ruling has highlighted the importance of how quickly a member benefit payment request is actioned is key to avoiding adverse tax consequences. Michael Hallinan details the issues this decision has raised.
Continued from previous page
the trustee and the trustee acknowledged receipt of the forms.
• After the issue of the trustee’s email to the administrator, the member died.
• Presumably the member was in declining health, but the ruling does describe the death as unexpected.
• The SMSF had a financial adviser and the adviser was notified of the death of the member (the precise date was redacted –but presumably shortly after the death of the member).
• The trustee of the SMSF ultimately paid out the commutation lump sum 28 weeks after the death of the member.
• The ruling does not discuss the reason for the delay.
The ATO accepted the pension was an account-based pension, that the member had the right under the trust deed of the SMSF to fully commute the pension and neither the Superannuation Industry Supervision (SIS) Act nor SIS Regulations prevented or restricted that right to request commutation of the pension. The ruling makes no mention as to whether the SMSF trustee had to “consent to” or “approve” the commutation request. Presumably then the member had a unilateral right under the trust deed to request full commutation of the pension and the only function of the trustee was to implement that request, that is, to determine the commutation value and to sell fund assets to generate sufficient cash so payment could be made.
Further, the regulator seemingly had no issue with the administrator exercising the power to commute the pension as it was not discussed in the published ruling. The lack of discussion is unfortunate. Possibly the ATO took the view the brother as administrator had sufficient power, solely by virtue of that office and irrespective of the terms of the trust deed of the fund, to commute the pension and request a cash out. Or was it the case the trust deed of the relevant fund conferred power on any agent of the member to take such decisions and the brother by reason of being administrator fell within the scope of the definition of agent of the member? Again, unfortunately, this fine distinction was not raised in the publicly released version of the PBR.
As previously noted, the PBR as published gives no details of or reason for the extended time between the receipt of the commutation request and the payment of the benefit. This lack of detail is very unfortunate as the following facts remain unanswered:
• Was the SMSF a single-member fund so that on the death of the member the executive control of the fund was in limbo pending the appointment of replacement directors to the corporate trustee or replacement trustees?
• Was the delay due to the need to obtain probate of the member’s will?
• Was there a challenge to the actions taken by the member’s brother by an interested party?
• Was there a need to obtain valuations of the assets of the fund before the commutation request could be actioned?
• Or was it the case where delays in cashing out assets were due to market issues or time taken to realise illiquid assets or to sell real estate? Possibly there were substantial reasons for the extended time between the receipt of the commutation request and the payment of the benefit.
In the absence of any discussion of the reasons of this nature, it seems an extended
delay in the payment of a cashing out request may well cause a benefit, which if paid with reasonable promptness after the death of the member, to be characterised as a superannuation member benefit. Conversely, an extended delay of about 28 weeks or more will cause the benefit to be characterised as a superannuation death benefit.
Encouragingly, the PBR as published at paragraph 23 states: “An amount that a member requested to be paid from their superannuation fund before their death, but was paid after their death, may be classified as a member benefit instead of a death benefit depending on the facts and circumstances of the payment”.
Paragraph 23 is entirely consistent with the relevant taxation legislation where the key distinction between member benefits and death benefits is that the former is paid to the member because they are the fund member, and the latter is paid to someone else because of the death of the member as per section 307-5(1) of the Income Tax Assessment Act 1997
In the present case, the member requested the full commutation of the pension, albeit by his statutory agent, and that right was unilateral and effective from the time it was exercised and the trustee’s duty was to implement the exercising of the commutation right by stopping the pension, quantifying the commutation amount and paying the benefit as directed. In these circumstances the payment is made to the member by reason of the individual’s exercise of their membership rights. The reason for the payment is the effective exercise of the commutation rights of the member and not the death of the member.
Less encouragingly at paragraph 25 the PBR then proceeds to undermine the clarity of the member/death benefit distinction based upon the reason for the payment with the distinction now being based upon the trustee having to consider a shopping list of relevant matters.
The shopping list included the following
Continued on next page
An extended delay of about 28 weeks or more will cause the benefit to be characterised as a superannuation death benefit.
Continued from previous page
critical factors:
(c) the fund trustee’s knowledge at the time that the payment is made (including whether they (the trustee) are aware the member had died,
(d) the entity that the payment is being paid to, and
(f) whether the payment is made because of and is consistent with the member’s request.
As to factor (c), if the right to commute the pension and to cash out the commutation proceeds has been exercised in the lifetime of the member, whether by the member, or authorised agent, and the role of the trustee is restricted to the administrative actions of implementing the commutation request, determining the commutation amount and paying the commutation amount, it should be irrelevant these administrative actions occurred after the death of the member and occurred at the time the trustee was aware of the death of the member. Obviously, it would be better if the commutation instruction had been given to the trustee before the death of the member.
As to factor (d), the commutation instruction must include the instruction that the proceeds be paid into the member’s bank account.
As to factor (f), and this seems to be the factor that persuaded the ATO the commutation payment should be treated as a death benefit rather than a member benefit, the significant and unexplained delay in payment gave rise to the inference the relevant parties had withdrawn the commutation request or simply ignored the commutation request, not by express resolution, but by their conduct. Consequently, when the commutation was made, the pension had been commuted, but not pursuant to the member’s, or their authorised agent’s, instruction, but by reason of the death of the member in circumstances where the pension was not reversionary.
In the case of SMSFs, factor (f) is of much
greater risk given the close connection between the trustee and the member and the possibility the member’s spouse or legal representative may control or be involved in the control of the fund after the death of the member. For large super funds, a 26-week delay in payment may well be within their accepted performance standards.
In short:
• The right to commute the pension must be a unilateral right exercisable by the member (so there is no requirement for the trustee to consent to the commutation or approve the commutation).
• A duly authorised agent of the member can still exercise the commutation right.
• It would be best if the trust deed provided that a member’s authorised agent can exercise on the member’s behalf any powers conferred by the trust deed on the member and that the trust deed provided a suitable definition of agent, such as the enduring attorney of the member or an individual who has been appointed the financial manager for the member.
• It is critical the right be exercised before the death of the member.
• It is highly desirable, but not critical, that the exercise of the commutation right be notified to the trustee before the death of the member.
• The role of the trustee is simply administrative in relation to the pension commutation request, that is, to quantify the commutation amount and then pay the commutation amount and undertake any necessary actions to realise fund assets.
• The commutation payment must be paid to the bank account of the member or paid by cheque, if applicable, with the member as payee.
• There must be no extended delay between the commutation instruction being made and the payment. As a rule of thumb, perhaps six or possibly eight
weeks maximum could be deemed appropriate.
• The trust deed should contain an express power to make in-specie payments of lump sum superannuation member benefits.
• If there is likely to be a delay in the payment of the benefit, then paying the benefits in instalments should be considered, as well as the possible application of SIS Regulation 6.21. On this point, if the cashing out is characterised as a superannuation member benefit, then SIS Regulation 6.18(3) is the relevant provision and, given the different wording to that contained in SIS Regulation 6.21, is arguably more permissive of the payment of benefits in instalments. SIS Regulation 6.21(2) provides “in respect of each person to whom benefits are cashed” they may be cashed as a single lump sum or, alternatively, as an interim lump sum and a final lump sum. This wording is not friendly to the paying of a benefit in instalments. So it seems a superannuation member benefit can be paid in instalments, whether equal or unequal, whether interim or final, so long as the benefit is paid as soon as practicable after the commutation request has been made.
The PBR as published gives no details of or reason for the extended time between the receipt of the commutation request and the payment of the benefit. This lack of detail is very unfortunate.
The SMSF sector is an industry leader across multiple aspects of the retirement savings system. Peter Burgess highlights a few areas where the sector is forging the necessary pathway.
It’s rarely acknowledged in the wider superannuation industry, but the SMSF sector often sets the pace of reform. Nowhere has this been more apparent than in narrowing the gender gap that has seen women retire on much lower balances than men or in utilising retirement income streams.
Significantly lower balances for women is an issue that has plagued the industry. As the Senate Economics Committee found when it handed down its report in 2016, aptly titled “A husband is not a retirement plan”, many women face an insecure retirement. Men’s superannuation
balances at retirement are, on average, twice as large as women’s. In practice, this means women, particularly single women, are at greater risk of experiencing poverty, housing stress and homelessness in retirement.
Although it was a damming indictment on the system, in the SMSF sector, at least, things are improving. The Class “2023 Annual Benchmark Report” shows that although men still have higher average balances than females, the gap is narrowing, from $149,905 in the 2022
Continued on next page
PETER BURGESS is chief executive of the SMSF Association.financial year to $140,446 in 2023. At 30 June 2023, female balances were 84.9 per cent of male balances, with the gap closing nearly 1 per cent over the previous year.
The contrast with the Australian Prudential Regulation Authority (APRA)-regulated funds could not be starker, with figures showing women in this superannuation sector retire, on average, with 23 per cent less super than men. Although there are myriad suggestions to narrow this gap, such as superannuation benefits for paid parental leave and a super baby bonus, the fact remains women still seriously lag men.
For the APRA funds, this situation was compounded by the federal government’s decision to allow the COVID-19 early release payment scheme, which had the effect of widening the super gender gap in these funds. Between 2017 and 2022, APRA funds recorded a 1.5 per cent increase in the gap, while SMSFs went the other way, reducing the gap by 4.4 per cent, according to the Class report. However, the gender gap between SMSFs and APRA funds does narrow as the retirement age of 65 approaches, but quickly widens after APRA fund members turn 65 and there are no restrictions on accessing super.
There can be no doubt recent legislative changes have played a role in reducing the gender gap, particularly for members with balances exceeding the general transfer balance cap (TBC) , currently $1.9 million. Those members will continue to adopt contribution splitting and recontribution strategies to rebalance their accounts to stay within the TBC. Removing the $450
super guarantee threshold was another positive, especially for members in public offer funds.
But the SMSF Association would strongly contend this positive trend to rebalance the gender inequality in superannuation that is happening in the SMSF sector is about far more than just regulatory or even societal change. Although we have always maintained SMSFs are not for everyone, for those that opt for this retirement savings vehicle there are two compelling factors – investment choice and control.
Wanting control means being actively involved in running your superannuation fund, often with specialist advice. It means there is a growing number of women who are prepared to give the necessary time, often not easy, especially for those in the accumulation phase still having full-time work and raising young families. Yet as the ATO statistics show, an increasing number of millennials and gen Xers are opting for this retirement vehicle. Consequently, we are now seeing a higher level of non-concessional contributions from women compared with men, while on the concessional contribution front, women’s contributions are closing in on those of their male counterparts.
None of this is to suggest the superannuation cards are still not stacked against women. They still have the career gaps, do more part-time work and have lower wages. In addition, they are typically the primary childcarers and, increasingly with an ageing population, more likely to be responsible for aged care. But for women who opt for an SMSF, and are prepared to take the responsibility this entails, the evidence suggests they are in a better position to enjoy a secure retirement.
It’s not just gender inequality where SMSFs are leading from the front. We would contend our sector is ahead of the curve when it comes to using superannuation to provide a retirement income. Certainly, we do know the regulator, APRA, is less than impressed with how the public offer funds are addressing this issue.
In a review recently handed down, it found that although trustees are improving their offerings of assistance to members in retirement, there is variability in the quality of approach taken and a lack of urgency in embracing the intent of the covenant regarding retirement incomes. APRA deputy chair Margaret Cole put it succinctly when she said: “A further 3 million members will become eligible to draw from their super
We are now seeing a higher level of nonconcessional contributions from women compared with men, while on the concessional contribution front, women’s contributions are closing in on those of their male counterparts.
Continued from previous page
in the next 10 years. They are entitled to rely upon their super fund for assistance as they plan for a sound financial future. Some trustees have made a good start, but overall there has been a lack of progress and insufficient urgency.”
It’s a comment borne out by the numbers. At June 2022, there were 2.8 million members aged 65 and over with accounts in APRA funds, but only half were in full or partial pension phase – despite the obvious tax benefits. By contrast, the Class report shows nearly 90 per cent of SMSF members aged 65 and over had a tax-free retirementphase account, with only about one in eight in this age bracket remaining solely in accumulation. Quite clearly most
SMSF members entitled to do so are drawing a retirement income from their superannuation. As the report said: “It is clear APRA funds have a long way to go to bridge the gap to assist members with utilising their superannuation in retirement.”
Which simply begs the questions: why this gap? In the association’s opinion, it’s largely a consequence of SMSF members being more engaged with their superannuation. In many instances they get specialist advice from financial advisers or accountants over the course of their super journey, from establishing the fund, through the accumulation phase and finally into retirement. Although this is often associated with their investment strategy, it covers all aspects of managing an SMSF.
Remember too, those who opt for an SMSF have a legal obligation to consider member objectives and cash-flow requirements as part of their investment
strategy and to plan for the fund’s ability to pay benefits when members retire. These are obligations the regulator strictly enforces, ensuring SMSF trustees have a strong focus on their retirement income strategies.
It’s a justifiable comment that with about half of SMSFs in retirement phase, it’s understandable they have a greater focus on retirement compared with the APRA funds where most members are in the accumulation phase. But that observation is becoming far less pertinent with the compulsory superannuation system now in its fourth decade and, as Cole correctly pointed out, 3 million more APRA fund members will be able to draw down on their superannuation in the next decade – many with considerable balances. These funds must have a greater focus on retirement. Perhaps a starting point is taking a closer look at how SMSFs handle it.
For women who opt for an SMSF, and are prepared to take the responsibility this entails, the evidence suggests they are in a better position to enjoy a secure retirement.
Many business owners view the sale of their company as the main opportunity to make a significant contribution to their SMSF. Linda Bruce explores how they are able to achieve this aim through the small business CGT concessions.
A company is a separate legal entity that can offer benefits such as the ability to retain earnings and protect a business owner’s personal assets. As such, a company is a popular business structure for small business owners to operate their business from.
Just like other entities, when a company sells a capital gains tax (CGT) asset, it may be able to use one or more of the small business CGT concessions to eliminate, reduce or defer capital gains arising from the CGT event where the relevant qualifying conditions are met.
However, even if the sale proceeds received by a company are exempt from CGT, there may be tax consequences when the company distributes the sale proceeds to its shareholders. This may also affect the amount an indiviudual business owner can
contribute to super using their lifetime CGT cap.
This article looks at these challenges in detail and explores potential strategies to overcome them. Please note, all legislative references in this article are to the Income Tax Assessment Act 1997, unless otherwise indicated.
Four small business CGT concessions are available to eliminate, reduce or defer the capital gains on disposing of an eligible CGT asset, namely:
1) Small business 15-year exemption – Allows the disposer to entirely disregard capital gains from a CGT event and there is no need to apply any other
Continued on next page
LINDA BRUCE is senior technical manager at Colonial First State FirstTech.CGT concessions.
2) Small business 50 per cent active asset reduction – Reduces a capital gain by 50 per cent. Often used in conjunction with the small business retirement exemption or rollover relief.
3) Small business retirement exemption – Reduces the taxable capital gain from a CGT event by a lifetime limit of $500,000 for each eligible individual.
4) Small business rollover relief – Allows a disposer to defer all or part of a capital gain resulting from the CGT event. The qualifying conditions are complex and are outside the scope of this article. For further information, please visit the ATO’s Small Business CGT Concessions page.
The 15-year exemption is the most generous of the four concessions. Upon qualification, a company disposer can entirely disregard a capital gain arising from disposing of a CGT asset.
Section 152-125 then allows the company to distribute the sale proceeds paid to the company entity, that is, the disposer, to its CGT concession stakeholder(s) tax-free, that is neither franked nor unfranked dividends, if the following conditions are met:
• the amount distributed to the company’s CGT concession stakeholder(s) is limited to the CGT exempt amount (that is, the sale proceeds less cost base),
• the distribution is made in accordance with a CGT concession stakeholder’s small business participation percentage, and
• the distribution is paid by the company within the time limit, which is generally two years after the relevant CGT event.
1. Distributing the cost base amount
Section 152-125 only allows the CGT exempt amount, the sale proceeds less cost base, to be paid out of the company taxfree, not the entire sale proceeds.
Depending on how the purchase of the CGT asset was originally funded, for example, whether it was executed using capital injection by a shareholder or retained profits, distributing the cost base amount out of the company to its individual CGT concession stakeholders may or may not result in significant tax consequences for the individual. Here:
– the distribution that represents the repayment of the outstanding shareholder loan can be paid tax-free, and
– the distribution that represents the retained profits is generally a franked dividend and taxed in the hands of the
individual.
2. Super contributions using the lifetime CGT cap
Section 292-100 (4) allows a company’s CGT concession stakeholder to contribute their share of the sale proceeds, not just the CGT exempt amount, to super using their lifetime CGT cap, However, the company must make a payment within the required timeframe, generally two years after the CGT event, to the individual CGT concession stakeholder first.
Where the company only distributes part of the sale proceeds to the relevant individual(s) to avoid significant tax consequences, the individual’s super contribution using the CGT cap is limited to the distribution they received from the company during the two-year period mentioned above.
The individual, if eligible to contribute to superannuation, then has 30 days from receiving the payment to contribute to super using their lifetime CGT cap.
Note, the ATO’s CGT cap election form must be submitted to the super fund before or when the contribution is made
Planning point:
Where the cost base of the CGT asset was funded through the company’s retained profits, the entity may decide to only distribute the CGT-exempt amount to its relevant stakeholders tax-free, section 152125, and retain the cost base amount in the company to avoid significant tax payable by the relevant individual(s).
The company may then distribute the cost base amount out to the relevant individual(s) over several years as dividends to reduce the impact of including the dividends in the individual’s assessable income.
This strategy can effectively reduce the tax payable by a relevant stakeholder on
Continued on next page
When a company sells a CGT asset, it may be able to use one or more of the small business CGT concessions to eliminate, reduce or defer capital gains arising from the CGT event where the relevant qualifying conditions are met.
receiving the dividends, however, any payments made by the company outside the two-year timeframe generally cannot be contributed to super using the lifetime CGT cap.
As an alternative, the company may wish to distribute the cost base amount out of the company before the two-year period ends and a Division 7A loan agreement may be used to avoid having the payment treated as dividends. Advisers should collaborate with clients’ tax accountants to establish how best to distribute the cost base amount out of the company.
If the 15-year exemption is not available to a company disposer, an examination of whether the retirement exemption or rollover relief is available should take place.
As the amount of capital gain that can be disregarded by the retirement exemption is limited by the $500,000 lifetime cap per individual CGT concession stakeholder, where the capital gain exceeds the limit, the company may choose to use the 50 per cent active asset reduction before applying the retirement exemption (or the rollover relief first and then the retirement exemption when CGT event J5 or J6 occurs).
The amount of the capital gain that is exempt by the 50 per cent active asset reduction forms part of the company’s capital profits reserve account. Although the company is not liable to pay tax on this CGT exempt amount, when the amounts are distributed to shareholders, the distribution generally is an unfranked dividend and is taxable at the individual shareholders’ marginal tax rate.
An exception is when the distribution from the company’s capital profits reserve
account is made by a liquidator under section 47 of the Income Tax Assessment Act 1936 and covered by ATO Taxation Determination 2001/14.
This means where it is appropriate to liquidate the company, and when a liquidator makes the final distributions out of the company’s capital profits reserve representing the cancellation of the shares, the distributions are treated as capital proceeds of rather than ordinary income for the shareholder.
The shareholder can then assess whether any CGT concessions can be applied, such as the general 50 per cent CGT discount or one or more of the small business CGT concessions, to reduce or eliminate the capital gain on receiving the capital proceeds relating to the shares bought back and cancelled by the company. Significant tax savings may be achieved under this option.
It is important to note the lifetime CGT cap may be available to part or all of the capital proceeds for the cancellation of the shares.
To qualify for the retirement exemption, section 152-325 requires that the company
makes a payment representing the CGT amount it has chosen to disregard to one or more of its individual CGT concession stakeholders. A lifetime CGT limit of $500,000 applies to each individual stakeholder.
Where the conditions specified by section 152-325 are met, the payment that represents the amount the company chose to disregard using the retirement exemption is tax free.
The individual generally has 30 days to contribute the distribution made by the company to their super fund using their lifetime CGT cap. It’s important to note that where an individual stakeholder is under age 55, the company must make the payment directly to the individual’s super fund as part of the qualifying conditions to use the retirement exemption.
As is the situation with the 15-year exemption, tax law does not provide a mechanism that allows the cost base amount to be distributed to shareholders tax effectively.
Depending on how the cost base of the CGT asset was originally funded, via retained profits or via a shareholder capital injection, distributing sale proceeds representing the cost base amount may or may not have tax consequences. It is important to work with a professional tax accountant to work out a tax-effective way of accessing the cost base amount.
In contrast to the 15-year exemption, only the CGT-exempt amount the company chooses to disregard using the retirement exemption may be contributed to super using the lifetime CGT cap, where all conditions are met. The cost base amount and any amount discounted by the 50 per cent active asset reduction cannot be contributed to super using the individual stakeholder’s lifetime CGT cap.
Even if the sale proceeds received by a company are exempt from CGT, there may be tax consequences when the company distributes the sale proceeds to its shareholders.
The recent rise in inflation and interest rates has significant implications for related-party limited recourse borrowing arrangements. Tim Miller details the effect of the economic landscape on SMSFs with these types of loans in place.
TIM MILLER is technical and education manager at Smarter SMSF.
As far as superannuation rates and thresholds are concerned, inflation can have both a positive and negative impact. On the positive side we see an increase in the general transfer balance cap resulting in higher pension commencement values and greater capacity to make non-concessional contributions. However, on the negative side we see related-party limited recourse borrowing arrangements (LRBA) take a big hit with interest rates jumping more than 3 per cent for those with variable interest rates. On the back of COVID-19, will this be the straw that breaks the camel’s back for many SMSF trustees?
SMSFs that comply with the safe-harbour terms, outlined in Practical Compliance Guideline (PCG) 2016/5 Income tax arm’s-length terms for limited recourse borrowing arrangements, must be aware the ATO uses the May published rate each year from the Reserve Bank of Australia’s Indicator Lending Rates for banks providing standard variable housing loans for investors to determine the appropriate interest rate (see Table 1).
This article outlines what unitholders’ agreements should typically contain and why they should be considered where there is more than one unitholder, including a related party.
There may of course be some comfort for any fund that established an LRBA in accordance with PCG 2016/5 in the past few years and fixed the interest rate at commencement. As noted in the table, the safeharbour provisions provide for a fund to fix the interest rate at commencement for a maximum of five years for property and three years for stock exchange-listed shares or units. For some that will provide temporary relief, but for those coming out of their fixed period they will need to be aware of the immediate rate hike.
Any change in respect to repayments by the fund should be documented, including consideration of the fund’s investment strategy regarding the ongoing cash-flow needs of the fund.
Failure to stay within the safe-harbour terms set out within PCG 2016/5 may result in the income generated from the asset being taxed as non-arm’slength income (NALI). The ATO has previously provided guidance in respect to this topic through the release of:
• Taxation Determination (TD) 2016/16 – Income tax: will the ordinary or statutory income of a self-managed superannuation fund be non-arm’slength income under subsection 295-550(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when the parties to a scheme have entered into a limited recourse borrowing arrangement on terms which are not at arm’s length? and
• Law Companion Ruling 2021/2 – Non-arm’s-length income – expenditure incurred under a non-arm’slength arrangement.
A hike in interest rates will be a double whammy for many SMSFs that may still be feeling the pinch of extra repayments coming out of the relief measures introduced as a result of COVID-19.
The complexity of an LRBA loan is compounded where the arrangement is financed through a related entity who must also comply with the requirements of Division 7A of the ITAA 1936
Division 7A rules provide strict requirements that must be met, including meeting the minimal annual repayment or having the entire loan potentially treated as a dividend and, by virtue of being deemed a dividend from a private company, will most likely
Continued on next page
Other key elements of the safe-harbour provisions are as follows:
Fixed or variable interest Variable uses the above rates each year. Fixed uses the above rate at inception, but can only fix for a maximum of five years, then reverts to variable. Term of the loan Maximum of 15-year term. If refinancing, the maximum refinanced term cannot exceed 15 years less the duration of any previous loans.
70 per cent LVR.
result in NALI.
As a result, some related-party LRBAs will traditionally have to meet both criteria of Division 7A and PCG 2016/5.
The ATO identifies there are three criteria a borrowing needs to meet to be considered a complying loan rather than a dividend:
• the interest rate must be at least equal to the Division 7A benchmark interest rate,
• the term of the loan must not exceed 25 years (where the loan is secured by a mortgage over real property), otherwise seven years, and
• there must be a written agreement in
place.
The current benchmark interest rate, which is the RBA’s indicator lending rate – the bank variable housing loans interest rate for owner occupiers, is 8.27 per cent.
The upshot being an SMSF related-party loan that meets the terms of PCG 2016/5 will meet the Division 7A requirements to be considered a loan.
With the sudden sharp rise in interest rates, many SMSFs may be contemplating refinancing their loan. Care must be taken if attempting to refinance a related loan with
another similar-type borrowing. There is nothing requiring an SMSF to use the terms of PCG 2016/5, however, to ensure a loan does not result in NALI, TD 2016/16 obliges the trustees measure the terms of the loan against a hypothetical arm’s-length borrowing the trustees could or would have entered into. Further, PCG 2016/5 says the trustees must demonstrate the terms of the borrowing replicate the terms of a commercial loan that is available in the same circumstances.
Therefore, if the SMSF trustees are going to replicate commercial lenders, they need evidence indicating the lender would have been willing to lend to the fund, and not just evidence of what is possibly available in the marketplace. It is worth noting not all lenders will assist in the refinancing of related loans.
One possible option available may be via the use of an intermediary LRBA. Here the holding trust rather than the SMSF trustee borrows money as the principal from the lender to acquire the asset. The fund must maintain the borrowing, so is responsible for the loan.
The ATO released SPR 2020/1, which excludes these arrangements from being an
Continued on next page
It’s important to ensure any related-party borrowings through any entity, company or trust comply with both the safe-harbour and Division 7A rules and if trustees are contemplating an intermediary LRBA, that they understand them.
in-house asset subject to the arrangement meeting certain requirements.
The intermediary LRBA is an arrangement entered into by the parties that meets the following requirements:
1. a holding trust is established with members of a fund being the only trustees or shareholders and directors of the corporate trustee (holding trustee),
2. the trustee of the fund is a beneficiary of the holding trust,
3. the holding trustee holds an acquirable asset (the asset) on trust for the trustee of the fund, who is beneficially entitled to the asset,
4. the asset is a single acquirable asset (as defined by Superannuation Industry Supervision (SIS) Act 1993 section 67A(1)) the trustee of the fund is allowed to acquire,
5. the holding trustee enters into a borrowing as principal with a lender with the borrowing secured by a mortgage over the asset,
6. the contract or deed of borrowing, referred to in paragraph (5), between the holding trustee and the lender may not limit the lender’s right of recourse, under the contract or deed, to only the asset in the event of default,
7. the lender may require personal guarantees to be given as part of the intermediary LRBA,
8. the arrangement is established by a legally binding deed(s) under which the trustee of the fund and the holding trustee agree, for:
a) the trustee of the fund to maintain all borrowing obligations entered into by the holding trustee in respect of the borrowing referred to in paragraph (5),
b) the trustee of the fund is absolutely entitled to any income derived from the asset, less fees, costs, charges and expenses incidental to the acquisition, holding or management
of the asset,
c) the trustee of the fund has the right to acquire the legal title of the asset on completion of the borrowing referred to in paragraph (5),
d) the rights of the holding trustee or any guarantors against the trustee of the fund in connection with default on the borrowing referred to in paragraph (5) is limited to the asset,
9. the documentation referred to in paragraph (8) in connection to the borrowing referred to in paragraph (5) is disclosed to the lender at the time of the borrowing.
Essentially, an intermediary LRBA overcomes the challenge of some lenders not contemplating a loan where the borrower does not hold title of the underlying property and also does not have to be limited in recourse, which can be attractive to potential lenders, but SPR 2020/1 acknowledges the involvement of an SMSF must be disclosed, meaning any recourse is against the guarantors rather than the fund.
If an asset is being disposed of, the sale proceeds will be used to discharge the loan and any remainder will be paid to the SMSF. All borrowed monies under the LRBA must be repaid, that is, the loan cannot be retained and used to acquire another asset.
When the loan is fully repaid, the SMSF has the right to obtain legal ownership of the asset from the holding trustee. It is important to note this is not considered an acquisition of an asset from a related party.
As there is the potential for stamp duty to be triggered when legal ownership is transferred, particularly where the arrangement was not correctly structured, there is actually no obligation under the super laws to transfer the asset from the holding trust to the SMSF. SPR 2014/1
– SMSF (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014 dictates that no breach of the in-house asset (IHA) provisions occur. However, if a fund elects to retain the asset in the holding trust after the loan is repaid, the LRBA restrictions continue to apply. This means certain transactions would be prohibited or alternatively will result in the asset being deemed an IHA, such as changing the asset’s character, for instance, subdivision. Further, ongoing costs of maintaining the holding trust would need to be considered.
If transferring the asset from the holding trust to the SMSF, related documents such as leases, rates notices and the like may have to be updated to reflect the new legal owner and the trustees must ensure the mortgage over the property is also removed.
Key concepts for LRBAs haven’t change since 2010 and they play a fundamental role in the ongoing compliance of SMSF borrowing arrangements.
It’s important to ensure any related-party borrowings through any entity, company or trust comply with both the safe-harbour and Division 7A rules and if trustees are contemplating an intermediary LRBA, that they understand them.
Finally, when a loan is to be paid out, understand the options available to ensure any compliance issues and potential stamp duty problems are avoided.
Failure to stay within the safe-harbour terms set out within PCG 2016/5 may result in the income generated from the asset being taxed as non-arm’s-length income.
Superannuation is a cornerstone of Australia’s retirement system and investments are a key to a successful retirement for any super fund member. Historically, Australian superannuation funds faced regulatory requirements that mandated a certain portion of their portfolios to be invested in government securities, primarily commonwealth and state government bonds. This was rooted in a dual objective – firstly, to ensure super funds maintained a level of liquidity and security in their investments, and secondly, to provide a stable source of funding for government projects and initiatives.
Over time, as the superannuation system evolved and matured, and as the financial markets in Australia became more sophisticated, these mandatory investment requirements were relaxed. This shift was in recognition of the need for super funds to diversify their portfolios and seek higher returns in a broader range of assets, while still maintaining an emphasis on the overall safety and security of members’ retirement savings.
Although there are no specific laws around a trustee investing member’s monies, there is a significant list of compliance issues a trustee and their adviser must take into account, including the in-house assets, lending to members and relatives, the sole purpose test, acquiring assets from a related party and the arm’slength test to name a few.
One of the most important is the investment strategy requirements for SMSFs found in section 52B(2)(f) of the Superannuation Industry (Supervision)
(SIS) Act 1993. This subsection imports the following requirements into the governing rules of an SMSF if the deed has them or is silent:
(f) to formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund including,
but not limited to, the following:
(i) the risk involved in making, holding and realising, and the likely return from, the fund’s investments, having regard to its objectives and its expected cash-flow requirements,
(ii) the composition of the fund’s investments as a whole including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification,
(iii) the liquidity of the fund’s investments, having regard to its expected cash-flow requirements,
(iv) the ability of the fund to discharge its existing and prospective liabilities.
For trustees of an SMSF, preparing an annual or more regular investment strategy is mandatory. The ATO has provided foundational guidelines for trustees to follow and steep penalties apply if these are ignored.
This has implications for financial planners and accountants as they can be sued for losses incurred by the trustee if the purported investment strategy is not an investment strategy at all or breaches the investment powers of the fund’s trust deed.
An investment strategy is more than a document –it’s a living blueprint. It’s a roadmap, meticulously designed by the trustee, to meet specific financial objectives and also is required to meet the retirement objectives of each member of the fund. Beyond the documentation, it’s about actualising these objectives, ensuring every investment decision aligns with the fund’s overarching goals. A well-constructed strategy is the linchpin for achieving retirement and estate planning goals. A casual approach can jeopardise the fund’s investment objectives and risk its compliance status with the ATO.
Note, an investment strategy is a forward-looking document so it cannot be completed after the end of
Continued on next page
An SMSF is required to have an investment strategy and this shapes the actions of trustees. Grant Abbott analyses the critical nature of this document.
the financial year unless it is accompanied by a deed of ratification.
According to the ATO guidelines, broad investment ranges, such as allocating 0 to 100 per cent in various assets, don’t reflect genuine consideration. For instance, if the Jones Family Superannuation Fund merely states it will invest between 0 and 100 per cent in both fixed interest and shares without further elaboration, the declaration does not constitute an investment strategy. According to the commissioner of taxation, such a vague approach fails to consider the risks, returns and objectives specific to the fund’s members.
Conversely, a genuine investment strategy for the Jones fund might detail a 40 per cent to 60 per cent benchmark allocation in fixed interest investments, 20 per cent to 40 per cent allotment to shares, and 10 per cent to 20 per cent holding in cash, considering the members’ ages, retirement goals and risk appetites. It would also factor in the need
for liquidity to pay benefits and the decision as to whether to hold insurance cover for each member.
An investment strategy is not a financial product, according to the Australian Securities and Investments Commission, which means accountants as well as financial planners can provide investment strategy advice without being licensed. However, an unlicensed professional cannot recommend a specific share or managed fund investment (gold and property are excluded from financial products).
Care needs to be taken at all times though.
Let’s look at two costly case studies:
1. Jones Accountants prepares all the compliance work for its 85 SMSF clients. They are skilled accountants and have a limited SMSF licence. They use a standard template which provides as follows:
The trustee of the fund has decided to achieve a return of 2 per cent above the consumer price index in the long term as its investment objective. To do so, the trustee will invest in assets within the following benchmarks:
$200,000.
The trustee comes to see if they can recoup the $300,000 from the accountant. Is it possible?
2. The All Monies Australian financial services licensee (AFSL) is strong on SMSFs and all its financial planners are SMSF Regulatory Guide 146 trained with SMSF Association specialist designations. To help its planners conduct SMSF business, the AFSL holder provides its planners with access to an SMSF trust deed acquired from a law firm.
A financial planner for the AFSL was advising on an investment strategy and portfolio for a client, the Brown SMSF, that had two members in their fifties with combined assets of $1 million. The planner had done well and invested in a Dow Jones index fund and also an MSCI index fund. However, in January 2024 the market dropped sharply and the trustee had to realise investments and booked a $500,000 loss.
When the fund was at audit for its 2023 compliance return, the auditor read the deed and found out the trustee could invest only in Australian investments. The trustee comes to you as an adviser to see if they can recoup the $500,000. Is it possible?
Fundamentally the SIS Act is there to protect members’ benefits. As noted above, one of the core elements is the requirement under section 52B(2)(f) to prepare an investment strategy deemed to be a covenant of the fund. That is where the fun starts legislatively:
i) Section 54C – Other covenants must not be contravened
The trustee of the Jefferson SMSF invested most of its assets in cryptocurrency and speculative stocks and has seen the portfolio reduced from $500,000 to
• Individuals must adhere to all covenants outlined in the governing rules of a superannuation entity and imported covenants in section 52B of the SIS Act for SMSFs. This includes SMSF professionals, auditors, members and trustees.
Continued on next page
For trustees of an SMSF, preparing an annual or more regular investment strategy is mandatory. The ATO has provided foundational guidelines for trustees to follow and steep penalties apply if these are ignored.
• Breaching this section is not considered a criminal offence.
• Such a breach does not invalidate any transaction.
• Section 54C does not restrict the implications of section 55.
• However, a breach of this section may lead to legal action to recover damages as per section 55.
ii) Section 55 – Recovering loss or damage for contravention of covenant
• If someone incurs a loss due to another person’s breach of subsection 54C(1) of the SIS Act, they can take legal action against the person responsible or any involved party to recover the loss.
• Such legal action must be initiated within six years from when the breach occurred.
• An individual has up to six years from the breach to seek the court’s permission to initiate legal action.
• The court, when deciding on granting permission, will consider the applicant’s intentions and the seriousness of the case.
• The court may specify a timeframe within which the legal action should be initiated.
• In defence against a claim of loss due to an investment made by a trustee, the defendant must prove compliance with all relevant covenants from sections 52 to 53 and those prescribed under section 54A of the SIS Act. In essence, the investment was in accordance with the fund’s investment strategy.
a) Jefferson SMSF
If an accountant prepared this document, as it is not an investment strategy, then there is a breach of SIS Act section 52B(2)(f). This leads to a contravention of section 54C, thereby enabling the trustee to recover for all losses against the accountant. There is no defence the investment was in accordance with the investment strategy as there is no
investment strategy. The fund auditor can also be brought in as a party to the suit if they signed off on the investment strategy.
b) Brown SMSF Section 10(1) of the SIS Act brings the fund’s trust deed into the governing rules. As the governing rules have been breached by investing in non-Australian investments, section 54C is contravened, which leads to a recovery action under section 55.
The SIS Act enables the trustee to run pooled investment strategies versus separate investment strategies. This is not about the segregation of pension assets for taxation purposes, but maximising investment returns for members. So, what is the difference between the two and the advantages and disadvantages of each?
i) Pooled investment strategy:
Here, all members share the fund’s investment outcomes proportionally. The allocation of income and gains is typically anchored in the trust deed, based on each member’s account balance and having regard to Part V of the SIS Regulations.
Advantages
• Streamlined administration, harmonising with most SMSF software.
• A unified approach requiring a singular, overarching strategy.
• Simplified reporting and easier tracking of investments.
Disadvantages
• A one-size-fits-all strategy might overlook members at different life stages or with diverse risk appetites.
• Limited earnings allocation flexibility, especially during suboptimal investment years.
• Challenges in catering to both accumulation and pension funds.
This structure allows the trustee to curate distinct, personalised investment strategies for each member or class of
members. This could take the form of having a specific investment strategy for members in accumulation phase and a separate investment strategy for members in pension phase.
Advantages
• Adaptability to cater to members at varied life stages or with different investment profiles.
• Tailored strategies aligned with each member’s unique objectives.
• Greater flexibility in adjusting to market changes for individual members.
Disadvantages
• The need for multiple strategies can complicate administration.
• Separate accounting for each member, though this can enhance transparency.
• Potential for conflicts among members regarding investment choices.
Trustees can adopt a hybrid approach, where a pooled strategy serves members with aligned objectives, while separate strategies cater to those with distinct goals. This approach offers the best of both worlds, ensuring all members’ needs are met while maintaining a cohesive investment strategy for the fund, provided, of course, the fund’s trust deed and governing rules allow this strategy.
An investment strategy is more than a document – it’s a living blueprint. It’s a roadmap, meticulously designed by the trustee, to meet specific financial objectives.
Providing discounted services for the SMSFs of staff members can trigger the non-arm’s-length expenditure rules and in turn result in severe tax penalties. Daniel Butler examines how these practices can be followed while mitigating the risk of an adverse outcome for trustees.
Firms providing discounted SMSF services to staff, including to partners, shareholders and office holders, must ensure an appropriate discount policy is in place to minimise the risk of triggering the nonarm’s-length income (NALI) provisions under section 295-550 of the Income Tax Assessment Act 1997
If an appropriate staff discount policy is not in place, discounted services may expose SMSFs to a 45 per cent tax rate instead of the usual concessional tax treatment. There is a different treatment applied depending on whether the lower expense, or nonarm’s-length expenditure (NALE), is a general or a specific expense. This article outlines key points to consider following the release of the draft legislation.
On 13 September 2023, the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 (NALE bill) was introduced into the House of Representatives.
The NALE bill proposes a cap on the amount of income that will constitute NALI from a non-arm’slength scheme involving a lower or nil general fund expense. This cap is in the form of a two-times multiple of the shortfall between the general expense recognised and the expense amount that would have been charged had the transaction occurred on a commercial basis for an SMSF or a small Australian Prudential Regulation Authority (APRA) fund.
The NALE bill also excludes assessable contributions from NALI, which are included under current legislation.
While the NALE bill will, when enacted, reduce the severe impact of NALE for general SMSF expenses, there is no relief provided for NALE in relation to a particular asset. Moreover, the proposed changes in the bill may be altered before they are finalised.
Under current law, from 1 July 2018, for an SMSF incurring a lower-than-arm’s-length general expense, such as that for accounting or audit services, NALE can result in a 45 per cent tax being levied on all of the fund’s ordinary and statutory income. This includes net capital gains, franking credits and assessable contributions.
The ATO’s Practical Compliance Guideline 2020/5 previously provided some relief, that is, the regulator was not applying its compliance resources to detect general NALE in respect of the 2019 to 2023 financial years. However, from 1 July 2023 there is no ATO administrative concession and the regulator is required to administer the law as it finds it.
In paragraph 51 of the ATO’s Law Companion Ruling 2021/2, it states discounted arrangements provided under an appropriate policy will not give rise to NALI: “A complying superannuation fund might enter into arrangements that result in it receiving discounted prices. Such arrangements will still be on arm’s-length terms where they are consistent with normal commercial practices, such as an individual acting in their capacity as trustee (or a director of a corporate trustee) being entitled to a discount under a discount policy where the same discounts are provided to all employees, partners, shareholders or office holders.”
(Emphasis added.)
Thus, there are a number of key points to consider, including:
• there must be a policy framework in place (that is, a formal policy document outlining the terms of the discount),
Continued on next page
Continued from previous page
• the discount must be consistent with normal commercial practice (that is, based on appropriate benchmark evidence), and
• the same discount must be provided to others of the same class (that is, the eligibility rules should have a classbased application).
The explanatory memorandum (EM) to the NALE bill discusses the capacity in which an SMSF trustee/member acts and whether those actions will give rise to nonarm’s-length risks or would be an internal arrangement not giving rise to NALI or NALE. Broadly, this distinction depends on the capacity in which the trustee undertakes those activities based on the particular facts and circumstances.
The EM notes if a trustee is not acting as a trustee, but is instead providing services that are procured as a third party, the NALI rules are intended to apply. The EM also recognises that in such cases, an SMSF trustee may be prevented from charging any
more than the arm’s-length price because of section17B of the Superannuation Industry (Supervision) (SIS) Regulations 1993, which, subject to certain criteria, permits a trustee to charge for duties or services performed other than in their capacity as trustee.
A recent edited ATO private ruling (authorisation number: 1052132378413) stated at [42]-[43]:
42. Given the statutory restrictions that prevent a trustee or director of a corporate trustee from receiving remuneration, paragraphs 295-550(1) (b) and (c) will not be enlivened due to the trustee or director not charging for the services performed in relation to the fund when acting in a trustee capacity. For example, the NALE provision will not apply where a trustee, acting in that capacity, performs bookkeeping or accounting services for the fund for no remuneration.
43. However, when the trustee or director of a corporate trustee operates in another capacity and either does not receive remuneration for those services or receives remuneration in accordance with the exceptions in section 17B of the SIS Regulations, paragraphs 295-550(1) (b) or (c) may apply where the fund incurs NALE.
The dividing line between when an activity or service is undertaken in the capacity of a trustee/director as compared to an individual capacity is important, but, in many cases, remains unclear. It is hoped the ATO will provide further examples and guidance to assist SMSF trustees.
There is no express ATO guidance regarding staff discounts being offered in relation to non-SMSF services, for example, in relation to accounting services provided to unit trusts or companies in which a staff member’s
SMSF may be invested.
If firms wish to offer discounts in relation to services relating to unit trusts or companies that are linked to a staff member’s SMSF, this will need to be based on an appropriate discount arrangement and one that is supported by sufficient benchmark evidence to support the relevant fees charged.
An additional point worth noting here is that any services provided to another entity that may be linked to an SMSF, such as a related company or unit trust, should be invoiced separately and paid for by the relevant entity and not the fund so there is a clear separation from any SMSF involved.
Firms providing discounted services to staff members’ SMSFs should act as soon as practicable to minimise the risk of invoking the NALI and NALE provisions. An appropriate education and staff training program is also needed to ensure the team are informed. A well-formulated staff discount policy may have numerous benefits as well as minimise the risks of NALI and NALE.
If an appropriate staff discount policy is not in place, discounted services may expose SMSFs to a 45 per cent tax rate instead of the usual concessional tax treatment.
Firms providing discounted services to staff members’ SMSFs should act as soon as practicable to minimise the risk of invoking the NALI and NALE provisions.
The SMSF Association celebrated its 20th anniversary at the Technical Summit 2023. The two-day event was held at the Star on the Gold Coast.
Superannuation does not form part of the asset pool of a person’s estate, but a common question still asked by clients is whether to pay their super death benefits direct to their adult financially dependent children or through their estate and then paid out accordingly.
As with many questions around superannuation and taxation, it depends on the dynamics of the family and estate planning wishes of the superannuant in question. Some of the issues that need to be considered are as follows:
To the estate:
Main advantages:
• Medicare levy is not payable.
• Should any of the adult children be receiving government support or alternatively are highincome earners, paying it to the estate has less impact on continuing to receive these benefits and the effect of Division 293 tax. This tax represents an additional tax on super contributions paid by people earning more than $250,000 a year.
• Depending on how the will is drafted can provide a level of asset protection to the beneficiaries and next generation(s). This would be via a testamentary trust. The characteristics and rules of a testamentary trust can be tailored to the asset protection needs of the beneficiaries, that is, they can range from being discretionary, where basically the beneficiaries have complete discretion with regard to the income and capital of the trust or right up to being capital guaranteed or protected and only income can be distributed. This spectrum also aligns to the level of asset protection. Testamentary trusts also have additional benefits, such as income splitting and income to minors taxed at adult marginal tax rates.
Main disadvantages:
• Dependent on the solvent position of the estate, the superannuation benefits may be used to pay the debts of the estate.
• If cash flow is tight and the beneficiaries require some or all the super benefits to pay expenses, or the like, long delays may occur while the estate is going through probate.
• A person’s will can be contested and, depending on the complexities, this process can take years and be very expensive. If superannuation is paid to the estate, this capital will form part of what can be contested. This is very relevant in New South Wales with the ability for an eligible family
member to make a notional estate claim under the Succession Act 2006 (NSW)
• Additional requirements. Making sure any binding death benefit nomination (BDBN) directing superannuation to the estate is current and valid. This will be dependent on the terms of the underlying trust deed and important to have reviewed, especially where there is a change in family circumstances. It is also important to make sure the person’s will is up to date in relation to the distribution of assets inclusive of superannuation.
Paid directly:
Main advantages:
• Simpler process. Especially if the lump sum payment will be made in-specie, such as a parcel of shares or property ownership.
• Less costly should there be a chance of the will being contested or the beneficiary requires immediate cash flow, such as for the repayment of debt.
• Clear payment directions should there be several beneficiaries.
• Depending on the trust deed of the fund. Payment direction to a superannuation proceeds trust. This type of trust has specific rules on payment of income and capital and is outside the scope of this article. It can also have the other benefits of a testamentary trust being asset protection, income splitting and taxation rate on minor income distributions.
Main disadvantages:
• No asset protection. Benefits may be exposed to creditors, family law or even the financial vulnerability of the beneficiary.
• Higher tax rate applied to the taxable component of the benefit due to the application of the Medicare levy.
• Non-resident beneficiaries. There could be additional taxation complexities dependent on the jurisdiction in which the beneficiary resides. Therefore, careful analysis and discussions around a client’s specific estate planning objectives, including personal, financial and social legacy, and family dynamics all need to be carefully considered when determining the most appropriate option on paying superannuation death benefits to adult financially dependent children. It might be that a hybrid model may work for one child over another. It needs to be that specific and tailored.
directly or through the deceased member’s estate.
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.
