The absence of indexation in regards to the disregarded small fund assets (DSFA) threshold could see SMSFs inadvertently fall under its provisions due to increases in inflation, according to an SMSF pensions expert.
Accurium SMSF technical services manager Melanie Dunn said the indexation of the transfer balance cap (TBC) earlier this year did not include the DSFA threshold, but it now had the ability to impact SMSF members through no fault of their own.
“Due to inflation and higher balances in super, more funds could be caught by the DSFA provisions and become misaligned with the transfer balance cap,” Dunn said during a presentation at the recent ASF Audits Technical Seminar 2021.
“You could have a situation where that fund will have DSFA because a member has a balance of more than $1.6 million, which will mean they need to use the proportionate method to claim exempt current pension income.
“Whether that ends up better or worse from a tax outcome is going to depend on what income was earned during the year, when it was earned and if the fund didn’t have DSFA but had a period solely in retirement phase, you could actually end up with a worse outcome using the proportionate method.
“It will depend on the situation, but that gap will grow over time and will mean more funds could fall under the DSFA provisions.”
The decision to not index the DSFA threshold in line with the TBC may have been a potential strategic decision on the federal government’s behalf, but no reason has been given for it, she said.
“I don’t know why [the government] chose not to [index the DSFA threshold] other than maybe they thought it could improve outcomes over time or it was just simpler to put the number in the legislation. I actually haven’t heard a reason as to why,” she said.
