First appeared in Switzer Daily, 5 June 2018
If your client has a self-managed super fund (SMSF) or is considering establishing one, there are some announcements in this year’s Federal Budget that you should be aware of, as they could have some impact on the future operation of SMSFs.
At the outset though, it is important to remember that at this stage these proposals are only announcements. Largely due to take effect from 1 July 2019, legislation will need to pass through the parliamentary process before changes take effect, and it is possible that the final version of the measures may differ to what has currently been announced.
So what are the changes and what sort of impact could they have?
Expanding SMSF membership
From 1 July 2019, it is proposed to expand the maximum number of members of a SMSF from the current level of four to a new maximum of six.
Whilst this change may have little impact on many existing superfunds, for those with larger family groups this could present a new opportunity to set up a single SMSF to cover all relevant members. Or where the size of a family has required multiple SMSFs to have been established, it may be possible to merge them into one.
For some small business owners who have been considering the option of establishing an SMSF to own business premises, this expanded membership opportunity may allow greater flexibility in achieving these goals. An example of where this could occur is in farming families, where an SMSF has been used to take ownership of the property, which is then leased back to the family to run.
With changes that took effect from 1 July 2017 that reduced the ability to contribute money into super once you had accumulated at least $1.6M, the ability to include new members may make the transfer of business real property something to consider once again.
Naturally though, introducing more members, and therefore more and new trustees, can bring added complexity to the operation of the SMSF, with more member accounts to be maintained, and could result in a different level of fees applying. It will also be important to ensure that there are clear guidelines for all trustees about the decision making process, as more trustees could lead to more differences in opinion on how the SMSF should operate.
Whether or not your client plans to expand membership of an existing SMSF, it is also a good reminder of the need to carefully consider the trustee structure your client has in place for the SMSF. Whilst many SMSFs have been set up with individual trustees, which is generally an easier and more cost effective choice for initial establishment, the on-going operation of a SMSF is generally better with a corporate trustee structure. Not only does a corporate trustee structure provide greater administrative ease in the appointment of new directors (as new members joining the SMSF), but aids in providing a clearer ownership of assets – making it easier to identify what is owned on behalf of the SMSF and what is owned personally. Clear separation of assets has historically been a focus area of the ATO.
Reduced audit requirements
The Government has announced it intends to amend the law so that SMSFs with a good compliance history will only need to be audited once every three years, instead of the current annual requirement. Current indications are that your client is deemed to have a good compliance history if they have three consecutive years of a clear audit result for their SMSF and their SMSF’s tax returns have been lodged on time.
Due to commence from 1 July 2019, this has the potential to reduce some of the on-going running costs for SMSFs. However, the removal of this annual audit requirement does not mean you can relax when it comes to operating your client's SMSF. In fact, it may be even more important to ensure your client's SMSF is professionally managed on an on-going basis to retain that strong compliance history into the future. In the unlikely event that an issue was identified in a future audit, there is the risk that the penalties that could be imposed back to the time of the error could become significant.
Other super measures
In addition to the above measures that were specifically directed at SMSFs, you should also be aware of other proposed changes to superannuation from 1 July 2019 that may have a direct or indirect impact on SMSFs also. These include:
- A proposed ban on exit fees when rolling out of a superannuation, which combined with previous announcements to extend streamlined measures for rolling over super to SMSFs will make it easier to combine multiple accounts into one.
- Members aged 65-74 won’t have to satisfy the existing work test (of 40 hours of employment within a 30 day period) in the first year they do not meet the work test requirements, if they have less than $300,000 in super and are seeking to make a contribution.
- The introduction of a new retirement covenant for superfunds. SMSFs have not (at this point) been specifically excluded from this measure which requires trustees to develop a retirement income strategy and consider the retirement income needs of members.
It’s important to remember that these measures are only announcements, they are not yet law - although consultation on some of these measures has commenced.
Bryan Ashenden is the Head of Financial Literacy and Advocacy, BT Financial Group
Information current as at June 2018. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714.