Administration, ATO, SMSF, Tax

More admin pain from $3m soft cap

SMSF SMSF annual return Total superannuation balance Defined benefit pension $3 million earnings tax

SMSF trustees and practitioners are likely to face a greater administrative burden and associated costs as a result of the new $3 million soft cap.

A technical expert has forecast the proposed $3 million soft cap is more than likely to add significant administration procedures and costs for SMSF trustees and practitioners.

Colonial First State head of technical services Craig Day confirmed this will be the case for SMSF members receiving a defined benefit pension.

“Currently you don’t have to worry about reporting any value for that [pension] for total super balance purposes. Why? Because the ATO goes and looks at the transfer balance account value. From 30 June 2025, that value is now irrelevant for total super balance purposes,” Day noted.

“That means if you’re the trustee or the administrator, you’re now going to have to calculate a value using the new [regulations pertaining to the $3 million soft cap] and report them to the ATO.

“So [there will be] additional reporting obligations here.”

According to Day, the regulator will be looking to gather most of the information required to calculate and impose the new superannuation tax from the SMSF annual return. However, he noted this practice will again be problematic as the current annual return form is not fit for that purpose.

To illustrate this point, he recognised trustees currently report the proceeds from an insurance payout in the same box as they do their investment returns for the income year.

“So how is the ATO going to know that figure is made up of two separate amounts – my earnings and my insurance proceeds? It won’t,” he said.

He suggested the situation will lead to the regulator having to revamp its approach to gathering the earnings information for the Division 296 tax and in turn will translate into greater expense and administration impositions for trustees.

One way the ATO may do this, he predicted, is to change the annual return, but noted amending one information field costs the government agency over $1 million.

He acknowledged there is an alternative, but warned it would place a greater direct burden on SMSF trustees.

This would involve the regulator issuing Division 296 tax determinations using existing information-gathering resources and techniques, and placing the onus on trustees to challenge these determinations should any earnings adjustments need to be made in a development that would put more pressure on them as well as practitioners.

“If you’re an administrator or an accountant and the client gets this letter, where do you think they’re going? Straight to your door to get help with that. Is that something you can charge for? Probably,” he said.

“But it’s more work and more red tape because of these rules. You just need to be aware of that.”

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