Whether you are the trustee of an SMSF or the professional adviser servicing SMSFs, no doubt you are busy tackling the changes to your or your clients’ super funds. With so much to get one’s head around, you would have thought the federal government would leave everyone alone to just get on with it.
But alas the operational details are now emerging in the same spirit of haste that the changes were formulated.
As part of administering the new transfer balance cap (TBC) measure, the ATO is currently developing a new SMSF event-based reporting regime. This regime is likely to be in the form of a report to be called the transfer balance account report or TBAR. At this stage, the reporting regime is expected to require a report to the ATO shortly after a variety of specific events occur. The TBAR will be separate to the SMSF annual return.
For many practitioners, and SMSF trustees, this will be a fundamental change in how they administer their SMSFs. Where an SMSF trustee will commence, or commute, a pension they can no longer see their tax adviser once a year after year’s end. They will have to see their adviser before, or soon after, an event occurs, while advisers may have to prepare real-time accounts so they can lodge such reports.
While it’s likely very few SMSFs will be reporting on a monthly basis, and in fact most SMSFs will have no TBAR reporting under the new regime, those that do will have to ensure they have systems and processes in place that will enable them to comply with their reporting obligations.
The main driver for requiring event-based reporting seems to be to ensure that members who exceed their TBC are notified by the ATO in a timely manner to allow for correction. The Self-managed Independent Super Funds Association (SISFA) doesn’t believe this is necessary for SMSF members because these individuals, who also control their fund, typically engage expert advice to assist with the management of their fund and appropriately carry a higher level of responsibility for understanding and complying with tax laws and regulations that apply. In the same way that SMSF members who in their role as trustees are responsible for understanding and complying with in-house asset rules and the non-arm’s-length income provisions, which may have implications during the year, it is not unreasonable to expect them to be responsible for understanding and seeking advice where appropriate regarding the excess TBC rules. Any benefit to members of a shorter excess TBC period, which is likely to be minimal, is heavily outweighed by the substantial regulatory costs of the reporting proposal.
This move will increase red tape and costs for SMSFs and their advisers, including updates required in systems and processes. Currently many SMSFs and their advisers operate on an annual reporting basis, so the proposed reporting regime will require a large amount of work and cost to change to an event-based model.
The regulatory burden that would be imposed on SMSFs under the proposal would not be proportional to the benefits obtained by the ATO. SISFA does not see earlier notification that a member has exceeded their TBC when compared to annual reporting would provide a sufficiently material benefit to the ATO compared to the cost the measure imposed on the SMSF sector.
As an alternative to the proposal, TBC information could be reported annually in the SMSF regulatory return by way of a transfer balance cap account similar to the franking account used in a company’s tax return. Similar to how a franking account is used to determine and calculate any franking deficit tax, the TBC account could be used in the same way. This would seem both practical and somewhat simple.
SMSFs have become an important part of the superannuation industry and offer competition to large funds, providing a market incentive for large funds to limit fees charged to members and offer competitive investment products. Accordingly, all superannuation members benefit from the existence of SMSFs but would wear the cost of a large-scale exodus from the SMSF system under excessive regulatory burdens. At the very minimum, a much longer transition period is needed. The reporting for the 2018 year should remain on the current annual process, moving to a quarterly basis in the 2019 year to enable more time to update systems and processes.