Navigating SMSF total super balances

There has been much SMSF industry debate and discussion surrounding the introduction of new legislation as a result of the reforms from the 2016 budget.

But the conversation appears to be centred solely on the transfer balance caps (LCG 2016/8), with little consideration given to total super balances (LCG 2016/D12).

Maybe it’s the $1.6 million limit that applies to both the transfer balance cap and the total super balance that causes confusion and hence the neglect.

SMSF advisers should be aware the risk of focusing on transfer balance caps at the expense of total superannuation balances may result in compliance breaches for many of their SMSF clients.

The reality is the transfer balance cap will affect less than 1 per cent of fund members, whereas the total superannuation balance will potentially have an impact on up to 50 per cent of fund members.

The best way to understand both concepts is to ignore the $1.6 million limit (for the moment) and focus on their meaning. The ATO clarified how the total super balance and the transfer balance cap work at the recent SMSF Association 2017 National Conference:

1. The total super balance is essentially the sum of the accumulation and retirement-phase interests across all of a member’s superannuation funds and life insurance companies.

2. The transfer balance cap is a point-in-time calculation of the assets supporting an income stream paid to a member, for which the SMSF claims a tax exemption.

The introduction of a total super balance is an important shift for both the ATO and SMSF industry as it moves away from a fund focus to a whole-of-member focus.

In essence, where a member has a $1.6 million total superannuation balance as at 30 June 2017, they will no longer be able to:

1. make non-concessional contributions without exceeding their non-concessional cap, or

2. access the concessional contribution cap bring-forward.

As a result, the door to transferring assets into the fund by way of an in-specie contribution will be closed to fund members forever.

Also, where the SMSF is in pension mode and the member has exceeded their total super balance, the fund must use the unsegregated (proportional) method to calculate exempt current pension income.

One of the most serious consequences of the new total super balance is where members exceed the $1.6 million limit, yet continue to pay for fund expenses out of their pockets.

Under this scenario, there is no ‘wiggle room’ to take up the payment as a non-concessional contribution.

And without the ability to use contribution caps in this manner, the fund will have no option but to book the payment as a borrowing, resulting in a breach of section 67 of the Superannuation Industry (Supervision) Act.

Where the ‘borrowing’ is more than $30,000 or 5 per cent of fund assets (in line with the financial threshold test), the SMSF auditor has no discretion and will be obliged to lodge an auditor contravention report with the ATO. Any repeated or unrectified breaches will also be reported, regardless of materiality.

Until 30 June 2017, fund members are still able to access the current contribution caps, without any restrictions based on members’ total super balance.

Remember, too, that triggering the bring-forward provision during the 2017 year will result in the member being unable to make further contributions in the 2018 year if they exceed the $1.6 million total super balance as at 30 June 2017.

It’s also important to realise the vital role asset valuations will have in the administration of both the total super balance and transfer balance caps.

Property and unlisted assets, in particular, will be under the intense scrutiny of the ATO and SMSF auditors to ensure valuations are substantiated and correctly reflected in fund financials.

Without the correct documentation in place, the ATO may question the value of these assets to ensure there’s no circumvention of the new $1.6 million limits.

There’s no doubt the new legislation will place additional work and responsibilities on SMSF auditors and advisers alike, with SMSF auditors playing an augmented role as gatekeepers of the superannuation industry.

One questions how the business model of a low-cost SMSF auditor can continue to be profitable given the complexities of the new compliance measures.

Making mistakes in the future is going to be costly. With litigation touted as the next problem facing SMSF advisers, working with an SMSF auditor who rubber stamps their audit reports has become a high-risk decision.

Multiply this situation by the number of clients administered by an SMSF adviser, and it’s easy to see how the false economy of saving a few dollars can lead to a disastrous financial outcome in the future.

The answer, as always, is to partner with a long-standing SMSF audit firm you trust to provide a quality service.

Shelley Banton is the director of SuperAuditors.

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