Self Managed Super: Issue 44

QUARTER IV 2023 | ISSUE 044 | THE PREMIER SELF-MANAGED SUPER MAGAZINE

THE IMPACT OF DECLINING SMSF AUDITOR NUMBERS

FEATURE

COMPLIANCE

STRATEGY

COMPLIANCE

SMSF auditor decrease Sector impact

Related-party transactions The additional restrictions

Contributions splitting Evening member balances

Residency rules Current parameters

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Update session – what’s new and federal budget review $3 million cap – assets inside or outside super (alternative to holding capital inside super) Death and taxes – strategies for reducing tax on super death benefits Investment strategy session The view from the trenches – case study session reviewing the interesting super questions we’ve received via the Accurium Helpdesk

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COLUMNS Investing | 20 The benefits of multi-asset ETFs.

Investing | 24 Uranium undergoing a revival.

Compliance | 28 Contribution reserves and ECPI interaction.

Strategy | 32 The operation and benefits of contributions splitting.

Compliance | 36 Rules governing related-party transactions.

Strategy | 39 Advice accountants can provide.

Compliance | 42 The current residency rules.

Strategy | 45 SMSF Association National Conference 2024 highlights.

Compliance | 48 Foreign trust rules and their relevance.

Strategy | 54 Contribution strategy intricacies.

Compliance | 58 NALE legislation anomalies.

EXIT DECLINING AUDITOR NUMBERS Cover story | 12

FEATURE Policy consultation process | 16 The current situation

REGULARS What’s on | 3 News | 4 News in brief | 5 SMSFA | 6 CPA | 7 IFPA | 8 CAANZ | 9 IPA | 10 Regulation round-up | 11 Super Events | 62 Last word | 64

QUARTER IV 2023 1

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

You cannot be serious The month of December is upon us and that means 2023 is nearly done and dusted.

And it’s been a busy year of change and proposed change for the superannuation industry and I think it’s safe to say it really hasn’t been great for the SMSF sector.

So many government measures have been skewed against it with the $3 million soft cap and the final non-arm’s-length expenditure (NALE) rules being glaring examples.

And just when you thought it was all over and we could take a collective step back and regroup for 2024, the government makes another announcement looking like it will have a negative impact on SMSFs. I’m referring to the discussion paper aimed at improving the retirement phase of superannuation. In short, Financial Services Minister Stephen Jones is looking to have the Retirement Income Covenant apply to SMSFs. To use an iconic phrase from tennis great John McEnroe: “You cannot be serious.”

No doubt the purpose of this discussion paper is to further light a fuse under the backsides of the industry super funds that, despite over a decade of discussions about the generational shift happening among the Australian population, have still failed to develop adequate retirement income solutions for their members in retirement phase.

In fact, if the minister performed a bit of due diligence on the topic, he would see this is the main reason why industry funds lose members with the highest balances. And what do a lot of these individuals end up doing? Establish an SMSF to create their own retirement income solution.

Often the solution comes in the form of implementing one or more account-based pensions and judging by the results of superannuation fund satisfaction, as measured

by research house Roy Morgan, it seems to be working as SMSFs consistently come out on top. To me it would suggest SMSFs are the gold standard with regard to the retirement savings drawdown phase.

But according to the government, the fact 84 per cent of retirement savings are held in either an account-based pension or allocated pension, with only 3.5 per cent in annuities, presents a problem. This means it would like more superannuants to use annuities, in particular SMSF members, and so will seek to include the sector in the Retirement Income Covenant.

Really?

It begs the question whether Jones understands the characteristics of an annuity and how they actually work. While they can provide a guaranteed income stream, they are considered expensive and any remaining monies in the annuity pool cannot be retrieved once the individual in question dies.

Compare this with an account-based pension that can be reverted to another fund member in the event of death. Which would you say is more equitable and flexible?

So it appears the government is wanting to push a greater number of SMSF trustees into products that are more expensive and less efficient and along the way further restricting the very freedom of choice these funds offer – exactly what people love about them.

If we compare this approach with how the NALE rules are to be implemented, it almost appears a carve-out is okay when it is for the industry funds, but a carve-out for SMSFs is totally unacceptable.

A note to the minister: rather than penalise SMSFs with an imposition that makes no sense, learn from them and see how more of their retirement income solutions can work for the greater part of the superannuation industry.

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

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WHAT’S ON

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

Accurium

DBA Lawyers

SMSF Professionals Day 2024

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

Inquiries: dba@dbanetwork.com.au

Inquiries: Vicky Zhao (02) 8973 3315 or email events@bmarkmedia.com.au

Managing TBA for SMSF Members

16 February 2024 12.00pm–1.30pm AEDT

30 January 2024 Webinar 2.00pm–3.00pm AEDT

SMSF Association Inquiries: events@smsfassociation.com

SMSF Online Updates

8 March 2024 12.00pm–1.30pm AEDT 12 April 2024 12.00pm–1.30pm AEST

SMSFA National Conference 2024

Institute of Financial Professionals Australia

21-23 February 2024 Brisbane Convention and Exhibition Centre Glenelg Street, Brisbane

Inquiries: 1800 203 123 or email info@ifpa.com.au

Heffron Inquiries: 1300 Heffron

VIC 21 May 2024 Rendezvous Hotel Melbourne 328 Flinders Street, Melbourne

NSW 23 May 2024 Rydges Sydney Central 28 Albion Street, Surry Hills

QLD 28 May 2024 Hotel Grand Chancellor Brisbane 23 Leichhardt Street, Spring Hill

2024 Annual Conference 15 March 2024 Sofitel on Collins 25 Collins Street, Melbourne

SMSF Clinic 13 February 2024 Webinar 1.30pm–2.30pm AEDT

Quarterly Technical Webinar 29 February 2024 Webinar Accountants 11.00am–12.30pm AEDT Advisers 1.30pm–3.00pm AEDT

Accounting Business Expo 2024 20-21 March 2024 Melbourne Convention and Exhibition Centre 1 Convention Centre Place, South Wharf

Super in 60 7 March 2024 Webinar 2.00pm–3.00pm AEDT

QUARTER IV 2023 3

NEWS

ATO pleased with LRBA compliance

By Darin Tyson-Chan

The ATO has revealed data on SMSFs with limited recourse borrowing arrangements (LRBA) where the lender is a non-licensed financial institution, including related parties, has shown compliance with the safe harbour rules set out in Practical Compliance Guideline 2016/5 is very good.

Based on the SMSF annual returns lodged for the 2022 income year, it has been established around 4000 LRBAs involved a non-licensed

financial institution and the regulator recently tested the compliance status of the funds employing these gearing measures.

“In terms of the question around the safe harbour [guidelines], we have done some analysis for the 2022 [income] year and of the 4000 classified as nonfinancial institution LRBAs, only around 47 [had auditor contravention reports lodged] for [Superannuation Industry (Supervision) Act] section 109 breaches,” ATO superannuation and employer obligations director Paul Delahunty told delegates

at The Tax Institute National Superannuation Conference recently hosted in Melbourne.

“That’s an indication that those funds are complying with the safe harbour guidelines, under the assumption the auditors [involved] are [performing] their check appropriately, but I think that is comforting for us that our safe harbour guidelines are being adhered to.”

Delahunty took the opportunity to acknowledge another shift in the use of SMSF gearing over recent years.

To this end, he pointed out the number of LRBAs using a non-licensed financial

institution had fallen from 5000 in the 2018 income year to the 4000 confirmed in the 2022 annual returns, but also framed some context around the result.

“So [the use of these loans] has decreased, but I think it’s important to also make the point that [the overall use of] LRBAs has decreased at the same time,” he said.

“It’s pretty much a flat line around 7 per cent over that period so I think it would be a little premature to say there has been a change in terms of how LRBAs are entered into with related parties or financial institutions.”

Treasury requires submissions supported by fact

By Darin Tyson-Chan

Treasury has revealed some stakeholder responses regarding the proposed Division 296 tax on total super balances over $3 million were given scant consideration as they were not supported by actual data and, as such, were treated more as ambit claims.

“We keep getting feedback from some sectors about their concerns over [the proposed Division 296 tax] and there was one industry group that came to me and said this will impact 33 per cent of our members,” Treasury retirement income policy division first assistant secretary Lynn Kelly said during a panel session at The Tax Institute National Superannuation Conference held in Melbourne recently.

“I asked for data to back it up and wasn’t

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given any. I then asked the ATO for data and it had some on its website that I could access. When I [examined the information], I found that of the impact it would have on the population today [it indicated] less than 5 per cent [would be] impacted of the broader industry.

“So now when I talk to [that] industry association I have some question marks over its claims.

“Ambit claims aren’t particularly helpful, [unlike] evidence-based, practical [feedback]. I can work with that and I can give that to ministers and I can say these are the concerns, this is who it impacts and this is why it matters.”

Kelly pointed out, by contrast, how some of the industry submissions she received regarding the non-arm’s-length expenditure (NALE) rules were far more constructive.

“Some people in this room actually came to talk to us about NALE and they gave

Lynn Kelly some real-life examples of the compliance costs [involved], what actually it was looking like in their business, and it was evidence based. It wasn’t [like a] dressed up ambit claim, it [was presented as] this is what we are actually doing and this is what it looks like,” she noted.

The submission resulted in a conversation with Treasury over the integrity concern raised and whether the tax system was the appropriate place for that integrity concern, she said.

“So that was a really good example of bringing an issue to me that was evidence based,” she said.

NEWS IN BRIEF

New class of adviser introduced The federal government will create a new class of financial advice providers who will be employees of financial institutions, but will carry a different title and hold lower education standards than those practitioners currently working in the financial advice sector.

The new class of advisers is part of government plans announced

by Financial Services Minister Stephen Jones to introduce further recommendations from the Quality of Advice Review, including replacing statements of advice with shorter records of advice and introducing a revised best interests duty that no longer carries safe harbour provisions.

Jones said professional advisers were unable to scale up their businesses in a way that would provide greater access to advice for millions of people and the government’s plans to expand the role of superannuation funds to provide it would also apply to life and general insurers and banks.

“This is a pragmatic step that will expand the provision of personal advice to improve consumer outcomes,” he said.

Crossbench support sought Crossbench senators have been called upon to reject the bill that will introduce the proposed superannuation earnings tax applied to balances over $3 million, with the SMSF Association highlighting the tax on unrealised gains represented a fundamental shift in taxation policy.

The Treasury Laws Amendment (Better Targeted Superannuation

Concessions and Other Measures) Bill 2023 has been introduced into parliament and read for a first time, with a second reading moved.

A second reading without amendments would progress the bill to the Senate, which has eight crossbench senators, who if they voted with the 31 opposition senators, would be able to vote down the progress of the bill, which is likely to be supported by 26 government and 11 Greens senators in the upper house.

SMSF Association chief executive Peter Burgess said the taxing of unrealised gains contained within the bill was “a tax on market movements and changes in asset values, not income, [setting] an alarming precedent as it represents a fundamental change in how tax policy is implemented in Australia”.

Super discussion paper released The federal government has released a discussion paper examining how superannuation can be better used in retirement, with questions being raised about the ability of SMSFs to manage risk and maximise income.

The paper, released by Treasurer Jim Chalmers and Assistant Treasurer and Financial Services Minister Stephen Jones, covers how superannuation members can be supported in navigating the retirement income system, how funds can be supported to deliver better retirement income products and services and how lifetime income products can become more accessible.

Jones and Chalmers said 84 per cent of retirement savings were held in account-based or allocated pensions, with a further 3.5 per cent held in annuities, and superannuation funds needed to do more in providing products and services suited for

retirement.

The paper noted retirees were faced with managing income from superannuation, the age pension and personal savings, with many, including SMSF trustees, lacking the information needed to manage these incomes sources for the long term.

It put forward a potential policy change of including SMSFs within the Retirement Income Covenant, which requires superannuation funds to propose suitable retirement income products and outcomes for fund members.

Wealthy investors favour SMSFs SMSFs remain a popular retirement savings vehicle for individuals in the high net worth (HNW) category, driven by the desire to control their investments and estate planning, according to integrated platform provider Hub24.

The “Directing the matrix: meeting the advice needs of high net worth clients” white paper revealed that while having control was a key consideration for wealthy individuals when deciding to establish an SMSF, this did not mean they chose to carry out the operations of the fund.

The white paper noted while many HNW individuals preferred the control and flexibility of an SMSF, most of the investment management was outsourced to professionals, such as wealth management firms.

This was consistent with findings that wealthy individuals were more focused on preserving their wealth rather than chasing it, with optimising tax treatment and asset protection among the key concerns.

Of those surveyed who expressed an interest in estate planning as a major consideration for how they managed their wealth, 55 per cent had unmet financial advice needs.

QUARTER IV 2023 5

SMSFA

Super will be under the microscope

PETER BURGESS is chief executive of the SMSF Association.

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In November 2014, the Financial System Inquiry (FSI) handed down its final report. Among its recommendations was for the superannuation system to have clear objectives. It stated: “A clear statement of the system’s objectives is necessary to target policy settings better and make them more stable. Clearly articulated objectives that have broad community support would help to align policy settings, industry initiatives and community expectations.”

No one disagreed. Indeed, it enjoyed the industry’s enthusiastic support, with the SMSF Association being a leading advocate. So, when we held our inaugural Thought Leadership Breakfast three months later at the association’s national conference, it was no surprise when the objective of superannuation was central to the four-member panel discussion under the topic, “The future of Australia’s Retirement Income System: What we want the system to look like in 40 years”.

That it was a lively, informative debate was unsurprising. FSI chair David Murray certainly had strong views on the issue, as did Don Russell, then the head of the South Australian Department of State Development and currently chair of AustralianSuper.

Former Reserve Bank of Australia director Warwick McKibbin and former association chief executive Andrea Slattery also did not hold back as veteran journalist Michael Pascoe kept the debate ticking over in his role as moderator.

It set the tone for future breakfasts where industry leaders were given the opportunity to freely express their views on a range of issues germane to superannuation. The focus has always been to look to the future, to tease out of these experts their views on where the industry is heading, and whether that trend is good or bad for our compulsory superannuation system or, more specifically, our SMSF sector.

Over the past nine years, we have enjoyed lively, informative debates. Some have even got a little testy and so much better for that. But delegates have always walked away with both their minds and appetites sated. And breakfast at the SMSF Association National Conference 2024, sponsored by Class, promises to be no different.

Indeed, it could prove to be one of the more interesting breakfasts as the SMSF sector takes a long hard look at itself to see where it does well and where it needs to ‘level up’. In particular, the panel will be asked to discuss how our super sector can better service the more than 1.1 million individuals who have opted for

an SMSF to achieve their retirement aspirations. This will not only mean looking inwards, but also looking over the fence at the Australian Prudential Regulation Authority (APRA)-regulated funds to see if they have any lessons for us.

The SMSF sector, with about half its members in retirement phase, has always prided itself on being ahead of the curve when it comes to retirement income strategies. By contrast, the APRA funds, with the bulk of their members in the accumulation phase, have tended to neglect their retired members, helping explain the exodus to SMSFs as people near retirement. It’s not just us saying this. APRA has been a constant critic of how the larger funds treat their members in retirement.

Certainly, it sets the scene for an enthralling debate.

And the panellists selected mean it’s not going to be a flat wicket. To begin with, Heffron Consulting managing director Meg Heffron is never one to shy away from calling a spade a bloody shovel and can be expected to draw on her vast experience to give her forthright views on where the sector is falling short.

KPMG partner Linda Elkins, who leads the firm’s national asset and wealth management practice in Australia, brings a varied background to the panel with more than 20 years’ experience in financial services, including industry funds and government, as well as seven years as executive general manager at Colonial First State, where she was responsible for providing member outcomes for more than 1 million superannuation members and investors.

There will also be a senior executive from an APRA fund to give its viewpoint. It will be the first time someone from the APRA super stream has participated in the discussion, so the gloves could be well and truly off.

To add further spice, the government’s recently released discussion paper on the retirement phase of superannuation is sure to garnish plenty of debate about the future of retirement income products and financial advice.

Our superannuation system is at an interesting juncture. It’s been compulsory for more than three decades, baby boomers (those born between 1946 and 1964) are retiring in increasing numbers and we are at the beginning of the biggest wealth transfer in this country’s history with $3.5 trillion expected to be passed down to younger generations over the next 25 years. So a debate about how our sector is servicing its members could not be timelier. I encourage you to sign up for this breakfast session.

CPA

Evaluating payday super

RICHARD WEBB is financial planning and superannuation policy senior manager at CPA Australia.

The 2023/24 federal budget unveiled a new initiative, the Securing Australians’ Superannuation package, commonly referred to as payday super. This package contains significant changes to the super landscape.

Starting from July 2026, the reforms aim to synchronise superannuation contributions with employers’ payroll cycles. Beyond simplifying the alignment of deferred and immediate remuneration, the package is intended to enhance the ATO’s capacity to proactively detect instances of unpaid or underpaid super, addressing a long-standing issue in the current system.

Currently, the existing system relies on employees notifying the ATO when they become aware of unpaid or underpaid superannuation. This may occur after significant delays, ranging from months to even years. The proposal seeks to lessen this reliance on employee complaints by ensuring the information captured at pay cycles is able to be used, in almost real time, to flag situations where reported super contributions have not yet been successfully made.

Proactively identifying discrepancies enables swift intervention and resolution before employees become aware of any issues.

This sounds like a simple and effective fix to longstanding issues around remuneration. However, there are issues in the current system that are likely to be dragged into the new regime, making the work substantially more complex than anticipated.

SuperStream, the mechanism for conveying data around contributions, has some identified drawbacks.

Contributions can only be processed if the data is both correct and aligns with payments received at super funds or at the gateways in between employers and funds. SuperStream is merely data and does not contain confirmation of payment, posing a challenge in understanding the nature of transactions and hindering prompt processing.

SuperStream is not normally used by the ATO. Instead, the Member Account Attribution/Transaction Service (MAAS/MATS) systems are used to promptly report successful receipt and processing of contributions by large Australian Prudential Regulation Authority (APRA) funds to the ATO. In contrast, contributions to SMSFs or small APRA funds remain unreported until the submission of the fund’s annual return. This delay in reporting affects the regulator’s ability to promptly identify underpayments in SMSFs and means members of these funds may not be able to immediately benefit from any proactive matching of contribution data by the ATO. SMSF members, who are also usually their funds’ trustees, have better visibility into contributions.

However, those experiencing underpayment may still only have the option to file a complaint unless they have been identified as part of a larger systemic issue affecting multiple employees where some are members of large APRA funds.

Another issue relates to the types of superannuation members are expecting to receive.

Treasury’s consultation paper released in October revealed, initially, only super guarantee (SG) amounts would be supported. This exclusion leaves out other contributions, such as those exceeding SG minimums, salary-sacrificed amounts or voluntary employer contributions. This omission may mean amounts outside of SG minimums may be submitted to funds at a separate time of the month.

Since contributions above SG minimums are not regulated by the ATO, members of funds subject to these arrangements are unlikely to see any additional transparency. Indeed, while there have been no solutions proposed to provide members of SMSFs with a similar level of support to members of large APRA funds, the time needed to develop solutions is ticking away.

One solution could see SMSFs providing information similar to the MATS dataset on an opt-in basis. Care needs to be exercised under this solution since single-touch payroll (STP) reporting communicates superannuation contributions on a year-to-date basis rather than for each pay cycle.

The need to provide the same level of information as large APRA funds for contributions, in case of underpayment, could undermine the intended benefits of the project, since it may require a full year of reporting by trustees to be effective.

Another issue is around the mismatch between Australians’ expectations regarding payroll and the super contributions applicable to a pay packet. SG amounts are assessable on ordinary time earnings (OTE) only.

A typical pay cycle sees wages paid both in arrears and advance, meaning at any given time only 50 per cent of the OTE is known with certainty. It means there will need to be adjustment to superannuation contributions after the event. This will add to uncertainty, since adjustments may not necessarily be able to be made through STP reporting.

While the Securing Australians’ Superannuation package represents a significant step toward streamlining super processes and enhancing detection capabilities, challenges both new and existing must be addressed. Nevertheless, Australians should expect their rights to correct superannuation to be upheld whether they are members of large APRA funds or SMSFs. QUARTER IV 2023 7

IFPA

The need to fix Division 296

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

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The government has delivered an early Christmas present by way of introducing the Division 296 legislation covering the proposed 15 per cent tax on total super balances (TSB) above $3 million into parliament on 30 November. As expected, the legislation remains largely unchanged from when it was first announced earlier this year, with no further changes made to the measure since the exposure draft legislation was released in October.

This means the same key issues remain unresolved, such as the fact unrealised capital gains will be taxed because the calculation of ‘earnings’ is based on movements in a member’s TSB, there being no refund of tax paid in years when earnings are negative and a member’s TSB drops below $3 million, and the threshold having no indexation mechanism applied to it. The bill is currently before the House of Representatives and if enacted by parliament, will commence on 1 July 2025 and apply from the 2026 income year onwards.

Initially a large part of the superannuation industry objected to the extra 15 per cent tax announcement as the introduction of another cap was seen to be unnecessary considering there are already several mechanisms in place, including contribution caps and the transfer balance cap on pensions, to address the issue the government sees as a problem.

As the consultation period passed and time went by, it became clear this extra tax was here to stay. Instead, we had to pick our battles and fight to ensure that if the tax settings must change for larger balances, there are other options that can deliver a fairer superannuation system. For instance, the new tax should be applied to actual taxable income rather than taxing unrealised gains.

The benefits of this recommendation are it will not only avoid taxing unrealised gains, but also rules out the need to calculate an individual’s modified TSB by adding back withdrawals and deducting contributions received by the fund. It also eliminates the need to track carried-forward negative earnings.

However, the government has said this alternative approach of reporting and taxing actual taxable earnings would require significant changes in

reporting by Australian Prudential Regulation Authority (APRA) funds that would come at a cost to all their members. As such, taxing actual earnings is not an option that will be considered. This has required the industry to go back to the drawing board to consider other alternative options due to the purported administrative issues APRA funds would face to comply with this measure.

Various other ideas have been put forward for the government to explore, from applying a deemed earning rate to a member’s TSB to imposing an additional tax on all taxable component withdrawals for those with a TSB greater than $3 million to revisiting the tax rate in superannuation for both accumulation and pension funds and potentially bringing back compulsory cashing by requiring individuals to start taking money out of super at a certain age. The list goes on.

All these alternatives have their pros and cons, but most people are of the view any pitfalls with them must be better than the government’s intention of taxing unrealised gains.

But not being able to tax actual earnings is unfair to superannuation funds, such as SMSFs, that already have the ability to calculate each member’s taxable earnings. SMSFs are being punished for the administrative and system reporting issues large APRA funds would face in implementing this solution.

If the superannuation tax concessions really do cost the government around $50 billion in revenue foregone per year and the policy intent is to reduce the tax concessions afforded to members with large balances, other options put forward must be considered by the government to fix the Division 296 tax measure. Rather than applying another piecemeal change to the superannuation system, it may be worthwhile conducting a holistic review of the associated tax concessions so we end up with a system that is fair and equitable for everyone. After all, an effective consultation period is one where stakeholders are given an opportunity to raise concerns and provide other simpler alternatives, that if adopted, will achieve the policy outcome rather than legislating draconian measures that are overly complex and unnecessary.

CAANZ

A massive system change

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

Payday super will be one of the biggest changes made to the superannuation sector since compulsory employer super began more than 35 years ago. Why? Because it alters almost every aspect of the sector.

For over 30 years, employers have become used to treating the payment of employees’ salaries and wages as separate to the payment of their superannuation entitlements. As a result there are many people who get paid salary weekly, fortnightly or monthly. But superannuation is very different. According to ATO data, over 60 per cent of employers pay their superannuation guarantee (SG) contributions quarterly.

Compulsory employer superannuation is a form of salary and wages and should ideally be paid at the same time as an employee’s salary. But given the low level of interest in superannuation among most employees, many of them wouldn’t really know, or care, when their SG contributions are made.

More frequent SG contributions will lead to higher costs for employers by way of processing costs and higher transaction and servicing costs. For example, it is reasonable to assume payroll software providers will want to charge more for additional developments and more transactions.

When the SG was being legislated in the early 1990s, the Superannuation Senate Select Committee asked Treasury to estimate how many people would become unemployed as a result of the additional employer expenses. At the time the workforce consisted of around 7.8 million people in Australia.

Treasury thought between 50,000 and 100,000 people would be unemployed with roughly half of these people unable to find new work.

It is reasonable to assume this new change will have an impact on the unemployment rate. It will cause some businesses to go under with the additional costs being the proverbial straw that breaks the camel’s back. Other businesses might delay or postpone employing more staff. And finally, other businesses may change how often they pay their employees because of the additional costs. For example, weekly or fortnightly-paying employers might change to monthly.

But it’s important to realise this change only impacts SG contributions. It doesn’t change when an employer must make salary sacrifice or other superannuation contributions, such as those found

in a specific industrial award or agreement. Unless provided for in industrial agreements or awards, under the Fair Work Act these payments must be made monthly and at this stage we believe this requirement will not change.

Six associations, including Chartered Accountants Australia and New Zealand, have told Treasury via a joint submission the penalties for late SG contributions need to change. There are at least 10 different ways employers can be penalised for failure to make SG contributions on time or for paying less than the required amount. We think these need to be reformed and simplified. They must deter bad behaviour while also encouraging employers to quickly identify and fix errors. The late payment of all SG payments, foregone fund earnings and other penalties are currently not allowed as a tax deduction. We think this needs to change.

But any alterations to the SG penalties also need to factor in the new wage theft provisions that may be inserted into the Fair Work Act. A failure to pay salary or wages by the required date, including superannuation contributions, could lead to very large penalties applying. Individuals could face up to 10 years in jail and/or the greater of three times the unpaid amounts or $1.5 million in fines. Corporations could be fined the greater of three times the unpaid amounts or $7.8 million. These penalties would send many small businesses into insolvency or receivership.

So employers will need great record keeping and good processes to ensure they are paying their staff the correct amounts and doing this by the required time. We think Australia should adopt the New Zealand payment model for superannuation contributions. That is, Kiwisaver contributions are sent to the country’s Inland Revenue at the same time pay-as-you-go withholding amounts are paid. Inland Revenue then dispatches the contributions to the nominated fund. The development of such a system run by the ATO would be expensive, but it would probably be the most efficient approach.

Whatever system is developed in Australia, it will need to work well from day one and it will need to work for SMSFs from the start date. It is due to start on 1 July 2026. We think employers ideally should be thinking about this new system as soon as possible and working out what changes they need to be implementing now.

QUARTER IV 2023 9

IPA

Issues need addressing before moving ahead

TONY GRECO is technical policy general manager at the Institute of Public Accountants.

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The federal government’s proposal to introduce payday super (PDS) represents a significant shift in the landscape for superannuation payments. While members of the Institute of Public Accountants (IPA) are broadly supportive of the proposal, it is crucial to address existing issues before embracing this new model.

PDS has the potential to streamline processes and rectify the unfairness of the superannuation guarantee penalty regime, but a careful and considered approach is necessary to avoid unintended consequences.

One of the main challenges lies in the complexity of superannuation payments compared to single-touch payroll (STP).

While STP has become the norm for most employers, PDS introduces real-time payments, requiring employers to pay superannuation simultaneously with salary and wages.

Unlike the relatively automated STP system, PDS involves a multitude of complexities, including SuperStream, super choice, stapling, remittance processes and the use of clearing houses.

With around 60 per cent of employers still paying superannuation quarterly, the transition to PDS demands a thorough examination of these intricacies.

The proposed move to compulsory super payments on payday raises concerns about process efficiency and potential unfairness.

PDS introduces additional steps, often involving intermediaries beyond the employer’s control, which could exacerbate existing problems if not addressed beforehand.

The consultation process needs to streamline these issues, considering the real-time nature of payments, which leaves a small window for error correction.

To ensure a smooth transition, a staged implementation process is recommended, particularly for smaller entities.

Larger businesses should lead the way, allowing time to identify and address potential pitfalls before small businesses enter the PDS regime.

This phased approach will minimise the risk of unintended outcomes and administrative shortcomings post-enactment.

Several concerns warrant attention, those being employers may face increased compliance costs, including expenses for payroll software, transaction fees and time spent addressing errors.

Weekly payroll employers, in particular, could see a rise in transaction costs.

Early data verification during employee onboarding is crucial to avoid processing errors.

A streamlined process for default funds, stapled funds and employee details on MyGov accounts is also essential to prevent unnecessary complications.

The government-provided Small Business Superannuation Clearing House, currently used by around 130,000 small employers, is ill-equipped for PDS. An overhaul is vital to accommodate the proposed more frequent super payments.

Additionally, handling corrections, overpayments and changes in payments due to public holidays, allowances, loadings and deductions raises questions about the practicality of implementing PDS. Cash-flow consequences for employers cannot be ignored, especially for small and medium-sized enterprises (SME).

Ensuring a smooth transition is critical, as threequarters of undisputed tax debts belong to SMEs. The move to immediate payment may pose challenges during the transitional period, where the old and new regimes overlap.

Speeding up the payment of debtors through initiatives such as the Payment Time Reporting Act would alleviate the cash-flow burden on some SMEs. While PDS presents an opportunity to modernise superannuation payments and rectify superannuation guarantee penalty regime unfairness, addressing existing issues is paramount.

The complexities involved necessitate a careful and phased approach to implementation, with thorough consideration of the impact on employers, particularly SMEs. The joint accounting bodies, which include the IPA, lodged a detailed submission on the proposal to Treasury in response to the consultation paper, “Securing Australians’ Superannuation”.

To read the submission, please click the link.

REGULATION ROUND-UP

Draft legislation for super earnings tax Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023

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

Draft legislation has been released to outline the introduction of the new Division 296 in the Income Tax Assessment Act. This measure aims to apply an additional 15 per cent tax on earnings in a superannuation fund if a person’s total super balance exceeds $3 million.

The proposed start date is 1 July 2025.

These measures have been controversial and the final outcome is yet to be determined.

Publishing disqualification notices Treasury Laws Amendment (Modernising Business Communications and Other Measures) Act 2023

Disqualification notices for SMSF trustees and directors of corporate trustees will now be published as notifiable instruments in the Federal Register of Legislation instead of the Government Notices Gazette.

The Disqualified Trustees Register will still be updated quarterly.

When an income stream stops/starts ATO Taxation Ruling 2013/5DC1

The 2013 ruling is in the process of being updated to reflect legislative changes since its introduction, particularly the impact of the transfer balance cap.

Major changes are not expected and the consultation period ended on 10 November.

ATO adviser strategy

Entities with an Australian business number (including sole traders) will need to nominate the adviser as an agent before they can be added to that agent’s client list.

This can be done using the new agent nomination feature in the ATO’s online services for business.

It does not affect existing clients.

SMSF statistics SMSF Quarterly Statistical Report, September 2023

The latest statistical report issued by the ATO shows the number of SMSFs continues to grow, with the year ended June 2023 showing the highest number of net establishments since 2018 (with a net increase of 19,541 SMSFs).

Franking credits and capital raisings Treasury Laws Amendment (2023 Measure No 1) Bill

This bill received royal assent in November. It prevents certain distributions that are funded by capital raisings from being franked.

Direct and indirect recipients of such distributions will not be eligible for a tax offset and the amount of franking credit is not included in assessable income.

This legislative change aimed to address an issue raised by the ATO in Taxpayer Alert 2015/2.

Changes to registration rules for financial advisers Treasury Laws Amendment (2023 Measures No 3) Act

An outcome of the Tax Avoidance Taskforce is the upcoming release of the ATO adviser strategy.

This aims to recognise the role advisers play in helping businesses meet their tax and super affairs accurately and honestly.

The ATO plans to expand the use of data to identify risks, concerning behaviours and common errors and will share the insights with advisers and their clients, with a focus on prevention.

The regulator will also share best practice insights.

The strategy will apply to advisers including tax agents, legal practitioners and financial advisers.

Changes to qualification rules to be registered as a financial adviser have been made to recognise experience and royal assent has been granted.

Advisers with at least 10 years of experience and a clean disciplinary record are no longer required to complete an approved qualification to meet the qualifications standard.

In addition, an adviser must be a ‘qualified tax relevant provider’ to provide tax (financial) advice services to retail clients.

Advisers have until 1 February 2024 to register with the Australian Securities and Investments Commission under this provision, in addition to being listed on the Financial Adviser Register.

Client-to-agent linking protocol

ASIC’s 2024 enforcement priorities

QC69794

Media release 23-310MR

From 13 November 2023, only authorised tax/ business activity statement agents or payroll service providers can link to an SMSF. This aims to increase safeguards from fraudulent activity and identity theft.

Superannuation is one of the areas that ASIC has noted an increase in enforcement priorities in 2024, with two new priorities added for a focus on member services failures and misconduct relating to the erosion of super balances.

QC73643

QUARTER IV 2023 11

FEATURE

THE IMPACT OF DECLINING SMSF AUDITOR NUMBERS Specialist SMSF auditor numbers have declined significantly over the past few years. Todd Wills delves into the significance of this trend for the operation of the sector.

12 selfmanagedsuper

FEATURE DECLINING AUDITOR NUMBERS

A clear reduction in the population of specialist SMSF auditors has piqued interest in the sector of late. This trend has become more pronounced following the introduction of the Stronger Super reforms by the Labor government in 2013.

These reforms required practitioners conducting audits on SMSFs to register with the Australian Securities and Investments Commission (ASIC) as an approved auditor. At the end of the 2014 financial year, 7073 auditors had registered with the database. However, following the imposition of this requirement, each successive year has seen a reduction in the number of individuals qualified to perform SMSF audits.

According to the latest ASIC information, the industry currently boasts 4352 registered SMSF auditors, representing a 38 per cent decrease in slightly less than a decade. This drop in practitioner numbers has become even more evident since the onset of the COVID-19 pandemic and the introduction of new independence standards under APES 110 from 1 January 2020, with over 1500 auditors choosing to exit the profession since 2019.

The decline in auditors is occurring at the same time new SMSFs are growing in number. To this end, the September quarter 2023 saw the highest total of net funds established in the past five years, with no indication this momentum will slow.

So why are fewer registered SMSF auditors remaining in the sector when it appears to be so healthy and what will this mean for the path ahead?

A changing regulatory landscape The landscape has shifted from the early 2000s, a period when the ATO predominantly embraced a hands-off regulatory stance, offering guidance only when necessary and mainly in an educational capacity. During this era there was no SMSF auditor register and

the idea of referring auditors to ASIC was deemed overly expensive and timeconsuming. Further, practitioners weren’t obligated to submit auditor contravention reports (ACR) even if they had detected contraventions of the Superannuation Industry (Supervision) Act 1993.

Fast forward to 2023 and SMSF auditors entering the profession are faced with an increasingly complex and sophisticated regulatory environment. Working in a specialised niche within the expansive financial services industry, SMSF auditors grapple with numerous requirements and obligations. The complexity of their operational landscape is exacerbated by the recent surge in legislative changes that have significantly influenced the SMSF sector. Examples of these changes include the proposed tax on total super balances over $3 million, or Division 296 tax, and the introduction of the non-arm’s-length expenditure regime.

There is an indication the challenges within this evolving landscape may have become too burdensome for auditors operating in the field, particularly for those only servicing a small number of funds. ATO data for the 2021 financial year highlights this situation, indicating 26 per cent of practitioners were auditing less than five funds and 44 per cent were performing audits on between five and 50 SMSFs. According to Super Sphere director Belinda Aisbett, for practitioners in this category, the work of auditing SMSFs may no longer seem worthwhile given the associated risks and hassles.

“There’ll be auditors that don’t do very many funds who have just decided, for whatever reason, now’s the time to get out. It’s not a benefit to them to stay in the space. There’s a lot of specifics required to stay up to date as an SMSF auditor,” Aisbett explains.

“And if you only do a handful of funds, that would be a really onerous task. So I suspect a big number or a big percentage of that drop would be just those smaller auditors who’ve thought it’s just not worth

“There’ll be auditors that don’t do very many funds who have just decided, for whatever reason, now’s the time to get out. It’s not a benefit to them to stay in the space.”

– Belinda Aisbett, Super Sphere the trouble. I can’t stay up to date, so I’ll just exit the space.”

Evolv Super Audits founder and The Auditors Institute director Ron PhippsEllis concurs, but suggests the ongoing educational requirement auditors are required to maintain, which can be costly, might be another contributing factor prompting professionals to exit the sector.

“There is a large cohort of SMSF auditors who do very small amounts of funds. So the minimum is 30 funds, but there’s quite a lot who do less than 100.

Continued on next page

QUARTER IV 2023 13

FEATURE DECLINING AUDITOR NUMBERS

per cent in the previous year, it perhaps can be inferred the recent decline in auditor numbers may be influenced by older practitioners opting for retirement or a similarly motivated exit.

“The decline in registered auditor numbers is something the association is aware of, but it’s not something that concerns us, rather we see it as a natural consolidation in that space.”

– Tracey Scotchbrook, SMSF Association

Continued from previous page

And I’m figuring that their requirement to maintain minimum continuing professional development hours is also creating a barrier for them to want to remain in the industry,” Phipps-Ellis says.

It is worth noting the SMSF auditing profession predominantly comprises experienced practitioners. ATO statistics from 2022 show about 41 per cent of auditors in the field are over 60. Although this figure has decreased from nearly 50

14 selfmanagedsuper

A cause for concern?

Care must be exercised when examining the drop in numbers. At the start of the year, 374 auditors had their registrations annulled, with a further 30 removed from the register in June 2023. While the majority were deregistered for failing to submit annual statements, there were some practitioners who deliberately waited for ASIC to take its action to avoid paying the registration cancellation fee.

This was originally set at $899, but has been reduced to $193.

SMSF Association head of policy and advocacy Tracey Scotchbrook believes the latter has impacted the overall auditor numbers, but says the industry body is not worried about the situation.

“The decline in registered auditor numbers is something the association is aware of, but it’s not something that concerns us, rather we see it as a natural consolidation in that space. I think why we’ve seen more recently an increase in the numbers of people leaving has been largely to do with the change in the ASIC fee structure,” Scotchbrook observes.

“Earlier this year, there were a number of auditors that ASIC had struck off the register and a large portion of those hadn’t submitted annual returns to ASIC. So ASIC terminated their registrations. And we think that a lot of that was driven by that $899 fee.

“I think now that the fee has actually come down, we’re just sort of seeing the natural movement of those that are going through the proper processes and deregistering because it’s no longer fit for purpose.

“The SMSF Association’s position is that we would like to see no fee. That should not be a barrier to exit, it should be frictionless. If somebody’s no longer capable or no longer willing to continue as a registered auditor for whatever reason, then they should be allowed to exit

without penalty.”

As touched upon earlier, new independence standards for auditors were introduced on 1 January 2020 and took effect for audits performed from 1 July 2021. The Auditors Institute director Graeme Colley identifies this as another factor leading to sector departures.

“Historically SMSF auditing came from a cottage industry way back in the 1980s when the ATO put in the requirement for SMSFs to be audited, mainly because the bigger funds were being audited anyway.

And then in 2013 we saw the registration of auditors. Now you would have thought those who were in the cottage industry and saw it becoming a bit more fair dinkum got out of it,” Colley says.

“But when the independence requirement was enforced sometime after that, it really sorted things out because what were common and accepted practices were no longer permitted under the independence requirement. And so a gradual a decrease in the number of auditors has resulted.”

On the surface, the significant exit of SMSF auditors has potentially painted a picture of an industry in decline, but this is not necessarily the case. To this end, Saul SMSF founder and managing director David Saul believes this phenomenon should be viewed as a positive development and might be precisely what the industry requires.

“To be honest, I think the reduction in registered SMSF auditors had to happen as a matter of course. SMSFs were previously just an add-on to many accounting practices and there was a requirement to have them audited,” Saul notes.

“The SMSF audit function wasn’t a sexy or complicated role in the business and it was usually done by a retiring partner of the firm or it suited someone who was easing themselves out of the business.

You had all of these part-time operators that were doing SMSF audits. Usually they were doing a lower number of audits Continued on next page

FEATURE

“I think the reduction in numbers had to happen to get back to a core level of auditors who are truly serious about working with SMSFs and want to be professional in delivering those services.”

– David Saul, Saul SMSF

Continued from previous page

and they were probably doing a bit of tax on the side and fulfilling several types of roles. As such I think there were a lot of practitioners who weren’t performing the audit function properly.

“So I think the reduction in numbers had to happen to get back to a core level of auditors who are truly serious about working with SMSFs and want to be professional in delivering those services.”

Bridging the gap The question remains, though, as to whether the shrinking auditing industry can continue to effectively service an SMSF sector housing over 600,000 funds and

seemingly growing. After all in 2014 there were around 74 funds per auditor, but today that figure stands at 140. However, the emergence of larger firms purely dedicated to SMSF audits may quell any angst over potential capacity constraints, Phipps-Ellis suggests.

“There is an opportunity for these specialised, audit-only practices to keep growing and gather more scale. And as they scale in a firm, you don’t need as many auditors because one auditor can do a lot more in one of these organisations than they could possibly do just on their own,” he acknowledges.

Supporting his viewpoint, ASF Audits head of education Shelley Banton asserts these more extensive and well-equipped firms are actively responding to the growing demand. However, this surge in capacity may have come at the expense of practitioners who were previously engaged in a smaller volume of audits.

“If you look at the number of auditors who are conducting audits on more than 250 funds, it’s increased from 53 per cent to 68 per cent over the past 10 years. What that means is those auditors today who are doing a smaller amount of audits are losing business to those who are doing a larger amount of audits,” Banton explains.

“We’re seeing an increase in the number of funds and they’re favouring being serviced by those accountants offering administration software and providing those efficient, streamlined services. Those accountants are then working with larger audit firms who are integrated with the software through application programming interfaces, which means the data integration is much more streamlined.

“If you’re auditing less than five funds you can’t get that sort of effectiveness because the SMSF administration software firms don’t offer it. You have to have a certain number of funds and five isn’t enough. You’ve got trustee clients who are potentially switching to those accounting firms who are using technology to its fullest.

“Looking at how those auditor numbers have dropped, the chasm is widening between those who are using technology to its fullest potential and those who

aren’t. And I think that we’ll just see that gap widening as time goes on.”

A way forward While a declining number of specialist SMSF auditors may not be as big a concern for the industry as it may appear, the lack of new entrants to the sector is another challenge being presented. ASIC data reveals 64 new practitioners sought registration in the 2023 income year, while 763 left the sector.

Aisbett has recognised some barriers to entry needing to be overcome.

“I think there are some challenges for people who want to come into the space.

The application fee is $2000 so that’s a big cost for someone just starting out.

Then you’ve got new entrants that will have independence issues because when you first start out, you get excited when you get your first client and you’ve got fee dependency issues,” she explains.

She points out a new approach to managing new entrants may be required to address the situation.

“Perhaps it might be worthwhile having some sort of mentoring approach so that these new entrants don’t necessarily have to fork out huge sums of money to get peer reviews. They could have a process where they have their hand held to a degree by a currently registered auditor to help them enter the space,” she says.

“I do a number of peer reviews for new auditors and it’s a significant cost to them, but those auditors are determined, they’re dedicated, they want to work in the space and they want to have a compliant approach and a quality approach. So that’s great for them. But how many others are deterred from entering because of those extra costs and issues?”

It’s clear there are a number of issues driving an exit of auditors from the industry. While some of these can be attributed to regulatory and legislative impacts, it appears the sector may actually be reaching a level of equilibrium, a change it sorely needed.

Whether the auditing profession can keep up with the growth of SMSFs remains to be seen, but there is optimism the industry will find solutions to address this evolving challenge too.

QUARTER IV 2023 15

FEATURE

PEOPLE HEARING WITHOUT LISTENING The pace of super reform has been rapid in 2023 with the government putting forward a number of key proposals impacting the SMSF sector and calling for stakeholder input on those. Yet, as Jason Spits writes, that feedback has had little impact on changing what bills enter parliament, prompting the question: Is the government actually listening to the industry?

16 selfmanagedsuper

FEATURE PEOPLE HEARING WITHOUT LISTENING

Superannuation has been a big ticket item this year with the federal government’s legislative agenda resulting in significant media coverage and forcing the SMSF and tax sectors to respond to a series of significant and unprecedented changes.

After starting the year with the lingering issue of non-arm’s-length expenditure (NALE) on the table, the government announced its plans for a resolution of that issue as well as a number of other measures. These included legislating an objective for superannuation and an additional earnings tax for total super balances over $3 million, and it is still sounding out its plans for the introduction of payday super and how the sector can boost its retirement income stream products.

It also found time to revise the franking credits framework, introduced a ‘blink or you’ll miss it’ amendment in the Senate to rules related to tax agent whistleblowing as part of its response to audit failures at PWC, approved the experience pathway for advisers and announced moves to introduce half of the recommendations of the Quality of Advice Review.

Representative bodies from the SMSF and tax sectors lined up repeatedly to provide input on the superannuation changes and put forward modifications or even alternative models they argued would maintain equity and fairness across the system.

Yet, looking back they have had little success, with the government pushing ahead with many of its initial positions unchanged by the time they reached parliament.

Limited time by design One observation across these events appears to be how limited the time has been for the government to seek input on the changes (see The government’s legislative timeframes below), particularly where they impact the SMSF sector.

For instance, the initial consultation period for the proposed objective of super was 30 working days, which dropped to 23 for the NALE revisions and then down to only 10 working days for the initial consultation period set aside for the $3 million soft cap.

The two latter measures have a proportionally higher impact on SMSFs than Australian Prudential Regulation Authority (APRA)-regulated funds, which have been exempted from the NALE rules.

“There has been a trend to short consultations on key measures this year

compared to the past where they usually ran for at least four weeks,” SMSF Association chief executive Peter Burgess says, singling out the very short initial and draft bill consultations for the new tax on total super balances over $3 million, which will be known as the Division 296 tax when it becomes law.

“We think this has led to poor policy in regards to the taxing of unrealised capital gains as well as the absence of the accompanying regulations when the bill was introduced into parliament, and it was difficult to consult properly without those.

“The shorter consultation periods also show us the way forward for government and we have made our points clearly because it is obvious to us the SMSF sector will be paying the price for these changes.”

The haste of the government has also been of concern to Institute of Financial Professionals Australia head of superannuation and financial services Natasha Panagis who sees it as part of a wider plan by the government.

“This year has felt like the government has a to-do list that it wants to get done as soon as possible. If we look at the objective of superannuation and Division 296 tax consultations, not all the details came out and we came to expect not to see any changes in the bills entered into parliament,” Panagis notes.

“Even with the NALE consultation, despite having more time, we did not see a better outcome than the two-times factor which appeared in the May budget, and it comes down to whether the government is listening and taking on what the industry is saying.”

It is worth mentioning governments are also subject to the parliamentary cycles and process in enacting their policy agenda and that was a key factor in the timing of the Division 296 tax, according to Chartered Accountants Australia and New Zealand superannuation and financial services leader Tony Negline.

“Between the initial announcement in February and its inclusion in the May budget, the government wanted to finalise the estimate for future revenue forecasts and was then able to reconsider the design of the bill,” Negline explains.

“How governments listen to industry on matters like this is also tied to the parliamentary process and who will support it in the house, but if they can make legislative decisions and get them through without change, not many governments are going to stop doing that.”

“We get the feeling APRAregulated funds have the ear of government and the NALE rules and Division 296 are a raid by government on SMSFs.” – Natasha Panagis, IFPA

More than a to-do list While the legislative and parliamentary process is an accepted part of the proposed and finalised changes introduced this year, there is a perception more is going on, which stems not just from the timeframes involved but also the growing separation in legislation of the treatment of SMSFs compared to APRAregulated funds.

Panagis points out the exemption of APRAregulated funds from the NALE rules and the choice of calculating the Division 296 tax seem to be pitched against SMSFs and will create a two-tier superannuation system.

“The government has said these approaches are the easiest way to reduce costs, but simplicity should not trump equity.

The issue is not about paying extra tax but about fairness,” she adds.

“We get the feeling APRA-regulated Continued on next page

QUARTER IV 2023 17

FEATURE PEOPLE HEARING WITHOUT LISTENING

Continued from previous page

funds have the ear of government and the NALE rules and Division 296 are a raid by government on SMSFs.” Panagis is not alone regarding this view, with Institute of Public Accountants technical policy general manager Tony Greco recognising that despite many hours of dealing with the government, the SMSF sector has found little success in lobbying for change.

“We do wonder why the government does not appear to be listening. The Division 296 tax is an issue for at least 80,000 people, but there was little time to consult, no feedback and no changes in the draft legislation,” Greco says.

“The superannuation sector spent a lot of time making submissions and we can appreciate the issues for APRA funds in calculating the tax, but it is SMSFs who will be primarily impacted. The government knows this but sees it as a small level of resistance and feels like it can get away with it.

“It is like a casino play for the government, they can’t lose and SMSF fund members can never recoup what they will lose under this tax.”

Saying what needs to be said Given it appears the cards were stacked against SMSFs from the start, one needs to ask whether there was any value in investing hundreds of hours in researching and writing submissions and meeting with Treasury and government representatives when the pay-off has been so low.

Negline believes there was and regards it as vitally important industry bodies and professional associations engage with government on all issues relevant to their members and the wider public.

“We are custodians of the superannuation sector and because of our background and experience we look after it for practitioners and their clients. Governments change so we advocate in the public interest and try to protect the system because we know how it works and point out to them the impact of their changes,” he says.

“Our job is to go on the record and state what works and what could change. It is not productive to beat up the government, but we have to be critical if need be.”

Burgess agrees with Negline’s position and reveals there was some positive movement on the issues the SMSF sector opposed.

18 selfmanagedsuper

“With the NALE changes, the two-times factor that will be applied is an improvement from the tainting of all expenses first proposed and the five-times factor presented in February,” he says.

He adds the treatment of defined benefits pensions under Division 296 is an issue raised by the sector and will be addressed by regulations that are still to be released.

Despite this, he does see the government overlooking the value and benefit of the SMSF sector in its current legislative plans. He points out SMSFs are meeting the desired goals of the superannuation system, with members continuing to be highly engaged, and with 90 per cent of retired members having already moved their balances into pension phase – an area the recently announced superannuation in retirement consultation will aim to improve for APRA-regulated funds.

“Our research, conducted by Rice Warner into the costs of running an SMSF, showed they are not just for those with large balances and we know SMSF members are investing for the social good and are getting into infrastructure and public housing investments,” Burgess says.

“We are aspirational when it comes to super and the government wants to encourage people to build their retirement savings. SMSFs are a useful and recognised part of that solution, but it appears their success is overlooked and they are being targeted with different tax structures.”

Panagis adds the changes of the past year no longer feel as if they are addressing issues within superannuation, but are following a path to dampen the appeal of SMSFs. She notes the total number of funds continues to grow and 1.125 million people are in SMSFs holding $851 billion in assets, which is about a quarter of total superannuation assets, and they remain a popular choice for a growing number of new members.

“We don’t believe the government is seeing the success of the SMSF sector and states it does not want to change it but it seems the ‘negative issues’, like NALE and large balances, are being given more attention to tarnish their appeal,” Panagis claims, adding this won’t deter further engagement on issues with government.

“Our aims are to drive good policy ideas with the government and we will do that again with our pre-budget submission next year.

Our approach this year appears to have been

“It is like a casino play for the government, they can’t lose and SMSF fund members can never recoup what they will lose under this tax.”

– Tony Greco, IPA

negative, but many of the policy issues have been negative to start with.”

While noting the limited changes from consultations in 2023, Greco and Negline say the SMSF sector will not be stepping back from continuing to question new policies and advocate for proactive changes where they are required.

“This year does paint a picture of what the future will look like and while we have not been able to score a win with government this year, we accept they have a mandate and will work with them in good faith seeking good outcomes,” Greco says.

Negline highlights much of the advocacy work this year has synchronised across industry bodies, including the Joint Action Working Group, which includes accounting, tax, advice and superannuation associations, and individually and collectively they are preparing for the next issue.

“We are, all the time, looking at Continued on next page

FEATURE

Continued from previous page

what can be done. Every group is weighing up who to talk with and how to achieve our policy objectives and adjusting strategies as things progress and develop,” he explains.

“There were two main policies that did not go our way this year, and while that may not

give any insight into what happens in 2024, we will enter an election cycle in the second half of the year.

“We know the government is closer to the large APRA-regulated funds than to the SMSF sector, but it has not shut the door on us and we still have good relationships with ministers,

Treasury and the regulators.

“The government is also aware SMSFs have more than 1 million members who are engaged with their super and we saw how those members, when it came to franking credits in the 2019 elections, were a key part of Labor’s loss.”

“We are aspirational when it comes to super and the government wants to encourage people to build their retirement savings. SMSFs are a useful and recognised part of that solution, but it appears their success is overlooked and they are being targeted with different tax structures.”

– Peter Burgess, SMSFA

The legislative agenda for superannuation, tax and financial advice matters has been full this year with the government choosing tight deadlines for comments at the initial consultation and draft bill stage. While most periods for feedback averaged about three working weeks, the shortest timeframe was two working weeks, or just 10 days, for the initial consultation on the Division 296 tax for total super balances over $3 million.

Conversely, the longest period of nine working weeks, or 46 days, has been set aside for the recently announced consultation into how the superannuation system can better support members with retirement income products and services.

Non-arm’s-length expenditure (NALE) The issue of NALE precedes the current government and has its genesis in the non-arm’s-length income (NALI) changes.

The policy commenced in mid-2018, however, the application of the NALI provisions to general expenses remained unresolved at the start of this year.

Initial consultation period: 24 January to 21 February 2023 – 23 working days Draft bill consultation period: 19 June to 7

July 2023 – 15 working days Status: introduced into parliament on 13 September 2023, currently before the Senate.

Objective of superannuation Initial consultation period: 20 February to 31 March 2023 – 30 working days Draft bill consultation period: 1 to 29 September 2023 – 21 working days Status: Introduced into parliament on 16 November 2023, currently before the House of Representatives.

$3 million soft cap Initial consultation period: 31 March to 17 April 2023 – 10 working days Draft bill consultation period: 3 to 18 October 2023 – 12 working days Status: Introduced into parliament on 30 November 2023, currently before the House of Representatives.

Payday super Initial consultation period: 9 October to 3 November 2023 – 20 working days Status: Draft bill yet to be released.

Superannuation in retirement Initial consultation period: 4 December 2023 to 9 February 2024 – 46 working days Status: Draft bill yet to be released.

Education standards for experienced advisers Initial consultation period: 18 April to 3 May 2023 – 11 working days Status: Introduced into parliament on 14 June 2023, passed 6 September 2023.

Quality of Advice Review recommendations Initial consultation period: 14 November to 6 December 2023 – 17 working days Status: Draft bill yet to be released.

Tax Practitioners Board reforms in response to PWC Initial consultation period: 20 September to 4 October 2022 – 11 working days Draft bill consultation period 18 November to 11 December 2022 – 16 working days Status: Introduced into parliament on 16 February 2023, amendments accepted in Senate without consultation 15 November, passed 27 November 2023.

Franking credits – off-market buybacks Initial consultation period: 17 November to 9 December 2022 – 17 working days Status: Introduced into parliament on 16 February 2023, passed 27 November 2023.

QUARTER IV 2023 19

INVESTING

More than a single-asset journey

Exchange-traded funds covering a single asset class or theme are very popular among SMSF trustees, but James Kingston notes the use of multiasset ETF offerings can provide greater flexibility and efficiency to better manage your SMSF portfolio.

JAMES KINGSTON is head of wealth solutions at BlackRock Australasia.

Exchange-traded funds (ETF) are listed funds that typically invest in asset classes such as stocks and bonds. They aim to provide access to several securities in one single trade, enabling investors to gain access to a diversified pool of assets that can cover a broad range of sectors and geographies by tracking the performance of a representative index (such as the S&P/ASX 200 for Australian stocks).

While single-asset-class ETFs provide exposure to a particular asset class, multi-asset ETFs provide access to multiple asset classes in one fund to manage risk, or potential loss, and achieve long-term growth.

Professionally managed by an investment house, they determine the optimum mix of assets to achieve investor risk and return goals, investing in Australian as well as global securities to gain international diversification.

Investing with multi-asset ETFs can present a compelling case for investors who: 1. want to use it as the core part of their portfolio and then hold other investments (such as stocks) to personalise their remaining investment strategy, and 2. want to start their investing, savings or SMSF journey with the purchase of a single ETF.

Using multi-asset ETFs as a core portfolio holding For the investor who wants a well-managed investment portfolio, but also wishes to benefit from an allocation to other securities, using a multi-asset ETF as a ‘core portfolio’ holding may be a consideration. iShares offers two quality multi-asset ETFs to help cover more bases cost effectively within an SMSF – the growth-orientated iShares High Growth ESG ETF (ASX: IGRO) and/or the more balanced option, the iShares Balanced ESG ETF (ASX: IBAL).

Let’s consider this approach for two different investors and why it might be beneficial, in particular for an SMSF trustee.

Investor 1: Abigail is starting an SMSF and wants to use a multiasset ETF as a foundational exposure, which she will supplement with some of her own stock ideas.

She is a long-term investor looking for a minimum investment timeframe of at least five years, with a medium to high risk/return profile, and so is interested in a growth multi-asset ETF such as IGRO. She also wants to invest in the top five stocks on the Australian Securities Exchange Continued on next page

20 selfmanagedsuper

50/50 Portfolio

Stock 5

75/25 Portfolio

Stock 5

Stock 1

Growth Multi Asset ETF

Growth Multi Asset ETF

Continued from previous page

Stock 4

Chart 1

Stock 2

Stock 1

Stock 4

Stock 3

Stock 2

(ASX). Her allocation towards IGRO and stocks will depend on her risk appetite. In this 50/50 Portfolio 75/25 Portfolio example, we explore what her portfolio looks A portfolio that is more diversified using ETFs, yields like if she allocates 50 per cent or 75 per cent to greater potential for a smoother ride in the portfolio compared to Stock 5 Stock 1 IGRO and the rest of the portfolio to those five ASX200. stocks (equally weighted).

Growth Growth Multi Asset Multi Asset As displayed, using multi-asset ETFs as a ETF ETF Stock 4 Stock 2 foundational exposure in the portfolio provides added protection to mitigate against potential Stock 3 losses and better manage risk, compared to a portfolio with only the top five stocks, particularly during equity market sell-offs (see 50/50 Portfolio A portfolio that75/25 is more Portfolio diversified using ETFs, yields Chart 1). greater potential for a smoother ride in the Investor 2: portfolio compared to 0 Stock 5 Stock 1 ASX200.

Karim is seeking capital growth and wants to -5 Growth invest some of his savings using both multi-asset Growth Multi Asset Multi Asset ETF ETF and single-asset-class ETFs. Stock 4 Stock 2 -10 He is an experienced investor with a medium risk/return profile looking for a Stock 3 -15 minimum investment timeframe of five years -20 and is more interested in a balanced multi-asset A portfolio that is more ETF, but would also like to invest in individualdiversified using ETFs, yields -25 Source: Bloomberg, greater potential for a asset-class ETFs based on some ideas smoother ride in and the Morningstar, 30 October portfolio compared to 2023. For illustrative ASX200. a few -30 themes he likes. He is considering 0 Jul-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Oct-23 purposes only. Subject to different options on how to do this.

Create with MPI Analytics change.

-5 As he is focused on the balanced risk profile, he considers using a fixed income ETF -10 alongside his other ETF ideas so as to maintain or can be more macro focused, related to the to a 90 per cent allocation to stocks or equities the same asset class mix as the balanced Australian economy or global equity markets. and a 10 per cent allocation to bonds. With -15 multi-asset class ETF he has used. The result Chart 3 demonstrates how the return for IBAL you’ll be investing in around 50 per cent is an investment portfolio that looks similar to -20 the top five stocks on the ASX has fluctuated equity holdings and 50 per cent fixed income. the multi-asset ETF in terms of overall risk, but over the past 10 years. The black line is the It is worth noting multi-asset ETFs are not -25 he is still able to express his own ideas and performance of the S&P/ASX 200. designed to outperform the broad equity 0 preferences. market. Instead, they are designed to have -30 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 one Dec-21 Jun-22 holdings Dec-22 Jun-23 As illustrated, a portfolio using a multi-asset Jul-17 Dec-17 A single investing solution through inOct-23 multiple asset classes so if equity -5 IGRO Stock Portfolio 5050 Portfolio Create with MPI Analytics ETF (such as IBAL) and single-asset-class ETFs trade markets were to perform negatively, the other 7525 Portfolio S&P/ASX 200 TR AUD has greater potential-10to experience less return One measure of risk is the ability to withstand asset classes held, such as fixed income, would volatility as well as large drawdowns compared the highs and lows of your investment portfolio. offset some of those losses. to the S&P/ASX200-15Index (see Chart 2).

An investor’s risk appetite and time horizon In general, the more equity exposure a (the length of time they want to invest) will multi-asset ETF has, the more potential there is -20 Riding the rollercoaster determine whether this volatility can be for stronger performance, however, this comes Investing in individual companies can be withstood. at greater risk of larger negative returns. Multi-25 rewarding, but doing so can also carry Managing these fluctuations can potentially asset ETFs have performed better in terms of significant risks. Share be achieved using a multi-asset ETF. For potential losses relative to the broad Australian -30 price can be driven by Jul-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Oct-23 issues related to a particular instance, investing in IGROCreate gives you exposure IGROcompany alone Stock Portfolio 5050 Portfolio with MPI Analytics Stock 3

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Continued on next page

QUARTER IV 2023 21

INVESTING

Continued from previous page

Chart 2

equity market, but in some instances other relevant factors can mean both bonds and equities can deliver negative returns, as we saw in the first half of 2022.

240

220

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Prepare for the unexpected using multiasset ETFs

This material has been prepared by BlackRock Investment Management (Australia) Limited (BIMAL) ABN 13 006 165 975, AFSL 230 523. This material provides general advice only and does not take into account your individual objectives, financial situation, needs or circumstances.

Before making any investment decision, you should obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction. For more information BIMAL’s Financial Services Guide, along with relevant Product Disclosure Statements and Target Market Determinations are available from www.blackrock.com/au.

22 selfmanagedsuper

Balanced Multi Asset ETF

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Portfolio 2 Healthcare Investment

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Portfolio 3 US Investment

Source: BlackRock, Morningstar, 30 October 2023. For illustrative purposes only. Subject to change.

-10

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A portfolio that is more diversified using ETFs, yields greater potential for a smoother ride in the portfolio compared to ASX200.

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Total Return %

In these examples we have considered how a new investor can build their portfolios, however, the reverse is also true. Multi-asset ETFs can potentially also help existing investors diversify their portfolios and manage risk more effectively. Allocating to a multi-asset ETF like IGRO or IBAL potentially enables investors to be better prepared for tomorrow’s unexpected markets.

It is important to note the IGRO offering is likely to be appropriate for a consumer with a minimum investment timeframe of five years, seeking capital growth and/or income distribution, with a medium to high risk/return profile. The consumer will likely use the product for a whole portfolio solution or less.

The IBAL ETF is likely to be appropriate for a consumer with a minimum investment timeframe of five years, seeking capital growth and/or income distribution and/or capital preservation, with a medium risk/return profile.

The consumer will likely use the product for a whole portfolio solution or less.

Growth of 100 AUD

Australian Bond ETF

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0

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CBA AU Equity Nov 23

CSL AU Equity Nov 23

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S&P/ASX 200 TR AUD

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Source: Bloomberg, Morningstar, 30 October 2023. For illustrative purposes only. Subject to change.

SMSF ASSOCIATION

NATIONAL CONFERENCE 2024 Go Next Level this February!

Australia’s biggest SMSF Conference is back in February 2024, and you won’t want to miss it!

This conference is a must for all those working in SMSFs or superannuation.

Hear from leading speakers in the SMSF sector, take a deep dive into specific topics in one of our interactive workshops, take some time out to visit the biggest Superannuation industry expo and finish each day by attending one of our Platinum partner networking functions.

If you are ready to take your skills, business, and daily practices to a whole new level, then join us at the SMSF Association National Conference in 2024.

Peter Burgess

Meg Heffron

Craig Day

For full event terms and conditions, visit our website smsfassociation.com

Mark Ellem

Shirley Schaefer

INVESTING

Uranium burning bright

Recent developments in the move to cleaner energy solutions have made investing in uranium a very attractive proposition once more, Phillip Hudak writes.

PHILLIP HUDAK is Australian Small Caps Fund co-portfolio manager at Maple-Brown Abbott.

24 selfmanagedsuper

After many years of being viewed as unattractive, nuclear energy is experiencing a renaissance.

Policy support from governments, driven by growing demand for green energy solutions, as well as recognition that reliance on other renewable sources of energy carries risk, has set the stage for a positive medium-term outlook for nuclear power and, in particular, uranium demand.

For investors, this creates a compelling opportunity in a commodity that has a long runway for growth.

Energy security The security and reliability of energy supply has become a major issue following the Russian invasion of Ukraine, as well as the potential impact in the Middle East, and its oil resources, of the turmoil in Gaza.

Public support for nuclear has grown as people directly experience the reality of disrupted and expensive forms of electricity supply. With Europe entering its second winter with sanctions in place against Russia, energy security is top of mind despite current European Union (EU) gas storage levels being above historical averages.

The geopolitical turmoil has also affected the supply of uranium. Currently, Russia represents 14

per cent of global uranium capacity and dominates the downstream fuel processing industry. Prior to the invasion of Ukraine, Russian exports of enriched uranium took up over a quarter of market share in the United States.

To help offset its reliance on Russia, the US Senate has introduced the Nuclear Fuel Security Act 2023, which supports the establishment of domestic nuclear fuel production. It has also introduced the Accelerating Deployment of Versatile, Advanced Nuclear for Clean Energy (ADVANCE) Act of 2023, which is intended to strengthen America’s interest in nuclear energy by investing in technologies and improving infrastructure and supply chains. Despite these initiatives, US imports of Russian enriched uranium have yet to be sanctioned and have actually increased recently despite the increasing political tensions.

The likely result of these types of initiatives will be to focus attention on ‘friendly’ sources of supply of uranium, including Australia, to help ensure energy security. The largest global uranium producer is Kazakhstan, followed by Canada and Namibia, with the latter having material Chinese interest (see Chart 1).

Continued on next page

resulted in greater political support globally for nuclear energy.

In early December 2023 at the World Climate Action Summit of the 28th Conference of the Parties to the UN Framework Convention

Continued from previous page

Political support Ambitious green energy transition targets by governments around the world have also

Production from mines (tonnes U)

Chart 1: Uranium production across countries 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2013

2014

2015

2016

2017

2018

2019

2020

2021

2022 Niger

Kazakhstan

Canada

Namibia

Australia

Uzbekistan (est.)

Russia

China (est.)

India (est.)

South Africa (est.)

Ukraine

USA

Other

Reactor pipeline

Source: World Nuclear Association, August 2023 https://world-nuclear.org/information-library/facts-and-figures/uranium-production-figures.aspx

Chart 2: Reactors under construction, planned and proposed (top 10 countries by reactors proposed) 180 154

160 140 120 100 80 60 40

42 28

26

20

8

0 China

25

12

India

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Reactors under construction

9 2

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Reactors planned

8 0 0

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4

8

on Climate Change (COP28), more than 20 countries announced the declaration to triple nuclear energy, which recognises the key role of nuclear energy in achieving global net-zero greenhouse gas emissions by 2050.

In the US, the Biden government introduced the Inflation Reduction Act in August 2022, which backs nuclear power as a clean energy source. This followed the Civil Nuclear Credit Program in November 2021, which supports the existing US reactor fleet and there has also been the introduction of the US Federal Strategic Uranium Reserve.

In Europe, the EU Taxonomy includes nuclear energy representing a significant shift in how the region views nuclear.

Japan and South Korea have also both launched green taxonomies that include nuclear as an energy option. They have also brought their nuclear fleet back online and have reversed phase-out programs.

Australia has also started debating the role of nuclear power in the energy mix although we currently have opposing views between the major political parties.

6

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1 0

Turkey

France

Reactors proposed

Source: World Nuclear Association, World Nuclear Power Reactors & Uranium Requirements November 2023, Reactor and electricity data: International Atomic Energy Agency Power Reactor Information System (PRIS); US Energy Information Administration; company data; World Nuclear Association estimates, https://world-nuclear.org/information-library/facts-andfigures/world-nuclear-power-reactors-and-uranium-requireme.aspx

Demand for uranium is already increasing in the short term following the reversal of early nuclear plant retirements, as well as a healthy pipeline of new reactor builds. As at November 2023, there were 436 reactors in operation globally, 62 under construction, 111 planned and 318 proposed (see Chart 2).

Notably China’s pipeline of new nuclear builds is the size of the rest of the world combined and is expected to overtake the US by the end of the decade. This build-out reflects China’s recognition nuclear is a core pillar in its emissions reduction strategy.

We see further upside to the new build pipeline due to the commercialisation of both small modular reactors (SMR) and micro modular reactors. In September 2023, the World Nuclear Association upgraded its basecase demand scenario from the current 391 Continued on next page

QUARTER IV 2023 25

STRATEGY INVESTING

Historically the uranium price has never been this high at this early stage of the cycle, implying there are further price rises to come if activity plays out as expected.

Chart 3: Uranium market supply/demand outlook Western Market (Mlb U3Oz p.a.)

200

Average supply deficit of ~35Mlb p.a over the next decade1

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Secondary Supply

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Returning Mine Production

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2040

Western Base Demand

Source: Paladin Energy presentation, ASX release 31 October 2023, TradeTech, Uranium Market Study 2023: Issue 3, Notes: Demand includes reactor requirements and secondary demand; Western Market excludes Russia

Continued from previous page

gigawatt electrical (GWe) of operable nuclear capacity to 686 GWe by 2040 (up 71 GWe from the 2021 edition).

Outlook for uranium

Chart 4: Term contracting activity (Mlb uranium pa) 275

Evaluating/Potential

250

Non-U.S. Utilities

225

U.S. Utilities

175

3

Mlbs U3OU8 O Mlbs

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200

150 125 100 75 50 25 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Contracting Year Source: Paladin Energy presentation, ASX release 31 October 2023, UxC Uranium Market Outlook, Q3 2023

As a result of these factors, we believe a material structural supply gap in uranium will emerge by the end of the decade, driving up prices (see Chart 3).

This gap will be triggered by: • subdued primary supply because of a number of uranium mines closing over the past decade, disciplined restarts and long lead times for new mines to come on stream, • significant reduction in supply from secondary sources given enrichment capacity constraints, resulting in western enrichers switching from underfeeding to overfeeding, • short-term supply disruptions such as when Cameco announced a production downgrade from its McArthur River/Key Lake operations due to productivity and reliability issues, while the military coup in Niger has raised concerns regarding supply security in September 2023, • aggressive action by financial buyers sequestering uranium inventory from the market, and Continued on next page

26 selfmanagedsuper

Chart 5: Uranium price – spot v term contracts (US$/lb) 90 80

Uranium price price (U$$/lb) Uranium (US$/lb

70 60 50 40

Public support for nuclear has grown as people directly experience the reality of disrupted and expensive forms of electricity supply.

30 20 10 0 Jan-19 Jan-19 Jan-19 Jan-19 Jan-19 Jan-19 Jan-21 May-21 Sep-21 May-22 May-22 Sep-22 Jan-23 May-23 Sep 23 Spot price (US$/lb)

Team price (U$$/lb)

Source: Cameco website, Cameco calculates industry average prices from the month-end prices published by UxC and TradeTech. www.cameco.com/invest/markets/uranium-price

Continued from previous page

• utilities contracting above replacement levels.

Indeed, there are signs long-term contracting levels are starting to approach replacement levels. Since the Fukushima earthquake in 2011, western utilities had been contracting at about 35 per cent to 40 per cent of replacement levels given excess industry inventory following the shutdown of Japanese nuclear reactors. Since 2022 this trend has reversed given depleting inventory across the nuclear value chain. Historically the uranium price has never been this high at this early stage of the cycle, implying there are further price rises to come if activity plays out as expected (see Chart 4).

We therefore expect a step-change in the uranium term price to incentivise new project developments over the medium term. Other components of the nuclear fuel cycle have shown greater price appreciation throughout 2022, including conversion and enrichment, which has typically been a good lead indicator for uranium prices. This is starting to play out in 2023 with the uranium spot price above US$80/lb as at November 2023 given

increasing market concerns regarding supply shortages into the future (see Chart 5).

Implications for Australian investors We believe there is significant medium-term value upside for investors in the uranium sector.

In Australia there are limited opportunities to invest across the nuclear value chain with the current large producers, including Kazatomprom and Cameco, as well as innovative companies looking to commercial SMR designs, listed on offshore exchanges.

Australian investors can take advantage of the nuclear thematic via two main ways. Firstly through upcoming uranium producers that have previously mothballed plants and also via developers and exploration companies.

We see significant short-term upside for those companies restarting projects, including Boss Energy (ASX code: BOE) and Paladin Energy (ASX code: PDN). Boss Energy is currently in the process of restarting its uranium mining operation this quarter at its Honeymoon Uranium Project, which is located in the geopolitically friendly jurisdiction of South Australia. The company is well funded with no debt, cash on hand of $63 million and a strategic uranium stockpile worth $156

million as at November 2023 with production scheduled to ramp up to 2.45 million lbs per annum within three years. The other near-term producer, Paladin Energy, based in Namibia, is expected to restart in the first quarter of the 2024 calendar year.

The main risk for these companies is project commissioning, which has derailed a number of new mines in the past few years, although is partially offset by the fact these plants were previously in operation and the companies have strong liquidity positions.

The other way to play the sector is via developers and exploration companies, however, they are typically riskier and require a sustainably higher uranium price to make their projects economical although offer more operating leverage if the uranium price continues to appreciate. Notable companies include Deep Yellow (ASX code: DYL) and Bannerman Resources (ASX code: BMN).

Overall we see nuclear power playing a critical role in the future energy transition, given the increasing importance of energy security and positive structural market fundamentals, as well as green energy initiatives. Nuclear power delivers minimal carbon emissions and is also a reliable source of base-load power to complement renewable energy sources, including solar and wind. In addition, public support for nuclear continues to grow as people directly experience the reality of disrupted and/or expensive forms of electricity supply.

As a result, we believe the tide has turned for uranium and the outlook is positive.

QUARTER IV 2023 27

COMPLIANCE

Status and strategy interaction

It is not uncommon for members to have both an accumulation and pension account as a result of a contribution, but what will the ECPI impact be should the new monies be initially allocated to a reserve. Anthony Cullen examines the proper management of this scenario.

ANTHONY CULLEN is senior SMSF educator at Accurium.

With the preparation of 2022/23 financial accounts and SMSF annual returns in full swing, we have responded to a number of queries recently in relation to whether an actuarial certificate will be required where an SMSF is using a contribution reserving strategy.

A common theme to the questions is that the relevant funds have generally had some form of segregation being applied prior to the contribution being received. If not for the contribution, it is likely the segregated method of claiming exempt current pension income (ECPI) would be available to the fund.

Contribution reserving strategy The name itself for this strategy is a misnomer as the ATO has confirmed setting aside contributions prior to allocating them to a member is not a reserve by its definition. It is more akin to having the amount in a

28 selfmanagedsuper

holding or suspense account.

The strategy is made possible due to the provisions of Superannuation Industry (Supervision) (SIS) regulation 7.08, which requires contributions made to an SMSF to be allocated to a member no later than 28 days after the end of the month in which the contribution is received. It is worth noting this is unique to SMSFs. Australian Prudential Regulation Authority-regulated funds are required to allocate certain contributions no later than three business days after both the contribution and relevant information have been received by the fund trustee. Generally these will be contributions made by an employer via SuperStream.

For contributions received by an SMSF in June, it Continued on next page

Continued from previous page

means trustees have until 28 July to allocate the amount to a member. The importance of the strategy is the contribution is taxable, where applicable, in the year the fund receives it. Any potential deduction is also claimed in the year of payment. However, the amount will not count towards the member’s contribution cap until the year it is allocated to them.

Claiming ECPI Where a superannuation fund is supporting retirement-phase pension accounts, it is generally able to claim any income derived from the assets supporting those pension accounts as exempt from fund income tax.

The claim for ECPI can be made using either the segregated method, as defined in section 295-385 of the Income Tax Assessment Act 1997 (ITAA), or the proportionate method as per section 295-390 of the ITAA. In some cases, both methods are used in the same income year.

An actuarial certificate will not be required where the segregated method of claiming ECPI is used. Consequently, there is no choice as to whether or not to claim ECPI where the segregated method applies.

Although it is beyond the scope of this article to go into greater detail, it is acknowledged disregarded small fund assets may prohibit a fund from using the segregated method. This does not stop a fund from segregating assets for investment or member choice purposes.

Where the proportionate method is used to claim ECPI, a certificate must be obtained from an actuary before the date for lodgement of the fund’s return for the year. Unlike the segregated method, claiming ECPI under the proportionate method is a choice as there is no legal requirement to obtain an actuarial certificate. However, where the relevant actuarial certificate is not obtained by the required time, the fund cannot claim ECPI under the proportionate method. This allows for times where it would not be worthwhile to

The importance of the strategy is the contribution is taxable, where applicable, in the year the fund receives it. claim ECPI where the proportionate method applies, such as instances where the fund may have available significant tax losses and/or the retirement-phase pension commences late in the income year.

Is there an interaction between the two?

A contribution to a fund, whether it is allocated to a member or not, will become an asset of the fund. The more common type of contribution will be a deposit to the fund’s bank account, with in-specie transfer of assets another popular option.

Where the value of these contributions is not allocated to a member, they will generally be recorded as a liability to the fund, either in the liability section of the statement of financial position or in the member’s equity section, but separate from the actual member’s interest.

When considering claiming ECPI under the segregated method, legislative reference is made to the assets of the fund, at a time, being invested or otherwise being dealt with for the sole purpose of enabling the fund to discharge all or part of its liabilities in respect of retirement-phase income streams. Further, reference is made to the fact that if the market value of the assets set aside to support the retirement-phase income streams exceeds the value of those benefits, they will not be segregated pension accounts.

Making a cash contribution to a fund’s bank account that was previously segregated to retirement-phase pension interests, without increasing the value of those interests (remember a contribution cannot be made

to a pension account), would result in that asset (the bank account) no longer being a segregated current pension asset. Likewise in-specie transfers are not going to increase the value of the pension interest either and the asset so transferred would also not be a segregated current pension asset.

Unless the trustees make a prospective, conscious decision to run sub-accounts for the bank account receiving the contribution and/or segregate specific assets to the pension accounts, the assets of the fund will no longer be segregated. How many trustees will take such actions when a shortterm contribution reserving strategy is being implemented?

In most cases, one would expect the majority of funds would no longer be seen as segregated from the time the contribution is received and this would preclude them from claiming ECPI under the ITAA section 295385 segregated method from that point on.

It may, however, be possible to claim the fund as segregated prior to that point. This leaves the option of using the proportionate method to claim ECPI from the time the contribution is received.

Where it can get interesting is how the proportion of any ECPI is calculated under this method. Unlike the segregated method, which makes reference to the assets of the fund, the proportionate method makes reference to the liabilities of the fund as follows: Average value of current pension liabilities Average value of superannuation liabilities

Where: • average value of current pension liabilities is the average value for the income year of the fund’s current liabilities (contingent or not) in respect of retirement-phase superannuation income stream benefits of the fund at any time in that year. This does not include liabilities Continued on next page

QUARTER IV 2023 29

STRATEGY COMPLIANCE

Continued from previous page

for which segregated current pension assets are held, and • average value of superannuation liabilities is the average value for the income year of the fund’s current and future liabilities (contingent or not) in relation to superannuation benefits in respect of which contributions have, or were liable to have, been made. This does not include liabilities for which segregated current pension assets or segregated non-current assets are held.

Let’s apply this formula to a simple example.

Say we have a fund with two members.

Member 1 has a retirement-phase pension of $750,000 and member 2 has an accumulation interest of $250,000.

ECPI proportion =

$750k ($750k+$250k)

75%

What happens though if both members are in retirement phase and member 1 makes a concessional contribution in June of $20,000 that is set aside and not allocated until early July, that is, the next income year?

Assume the financial statements show this amount as a liability. Will this amount be incorporated into the above formula or will it sit outside as it is not being recorded as a member/superannuation benefit?

We have already determined the fund would not be segregated from the time member 1 makes the contribution and could not apply ECPI under the segregated method. When applying the proportionate method and only looking at what appears to be superannuation benefits, per the above definition, do we have a situation where the formula will look like this: ECPI proportion =

($750k+$250k) ($750k+$250k)

30 selfmanagedsuper

100%

The argument being that the $20,000 contribution is not a member interest or superannuation liability as it has not been allocated to the member yet and therefore does not feature in the formula.

Do reporting obligations and total super balance play a role?

The instructions to the SMSF annual return confirm when reporting contribution details in section F (member information), amounts not allocated until the subsequent year must still be reported for the year in which they are received by the fund. That is, despite the amounts not being allocated until year 2, for the trustees of a fund to complete the annual return correctly, they must first know who the contributions are for and report as such in year 1.

These reported amounts will flow through to other parts in section F of the return, namely item X1. Item X1 is then used to help calculate the accumulation-phase value of the individual. Some may argue item X1 can be changed to record a lower value by excluding the amount not allocated as it doesn’t belong to the member at that point in time.

Section 307-230 of the ITAA tells us that, among other balances, an individual’s accumulation-phase values will count towards their total super balance. ITAA section 307-205 defines accumulation-phase value to include the total amount of the superannuation benefits that would become payable if the individual voluntarily caused the interest to cease at that time.

When considering this definition, it is hard to argue the amount doesn’t belong to the member, whether allocated to them or not, as any member who voluntarily caused the interest to cease at that time would expect to receive the amount contributed as part of any benefit payment or rollover. Not forgetting the amount has also been recorded as a contribution by/for them in the SMSF annual return.

Returning to our example above, where

Where a superannuation fund is supporting retirement-phase pension accounts, it is generally able to claim any income derived from the assets supporting those pension accounts as exempt from fund income tax. member 1 has contributed $20,000 to the fund, regardless of whether this is allocated to them or the contribution reserving strategy, it would be expected the value (net of tax) would be included in the denominator of the formula, bringing the ECPI down to about 98 per cent.

Conclusion Except in the rare occasions where trustees of a fund may have proactively and prospectively engaged in segregating assets to retirement-phase pension interests, the use of a contribution reserving strategy will lead to the option of claiming ECPI under the proportionate method.

Contributions not allocated to the member in the year received will generally still be linked to the member and included in the overall average value of the superannuation benefits when it comes to determining ECPI. For any trustee wishing to claim ECPI under the proportionate method, they will need to obtain an actuarial certificate for that relevant period.

Speak to your fund’s actuary where this scenario arises for guidance on how to maximise the SMSF’s claim for ECPI.

Add low-cost multi-asset ETFs to your SMSF Search IBAL and IGRO

Issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL) This material provides general advice only. Before making any investment decision, you should assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. Consider the PDS, FSG and TMD available at www.blackrock.com/au © 2023 BlackRock, Inc. All Rights reserved.

BLACKROCK, BLACKROCK SOLUTIONS, iSHARES and the stylised i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704, is a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). This content does not represent the views or opinions of WealthHub Securities. NAB doesn’t guarantee the obligations or performance of its subsidiaries or the products or services its subsidiaries offer.

MKTGH1023A/S-3040875

STRATEGY STRATEGY

Evening up the score

Contribution splitting is a strategy allowing spouses to even up a disparity in their superannuation balances. Tim Miller details the key requirements needed to implement this course of action.

TIM MILLER is technical and education manager at Smarter SMSF.

Introduced all the way back in 2006, contribution splitting is a strategy that allows a member of a superannuation fund, including SMSFs, with an accumulation interest to split certain contributions with their spouse. It is a highly useful strategy not only to help in the management of a member’s total super balance (TSB), but also to assist with spousal balance discrepancies prior to a time that members can actively engage in recontribution strategies, like when they reach preservation age or retire.

This article will not only look at all of the necessary conditions that must be met for a splitting application to be valid, but also at how contribution splitting can be used with other strategies members might use to channel money into super and how it can impact others.

Who can split?

Contribution splitting is only possible between spouses and in this regard spouse takes on its usual

32 selfmanagedsuper

meaning, that is, inclusive of both legally married individuals and also de facto couples. This means the relationship must be current. It should be noted contribution splitting should not be confused with superannuation splitting, which is the term often associated with relationship breakdowns and payment splits.

The receiving spouse must be under age 65 and if they have reached preservation age, they must not have met a condition of release, with a nil cashing restriction, such as retirement.

What contributions can you split?

Only concessional contributions can be split and these are referred to as splittable contributions.

The rules differentiate between taxed splittable contributions and untaxed splittable contributions.

For the purposes of splitting, SMSF members will only Continued on next page

A member can split up to the lesser of 85 per cent of the concessional contributions made for the year and the concessional contribution cap for the year the contributions were made.

Continued from previous page

have taxed splittable contributions. They include: • employer contributions (including salary sacrifice), • personal contributions where a personal deduction has been claimed, • contributions made by family or friends (excluding spouse and contributions for children under 18), and • certain assessable allocations from reserves, that is, an allocation to meet an employer’s contribution obligation (unusual in SMSFs).

Contributions that can’t be split include: • personal non-concessional contributions, • capital gains tax cap contributions, • personal injury contributions, • spouse contributions, • contributions made for members under the age of 18 (excluding employer contributions), • transfers from foreign funds, • other allocations from reserves, • rollover super benefits, • contributions that have already been split, • government co-contributions,

• government low-income super tax offset contributions, • First Home Super Saver Scheme contributions, • downsizer contributions, • temporary resident contributions, • trustee contributions, and • super interests that are subject to a payment split (due to a relationship breakdown).

How much can be split?

A member can split up to the lesser of 85 per cent of the concessional contributions made for the year and the concessional contribution cap for the year the contributions were made.

That last point is relevant as in most instances the contribution splitting application will occur in the year following the contributions, however, there are circumstances where the splitting application is made in the year of the contribution.

An SMSF member may apply to split contributions in the financial year in which the contributions are made, but only if the member’s entire benefit is to be rolled over or transferred in that year to another fund or to commence an income stream.

Application validity An application is valid if it includes a statement from the receiving spouse that, at the time of the contributions, he or she is either between his or her preservation age and 65 and not retired or is under preservation age. This statement is made via a declaration on the ATO’s “Superannuation contributions splitting application” form.

Invalid application Applications are invalid if the spouse doesn’t meet the above conditions or in the event the contributing spouse has already applied and the trustee has received the application or the amount intended to be

split is greater than the maximum amount allowable.

Trustee’s decision on member’s application An SMSF trustee may only accept a member’s contribution-splitting application if all of the necessary conditions are satisfied. That is: • the application complies with the regulations, • the trustee has no reason to believe the statement from the receiving spouse is untrue, and • the application relates to an amount that is not more than the maximum splittable amount for the year.

A trustee who accepts a member’s application must roll over, transfer or allot the amount within 90 days of receiving the application.

Tax and other consequences The splitting of a member’s contributions with their spouse has the following consequences: • a new superannuation benefit is created for the spouse, • the new superannuation benefit is treated as a rollover if rolled over to another fund or if transferred to an account in the existing fund in the spouse’s name. It is not treated as a contribution to the spouse’s fund, and • the new benefit consists entirely of a taxable component.

Splitting example John is 55 and maximises his concessional contributions each year. His spouse, Alison, is 53 and also maximises her contributions during the year, but due to years out of the workforce her superannuation balance is substantially lower than John’s. To improve this situation they decide to engage in strategies to equalise their balances. John’s Continued on next page

QUARTER IV 2023 33

STRATEGY

Table 1 Contribution type

Amount ($)

John’s personal deductible contribution

27,500

85% of concessional contributions

23,375

Concessional contribution cap

27,500

John can split lesser of these amounts

23,375

Continued from previous page

carried forward not used after five years will expire on a first in, first out basis.

The first year in which a member was able to access unused concessional contributions was the 2020 financial year.

TSB at the previous 30 June was $600,000 so his concessional contribution cap is $27,500. Based on the contributions made during the 2023 financial year, his splittable contributions are as in Table 1.

As John has not rolled over his balance, nor commenced an income stream, then during 2023/24 he can complete an application to split $23,375 to Alison. She is under preservation age so can comfortably sign the declaration to that effect and the fund can process the split.

Strategy stacking Contribution splitting can be complemented by two other often spoken about contribution strategies.

They are the carry-forward provision for unused concessional contributions cap amounts and contributions reserving and reallocation.

Carry-forward unused concessional contribution cap As is well established, from 1 July 2018, where a member has not used their entire concessional contribution cap in a financial year, they can carry forward the unused portion of the cap if they have a TSB less than $500,000 at the previous 30 June.

Unused amounts can be accessed on a rolling basis for five years and amounts

34 selfmanagedsuper

Contribution reserves The ATO confirmed in its SMSF Regulator’s Bulletin 2018/1 that contribution reserves are allowed. As we know, contribution reserves are not considered reserves in the traditional Superannuation Industry (Supervision) Regulations sense, but rather are viewed as short-term warehousing accounts or suspense accounts. Their feature is they regularly go back to $0 due to time allocation requirements dictating contributions must be allocated within 28 days following the end of the month the member makes the contribution.

For funds contemplating this strategy, we appreciate it is only beneficial for contributions made in June as the allocation can be made in July, ultimately allowing for a deduction to be claimed in the year of the contribution and the allocation allowing the contribution to count towards the following year’s cap.

It should be noted even where the amount is held in a short-term contributions reserve to be allocated in the following year, the ATO administrative process is for contributions to be reported as being made and received in the (same)

A contribution-splitting amount rolled over or transferred for the benefit of a member’s spouse is a minimum benefit and is deemed to be a preserved benefit unless and until the trustee is satisfied it can be accessed. earlier year and then the completion and lodgement of the ATO “Request to adjust concessional contributions” form (NAT 74851) by the individual to avoid excess contributions.

SMSF trustees must ensure their deed provides for this and that each step is appropriately minuted.

The benefit of these two strategies is they allow a member with a total superannuation balance below $500,000 to potentially have a higher concessional cap, but further, the use of contribution reserving provides an opportunity to split more earlier.

Example with carry-forward concessional contribution cap Let’s look at the example of Helen, 45, who earns $100,000 a year and receives employer super guarantee (SG) contributions. In 2022/23, she sold an investment property she purchased prior to getting married, making a significant capital gain. Let’s examine her position with regards to her unused carry-forward concessional contribution cap (see Table 2).

From 2018/19 to 2021/22, Helen’s employer made SG contributions to Continued on next page

Table 2 Description

2018/19

2019/20

2020/21

2021/22

2022/23

Concessional contribution cap

$25,000

$25,000

$25,000

$27,500

$27,500

Total unused available cap space

$0

$15,500

$31,000

$46,500

$64,000

Maximum cap space

$25,000

$25,000*

$56,000

$74,000

$91,500

TSB at 30 June prior year

$460,000

$510,000

$465,000

$475,000

$485,000

Concessional contributions made

$9500

$9500

$9500

$10,000

Accrued unused concessional contributions

$15,500

$31,000

$46,500

$64,000

Table 3

contributions with her husband, Jack, 45, who is self-employed with $100,000 in superannuation.

She completes a splitting application indicating she wishes to split $91,500 of her taxed splittable contributions.

Her concessional contributions cap for the financial year is $91,500 (the general cap of $27,500 for 2022/23 plus the unused concessional contributions cap amount of $64,000 from 2018/19 to 2021/22 that was carried forward).

As a result, the SMSF can accept her application and determines it is valid because $91,500 is the lesser of both: • 85 per cent of the $108,000 ($91,800)

Contribution type

Amount ($)

Personal deductible contribution

97,500*

Employer contributions

10,500

Total concessional contributions

108,000

Continued from previous page

her SMSF, her TSB at 30 June 2022 was $485,000 (that is, less than $500,000) and she had an unused concessional contribution cap amount of $64,000 that could be carried forward to the 2023 financial year.

In 2022/23, Helen had a net capital gain of $100,000 from the sale of an investment property and made contributions for the financial year as in Table 3.

Helen wishes to split her 2022/23

concessional contributions made by her and her employer, and • Helen’s concessional contributions cap of $91,500.

Helen must lodge the following forms within the required timeframes: • “Notice of intent to claim or vary a deduction for personal super contributions” (NAT 71121) – for $97,500 • “Request to adjust concessional contributions” (NAT 74851) – for $16,500 to ensure she doesn’t exceed her cap, and • “Superannuation contributions splitting application” (NAT 15237) – for $91,500.

This strategy provides an opportunity for Helen to stay under $500,000 to make unused catch-up concessional contributions to Jack potentially in the future.

The only downside is if Helen and Jack are first-home buyers as this would not allow them to access the contributions via the First Home Super Saver Scheme.

Overall, contribution splitting is an underrated strategy likely to be used more in an SMSF environment where parties are starting to look at ways of reducing rather than increasing their balance.

QUARTER IV 2023 35

COMPLIANCE

Related restrictions

SMSF transactions involving related parties invoke a significant number of additional compliance restrictions that have considerable adverse consequences if breached. Liz Westover details the relevant definitions and the related rules.

LIZ WESTOVER is partner and national SMSF leader at Deloitte.

SMSFs are able to invest in an almost limitless array of assets and, in most cases, there are few rules hindering the manner in which they do so except when related parties are involved. Once this occurs, investment rules become far more restrictive, with a raft of legal requirements coming into play.

Nevertheless, related-party dealings are commonplace in SMSFs so advisers need to have a solid grasp of who or what a related party is together with when and why it matters.

When does it matter?

The two key rules of which to be aware with respect to related parties involve the acquisition of assets and

36 selfmanagedsuper

in-house assets (IHA).

Section 66 of the Superannuation Industry (Supervision) (SIS) Act 1993 prescribes a general prohibition on the intentional acquisition of assets by a trustee, or their investment manager, from a related party. A number of exceptions exist, most notably business real property, listed securities, certain IHA (acquired at market value and not causing a breach of the permitted level of IHA) and upon relationship breakdowns. Understanding which are the ‘certain’ IHA is important as the exception covers a broader range of assets other than those defined in section Continued on next page

Continued from previous page

71(1) of the SIS Act. Section 71(1) gives the basic meaning of an IHA as a loan to or investment in a related party of the fund, including a related trust, or an asset subject to a lease arrangement with a related party. While an SMSF is able to hold IHA, the total of these types of assets is limited to no more than 5 per cent of the total market value of fund assets.

Identifying a related party is also relevant with respect to SuperStream, limited recourse borrowing arrangements and collectables or personal-use assets. Each of these areas has specific rules where related parties are concerned.

Who is a related party?

A related party of an SMSF is a member of the fund, a standard employer-sponsor of a fund and any Part 8 associates, as defined by the SIS Act, or either of these.

A member of a fund generally takes its ordinary meaning, noting that the SIS Regulations are able to provide for a modified meaning and in fact do for the purposes of Part 2 of the regulations. Even then, it still refers to a member as a person who is a member, receives a pension or has a deferred entitlement to a benefit from a fund.

A standard employer-sponsor of a fund is an employer that contributes to a super fund for its employees due to an arrangement between the employer and the fund.

Typically this would not be relevant for SMSFs established in recent years, however, trust deeds of older funds should be reviewed to confirm whether or not the fund has a standard employer-sponsor. Should an SMSF have a standard employer-sponsor, the definition of a related party of the fund may need to be assessed in the context of Part 8 associates of a company or partnership as appropriate.

A standard employer-sponsor is distinct from an employer-sponsor that is an employer who contributes to a fund for an

employee because of an arrangement with the member of the fund.

SMSF trustees are also the members of the fund so the distinction is somewhat grey. Generally, however, it is accepted arrangements written into the deed are taken to be arrangements with the trustee unless the deed specifically states otherwise. As such, deeds may need to be considered carefully for any hint of an arrangement that may give rise to an employer being determined to be a standard employersponsor.

A deed update may assist in removing a standard employer-sponsor, but the provisions for such removal in an existing deed need to be carefully followed to ensure a deed update is effective. Similarly, prior deed updates may need to be reconsidered to ensure they also are deemed to be effective. If these have not been performed correctly then the older deed, possibly referencing a standard employer-sponsor, may be the one that is actually the relevant or effective deed.

Part 8 associates A Part 8 associate of an individual member includes: • a relative of the member, • the other members and trustees (or trustee directors) of the fund, • business partners in a partnership (and their spouses and children) and the partnership itself, • a trust controlled by a member of the fund, • a company sufficiently influenced or for which majority voting interest is held by a member or another entity or entities to which these provisions would also apply.

A relative of a member This includes a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or their spouse. It also includes the individual’s spouse and the spouse of any of the above. It

Related-party dealings are commonplace in SMSFs so advisers need to have a solid grasp of who or what a related party is together with when and why it matters. does not include a cousin.

A child includes an adopted child, stepchild or ex-nuptial child of a person, a child of a person’s spouse and a child within the meaning of the Family Law Act 1975.

Assessing relationships with respect to a child should be done as if the individual was the natural child of the pension in question.

Other members Other members of the fund are Part 8 associates and in the case of a single-member fund it will also include other individual trustees of the fund and/or other directors of a corporate trustee.

Partners and partnerships For these purposes, partners and partnerships have the same meaning as in the Income Tax Assessment Act 1997 (ITAA).

The ITAA determines a partnership to be: (a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly, or (b) a limited partnership.

A limited partnership is the same as (a) above, but where liability of at least one of the partners is limited. It also includes a range of Continued on next page

QUARTER IV 2023 37

COMPLIANCE

Continued from previous page

other associations of individuals who have a separate legal personality from those persons.

This definition of a partnership would capture not only the traditional form of business partnership, but also joint ownership of property where the property was held for income-producing purposes. That is, a coowner of property would be considered a Part 8 associate of a fund member.

A trustee of a trust, in the capacity of trustee of that trust, is a related trust where the trust is controlled by a fund member or a Part 8 associate of that member.

Control of a trust This is frequently taken to be where a member or a group in relation to the member has a fixed entitlement to more than 50 per cent of the capital or income of the trust. However, control can still be established in cases where 50 per cent or less of these entitlements are held by the member or the group.

Control can also be taken to exist in circumstances where the trustee of the trust, or a majority of the trustees of the trust, act in accordance with the directions or wishes of a member or their group, whether those directions are given directly or through interposed companies, partnerships or trusts.

Further, where a group is able to remove or appoint the trustee, or a majority of the trustees, control will also be taken to exist.

A group for these purposes includes the member or a Part 8 associate acting alone or together or two or more Part 8 associates acting together.

A company significantly influenced A majority voting interest in a company is held where a member and/or their Part 8 associates are in a position to cast or control the casting of more than 50 per cent of the maximum number of votes that might be cast at a general meeting of the company.

Similar to trusts, sufficient influence of a company by a member and/or their Part 8

38 selfmanagedsuper

associates exists where the company, or a majority of its directors, act in accordance with the directions or wishes of the member and/or their Part 8 associates whether those directions are given directly or through interposed companies, partnerships or trusts.

Anti-avoidance provisions Section 66 of the SIS Act contains specific provisions placing a prohibition on avoidance schemes that might otherwise be implemented to circumvent the ban on acquiring assets from a related party.

With respect to IHA rules, SIS Act section 71(2) determines where a loan, investment or lease arrangement is made under an agreement and that carrying out that agreement effectively results in a loan, investment or lease arrangement with a related party, then the loan, investment or lease arrangement will be taken to be with a related party, irrespective of the agreement made. As such, the 5 per cent IHA limit would apply. The ATO also has the power in section 71(4) of the SIS Act to deem an asset to be an IHA. Further, SIS Act section 85 prohibits a scheme being entered into with the intention that the market value ratio of a fund’s IHA is artificially reduced to avoid the application of IHA rules.

Breach of anti-avoidance provisions can have civil and criminal consequences, including imprisonment.

Consequences of getting it wrong Auditors are required to form an opinion and report on specific provisions of the SIS Act and SIS Regulations. This includes acquisition of assets from related parties and IHA. If they do not believe trustees have complied with these provisions, they will issue a Part B qualification in their auditor’s report. If the contravention meets relevant reporting criteria, they must also lodge an auditor contravention report (ACR) with the ATO. The ATO has a range of responses available to it for non-compliance with super

The two key rules of which to be aware with respect to related parties involve the acquisition of assets and in-house assets. law. An administrative penalty of 60 penalty units can be imposed for breaches of IHA rules. One penalty unit is currently $313 so fines of up to $18,780 per breach per trustee can be imposed. Alternatively, the ATO may issue rectification or education directions or in some cases a non-compliance notice for the fund. It can also disqualify a trustee or seek civil or criminal penalties. Its approach will be influenced by the nature and severity of the breach, whether it was deliberate, if it has been rectified and trustee behaviour with respect to the breach, rectification and engagement with the regulator.

What to do when it goes wrong When things go wrong, it is best to engage with the fund’s auditor and, if needed, the ATO. The regulator will view more favourably a reported breach that has already been rectified so it is recommended to work with the auditor to ensure trustees have the opportunity to rectify before the auditor lodges their ACR. If rectification is not possible or problematic, consideration should be given to lodging a voluntary disclosure with the ATO. This involves providing the regulator with the facts and any mitigating circumstances that gave rise to the breach and, importantly, a proposal for rectification (or not) and the timeframes over which this will occur. The key is to offer a reasonable solution to facilitate an acceptable outcome for both parties.

STRATEGY

Parameters for accountants

The accounting profession is still looking for a practical alternative to the limited licensing regime that is clearly not working. While this process continues, Grant Abbott offers a reminder of the SMSF advice accountants can provide without having to be licensed.

GRANT ABBOTT is a director and founder of LightYear Docs.

Australia has over 600,000 SMSFs with close to $900 billion in assets and represents a large market for specialist SMSF advice. Until 2016, accountants had a specific exemption when it came to advising on SMSFs and provided extensive advice to small and medium business clients on these types of funds.

Classic strategies, such as acquiring business real property in an SMSF and leasing it back to a member’s business, as well as transferring proceeds from the sale of a business, courtesy of non-concessional contribution concessions, provided a great advice avenue plus significant tax benefits for clients.

Apart from tax strategies, there were great incentives for accountants and tax agents to offer

SMSF services, including advice and administration.

With each SMSF annual administration fee costing upwards of $2000, having 100 or more SMSFs was great recurring fee income. And with the Association of Superannuation Funds of Australia predicting the amount of money in SMSFs by 2040 to top $3 trillion, servicing these funds should be considered a must for accountants.

The limited licensing regime In 2016, the accountant’s SMSF advice exemption was diluted and a limited licensing regime was introduced.

Continued on next page

QUARTER IV 2023 39

STRATEGY

Continued from previous page

In short, accountants were able to apply for a ‘limited’ Australian financial services licence (AFSL) tailored for providing specific financial services related to SMSFs. This licensing approach is detailed in Superannuation Industry (Supervision) regulations 7.8.12A and 7.8.14B. Key aspects of the limited AFSL for accountants include: • Scope of services: The limited licence allows for advising on SMSFs, a client’s existing superannuation holdings (under certain conditions) and providing ‘class-ofproduct advice’.

• Class-of-product advice: This refers to advice about a category of products without recommending a specific product. For instance, an accountant with a limited AFSL could advise on mining shares or equities listed on the ASX 100 Index, but could not recommend a specific company’s stock.

• Authorised products: A limited AFSL may be authorised to offer ‘class-ofproduct advice’ on a range of financial products, including: o superannuation, o securities, o simple managed investment schemes, o general insurance products, o life risk insurance products, and o bank deposit products.

The downside of limited AFSLs Licensing accountants to provide SMSF advice sounded in principle to be a great idea until the roadblocks started to appear. Some such inconveniences included: • Increased compliance and regulatory burden: Obtaining and maintaining an AFSL involves adhering to strict regulatory requirements. Accountants must comply with ongoing professional development, auditing and reporting requirements, which can be time-consuming and complex. This includes preparing a

lengthy statement of advice for even the most menial recommendation, such as making a tax-deductible contribution up to a member’s concessional contributions cap.

• Higher costs: The process of obtaining an AFSL, or paying a licence holder to be an authorised representative, along with the ongoing costs associated with compliance, can be significant.

These costs include licensing fees, training expenses to meet compliance requirements, insurance and potentially hiring additional staff or consultants to manage compliance-related tasks.

• Liability and risk exposure: Providing SMSF advice under an AFSL increases the accountant’s exposure to legal and financial risks. This includes the risk of litigation if the advice is deemed inappropriate or if it leads to financial loss for the client. The responsibility for providing accurate, compliant advice can be a significant burden.

• Limitation on the scope of advice: Even with a limited AFSL, there are restrictions on the range of advice an accountant can provide. This limitation can sometimes hinder the ability to offer comprehensive financial planning services to clients as it may not cover all areas of financial advice.

• Resource allocation: The focus on compliance and managing the requirements of an AFSL can divert resources away from other areas of an accountant’s practice. Time and resources spent on licensing issues could otherwise be used for client service, business development or other value-added services.

Currently there are only just over 800 accountants holding a limited licence in a pool of over 600,000 funds, which means one of three things for those SMSFs not being looked after by one of these practitioners: i. SMSF administration-only services are being provided for clients running their

When a decision is made to restructure, many business owners are potentially missing out on valuable capital gains tax concessions, which can be used to top up superannuation balances. own super fund with no strategic advice, ii. financial planners are teaming up with accountants to make strategic recommendations for SMSF trustees under the planner’s AFSL, and iii.accountants are providing advice without a licence.

ASIC SMSF exemption for accountants INFO 216 shows there is a vibrant landscape of opportunity for accountants to provide valuable SMSF advice without the need to hold a limited AFSL. One of the crucial takeaways from INFO 216 is the range of services accountants can provide without needing to be licensed. These exemptions are not loopholes, but well-defined areas where professional accountants can operate confidently and legally.

Key exempt services and rules for accountants include: i. Investment strategy recommendations: Accountants can make recommendations to the trustee of an SMSF about investment strategies.

This is a vital area where accountants can apply their financial acumen to guide trustees in aligning their investment strategies with the fund’s objectives.

Continued on next page

40 selfmanagedsuper

This is a field ripe with potential and accountants are well positioned to seize these opportunities, adding immense value to their clients’ financial futures.

Continued from previous page

Importantly, an investment strategy is not a financial product. This extends to asset allocation, but not advising on specific stocks. ii. Taxation advice: Informing clients about the taxation consequences of different SMSF actions, like commencing a pension or making a contribution, is within the accountant’s purview. This service is especially valuable given the intricate nature of tax laws and their impact on superannuation planning. iii. SMSF borrowing for property: Property is not considered a financial product nor is borrowing, so any advice an accountant might provide to an SMSF trustee about the use of gearing to buy residential, commercial or holiday property does not require a licence. iv. Factual information provision: Providing factual information about SMSFs, including processes, compliance requirements and general market information, falls within the exempt category. This empowers accountants to educate and inform clients without crossing into territory where they would need to be licensed.

Three important examples from INFO 216 highlight these exemptions:

i. Establishing an SMSF: The advice accountants give about establishing, operating, structuring or valuing an SMSF must not amount to an explicit or implied recommendation to establish an SMSF or to acquire or dispose of an interest in an SMSF (or another superannuation product). However, we recognise advice given to a person about the establishment of an SMSF may also carry an implicit recommendation that the person acquire an interest in the SMSF. Therefore, you are more likely to be able to rely on the exemption when your client has already made a decision to establish the SMSF before seeking your assistance to take the next steps.

For example, you may recommend the best structure for an SMSF to suit your client’s situation after they have made the decision to establish an SMSF. ii. Contributions: Under the exemption, a registered tax agent may provide advice on any tax implications of contributions into an SMSF (or other superannuation fund), such as a client’s eligibility to make concessional and non-concessional contributions and the tax treatment of those contributions. For instance, a tax agent can use a client’s total superannuation balance to advise the client on their eligibility for: a. the unused concessional contributions cap carry forward, and b. the non-concessional contributions cap and the two-year or three-year bring-forward period.

However, they cannot recommend a client make a particular level of contributions although they can advise on the maximum level of contributions a client can make. This is because the decision to make a particular level of contributions involves considerations other than tax. iii. Pensions: A registered tax agent may also advise a client on the tax implications of moving their

superannuation benefits from accumulation to pension phase, but may not make a recommendation to a client about when to do so. For instance, a tax agent may advise the client about the tax implications of retiring at different ages, such as a client being able to withdraw superannuation benefits tax-free after a certain age, but should make it clear to the client tax is not the only consideration involved in making retirement decisions.

ASIC SMSF exemption for accountants Section 766B(5) or the Corporations Act 2001 provides exemptions for both lawyers and tax agents advising on financial products, including SMSFs. In that regard, lawyers can advise on SMSFs in the ordinary course of their business of providing legal advice.

For an accountant registered with the Tax Practitioners Board as a tax agent or business activity statement agent, they do not need to be licensed to provide advice given in the ordinary course of their activities and reasonably regarded as a necessary part of those activities under section 766B(5)(c) of the Corporations Act. The accountant as the SMSF adviser INFO 216 opens a window of opportunity for accountants to delve into the world of SMSF advisory with confidence and competence.

By understanding and adhering to the guidelines, accountants can continue to be pivotal in guiding their clients through the complexities of SMSFs, enhancing their financial strategies without the constraints of holding or operating under an AFSL. This is a field ripe with potential and accountants are well positioned to seize these opportunities, adding immense value to their clients’ financial futures.

However, accountants must keep up to date with the ongoing review of licensing being conducted by the government as it relates to SMSFs. But in the meantime, INFO 216 is a must read and must do for accountants.

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Residency matters

There is no point in establishing an SMSF if it cannot be classified as an Australian superannuation fund. Bryan Ashenden looks at how this definition can be satisfied and the severe consequences should a fund lose this status.

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

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In a world that has returned to a somewhat normal state following COVID-19, the ability to travel and work internationally has opened up again. Extended periods of time outside of Australia can present great opportunities for clients. Travel offers new experiences and enriches the soul, but also in some cases the ability to earn more or possibly minimise tax.

During times like these, clients may be looking for ways to invest some of their wealth and the low-tax environment of superannuation looks attractive.

However, especially where a client has an SMSF, travelling overseas can introduce the risk of the fund losing its complying status and therefore its concessional tax treatment.

The good news is there are strategies to minimise this danger. Additionally, the previous coalition government announced it would introduce measures to remove some of the concerns in this area. The current Labor government has indicated its support to continue with these amendments, but at the time

of writing this article it had not yet introduced this measure into federal parliament in the form of a bill.

Before we turn to the strategies and future potential changes, it is important to start by looking at the requirements to be a complying fund and, in this case, what is required to be, and remain, classified as a resident Australian superannuation fund. To meet this requirement, three tests need to be satisfied.

The first test – establishment and investments To satisfy the first test, there are two options available and only one of these needs to have been met. Firstly, the SMSF needs to have been established in Australia.

In most cases when we think about where a fund was established, we normally think about where the SMSF trust deed, the signal for commencement of the fund, was executed and this would invariably be within Australia for the majority of cases. However, Continued on next page

Continued from previous page

the location of execution of the trust deed is irrelevant in this case. Rather, a fund is considered to be established in Australia if the initial contribution made to set up the fund was paid and accepted here. Again, in most cases this will be satisfied, but it could be an area of which to be conscious if the SMSF was established when the trustees were overseas, meaning the initial contribution, while received in an Australian bank account, could have been paid from an offshore account. Note, satisfying this option is a point-in-time option at establishment. If met at establishment, this first test is passed and can never be failed.

The alternative option under this initial test is for at least one of the fund’s assets to be located in Australia. This test is relevant for the point in time, or for the income year, in which you are looking to apply this first test. It does not require all of the SMSF’s monies to be invested in Australian assets at all times. Rather, at some time during the income year at least one asset of the fund was located in Australia. Arguably, this would be met on an ongoing basis if the SMSF has an Australian bank account.

The second test – central management and control The second test requires that central management and control of the fund is ordinarily in Australia. In simple terms this means the SMSF’s strategic decisions are regularly made and high-level duties and activities are performed in Australia. Within these parameters are decisions such as: • formulating the investment strategy of the fund, • reviewing the performance of the fund’s investments, • formulating a strategy for the prudential management of any reserves, and • determining how assets are to be used for member benefits.

Certain other activities that are important

in the running of an SMSF do not constitute central management and control tasks. These include the acceptance of contributions made on a regular basis, the actual investment of the fund’s assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits. Rather than decision-making tasks, they are more administrative in nature or are tasks to execute strategy rather than formulate it.

To satisfy the requirements of this test, we need to see who is making the decisions relevant to central management and control and where the individual is located at the time of making those decisions. For this, you would normally look to the location of the trustees (for an individual trustee SMSF) or the directors (for a corporate trustee SMSF).

This could therefore become an issue if the clients (trustees/directors) are currently outside Australia. While a person could be appointed under an enduring power of attorney to act on behalf of the trustees when they are overseas, this would only negate this issue if the attorney had the ability to make decisions on their own and were not seen to be merely implementing decisions at the direction of the overseas trustees.

For clients who have left Australia there is some potential relief provided by way of current law. Under existing section 295-95(4) of the Income Tax Assessment Act 1997, “the central management and control of a superannuation fund is ordinarily in Australia at a time even if that central management and control is temporarily outside Australia for a period of not more than two years”.

The critical element for this provision to operate is whether the trustees’ absence is temporary in nature and is tested at the time of the absence. There is no simple, hard and fast rule for determining whether an absence is permanent or temporary. Some of the factors that could be taken into account in trying to determine an outcome include establishing: • if the trustees maintained a residence in Australia (whether owned or rented)

Especially where a client has an SMSF, travelling overseas can introduce the risk of the fund losing its complying status and therefore its concessional tax treatment. for the period of their absence or if they purchased a new place of residence outside Australia, • if the trustees retained their furnishings, or • whether other possessions, such as cars, have been retained or disposed of.

There is a question of whether the twoyear period could be reset, for example, by having the trustees return to Australia for a period of time and exercise trustee duties in Australia while here before departing again.

It may be possible, but the question comes back to whether the absence should be viewed as a temporary absence, or a series of temporary absences, or whether in fact the absence is more permanent in nature.

It is in this area where a legislative amendment proposed by the former coalition government would be of potential assistance. It had been proposed to extend the period of an allowable temporary absence from two years to a higher duration of five years. The current government has indicated its support for this measure, announcing it will commence from the next 1 July after the amending legislation receives royal assent. Unfortunately, however, at time of writing a bill that would give effect Continued on next page

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Continued from previous page

to this change has yet to be introduced into parliament. On that basis, the current earliest start date for such a change, based on the stipulated timeline, would be 1 July 2024.

The third test – active members Under this third and final test, it is a requirement for the fund to either have no active members or, if it does, have at least one active member. Active members are individuals who are Australian residents and hold at least 50 per cent of either: • the total market value of the fund’s assets attributable to super interests, or • the sum of the amounts that would be payable to active members if they decided to leave the fund.

A person will be an active member if they are a contributor to the fund at a particular point in time. In essence, this turns on the question: are they making contributions to the fund or are contributions being made on their behalf? This will cover personal contributions, employer contributions, spouse contributions, government cocontributions and also superannuation rollovers from an external super fund into the SMSF. If a member is an active member, you then need to determine if they are a resident member or not as you need at least 50 per cent of the accumulated benefits in the SMSF to belong to resident active members.

Again, this is an issue that can potentially arise when you have clients who are moving overseas and cease to be Australian residents for a period of time. If they are deemed to be a contributing member during the time of absence and are no longer Australian residents, they would likely fail this third test and the SMSF could no longer satisfy the requirements to be a resident Australian super fund.

There is a solution to this if the members wish to retain the SMSF for their future return, assuming the other two tests continue to be

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The second test requires that central management and control of the fund is ordinarily in Australia. In simple terms this means the SMSF’s strategic decisions are regularly made and high-level duties and activities are performed in Australia. met, and that is to ensure all contributions while the member is a non-resident are made to a different fund, for example, an Australian Prudential Regulation Authority (APRA)regulated fund. This is because: • the issue about being a non-resident active member depends on being a contributor to the fund in question – in this case the SMSF. Therefore if they aren’t contributing to the fund, it will not have adverse consequences under this third test for the SMSF, and • while the member would still be regarded as a non-resident contributing member to the APRA-regulated fund, given the expected size and member numbers of the public offer fund in question, it would be very unlikely the 50 per cent threshold would be of concern.

Again, the previous coalition government had proposed an amendment to this third test also, which was to remove the active member test requirements completely, which would allow the SMSF to continue to receive contributions from and in respect of nonresident members. Coupled together with

the proposed extension of the temporary absence provision to five years, this would allow many SMSFs with members temporarily overseas to retain and use their funds for building their retirement benefits. The current government is committed to enacting this reform, but as mentioned previously, we are yet to see the amending legislation introduced.

So why does residency matter?

These tests, and passing them, is important as the consequence of an SMSF losing its status as a resident Australian superannuation fund can be significant. In effect the fund will cease to be a complying superannuation fund and the following consequences will arise: 1. In the year the fund loses its complying status, the assessable income of the fund will include the entire value of the fund’s assets at the start of the income year, less any non-concessional contributions or a crystallised undeducted component. The net amount is then taxed at the highest marginal tax rate.

2. Going forward, any earnings in the fund will be taxed at the highest marginal tax rate rather than the 15 per cent concessional rate.

3. Withdrawals by members in retirement will be subject to taxation rather than retaining existing tax-free status if the member is over 60 years of age.

4. These impacts apply at the fund level and not just in respect of members who have gone overseas. Any members who remain in the SMSF and have remained in Australia will also suffer these impacts to their accumulated benefits.

Most SMSFs will not have an issue around the resident Australian superannuation fund requirement. But where an adviser has SMSF clients who are contemplating going overseas, even for a short period of time, it’s important to be aware of these potential consequences and ensure plans are in place to minimise their impact.

STRATEGY

Not to be missed

The coming February will see the SMSF Association National Conference 2024 take place in Brisbane. Mary Simmons summarises the highlights delegates can expect to enjoy at the event.

MARY SIMMONS is head of technical at the SMSF Association.

For the SMSF sector, all roads lead to Brisbane in midFebruary. It’s that time of the year when the brightest minds in the sector head to the SMSF Association National Conference, with the 2024 event being held at the Brisbane Convention & Exhibition Centre from 21-23 February. The national conference has a well-deserved reputation nurtured over more than two decades of delivering high-quality technical content and providing unparalleled networking opportunities, and next year’s event should be no different.

The theme will be “level up” to challenge SMSF practitioners to embrace the professional opportunities being presented by an ever-changing legislative and regulatory environment, a volatile investment climate and advancements in practice strategies. For twoand-a-half days, the conference will tease out these topics at the plenary or concurrent sessions, interactive workshops, or over a convivial glass or two in the exhibition centre, which will be home to the sector’s Expo, or at one of the many social events.

Conference delegates know change is the only constant in their super sector. So, the event becomes an essential platform to unravel the intricate details and the impact of any changes that have occurred in the industry

over the past year and are expected in the coming 12 months. What follows is a snapshot of the exciting agenda, which has much to offer SMSF practitioners.

Proposed $3m tax on super earnings The proposed tax on total super balances exceeding $3 million is a classic example. At next year’s event, there will be myriad sessions and workshops to examine what it all means and how practitioners should prepare for it – assuming it does become law in its current incarnation. Given its importance, delegates can expect a number of presentations covering the subject.

SMSF Association chief executive Peter Burgess plenary session (P1): His fast-paced legislation and regulation update can be expected to inform delegates on the association’s campaign to oppose this tax in its current form.

SMSF Association technical manager Fabian Bussoletti and BDO senior consultant Peter Crump (2E): Their workshop, titled “Understanding TSB and TBC Continued on next page

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Continued from previous page

and navigating the $3m cap”, will provide an in-depth exploration of the total super balance and transfer balance cap, focusing on their interplay and impact on clients, especially considering policy changes and the proposed new tax on fund member balances over $3 million.

Heffron Consulting managing director Meg Heffron plenary session (P3): Her session, “$3m super tax – Beyond the doom and gloom”, will address concerns regarding the future impact of the new measure, particularly for clients in the wealth accumulation phase, questioning if middleaged individuals should reconsider their super contributions. She will also explore strategies for those affected already, including optimal timing for withdrawals, managing retirement withdrawal rates and crucial considerations for minimising tax implications and navigating negative earnings scenarios.

Macquarie technical head David Barrett (4B): David’s session, “$3m super tax: Weighing up the alternatives”, will evaluate whether to keep funds in super or explore other investment options. It will cover the potential impact of the tax, compare alternatives to superannuation, discuss the optimal withdrawal amounts and examine the effect of a lump sum death benefit tax.

Cooper Partners Financial Services director Jemma Sanderson (6E): Jemma’s workshop, “Adapting to change: Strategies for high net wealth clients”, is client focused for those practitioners with high net wealth clients. It will cover tax planning and asset transfer strategies, and explore integrating SMSFs with other investment vehicles, such as companies and trusts, to navigate the proposed new tax.

Property As an asset class, property has always appealed to SMSFs. Based on the latest

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estimates from the ATO for the September quarter 2023, funds were holding $88 billion in commercial property and $48 billion in residential, in total comprising 15 per cent of total net SMSF assets of $885 billion. For the same period, the ATO’s estimates for limited recourse borrowing arrangements (LRBA) stood at $59 billion. So property issues will be fully aired at the conference via the following experts.

ADBA Lawyers special counsel Bryce Figot: In a specialist-only session, titled “Navigating the complex world of SMSF property investments”, Figot will examine property structuring options, acquisition methods, such as trusts and fractional interests, and operational complexities. He will also provide insights on managing relatedparty transactions and risks associated with property development or borrowing, as well as discuss strategies for handling complex scenarios, such as defaults, member disputes, incapacity issues, and the implications of a member’s death.

RSM Australia director SMSF services Katie Timms (5B): In her session, “Harvesting opportunities: The ins and outs of farming assets in SMSFs”, Timms will explore the complexities of integrating farming assets into an SMSF investment strategy, examining the unique opportunities and risks of primary production ownership. She will look at intergenerational wealth transfer, estate planning, housing members and employees, risks of non-arm’slength transactions and potential stamp duty family farm exemptions.

Bluestone Home Loans head of specialised distribution Richard Chesworth (6B): Chesworth’s concurrent session, “SMSF lending and refinancing through the eyes of a lender”, will shift the focus to examine LRBAs from a lender’s perspective, especially relevant in the current high interest rate environment. It will address issues such as

The theme will be “level up” to challenge SMSF practitioners to embrace the professional opportunities being presented by an everchanging legislative and regulatory environment, a volatile investment climate and advancements in practice strategies. managing interest rate changes, refinancing, loan discharge and the practical challenges SMSFs face under super laws. Delegates attending this session will get a better understanding about the risks involving defaults, guarantees, offset accounts, redraw facilities and more to tackle these issues ethically and in compliance with the Superannuation Industry (Supervision) Act. Deloitte partner/national SMSF leader Liz Westover (9A): Westover’s concurrent session, “Game on or game over: The pitfalls of SMSFs investing in overseas assets”, will examine the intricacies of SMSFs investing in overseas assets, including property offering trustees diversification opportunities alongside unique challenges. It will cover critical aspects such as regulatory compliance, financial risks, property asset management and exit strategies.

The grim reaper It wouldn’t be a national conference Continued on next page

Continued from previous page

without experts examining the many issues death creates in this super sector. In 2024, this will include the following presentations: KPMG enterprise head of SMSF and estate planning Julie Dolan (2A): This concurrent session, “Are you prepared for the death of a client?”, will equip practitioners with essential knowledge to manage SMSFs effectively following a member’s death, focusing on administering death benefits in compliance with regulations.

It will cover key areas such as the allocation and payment of death benefits, trustee responsibilities and common pitfalls to avoid in these sensitive and legally complex situations.

BDO partner Shirley Schaefer and Cooper Grace Ward Lawyers partner Clinton Jackson (4D): Their workshop examines the topic “Deathbed document disasters: Real SMSF cases that went wrong”. It will be driven by real case studies to provide practical strategies for compliant execution of an SMSF member’s death wishes where failures in documentation can lead to complex legal issues. Attendees can expect an exploration of the intersection of legal requirements and auditing standards to demonstrate how collaborative efforts can mitigate the risk of litigation.

HopgoodGanim Lawyers partner Brian Herd (6A): This concurrent session, “Enduring Powers of Attorney – Coming to an SMSF near you – Are you ready?”, will see Herd focus on the critical role, powers and responsibilities of a valid enduring power of attorney using real-life examples to highlight the importance of proper decision-making on the death of a member or where a client loses capacity, ensuring competent, ethical and legal handling.

Bobbin Lawyers consultant lawyer Peter Bobbin (8A): This concurrent session, “They’ve gone

rogue: Your risks, remedies and when (and how) to run away”, will tackle the challenges posed by rogue trustees and beneficiaries on the death of a member, highlighting their risks to surviving trustees, members and dependants. It will also explore issues of fiduciary breach when dealing with uncooperative trustees, the roles and liabilities of advisers and auditors in disputes, and effective strategies for protecting clients.

Insignia Financial senior technical services manager Julie Steed (9B): The presentation, titled “Crafting legacies: estate planning beyond the SMSF”, will see Steed examine why estate planning solutions outside of SMSFs may be more beneficial for some clients, especially in cases of potential family disputes or the desire to maximise tax benefits. This session will examine the advantages and limitations of testamentary trusts, investment bonds and other options such as intestacy laws, retail funds or joint asset ownership to tailor estate plans beyond an SMSF. SMSF Association chair and Cooper Grace Ward Lawyers partner Scott HayBartlem (P5): In the closing plenary session, “Policy shifts and last wishes: The future of death benefits”, Hay-Bartlem will aim to explore estate planning issues that don’t always make the headlines, but are crucial to death benefit planning. It will look at the elements that should be considered before a member dies that could add significant value to an SMSF or the underlying beneficiaries, or prevent a massive headache for surviving trustees, beneficiaries and even SMSF practitioners.

The impact of the proposed new tax on super will also be considered.

Auditing Issues confronting auditors will also come under the microscope at the conference. They play a critical role in maintaining the integrity of the SMSF sector, so having sessions and workshops that examine issues through their

Throw in the social events and networking, and the Brisbane conference is set to demonstrate, yet again, why the SMSF Association National Conference is the preeminent event on the SMSF calendar. lens is critical.

ASF Audits head of education Shelley Banton and ATO SMSF auditors director Paul Delahunty (2D): Their workshop, “Level up or get left behind – Take your SMSF compliance skills to a game high”, will focus on the current challenges in SMSF audits, emphasising the need for collaboration among all parties to meet auditing standards and the regulators’ requirements effectively.

Super Sphere director Belinda Aisbett (5A): This concurrent session, titled “Getting the audit report right”, will delve into the nuances of drafting qualified opinions, crafting effective management letters and completing the auditor’s compliance report, all illustrated through real case studies.

Other issues to be addressed will include artificial intelligence, ethics and cybersecurity, ensuring a well-balanced program that ticks off on all the issues that are top of mind with SMSF practitioners. Throw in the social events and networking, and the Brisbane conference is set to demonstrate, yet again, why the SMSF Association National Conference is the preeminent event on the SMSF calendar.

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COMPLIANCE

Casting the foreign trust net

Michael Hallinan explores whether SMSFs can be subject to taxes and duties applicable to foreign trusts.

MICHAEL HALLINAN is superannuation special counsel at SuperCentral.

Surcharge purchaser duty and surcharge land tax have been imposed on foreign trusts in most state jurisdictions. In most jurisdictions the current rates for these surcharges are quite high, for example, in New South Wales surcharge duty rates are 8 per cent (purchaser duty) and 4 per cent (surcharge land tax). The surcharge duties are in addition to the normal duties that apply whether or not the trust is a foreign trust.

Essentially surcharge purchaser duty applies if a trustee of a foreign trust – for ease of reference, a foreign trust – acquires residential real estate whether by purchase or whether by an in-specie capital contribution to the trust. Surcharge land tax

applies if at the relevant date, usually 30 June or 31 December, depending on the jurisdiction, the foreign trust holds residential real estate or, in certain jurisdictions, either or both residential or primary production land. It should be noted residential real estate includes vacant land that is zoned for residential use and residential land use entitlements.

The issue becomes whether an SMSF can be a foreign trust for the purposes of these surcharge duties. If so, what actions can be taken to preclude an SMSF being a foreign trust?

The rationale, other than the collection of tax, for the introduction of these surcharge duties was to Continued on next page

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dampen price escalation in the residential property market. Whether these duties have achieved this purpose is open to doubt. Possibly the stimulation of demand for residential property by the federal government, the restriction of supply of new residential housing stock by the policies of the state and, particularly, local governments and the generous monetary policy adopted by the Reserve Bank of Australia have created the situation where there are more potential buyers bidding for a restricted supply of stock where the potential buyers can afford to pay higher prices given the lower cost of money.

However, the present issues are: • first, whether these surcharge duties can apply to SMSFs, • secondly, if they do apply, can the application of these duties be avoided by means of including ‘foreign person’ exclusion provisions in their trust deeds and governing rules, • thirdly, are there any downsides to the ‘foreign person’ exclusion provisions, and • finally, can the application of surcharge duties be avoided as being unconstitutional, that is, being inconsistent with overriding federal legislation of double tax treaties.

Given these surcharge duties have been introduced into multiple jurisdictions, this article will focus on NSW.

Can an SMSF be a foreign person?

In general terms, a trust will be a foreign trust if any substantial interest beneficiary of it is either not ordinarily resident in Australia, a foreign corporation or a foreign government. A substantial interest beneficiary is any beneficiary who holds, or is deemed to hold, a 20 per cent or more interest in the trust.

Consequently the process to determine whether an SMSF is a foreign trust involves the following steps: 1. identify each beneficiary of the SMSF, 2. for each beneficiary determine whether they hold an interest in the SMSF, 3. for each beneficiary who holds an interest, whether that interest amounts to a 20 per cent or greater interest in the SMSF, and 4. for each beneficiary who is a substantial interest beneficiary, determine whether they are ordinarily resident in Australia.

An initial impression is that as only individuals can be members of SMSFs and if every member is an Australian citizen or a New Zealand citizen holding a special category visa, then the SMSF cannot be a foreign trust.

Beneficiaries of an SMSF Clearly each individual who has a member account is a beneficiary of an SMSF. However, individuals who may receive, whether by reason of a pension reversion, exercise of trustee discretion or pursuant to a binding death benefit nomination, a benefit on the death of a member are not beneficiaries of the SMSF unless they are members of the SMSF in their own right.

Quantum of interest This is best determined by the balance of each member in the SMSF. However, if the member has associates who also have an interest in the SMSF, the interest of the associates is aggregated with that of the member. Typically, the associates are relatives of the member. So that if A and B each individually have an account balance in the SMSF which is 15 per cent and 12 per cent respectively of the value of the SMSF, each of A and B will be treated as holding a 27 per cent interest in the SMSF as B’s interest is attributed to A and A’s interest is attributed to B.

Substantial interest of 20 per cent A substantial interest would be determined by their member account balances compared

to the total value of the SMSF, having due regard to the attribution of associates interests in the SMSF.

Residency requirement This is normally satisfied by the Australian citizenship status of the substantial interest beneficiary or a New Zealand citizen who holds a special category visa as defined within section 32 of the Migration Act. If a member is neither an Australian citizen nor a New Zealander with the special category visa, the beneficiary can satisfy the residency requirement at a particular time by being present in Australia for 200 or more days in the 12 months preceding that time and their continued presence in Australia is not subject to any time limitations.

An initial impression is that as only individuals can be members of SMSFs and if every member is an Australian citizen or a New Zealand citizen holding a special category visa, then the SMSF cannot be a foreign trust. However, this impression does not take account of the deeming provisions Continued on next page

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found in the surcharge legislation.

NSW laws The surcharge purchaser duty is set out as Chapter 2A of the Duties Act. This chapter now contains section 104JA introduced by Act No 14 of 2020. The effect of this deeming provision is that a discretionary trust is treated as a foreign trust unless the terms of the trust expressly prevent a foreign person from being a beneficiary. A similar deeming provision applies in relation to surcharge land tax under section 5D of the Land Tax Act. The question is whether the definition of ‘discretionary trust’ is so wide that it can apply to SMSFs. At general law there is no precise definition of a discretionary trust. The term is more of a general description of a type of trust where the income or corpus, or both, is allocated by an entity, usually the trustee, but need not be the trustee, pursuant to a power of appointment. Alternatively, the trust may confer interests in income and corpus on certain beneficiaries (default beneficiaries) which can be changed and conferred on other beneficiaries. The former would be a purely discretionary trust, while the latter would be a defeasible discretionary trust.

SMSFs, as well as Australian Prudential Regulation Authority-regulated superannuation funds, do not easily fall within either type of discretionary trust.

SMSFs are probably best described as fixed trusts where the member’s interest is measured typically by the dollar value of an account or less typically units, which in any event have a dollar value. Further, in an SMSF, as in all regulated superannuation funds, there is no separation of income and capital as there are no capital beneficiaries or income beneficiaries as there is a life tenant

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and remainderman dichotomy.

However, the definition of ‘discretionary trust’ set out in the dictionary of the Duties Act (and which applies for the Land Tax Act) is worrisomely wide in its drafting. The relevant part of the definition is as follows under which the “vesting of ... any part of the capital of the trust estate … or any of the income from that capital or both … is required to be determined by a person either in respect of the identity … or quantum of interest to be taken…”. The definition also deals with situations where interests may be vested if a discretion is not exercised or which may be divested if a discretion is exercised.

Most superannuation funds provide that on the death of a member, and subject to any binding death benefit nomination or reversionary pension nomination, the trustee has a power of appointment in respect of the death benefit that requires them to allocate the entire death benefit of the member to or among a closed class of individuals, including the legal personal representative of the deceased member.

This feature of superannuation funds does seem to satisfy the definition of ‘discretionary trust’ as that term is defined. Does this mean superannuation funds are discretionary trusts for the purposes of the surcharge purchaser duty and surcharge land tax? If so, does this mean section 104JA of the Duties Act applies and so the trustee of a superannuation fund is taken to be a foreign trustee unless the super fund provisions prevent a foreign person from being a beneficiary of the fund?

Possibly the strongest argument against the application of section 104JA to SMSFs is that the characterisation of a trust as being a discretionary trust is to be determined by the principal features of the trust. Clearly in the case of purely discretionary or defeasible discretionary trusts the power of appointment of income or corpus is the

The issue becomes whether an SMSF can be a foreign trust for the purposes of these surcharge duties. If so, what actions can be taken to preclude an SMSF being a foreign trust?

predominant feature of them. Without the power of appointment such trusts would be functionally impotent to achieve their goal. By way of contrast while regulated superannuation funds may have a feature of discretionary allocation of the death benefit of a deceased member, this is not the predominant feature of the super fund. It is even not an essential feature of a regulated superannuation fund.

A regulated superannuation fund could simply provide, without breaching the Superannuation Industry (Supervision) Act that the death benefit is automatically allocated to the estate of the deceased member. The predominant feature of SMSFs is the fixed trust of the retirement benefit for the member. Section 104JA is a provision intended to address the mischief that discretionary trusts have various forms and structures and usually such wide powers of allocation of income or corpus that unless and until the discretions are exercised Continued on next page

Continued from previous page

no one has an interest in the trust (purely discretionary trusts) or only the default beneficiaries have an interest (defeasible discretionary trusts).

A second though highly technical argument is section 104JA can only apply to trusts that have a ‘trust estate’. The term ‘trust estate’ is taken from Division 6 of the Income Tax Assessment Act 1936 and was discussed in the High Court in Bamford v Commissioner of Taxation [2010] HCA 10.

SMSFs are not taxed under Division 6, but taxed as entities in their own right under Part 3-30 of the Income Tax Assessment Act 1997 in the manner similar to the classical method of taxation of companies prior to the imputation system. If the concept of a ‘trust estate’ applies to trusts taxed under Division 6, under which both purely discretionary and defeasible discretionary trusts are taxed, then it cannot easily apply to trusts taxed as separate entities. Consequently, SMSFs do not have a ‘trust estate’ and so section 104JA cannot apply.

If ‘trust estate’ means the collection of property from time to time of the SMSF, this collection has no capital and income. It may include interest paid by a bank, but the interest is really a debt owed to the SMSF and that debt may be converted to cash by withdrawal from the bank and can then be used to purchase shares. The terms capital and income are accounting constructs used to determine the relative interests between the life tenant and the remainderman where the trust is structured as successive estates, and also used to measure the magnitude of the ATO’s take from the property of the trust.

They do not correspond to any particular items of property constituting the collection of property of the SMSF. If a trustee of an SMSF exercises a discretion to allocate $100,000 to the

spouse of the deceased member, the trustee is not allocating capital or income; the trustee has simply created a debt payable to the spouse that may be discharged by the transfer of any property of the SMSF. A response to these arguments is that definition should be read as if the words ‘trust estate’ were removed. In the absence of an obvious error, which is not the case as the definition can apply to normal discretionary trusts, this is not a legitimate interpretative response.

Can these surcharge duties apply to SMSFs? Yes. However, if every member is an Australian citizen or a New Zealand citizen with a special visa, they will not. If a member is neither an Australia citizen nor a New Zealand citizen, then the member may still satisfy the ordinary residence requirement by being lawfully present in Australia for the 200 days in the previous 12 months. Most importantly it seems the SMSFs will not be caught by section 104JA as they do not fall within the definition of ‘discretionary trust’.

Are ‘foreign person’ exclusion provisions in trust deeds and governing rules needed?

If section 104JA does not apply to SMSFs, then there is no need to include such exclusion requirements as set out in section 104JA(3). Consequently, the better solution is to determine the citizen status of a prospective member before they are admitted as a member.

Are there downsides to ‘foreign person’ exclusion provisions?

One downside would be a member who satisfied the citizenship requirement when admitted but subsequently ceased to be an Australian citizen and has not been voluntarily exited from the SMSF. While such provisions could disentitle an admitted

member from membership, unless and until their interest in the fund has been rolled over or paid out, they will remain a beneficiary of the SMSF for the purposes of the surcharge duties provisions. Excluding a member of an SMSF is simply excluding them from membership of a private club.

In the absence of voluntary rollout, court proceedings will be required.

Can the application of surcharge duties be considered unconstitutional and avoided?

Surprisingly, yes. Australia has entered into double tax treaties with various countries – typically based on a version of the Organisation for Economic Co-operation and Development model treaty. If a nonAustralian citizen member of an SMSF is a citizen of a country with which Australian has a double tax treaty that contains a nondiscrimination article, such as Article 23 of the Finland-Australia Double Tax Treaty, that applies not just to commonwealth taxes but taxes of political subdivisions (for example, NSW) of the commonwealth.

In broad terms, Article 23 imposes an obligation on each contracting party, like Australia and Finland, that taxes, both federal and state, do not discriminate between locals and Finish nationals. In short, NSW cannot impose a higher rate of transfer duty on a Finnish national when compared to the rate that would apply to an Australian citizen, assuming the circumstances of the application of the transfer duty are materially identical. As the double tax treaty has been incorporated into domestic legislation, it operates as federal legislation and under section 109 of the constitution overrides any inconsistent law of the state.

Not every double tax treaty will have a non-discrimination article and if there is such an article, it must be expressed to apply to taxes imposed by political subdivisions.

QUARTER IV 2023 51

1 DAY EVENT - 11 CPD Institute of Financial Professionals Australia’s 2024 Annual Conference In an era where the financial terrain is ever-shifting, the demand for foresight, agility, and strategic acumen has never been greater.

EVOLVING WITH THE TIMES, LEADING THE CHARGE Scheduled for the 15th of March 2024 at Melbourne’s illustrious Sofitel on Collins, this event isn’t just a date in your diary; it’s a portal to the future of professional excellence. Delve into the latest strategies moulding our industry and emerge armed with insights that will fortify your practices against the tides of change.

DUAL TRACKS OF WISDOM: STRATEGIC SUPERANNUATION + FINANCIAL PLANNING AND TAX The conference spotlights two crucial streams: the first being tax, and the second being a designated superannuation and financial planning stream. Featuring a dozen subject matter experts, this event offers a deep dive into the nuances of contemporary tax and super landscapes. It’s an unmissable opportunity for both seasoned professionals and those newly embarking on their careers.

DEMYSTIFYING REGULATION AND COMPLIANCE We bring together the minds behind regulation and compliance, offering clarity in a complex regulatory environment. This vital knowledge is key to not only staying compliant but also thriving in a landscape of constant regulatory evolution.

A DAY OF ENLIGHTENMENT AND NETWORK BUILDING Beyond the invaluable learning, the conference promises an engaging community atmosphere, excellent cuisine, and unparalleled networking opportunities. Connect with peers, exchange innovative ideas, and forge relationships that could be pivotal in your professional journey.

NETWORKING DRINKS: THE PERFECT CONCLUSION As the day concludes, relax and network over drinks and canapés. It’s more than just a social gathering; it’s where future collaborations and partnerships are born.

A CENTURY OF EXCELLENCE: THE IFPA DIFFERENCE The Institute of Financial Professionals Australia stands apart with its 104-year legacy. Having navigated through a myriad of financial cycles, we bring a depth of knowledge and commitment that is unmatched. This conference is more than an event; it’s a stepping stone to the future of your practice.

JOIN US ON THIS TRANSFORMATIVE JOURNEY We cordially invite you to be part of this landmark event. For further details and registration click here. Please contact our dedicated team at members@ifpa.com.au should you have further enquires. Secure your place and be part of shaping the future of our industry.

THE INSTITUTE OF FINANCIAL PROFESSIONALS AUSTRALIA: WHERE TRADITION MEETS TOMORROW. SEE YOU ON THE 15TH OF MARCH 2024!

Click here to register today and take advantage of the Early Bird ticket prices.

SPEAKERS PETER DE CURE Board Chair- Tax Practitioner Board

Session: TPB Update

PETA LONERGAN

Acting ATO Assistant Commissioner Risk and Strategy – Superannuation and Employer Obligations

Session: ATO Superannuation Update

MICHELLE GRIFFITHS

Partner | Investment Advisory & Wealth - TAG Financial Services

Session: Super Contribution Strategies

KAREN GOODFELLOW Goodfellow Tax Advisory

Session: Main Residence Exemption & Deceased Estates

WARREN STRYBOSCH Director - Find Group

Session: Managing Ethical Dilemmas

JOSHUA GOLDSMITH Head of Operational Tax Computershare

Session: Legislation and Regulations Update - Tax

ROBERT THOMPSON

Assistant ATO Commissioner and Tax Time Spokesman

Session: ATO TPB Update

SEAN GRAHAM Assured Support

Session: Proactive Risk Management for an Ethical Practice

DARREN WYNEN Insyt Pty Ltd

Session: Small Business CGT Concessions

DAN BUTLER

Director - DBA Lawyers

Session: SMSF Succession and Related Estate Planning - 101

NATASHA PANAGIS

Head of Superannuation and Financial Services - Institute of Financial Professionals

Session: Legislation and Regulations Update - Super and Financial Services

TIM REID

Author, and Host of Australia’s #1 Most Awarded Business Marketing Podcast

Session: Little Known Marketing Secret

STRATEGY

Contribution cap strategy intricacies

The superannuation rules give individuals a significant amount of flexibility as to how they can make the most of their contributions caps. However, to do so successfully the relevant boundaries must be observed, Jemma Sanderson writes.

JEMMA SANDERSON is director and head of SMSF and success at Cooper Partners.

54 selfmanagedsuper

Over the past few years, we have seen some substantial beneficial outcomes from a contribution perspective as introduced by the federal government.

Some of these include: 1. The removal of the work test from age 65 to age 67 since 1 July 2021.

2. The removal of the work test for salary sacrifice and non-concessional contributions (NCC) to age 75 since 1 July 2022.

3. The extension of the bring-forward NCC contribution provisions up to the year an individual attains age 75 since 1 July 2022.

4. A reduction in the downsizer contribution age to 55.

This is in addition to the medium to long-standing rules and strategies we have had for some years, such as: 1. Carry-forward concessional contributions since 1 July 2018.

2. Contribution reserving within an SMSF. 3. Withdrawal and recontribution strategies.

This article will concentrate on the opportunities Continued on next page

Continued from previous page

and planning regarding the carry-forward concessional contribution provisions and the interaction between total super balances and the NCC bring-forward rules.

Carry-forward unused concessional contributions Since 1 July 2018, individuals have been able to carry forward their unused concessional contributions cap over a rolling six-year period, the current financial year and the previous five, where their total superannuation balance (TSB) as at 30 June of the year prior to the contribution is less than $500,000.

The ability to carry forward only applies to an individual’s unused cap from 1 July 2018.

In 2023/24, it will be the first opportunity for taxpayers to be able to use the current year’s cap, and the previous five years would take them back to 1 July 2018. Therefore,

Table 1 Year

Concessional cap ($)

2018/19

25,000

2019/20

25,000

2020/21

25,000

2021/22

27,500

2022/23

27,500

2023/24

27,500 157,500

someone could have an available contribution cap in the 2023/24 of $157,500 as shown in Table 1.

The full amount of $157,500, or lesser amount made up of the 2023/24 cap and a portion of a prior year’s unused cap, would be available if the following criteria are met:

1. The TSB at 30 June 2023 is less than $500,000 (this is not an indexed threshold).

2. The individual can meet the work test if they are between age 67 and 75.

3. The individual has sufficient taxable income to claim the relevant contributions amount as a deduction.

4. The contribution is received within the fund by 30 June 2024.

5. The correct process is followed for deductibility (section 290-170 of the Income Tax Assessment Act 1997 – notice and acknowledgement).

Using the carry-forward provisions can be of benefit in the following situations: • the individual has sold an asset and made a substantial capital gain they wish to manage, • the member hasn’t been working for the past few years, • the person has a business that was in startup phase where no contributions were made and now is starting to generate some reasonable profits, • the superannuant has only recently moved to Australia so won’t have used the cap during their first few years in the country as they were ineligible to do so, seeing they were not a resident at that time, and • non-working spouses with trust distributions.

It is important to note there are several other elements to take into account when looking to take advantage of carried-forward unused concessional contributions. These include: 1. Remembering to include the contributions already made over the period in the calculation of the available amount. To this end, the TSB report on the ATO tax portal is a useful starting point, however, it may be incomplete if 2023 financial statements are yet to be recorded. It is always worthwhile ensuring all of the contributions have been checked off over the period to confirm there is no excess amount

A person’s T SB does not have to have been under $500,000 for each year over the six-year period, but only at the prior 30 June in the year that you want to make the top-up contribution.

without relying completely on the portal information.

2. A person’s TSB does not have to have been under $500,000 for each year over the six-year period, but only at the prior 30 June in the year that you want to make the top-up contribution.

3. The member does not need to have been an Australian resident over the six-year period, but only the year they are wanting to manage their tax position in Australia.

4. An individual does not have to be under 18 in each year a carry-forward amount is available in order to claim the deduction in the year they turn 18.

However, preservation always needs to be considered before any substantial contributions might be made for young people.

5. Division 293 tax will apply to any concessional contribution as it is the low-rate contributions for the person, so could reduce the benefit of implementing such a strategy.

6. Once 30 June 2024 passes, any unused amount from 2018/19 will no longer be available.

Continued on next page

QUARTER IV 2023 55

STRATEGY

Table 2 TSB at 30 June of the prior year

Bring-forward available ($)

Bring-forward period

Under $1.68m balance

330,000

Three years

Between $1.68m and $1.79m

220,000

Two years

Between $1.79m and $1.9m

110,000

One year

Greater than $1.9m

nil

nil

Continued from previous page

TSB and NCC cap bring-forward provisions Table 2 highlights the NCC bring-forward rules, which will need to be applied where an individual makes an NCC greater than their single-year cap, and the TSB thresholds pertaining to those caps for the 2023/24.

The table provides the basic criteria for someone to be able to make an NCC and consider whether it will be in excess of their cap or not. If the individual has no NCC cap available, it doesn’t mean they can’t make a contribution. Instead it means they will have an excess that then needs to be dealt with under the relevant provisions if they put more money into their fund.

The TSB is very important in determining an individual’s NCC cap for a particular year.

However, this can be challenging to navigate in situations such as: • at the time a contribution is intended to be made, the individual may not know what their TSB was at the prior 30 June, particularly where: o they have multiple superannuation accounts, and/or o the financial statements for their SMSF haven’t been prepared yet, meaning member balances for the prior year have not been finalised, • if the member does not know their TSB and they are approaching age 75, it can prove difficult to know what to do

56 selfmanagedsuper

as dealing with an excess that may arise from a contribution should they end up with a higher TSB than expected can be problematic, • since the shift of the work test from the Superannuation Industry (Supervision) legislation to the income tax provisions, there is no mechanism to reject a contribution where, for example, the work test is not met. If the individual exceeds their contribution cap, the fund has limited circumstances where it can reject the contribution and must pay it back only through the excess contribution refunding provisions, • as contributions can be received by a fund up to 28 days after the end of the month in which the individual turned 75, and at a minimum be classified as NCC, then there are risks of excess contribution scenarios where the intention may be to claim a tax deduction, but the work test isn’t met, and • members may wish to be making their contributions to superannuation as soon as possible at the commencement of a year in order to optimise the benefit of having the money invested in the super environment.

A further consideration is the actual bringforward period available to an individual isn’t a function of the contribution they make (with reference to Table 2), but their TSB at the 30 June before the contribution is made.

As an example, if the TSB was $1.75 million,

It is also very important to review in detail the contribution history of the individual member and not just the current year and previous two years. This ensures when advising members to make contributions, a full picture of the position is available.

being between $1.69 million and $1.79 million, then the individual has an NCC cap of $220,000 and a two-year bring-forward period is applicable.

If the TSB was $1.65 million, that is, less than $1.68 million, then even if a $220,000 contribution was made, the individual still can bring forward three years of their NCC cap because their TSB was less than $1.68 million.

It is irrelevant what the contribution was.

It is also very important to review in detail the contribution history of the individual member and not just the current year and previous two years. This ensures when advising members to make contributions, a full picture of the position is available.

Example: Han, 68, has benefits in super at 30 June 2023 as in Table 3.

Han has some funds available outside superannuation he would like to contribute to super. How much could he contribute in 2023/24?

Han’s contribution history is as in Table 4.

Han has some funds available outside superannuation he would like to contribute Continued on next page

Table 3 30 June 2023

Pension #1 ($)

Pension #2 ($)

Pension #3 ($)

Total ($)

Tax-free component

150,000

145,000

300,000

595,000

Taxable component

250,000

535,000

256,000

1,041,000

Total

400,000

680,000

556,000

1,636,000

Continued from previous page

to super. How much could he contribute in 2023/24?

With a cursory look at Han’s contribution history for the current year, 2023/24, and the previous two years, it may be concluded that because of the $120,000 contribution in the 2022 financial year, Han triggered a bringforward period in that year and therefore there is only $100,000 available to contribute in 2023/24.

However, Han is eligible to contribute $330,000 in the 2024 financial year, due to the following: • looking further back, Han made a $180,000 contribution in the 2020 financial year, • as his TSB at 30 June 2019 was less

than the current lower threshold at that time of $1.4 million, Han would have triggered a three-year bring-forward period, • that would then apply for 2019/20, 2020/21 and 2021/22, • therefore, the contribution in 2021/22 of $120,000 was serving out that period to make complete the full $300,000 over the period from 1 July 2019 to 30 June 2022, • as his TSB at 30 June 2021 was less than $1.7 million, the upper TSB threshold at that time, then he would have been eligible to make the $120,000 top-up, • the contribution in 2022/23 was not more than the single NCC cap and therefore no consideration required of

Table 4 Contribution history

NCC ($)

TSB at prior 30 June ($)

TSB date

2018/19

100,000

1,548,000

30 June 2018

2019/20

180,000

1,389,548

30 June 2019

2020/21

-

1,795,000

30 June 2020

2021/22

120,000

1,395,000

30 June 2021

2022/23

110,000

1,685,000

30 June 2022

a bring-forward period, and • as Han’s TSB at 30 June 2023 is less than $1.68 million, then he has the full $330,000 available to contribute in 2023/24.

This example highlights the benefit, and need, of looking further back into the contribution history than the current year and previous two years.

A few other considerations include: 1. Ensuring the TSB at the previous 30 June in the second or third year of the period needs to be less than the upper TSB threshold in order to make a top-up.

2. To watch out for certain amounts that count towards the TSB, but are dismissed. The main one is a pension account that has reverted from a deceased spouse before 30 June. This automatically becomes the recipient’s own pension account and therefore counts towards the TSB. It doesn’t matter there are no transfer balance cap implications for 12 months with reversionary pensions because this threshold is governed by a different set of provisions. The TSB is impacted immediately on death.

There are many opportunities to make contributions to superannuation and build up as much as possible in this structure.

However, it is always preferable to remain within the contribution caps due to the practical implications of dealing with an excess.

QUARTER IV 2023 57

COMPLIANCE

Urgent work still required

The bill to legislate the government’s final position on non-arm’s-length expenditure has been introduced to parliament, but Daniel Butler and Bryce Figot point out the issue is still far from resolved.

DANIEL BUTLER (pictured) is director and BRYCE FIGOT special counsel at DBA Lawyers.

58 selfmanagedsuper

The non-arm’s-length expenditure (NALE) provisions have proved controversial since they were introduced with effect from 1 July 2018. Perhaps the most controversial aspect has been the fact small discounts on services, such as an adviser fee of $100, can give rise to substantial extra tax.

For instance, under the current law, a NALE breach will subject all of an SMSF’s ordinary and statutory income, including net capital gains and assessable contributions, to a 45 per cent tax rate instead of the usual 15 per cent.

The amending legislation to reduce some of this tax impact, namely the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023, was introduced into parliament on 13 September, but has not yet been passed as law. This bill will, if it becomes law, reduce the tax impact where a lower or nil general expense is incurred by an SMSF through the imposition of an upper cap on the amount that is taxed as non-arm’s-length income (NALI).

The bill provides an upper cap on changes to NALE

introduced in section 295-550(1)(b) and (c) of the Income Tax Assessment Act 1997 (ITAA) where the NALE relates to a general expense. There is no relief for SMSFs for specific expenses which will be subject to the usual NALI rules as per ITAA section 295-550. References in this article will be to the ITAA unless stated otherwise.

At the time of writing this article, the bill needs the approval of the Senate and, if finalised as law in early 2024, the changes could take effect from 1 March. Once passed, this bill will have retroactive application back to 1 July 2018.

What were the 2018 NALE changes?

Broadly, under the current NALE provisions (see paragraphs (b) and (c) of section 295-550(1)) where the parties are not dealing at arm’s length, and a lower or nil expense is incurred, all the ordinary and statutory income of a superannuation fund for a financial year (FY), including assessable contributions, will be taxed Continued on next page

Continued from previous page

at 45 per cent. In other words, NALE results in substantial NALI exposure.

Moreover, NALE currently applies to all superannuation funds, both Australian Prudential Regulation Authority (APRA) funds and SMSFs. Note, however, the ATO provided an administrative solution by way of its Practical Compliance Guideline (PCG) 2020/5 where it did not apply its compliance resources for the FYs spanning 2019 to 2023 to enforce a general expense NALE in relation to large and small funds.

A specific NALE exposure was, however, not covered by PCG 2020/5 and therefore can result in NALI from 1 July 2018.

Will PCG 2020/5 be extended for FY2024?

There are sound grounds for the ATO to extend its administrative relief in PCG 2020/5 up to the time the bill is passed as law. Given the bill may not become law until 1 March 2024 or possibly later, for example on 1 July 2024, it is hoped the ATO will consider extending its administrative relief of not applying its compliance resources towards general NALE breaches for the year ending 30 June 2024. This would therefore result in the ATO not applying its administrative resources to general NALE breaches for the period of 1 July 2019 to 30 June 2024.

However, while certain professional bodies have requested an extension, there has been no indication the ATO will provide one.

Upper cap on general expense NALE The bill proposes a cap on the amount of income that will constitute NALI from a nonarm’s-length scheme involving a lower or nil general fund expense for a small fund. This cap is in the form of a two-times multiple of the amount of the lower general expense for an SMSF or a small APRA fund. The example below outlines how this cap is to apply.

As noted above, the proposed changes do not apply in relation to expenses relating to “gaining or producing income in relation to any

particular asset or assets of the fund”, that is, a specific expense. This is unfortunate as specific expenses can result in tainting the asset for life.

The difference between a specific and a general expense is discussed further below.

Example applying a two-times multiple: If an SMSF trustee uses a member’s brother’s accounting firm’s services, which would usually cost $8000 under an arm’s-length relationship, but is not charged any fee, this is considered NALE as the parties were not dealing at arm’s length. Therefore the tax payable would be calculated as follows: • 2 x $8000 = $16,000 NALE • $16,000 x 45% = $7200 tax payable by the fund.

Note, where the product of two times the NALE amount is greater than the fund’s actual taxable income, an upper cap will be the SMSF’s taxable income for the FY (not including any assessable contributions or any deductions against those assessable contributions).

Referring to the above example if the fund’s actual taxable income is say only $6000, the upper cap would result in total NALI of $6000.

Other proposed changes Clarification on non-arm’s-length and internal arrangements The explanatory memorandum (EM) to the bill discusses the capacity in which an SMSF trustee/ member acts and whether those actions will give rise to non-arm’s-length risks or will be an internal arrangement not giving rise to NALI/E risks.

Broadly this distinction depends on the capacity in which the trustee undertakes those activities based on the particular facts and circumstances.

This is not always clear and can prove difficult in practice to distinguish between which capacity a person is acting in.

The EM notes if a trustee is not acting in their capacity as trustee, but is instead providing services procured as a third party, the NALI rules are intended to apply. The EM also recognises in such cases an SMSF trustee may be prevented from charging any more than the arm’s-length price because of section 17B of the Superannuation Industry (Supervision) Act

Despite ongoing and extensive submissions to the government, Treasury and the AT O over the past five years by numerous professional and industry bodies, this area of law remains a mess and in needed of urgent revision.

1993, which permits a trustee to charge in limited circumstances.

The EM uses different language to that used by the ATO in Law Companion Ruling (LCR) 2021/2 and further clarification by the ATO on the bill in this regard would be welcome.

Specific v general expense The EM states: 7.5 Any [NALE] will be either a specific expense or a general expense. A general expense will be an expense that is not related to gaining or producing income from a particular asset … of the fund. A specific expense will be any other expense.

7.6 For specific expenses the previous treatment continues to apply, and the amount of income that will be taxed as [NALI] is the amount of income derived from the scheme in which the parties were not dealing at arm’s length.

Example 7.4 of the EM is relevant to SMSFs using the services of related members and parties as the example, among other matters, states: [Sam is a related party of an SMSF, whose assets include a rental property.]

Continued on next page

QUARTER IV 2023 59

COMPLIANCE

Continued from previous page

Sam is a licensed builder and blocks time out of his work calendar to conduct renovations on the rental property worth $3000 for which he charges nothing.

The renovations were an expense incurred in deriving income from a particular asset, the asset being the rental property. The renovations are a specific [NALE].

Thus, given the lower $3000 specific expense, the net rental income from the SMSF’s rental property in example 7.4 is taxed at 45 per cent. LCR 2021/2 suggests Sam’s $3000 of work taints the property with a 45 per cent tax rate for the remainder of its life.

Example 9 in LCR 2021/2 involves Trang, a plumber, who renovated the kitchen and bathroom of her SMSF’s second rental property.

This exposed the net rental income and future capital gain forever to NALI. Note, there is no express discretion for the tax commissioner to disregard honest or inadvertent oversights, despite numerous professional bodies requesting this type of flexibility.

Contributions to be excluded The bill proposes to exclude contributions assessable, under sub-division 295-C, from NALI. Note that under current legislation, general expenditure NALE results in assessable contributions being taxed as NALI at 45 per cent. However, specific NALI relates to a particular asset and therefore should not capture contributions. This is why the ATO view on general expense NALE gave rise to so much controversary over many years. Indeed, after nearly five years of seeking to effect changes, most professional and industry bodies conceded defeat as the government did not seek to revise the law in relation to specific NALI, which can have substantial impact and does not have any express flexibility to consider honest and innocent oversights.

60 selfmanagedsuper

The exclusion of assessable contributions from NALI makes sense seeing there are a range of other taxes impacting concessional contributions, including the 15 per cent income tax on contributions, the Division 293 tax and excess contribution taxes. There is the prospect for taxes on contributions to exceed 120 per cent.

Pre-1 July 2018 expenditure to be excluded Large APRA funds will be exempted from NALE in relation to both general and specific expenses. These funds remain subject to NALI where the income derived is derived from a non-arm’s-length arrangement. This could arise, for example, where a large APRA fund receives more income from a non-arm’s-length dealing.

A staff discount policy minimises NALE risk Given many firms and businesses offer discounted services to staff, appropriately documented staff discount policies should be in place.

Firms and businesses providing discounted services to staff, such as to partners, shareholders and office holders, must ensure an appropriate discount policy is in place to minimise the risk of having the NALE provisions apply to a staff member’s SMSF. If an appropriate staff discount policy is not in place, discounted services may expose SMSFs to a 45 per cent tax rate.

The key points to implement include: • a policy framework, that is, a formal policy document outlining the terms of the discount), • ensuring the discount is consistent with normal commercial practice, that is, based on appropriate benchmark evidence, and • providing the same discount to others of the same class, for example, the eligibility rules should have a class-based application to, say, all staff or all directors.

Specific NALE remains a significant risk given it can expose all ordinary and statutory income (less deductions) in relevant financial years to a 45 per cent tax rate.

Conclusions Many SMSF trustees are unaware of the breadth of these provisions and advisers should ensure there is ongoing education and monitoring for both NALI and NALE risks in their client base.

In particular, the general expenses NALE risk is substantial and the upper cap relating to general expenses has not yet passed as law. Thus care is needed as the ATO’s administrative approach reflected in PCG 2020/5 does not apply to the financial year ending 30 June 2024.

Specific NALE remains a significant risk given it can expose all ordinary and statutory income (less deductions) in relevant financial years to a 45 per cent tax rate.

Moreover, NALI also remains a serious ongoing risk given it can expose all future ordinary and statutory income (less deductions) from a particular asset to a 45 per cent tax rate, including a future net capital gain on disposal of the asset.

Despite ongoing and extensive submissions to the government, Treasury and the ATO over the past five years by numerous professional and industry bodies, this area of law remains a mess and in needed of urgent revision. The changes requested included a discretion to forgive innocent and honest oversights and more appropriate tax liability that allows for rectification and is proportionate to the amount of tax sought to be saved.

QUARTER IV 2023 61

SUPER EVENTS

SMSF TRUSTEE EMPOWERMENT DAY 2023

SMSF Trustee Empowerment Day was hosted on the Gold Coast and in Melbourne and Sydney in 2023, bringing delegates a mix of technical and investment presentations relevant to their requirements.

1

3

5

4

6

62 selfmanagedsuper

2

7

8

9 10

11

12

13

14

1: Darin Tyson-Chan (smstrusteenews). 2: Andrew Thomson (CFMG Capital). 3:Liam Shorte (Sonas Wealth). 4: Tracey Besters (Strategy Hub). 5: Lauren Ryan (Thinktank). 6: Julie Dolan (KPMG). 7: Damien Straker and Kirsty Maher (both Australian Shareholders’ Association).

8: Tracey Besters (Strategy Hub), Liam Shorte (Sonas Wealth) and Darin Tyson-Chan (smstrusteenews). 9: Andrew Thomson (CFMG Capital).

10: Dean Hutchins (Diversified Financial Planners). 11: Liz Westover (Deloitte Australia). 12: Darin Tyson-Chan (smstrusteenews), Dean Hutchins (Diversified Financial Planners) and Tracey Besters (Strategy Hub). 13: Lauren Ryan (Thinktank) and a delegate.

14: William Horan (Limerick Electronics Super Fund) and Liam Shorte (Sonas Wealth).

QUARTER IV 2023 63

LAST WORD

JULIE DOLAN DETAILS THE STEPS REQUIRED WHEN AN SMSF IS TO BE WOUND UP.

JULIE DOLAN is a partner and head of SMSFs and estate planning at KPMG Enterprise.

64 selfmanagedsuper

Based on the ATO’s “SMSF quarterly statistical report September 2023”, the number of fund wind-ups for the year ended 30 June 2023 was 7559. This was less than half the funds shut down in prior years.

Wind-ups occur for several reasons. The most common reasons are failing health or the death of a key member, the fact fund assets have reduced to a level such that it is not cost-effective to run an SMSF, disputes between trustees or the fund no longer meets the residency test.

As SMSF professionals, it is important we guide trustees through the number of steps required to effectively close down a fund. It is not as simple as just selling up the assets and paying out the member benefits.

The process of winding up an SMSF generally involves the following steps: 1. Checking the trust deed. Does the deed have certain requirements that need to be met, such as written trustee and member consents and signed minutes of meetings?

Does the deed allow rollovers or in-specie benefit payments?

2. Disposal of assets. Do assets need to be sold and/or transferred out as in specie?

What amounts are to be rolled over to other funds via SuperStream as opposed to being paid directly to members? What are the capital gains tax and stamp duty implications?

Trustees are required to deal with all assets in accordance with the super laws and trust deed. In-specie payments must be transacted at market value and substantiated by external evidence.

3. Finalise outstanding tax and compliance obligations. This includes having to: a. Ensure pension payments are up to date, which includes pro-rata payments prior to full commutation of the pension(s).

Lodge a transfer balance account report for the full commutation of the pension(s). b. Lodge contribution notices under section 290-170 of the Income Tax Assessment Act 1997 for personal taxdeductible contributions. c. Completion and lodgement of payas-you-go payment and withholding summary statements.

4. Pay outstanding expenses and tax liabilities. Prepare an estimate of accounting fees and request audit fee for payment. Certain expenses may not fall due until after the SMSF is to be wound up. Rather than keep the SMSF running and delaying the wind-up process, the fund can be closed and the necessary cash can be retained on trust by the former trustees until the liability is paid.

If the amount of the refund can be reliably calculated, accrue into the SMSF’s final year accounts.

5. Calculation and payment of member benefits. Prepare final accounts based on whether each member has satisfied a condition of release to access their benefits. If a member meets a condition of release, benefits can be paid as cash, in-specie transfer or rolled over to another complying super fund. If the member does not satisfy a condition of release, benefits must be rolled over. Payment of benefits and how they are made should be documented.

If benefits are paid to a person other than a member, for instance upon the death of a member, trustees need to ensure the trust deed allows for the payment and that the recipient is a superannuation dependant under the super regulations. Tax obligations will be dependent on whether the recipient is a tax dependant under the tax act.

If benefits are to be rolled over, SuperStream must be used. This includes validating the member’s tax file number via SMSFmemberTICK and validating the receiving fund details via the relevant validation service.

The rollover needs to occur via an electronic service address (ESA) provider. A list of ESA providers that offer contribution or rollover capabilities is available at www.ato.gov.au/ esaprovider.

6. Complete the audit and lodge final tax return. Lodging the final tax return notifies the ATO to cancel the fund’s Australian business number and close on their system.

7. Other. If the fund had a corporate trustee, it may need to consider deregistering. Once all the above are done and ATO confirmation has been received, the fund has officially been wound up and its bank account can be closed.

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

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

Together we can help stop the rise in homelessness.

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