The new SuperStream requirements present a significant change to how SMSFs operate. Zoe Fielding takes a look at the effect they will have along with some other significant legislative changes trustees will have to address.
SMSFs have been affected by many regulatory changes over the years, forcing trustees to closely monitor government and tax office announcements if they want to stay on top of their responsibilities.
Some changes have required updates to trust deeds or investment holdings. Others have ushered in new approaches to fund administration. But it can be difficult to keep track of the requirements, particularly those that emerge as side-effects of regulations not directly targeted at SMSFs.
The so-called SuperStream reforms, primarily aimed at large super funds, are one area in which experts believe the details have slipped under trustees’ radars and may catch funds off guard this year.
The issue, says Sladen Legal partner Phil Broderick, is that from 1 July this year businesses with 20 or more staff members will be required to make contributions to employee superannuation funds electronically, using specified data formats. That requirement will be extended to smaller employers from 1 July 2015.
“It doesn’t matter what sort of super fund it is, a public offer industry fund, a retail fund or a self-managed super fund, they will all have to have the ability to receive contributions electronically and also in the correct data standards,” Broderick says.
Funds that fail to comply with the standards will be unable to receive contributions, including superannuation guarantee (SG) payments and salary sacrifice amounts, from businesses that employ their members.
“The word is not getting out there to the self-managed fund level that if they still want to receive super guarantee contributions from July 1 this year, they will have to have these systems in place,” Broderick says.
MLC SMSF advice manager Peter Hogan agrees many trustees are unaware of the changes they may be required to make.
Hogan expects that between now and May most SMSF trustees will sit down with their accountants to discuss their fund, its returns and the year that has passed as part of an annual review. At these meetings he expects accountants will inform trustees of the requirements and suggest steps they should take to prepare for the changes.
Communication with employers will be vital, too, he adds. “It’s mainly a matter of the member in their capacity as an employee having a conversation with their employer about how [the employer] plans to make the payments,” he says.
The Australian Taxation Office (ATO) estimates around 200,000 of the country’s 509,000 SMSFs receive contributions from an employer. Some 60 per cent of those, more than 155,000 funds, receive contributions from large and medium-sized employers.
Not all of those 155,000 funds will be affected due to a carve-out exempting SMSFs that are considered related parties of the employers. The ATO estimates around one in four SMSFs fall into that category, although that still leaves more than 100,000 funds that are likely to have to make system changes.
There are detailed rules set out in the Superannuation Industry (Supervision) Regulations that determine whether or not an employer is a related party of the fund. There are different rules depending on the business structure, whether it’s a company, a partnership or a trust, as well as its size.
An employee of a company with more than 40 staff must own 50 per cent or more of the shares to be considered a related party, SMSF Professionals’ Association of Australia technical and professional standards director Graeme Colley says. If the owner holds less than half of the shares, the employer may be considered unrelated. In partnerships, each partner is generally considered a related party. Colley recommends getting professional advice if there’s any doubt as to whether the employer is a related party of the fund.
SMSFs that are affected by the incoming SuperStream requirements will have to supply three key pieces of data to the employer, he says. They will have to provide the fund’s Australian business number (ABN); its bank account details, including the BSB, bank name and account number; and, importantly, an electronic service address for receiving data messages about the contributions.
It is unlikely SMSFs will have to review or update their trust deed to meet the requirements.
Colley says while a handful of funds don’t have an ABN, and an even smaller sample doesn’t have a bank account that can receive electronic payments, the main task for SMSFs will be to obtain an electronic service address that complies with the data and payment standards.
The electronic service address is more than just an email address and SMSFs are unlikely to be able to meet the requirements without engaging a service provider. The key requirements of the address are that the system must be able to receive and host data messages from super funds, and translate those messages into a format that people can read. There are also requirements about system certification, operational performance and information security.
The ATO plans to publish a register of between 10 and 20 providers that can help SMSFs meet their data obligations. It is expected the list will be released in the coming weeks.
SMSFs will have to supply the fund name, ABN and trustee contact details to register with a provider that can issue an electronic service address.
Fund administrators have been working on solutions for SMSFs. Some, such as Class Super and BGL, have announced they will not charge an additional fee to existing clients for issuing an electronic service address. Others, such as Ozedi SuperStream Hub and Australia Post, will charge a small fee. Australia Post, for example, is charging a $25 registration fee for the first 12 months for those that sign up before 31 May 2014, which represents a 50 per cent discount to the expected regular fee.
“The [SMSFs] that are going to run into problems are the ones that don’t have a link to an administrator,” Colley says.
The ATO estimates around 30 per cent of SMSFs keep records on spreadsheets and do not use an administration service.
“I do know of one case where the accountant is still keeping the books by hand. They are going to have a quantum leap to make,” Colley says.
SMSFs that do not use an administrator will have to identify a provider that can help them meet the electronic requirements.
SMSF members should provide the necessary data to employers by 31 May 2014 to give employers time to update their payroll systems and run any tests needed to meet the 1 July 2014 deadline. Employers that don’t receive the details by 1 July may start making SG contribution payments into the company’s default super fund rather than into the employee’s SMSF.
Newly established SMSFs will have to provide SuperStream-compliant information as part of the start-up process. The ATO plans to update the Election of Superannuation Choice form to collect this data.
In addition to employer contributions, the ATO expects that from 1 July 2015, SMSFs will have to use the electronic standards to receive and pay out rollovers to Australian Prudential Regulation Authority-regulated funds. Legislation supporting this requirement has yet to be passed, but Colley says it’s another factor SMSF trustees should bear in mind.
“If you don’t have the details required, [APRA-regulated funds] will refuse to provide the rollover from 1 July 2015,” he says.
It’s likely there will be some flexibility with electronic processing at the start of the regime, Macquarie Adviser Services executive director David Shirlow says.
“My sense is that there will be a fair bit of latitude because a lot of people simply won’t be ready for it. It’s not going to be a strongly enforced requirement,” Shirlow says.
Another message SMSFs may have missed concerns the requirement for trustees to consider and document the insurance needs of their members.
“That’s law already … the ATO for its part has been getting the message out there, but this will take quite a bit of repetition to get through,” Shirlow says.
The ATO will soon have more flexibility to deal with SMSFs that fail to meet their obligations due to a separate piece of legislation that comes into force from 1 July 2014.
“At the moment the ATO has a choice of making the fund non-compliant or doing nothing. It’s got fairly blunt instruments in terms of the penalties it can impose,” Shirlow says.
In mid-December, Assistant Treasurer Arthur Sinodinos announced the federal government would continue with a proposal put forward under the previous government (but not legislated in time for the election) that the ATO should be given the power to issue a wider range of penalties for breaches of SMSF regulations.
The incoming set of penalties could simply require the SMSF to rectify the problem or its trustees to receive training and education to help them understand their responsibilities. The ATO would reserve the penalty of making a fund non-compliant, which revokes its tax advantages, for the most serious of offenses.
That proposal was one of 64 measures Sinodinos clarified in the announcement in December. Federal Treasurer Joe Hockey had already announced on 6 November that the government would proceed with 18 un-enacted measures put forward by the former government, while three would continue with significant amendments and seven initiatives would not proceed.
Several proposals on the list of 92 measures concerned SMSFs. Shirlow says the main point on which SMSFs had been awaiting clarity was around proposed changes to rules concerning the acquisition and disposal of assets between SMSFs and related parties.
“That would have prevented members of a fund making in-specie contributions to the fund of listed securities off market,” Shirlow says.
“The government decided not to pursue that set of constraints … so funds can continue making in-specie contributions as they have done in the past.”
Finally, contribution rates are due to change this year for all super funds and SMSF trustees should be aware of the new levels.