The consequences of retrospectivity

One has to wonder just how much change the current government is prepared to force on the SMSF sector. Originally driven by a severe budgetary shortfall, the burgeoning SMSF sector was regarded as particularly ripe from which to glean extra revenue to fill a hole. While the approach taken by the government to the creation of new legislation was clumsy, with drafts rushed out and minimal industry consultation, the resulting poorly constructed wording was offered to the industry with an even shorter amount of time to respond.

The resulting complex changes have been accepted with resignation by the industry as we now all try and make the legislation workable for over 500,000 SMSF funds by 1 July. It was hoped the remaining months of this financial year would give the industry some ‘clear air’ to implement the changes, but it appears the government intends to make further changes to the measures introduced in the 2016/17 budget. A report in the press has flagged that the government is working on legislation that would make SMSF trustees take the value of their gross assets into account when calculating the total $1.6 million cap on their members’ superannuation balances, at which point they cannot make any further non-concessional contributions.

This would impact on SMSFs that have borrowed to invest in assets to grow their investments and create income in their retirement. It may also affect the minimum annual amount SMSF members are required to draw down in retirement. Revenue and Financial Services Minister Kelly O’Dwyer has written to a small sector of the industry on the intention to introduce legislation in the winter session of Parliament and will release draft legislation “if time allows”.

Given the poor track record of this government on the process of legislative change, there seems little hope there will be any industry-wide consultation before the winter sitting of Parliament and once again SMSF owners and industry practitioners will be left to fathom how to apply more new rules.

This is following a familiar pattern. As we found after last year’s budget, complex laws that will have a retrospective effect are released with very little time for consultation. O’Dwyer needs to announce now exactly what she is planning. It has generally been assumed that net assets are taken into account for the purpose of setting the $1.6 million transfer balance cap and the $1.6 million limit total superannuation cap on non-concessional contributions.

However, it now appears the government intends that the total superannuation balance cap will be based on gross assets. So SMSF members with more than $1.6 million in superannuation who have borrowed to make investments that will pay off in retirement won’t be able to make non-concessional contributions to service their interest costs.

Like the new taxes and contribution limits to be introduced on 1 July, the new law will be retrospective because it will affect arrangements SMSFs already have in place under the existing rules. Some SMSFs borrow under limited recourse arrangements to acquire assets so they will, over time, boost their income-generating assets in retirement. Members of these SMSFs may run into difficulty if the total gross value of their accounts is over $1.6 million as they will not then be able to make non-concessional contributions which can be set against interest payments under a borrowing arrangement. Some may even be forced to divest borrowed assets and may incur losses.

SMSF members in pension phase who may still be paying off investment loans will be squeezed as they will be required to take more money out of their pension accounts each year, but not be able to use this money to pay off outstanding loans to their SMSF.

This government has broken a long-standing tenet that has applied to superannuation since the introduction of compulsory super. Governments of all persuasions have avoided retrospective penalties as a consequence of legislative change because investors have acted in good faith using the superannuation rules applying at the time. Owners of SMSFs should keep a close eye on these mooted changes and once the consequences are clear, express their views to their local parliamentarian.

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