Simpler super?

If you are a regular reader of this fine publication, you will be well aware our government, like others before it, is once again tinkering with the regulations governing superannuation.

This time the Turnbull administration is proposing the changes will only affect the top 4 per cent of superannuants, leaving the rest of us with little if any impact. However, with the government ever widening its search for revenue sources to plug the well-publicised budget shortfall, and with the total super pool now over $1 trillion, super was always going to be an easy target to help top up its coffers. The opposition may have slightly delayed the changes first mooted last year, but only for a short time.

The pity is the latest round of draft legislation, released by the government in early October, this time dealing with the new $1.6 million limit for tax-free retirement savings, will add complexity to an already complex system and that’s where the 96 per cent of us will be affected. It’s ironic one of the aims of the first round of changes released in mid-September, where the objective of superannuation was defined, was to make the system “simple and efficient”. Instead we are getting changes that are complex and bound to increase compliance costs for SMSFs.

Others have well covered the proposed changes so I won’t outline the detail here, but suffice to say, in simple terms, retirees will be paying a new tax on their superannuation fund earnings, more working people will be paying more tax on their contributions and everyone will have less opportunity to make concessional contributions.

Increased complexity is in no one’s interest and many professional industry organisations are urging the government to redraft the proposed legislation in relation to the $1.6 million transfer balance cap and the catch-up provision for concessional contributions.

Complexity creates a barrier to taxpayers complying with their obligations. Not every taxpayer can afford to pay for an adviser to interpret their tax obligations for them – the legislation should at least be intelligible, at a general level, for all taxpayers.

Complexity creates additional expense for all taxpayers. This will include the money spent by large superannuation funds to comply with the new laws and for them to create administrative systems – this cost is passed on to all members. Generalist advisers may not be able to provide advice and may further discourage these practitioners (in particular non-specialist accountants and financial planners) from providing superannuation advice. This means taxpayers will be compelled to see specialist advisers, which may be more expensive, or go without advice.

Complexity also creates an additional burden for regulators such as the ATO. This includes introducing new internal training and systems and having to prepare and release more material (website content and rulings) explaining and interpreting the law. Further, it means matters are more likely to proceed to court. The ATO and the industry will be stuck and will have to grapple with this legislation for a long time – potentially decades. How does this align with super’s goal of simplicity and the ability for taxpayers to readily understand their obligations? Unfortunately, this has all the hallmarks of the old reasonable benefit limit regime that complicated super for years until removed.

In the midst of all this, some commentators have started to question if super has lost its lustre and maybe family trusts are a better vehicle for the distribution of wealth towards retirement. Despite all the proposed changes, super is still likely to be the best place to park large amounts of wealth, with generally considerable advantages to retaining excess funds in this environment. Concessional tax on earnings may not be as good as no tax, but it sure is better than the marginal rate at the heavy end of the wealth spectrum.

If you are a trustee of an SMSF, you should eagerly follow the progress of the mooted changes. The government is keen to have the changes passed in this year’s parliament and operational from 1 July 2017. That will mean all trustees will need to make sure the changes don’t affect them and, given the likely complexity, they should seek professional advice to help with their management. The government might tell us it will only impact on the balances of 4 per cent of funds, but it’s likely it will add an administration burden to 100 per cent of SMSFs.

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