An SMSF policy wish list

Darren Kingdon

The SMSF community has had some wins recently, with the government abandoning its proposed related-party transaction restrictions and the progressive introduction of a $35,000 concessional contributions cap in lieu of what would have been a complex system for determining higher cap eligibility.

With regard to the related-party restrictions, previously the government considered that in-specie contributions resulted in tax and contributions cap date manipulation to illegally benefit the SMSF or related party, despite there being no evidence to this effect.

It is unfortunate it’s taken this much time and effort, but the end result is what the industry wanted. These matters have been high on the Small Independent Superannuation Funds Association’s (SISFA) policy agenda since the Stronger Super review. Below are a few of SISFA’s other current advocacy issues.

Temper limited recourse borrowing arrangements

SISFA believes there is considerable room for the simplification of limited recourse borrowing arrangements. The existing regime is highly complex and can create significant costs for SMSFs investing in asset classes such as property.

To remove the complexity, lower costs and put more control over promoted and heavily geared property schemes, the law should be amended to allow all superannuation funds to borrow to acquire and legally own assets up to a regulated capped gearing limit as at the date of acquisition.

The removal of the holding trust requirement, allowing a superannuation fund trustee to legally and beneficially own the asset, would further reduce complexity and costs without materially exposing the assets to greater risk.

Modify the four-member rule

SISFA continues to hold the view that SMSFs should not be limited to four members if the immediate family members extend beyond that number. An arbitrary cap on members is inappropriate for the purpose of determining the level of prudential regulation a fund requires. The test should only be linked to the relationships between members/trustees. Removing the four-member cap would provide greater scale of funds inside the SMSF, which would ultimately lead to greater cost efficiencies.

Fix the contributions cap mess

Despite the proposed progressive increase of the concessional contributions cap to $35,000, the current system of capping concessional and non-concessional contributions is inflexible and doesn’t accommodate for the changing nature of the workforce or economic events that impact on fund asset values. It also severely taxes mistaken contributions made over existing limits to the point of discouraging superannuation savings, or at least fostering a distrust of the system itself.

The current system militates against people who bear the cost of raising a family. Australians should be allowed to ‘play catch up’ with a permitted level of concessional contributions when cash flow permits. Why not introduce a bring-forward rule similar to that used for non-concessional contributions?

At the very least, the removal of superannuation guarantee contributions from concessional caps counting would reduce the incidence of unintended mistakes, as would reducing counted contributions by the amount of any insurance premiums paid.

Remove unnecessary contribution legacy issues

SISFA has long advocated the complete de-linking of the contributions rules from workforce participation. That is, remove the antique contributions work test for those people aged 65 to 74. Let them contribute if they so wish. Removing the ‘under 10 per cent deductibility rule’ would also provide further incentive to contribute and enable greater contributions to be made, and provide greater equity between the employed and the self-employed.

Allow acquisitions of residential property from related parties

A simplification measure SISFA continues to advocate is that all real property, including residential properties, should be allowed to be transferred to SMSFs at market rates, even if acquired from related parties. There is no logical rationale for drawing a distinction between business and residential property. Further, there is no evidence to suggest business real property carries more or less regulatory risk than residential property.

If an SMSF can acquire a residential property from an unrelated party in accordance with the sole purpose test and investment strategy and it is acquired according to arm’s-length principles, where is the  mischief in that?

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