The further we move away from 1 July into the brave new world of the most recent post-super reforms, the more we are seeing the flow-on effects from the system changes be they intentional or unintentional.
It means the real impact of the changes are now being, and will continue to be, felt by the SMSF trustee community.
Amendments some trustees must all of a sudden contemplate in regard to the estate planning of their fund are a great example of this.
Up to this point there was no limit on the size of a person’s pension account, meaning if they were the recipient of an automatic reversionary pension, they could keep the entire amount of the benefit inside their SMSF.
This of course is no longer the case with the new rules dictating only the portion of the reversionary pension that fits under the beneficiary’s transfer balance cap can be retained in the super fund. To that end, any portion of the benefit that exceeds the recipient’s transfer balance cap cannot be rolled back to the SMSF’s accumulation account so must be taken by the recipient as a lump sum payment outside of the super fund.
For individuals facing this situation it means a whole raft of new issues to consider. For example, what will they do with the lump sum paid out to them? How and where will they invest it? More importantly, this amount of money has exited the tax-effective superannuation environment, and while the lump sum itself will not be taxed, the income generated from it will be taxed at the person’s marginal rate.
This brings on potentially a whole new dimension of tax planning not previously required.
The more cynical among us may accuse the government of stretching the fiscal repair element of these reforms to include a bigger revenue windfall through marginal tax catchments. However, I personally wouldn’t credit Canberra with this motive considering any peripheral consequences from the changes would seem to have been largely unforeseen.
The imposition of the transfer balance cap has also forced some trustees to roll back a portion of their pension assets to the accumulation account to comply with the $1.6 million limit.
This course of action will automatically mean some assets will have to be revalued so as to know how much they were worth when the rollback was performed. Revaluation of the pension assets to be put back into the accumulation account will also be necessary if the trustee is aiming to take advantage of the capital gains tax relief provisions contained in the reforms.
In turn this has placed valuations on the ATO’s compliance radar, meaning potentially further unwanted fund scrutiny from the regulator.
In fact even if the asset valuation procedures of an SMSF had been tip top until now, if the process is out of cycle, say performed every three years where 2017 was not a third year, some experts are recommending a current valuation be performed anyway.
All of this means more hassle, and most importantly, greater expense for people running their own SMSFs.
With more consequences to be shaken loose from the superannuation tree as the reform implementation process continues, we can only imagine the situation will get worse before it gets better, if it gets better, for trustees.