In the lead-up to many measures of the Turnbull government’s new superannuation legislation commencing on 1 July, a number of areas must be reviewed and presumably amended to ensure SMSFs are in line with the new rules. Krystine Lumanta asks the experts what actions SMSF practitioners are expected to take and what should be on their radar over the next four months.
With SMSFs now holding more than $622 billion in investments, trustees and members who are in a position to should make a point of boosting their balances ahead of 30 June. But there are plenty more issues to consider, some complex and with their own intricacies, which these new, significant super changes present.
Since the anticipation of major changes to the super system off the May 2016 federal budget, the government delivered three tranches of exposure draft super laws between September and October. In November, both houses of Parliament passed the Fair and Sustainable Superannuation Bill and Excess Transfer Balance Tax Bill unamended.
The Superannuation (Objective) Bill, which will enshrine the objective of superannuation in legislation, is being considered by the Senate Economics Legislation Committee, which is due to report back on 14 February.
Even before the passing of either bill, the crucial message echoed in the industry at a practitioner level has been one of urgency around firstly understanding the complexities, followed by reviewing SMSF clients’ positions and resolving matters well ahead of the incoming super regime. Add to this the fact these changes are expected to have a far wider impact than the 4 per cent of the population of superannuants projected and repeated by Treasurer Scott Morrison.
An analysis by BGL Corporate Solutions on anonymous data from 1200 administration firms representing over 60,000 SMSFs found at least 15 per cent of SMSFs would be affected by the $1.6 million transfer balance cap, or 85,000 SMSFs with 160,000 members as at 30 September 2015.
In the coming months, HLB Mann Judd director of superannuation Andrew Yee expects trustees will be relying heavily on their advisers and accountants to provide them with advice on planning and compliance, both pre and post 30 June.
“The feedback we’re getting from clients is that the new rules, since announced in the budget and including changes made later on, are very confusing and complicated,” Yee tells selfmanagedsuper.
“Hence there’s a real onus on SMSF advisers to be across the existing rules and the new rules coming into play on 1 July 2017.”
SuperConcepts SMSF technical and private wealth executive manager Graeme Colley admits on some level the industry was preparing for major changes to super.
“Most clients have accepted that we’ve had a good couple of years so it had to come to an end at some stage – I’ve had a number of people say that to me,” Colley reveals.
“The new super measures are a 2017 project. It’s as big a change as when the reasonable benefit limits (RBL) came in, which resulted in a dynamic shift in the way people thought about their superannuation.
“The main thing to understand will be pensions and how the $1.6 million transfer balance cap works, and it’s also important to understand the distinction between that and the general $1.6 million balance cap because they both determine separate things.
“I’m seeing confusion with some clients over this at the moment so there’s certainly an education piece that we have to do with them.”
Nevertheless, he says SMSFs may have some advantages over the other super structures.
“It’s all in the one packet so from a planning point of view, that allows you to look in camera, and if there are external factors like a public service pension, then at least it’s only one or two benefits outside, which are reasonably easier to understand in terms of their impact on the fund,” he explains.
“Whereas if it’s a client with a number of retail or industry super funds, it might be all that more difficult to get the information and be ready at 30 June as best you can.
“That doesn’t mean it’s all good for SMSFs because in some cases you’ve got valuation issues, which we know are sometimes difficult to obtain by 30 June.”
@GrantSMSF founder Grant Abbott believes the changes to super are a huge wake-up call.
“The first big problem I see is that both planners and particularly accountants need to be on top of what they have to do for their clients, and accountants are generally not on top of the rules themselves,” Abbott says.
“Another big one is that the administration or accounting systems that they’re using will effectively have to identify what the pension account balance is at 30 June 2017, and alert whether it’s over the $1.6 million transfer balance cap.
“The problem with that is if the commissioner gets the data and suddenly issues a commutation letter, basically a commutation assessment, clients could lose the $1.6 million balance and advisers and accountants could be blamed. So they need to be on the front foot.”
First port of call: contributions
In order to take full advantage of the current, more favourable contribution rules, topping up SMSFs where possible is expected to result in an influx of contributions ahead of 30 June.This will certainly be the case for wealthy individuals, Yee says.
“Especially around maximising non-concessional contributions (NCC) as there is an incentive for those with more than $1.6 million in superannuation to do that before 1 July, when the general balance cap applies and restricts their ability to make large NCCs to superannuation,” he explains.
“I also think there’s an incentive to maximise concessional contributions (CC), especially for those over age 50, this year before the cap drops to $25,000 for all individuals. But not to the same extent as the NCCs.”
An interesting suggestion here is that SMSFs may see borrowing as a viable way to boost their balances.
“People could borrow in order to put money in, but it generally would depend on the state of returns,” Abbott says.
“Borrowing costs are pretty low at the moment so you’d have to try to work out your returns over time, which you can do with one of the planning systems, but I’m sure any planner would want to assess if over the next three to four years, the amount they’re going to get in there is significantly greater than the borrowing.”
Colley points out there’s no tax deduction for the interest payable on the loan if an SMSF decides to go down the borrowing route.
“I suppose if you were close to drawdown phase and over the next couple of years the investments were going to provide you with a rate of return better than the interest rate you’re paying on the loan, it would work well, but you’re taking on a risk there, of course,” he says.
“However, you really need to think about what’s the benefit to you because while you can only put the $540,000 in this year, you can still put $300,000 in subsequent years so it’s not the end of the earth.
“There could be some people who will go out and borrow, but I wouldn’t think it’d be too common.”
While it was good news SMSFs have one last opportunity to get money into their fund, ensuring the contribution limits aren’t exceeded should not be forgotten.
Crystal Wealth Partners executive director Tim Wedd says if clients are selling a small business to take advantage of the small business tax concessions, it’s important to get the timing right between contributing NCCs and capital gains tax (CGT)-related contributions under the new regime as the $1.6 million total super balance cap will count CGT contributions.
“This may prevent subsequent NCCs being able to be made unless the order of contributions is watched carefully,” Wedd warns.
“In addition, cash-flow management will be important over the next few months as funds may need to make benefit payments and/or final re-contribution plans before the rules change, including paying benefits out and contributing to a member’s account where feasible.”
The $1.6 million question
Arguably the biggest surprise in the government’s 2016 budget package was the introduction of a $1.6 million transfer balance cap, altering pensions from being generally a set-and-forget structure to one that now requires careful planning.Determining whether pension balances over $1.6 million should be brought back to accumulation phase or be taken out of the super environment requires extensive analysis, and advisers have been prompted to look at clients who are already over $1.4 million and making assessments of what will be done ahead of 30 June.
According to Wedd, there are multiple issues to consider around this change, for example, determining whether a fund has one member somewhere in pension phase over $1.6 million in benefits and if this can lead to the fund losing segregation for tax purposes.
“This will be an important conversation for those affected and whether the CGT relief needs to be adopted,” he explains.
“However, the other less talked about issue around this segregation aspect is what we call ‘member account’ segregation, which has nothing to do with the tax changes.
“Rather, it’s about keeping a member’s account separate in a fund, which doesn’t mean it also has to be ‘segregated’ for tax purposes. For example, one member who is near a $1.6 million balance may choose lower growth options compared to another fund member who invests more aggressively.
“This will lead to different appreciation in the respective account values that may assist keeping all members under the $1.6 million cap and thus the fund still totally tax-free.”
He says this may also help those who want to put in more contributions while their balance is under $1.6 million, however, it will require case-by-case assessment.
Yee adds for the higher-end clients with large super balances, this could be a good value-add exercise for advisers to assist clients to cherry-pick assets between accumulation and pension accounts.
“There are suggestions that this segregation exercise will be better achieved by having two SMSFs – one for accumulation and one for pension,” he says.
“The other potentially time-consuming exercise will be the resetting of cost bases of relevant assets under the CGT transitional period from 9 November 2016 to 30 June 2017.
“A lot of time can be consumed in this exercise, unless the adviser has sophisticated software in place.”
As a result of the work that needs to be done in reviewing and amending SMSFs comes an estate planning opportunity, which will allow this often overlooked area to have greater prominence, Abbott reveals.
“Making wrong decisions will have a significant impact on the estate,” he warns.
“The government is basically saying you can have $1.6 million on the pension side.
“So whether you’re rolling back into accumulation or taking it out, either way you need to look at it from an estate planning perspective because this money is generally not going to be used up in their life, bar aged-care costs, but essentially it’s going to be passed on to the next generation.
“So it’s an opportunity for the smarter advisers and accountants to talk about estate planning, but in order to succeed they must get up to speed with the new rules and ensure they let their clients know.”
The dangers of complacency
Across the industry, there’s a feeling of concern over SMSFs that may not be across all the new super rules, and, as a result, choose not to take any action or act when it’s too late.Commenting on this, Colley says: “I think that needs to be heralded much more because people will be complacent and they might finally wake up on or after 30 June, just depending on how much they read about it and how much that information assists them.
“I think we will see tax penalties for non-compliance with the new legislation. It’s like what we’ve seen occur in the past with excess contributions and how that evolved.”
Even under the current rules, Yee says there are many trustees and advisers who do not plan or take advantage of the super concessions and benefits available to them.
“So I expect this complacency or ignorance to continue amongst certain trustees and advisers,” he says.
“I suspect, like a lot of things in life, many people will adopt a ‘head in the sand’ approach until it finally hits them.”
Wedd says ultimately it’s the complexity of the new rules that is concerning for many trustees.
“This may lead to them not addressing the issues before it is too late. Expect a late rush in June 2017 and calls to the trustee’s accountant, in many cases, who will need to be licensed to provide advice,” he predicts.
Time is ticking
From now until 1 July, Yee says there will be much self-education required of SMSF advisers and trustees on the new super rules and how to make best use of the current and incoming rules. “Advisers will really need to be on their game otherwise their clients will find a reason to go elsewhere for good and proactive super advice,” he warns.
Abbott says he hadn’t seen evidence of proactive advisers and accountants tackling these issues head on before the Christmas break.
“It’s a really hard one because there’s going to be at least 60,000 to 70,000 people who’ll be impacted by these laws and you just wonder, a lot of these people are looked after by accountants and if they breach the licensing rules, will that have a great impact?” he poses.
“The complication around most of the legislation is the administration side of it. It’s a nightmare. But I think the government’s going to keep tightening the rules as to how much can go into super.
“So it’s a value-add for advisers and particularly accountants because the best thing about the situation is that there’s a time frame on it, so you have to do something, otherwise there will be huge penalties.
“While there’s a lot of work to be done in the space of 10 or 12 weeks, SMSF strategies don’t have to be complicated – you can do quite a lot with modelling.”
As a starting point, Wedd recommends current retirement planning strategies be reviewed, as well as considerations around transition-to-retirement plans, estate planning nominations, contribution levels, fund balances and splitting or equalising benefits between couples, not to mention trust deed reviews to make sure the fund’s deed can cope with the new rules.
“I think it will be very challenging now as the government has removed the ‘simple’ from the previous Simple Super reforms,” he says.
“We are back in the midst of complexity, which will make it very difficult for the uninformed trustee to know what to do without proper advice. The SMSF sector will be in overdrive in 2017.”