Rules relating to disregarded small fund assets (DSFA) should be reviewed as they are complex and appear to have limited application to the SMSF sector, according to the SMSF Association.
Association deputy chief executive and director of policy and education Peter Burgess said the situation the rules were designed to tackle when introduced is currently not common and the rules are complex and difficult to apply.
“It was introduced in 2017 and there was concern back then, particularly by Treasury, that people who had considerable pension balances in order to comply with the $1.6 million transfer balance cap (TBC) were going to need to transfer some of that balance back to the accumulation phase,” Burgess said during the SMSF Association Virtual Technical Summit 2021 yesterday.
“The concern was they would use the segregated approach to pick and chose which assets they would move back into the accumulation phase and get some form of tax benefit.
“Statistics show that very few SMSFs use the segregated approach, even before the DSFA rule came in, and it is time to review if we still need this rule. It is complex and in the interest of reducing red tape we should reconsider if we need it.”
He said Treasury may consider the rule served a purpose when it was introduced and that purpose remained, but changes to segregation could also provide a better result.
“If the Treasury view is the case, then perhaps we should also consider whether we should still allow SMSFs to segregate as very few do that with their assets and it does create complexity in law, and it may be time to review whether SMSFs should only be allowed to use the proportionate method,” he said.
He added if no changes were made to the DSFA rules, then the relevant threshold should be brought in line with the general TBC.
“If we are going to continue DSFA rules and the ability to segregate, then it is important the DSFA threshold is indexed to the TBC. It is set and fixed at $1.6 million and for individuals who have a balance in retirement phase in excess of that, their SMSF cannot use the segregated method,” he said
