Self Managed Super: Issue 45

QUARTER I 2024 | ISSUE 045 | THE PREMIER SELF-MANAGED SUPER MAGAZINE

FEATURE

STRATEGY

COMPLIANCE

STRATEGY

Trustee disqualifications Driving factors

Div 296 tax Impact modelling

In-house assets Compliance requirements

Super alternatives Optimal HNW outcomes

Brought to you by

21 MAY | MELBOURNE

23 MAY | SYDNEY

28 MAY | BRISBANE

SMSF PROFESSIONALS DAY 2024 Speakers

Mark Ellem Head of Education (SMSF) Accurium

Lee-Ann Hayes Head of Education (Tax) Accurium

Melanie Dunn Principal Accurium

Anthony Cullen Senior SMSF Educator Accurium

Matthew Richardson SMSF Manager Accurium

Event MC Darin Tyson-Chan Founder and Publisher selfmanagedsuper

Register now

Sponsorship opportunities now available https://smsmagazine.com.au/events

COLUMNS Investing | 20 The best emerging market economies.

Investing | 24 Merger and acquisition activity set to increase.

Strategy | 26 Modelling the impact of the Division 296 tax.

Compliance | 30 The rules regarding in-house assets.

Strategy | 34 How to make contributions deliver optimal outcomes.

Compliance | 38 How to calculate the Division 296 tax liability.

Strategy | 42 Assessing the options for high net worth clients.

Compliance | 46 Contributions cap indexation.

Strategy | 50 Managing super splitting.

Compliance | 54 Temporary incapacity cover inside an SMSF.

Compliance | 58 Holding a farm as a fund asset.

Strategy | 62

A WORRYING TREND THE RISE IN TRUSTEE DISQUALIFCATIONS Cover story | 12

FEATURE The role of superannuation in retirement | 16 Changes recommended.

Tax benefit maximisation.

Compliance | 66 The merit of staff discount policies.

REGULARS What’s on | 3 News | 4 News in brief | 5 SMSFA | 6 CPA | 7 IFPA | 8 CAANZ | 9 IPA | 10 Regulation round-up | 11 Super Events | 68 Last word | 70 QUARTER I 2024 1

FROM THE EDITOR DARIN TYSON-CHAN INAUGURAL SMSF ASSOCIATION TRADE MEDIA JOURNALIST OF THE YEAR

Couldn’t care less The SMSF Association National Conference has not been a happy stomping ground for Assistant Treasurer and Minister for Financial Services Stephen Jones and it would appear he may have completely given up on the experience.

It began when he presented as shadow minister for financial services before the last election. At the time, I had never heard of Jones, but I noted he committed several fundamental errors when he spoke. Firstly, he rattled off a series of sector statistics – a pointless exercise seeing all of the delegates would already have been across that information, but secondly, some of the data he quoted was actually wrong. Surely if you are going to do something like this, at least check your numbers are correct.

Next came last year’s train wreck when he incorporated the beehive conference theme into his speech. Not entirely his fault, but it was perceived the government regards superannuation as a honey pot it just can’t wait to get its hands on.

So this year he decided not to attend the event and instead recorded a short video for delegates. Predictably the message was not groundbreaking or noteworthy in any way, shape or form. And the delegates certainly sent a message to Canberra that unfortunately he didn’t get to see. Just as the video began, attendees started heading for the exits immediately, much like when a football team is consigned to a defeat and supporters want to get a jump on the traffic out of the ground.

It is something I have never witnessed before in the 17 consecutive years I have been attending the conference.

Worse still, he now has the dubious honour of being one of the few superannuation ministers, if the not the only one, to have not attended the conference in person. A bad look indicating in many people’s eyes he just couldn’t care less about SMSFs. The signs of indifference to the sector, and probably the industry as a whole, have been emphasised also with the error, which the legislation for the proposed Division 296 tax.

The bill contains an anomaly I have reported on whereby a person who dies on 30 June is caught by the measure while someone who dies on any other day of the year is exempt.

This is clearly a drafting error, which the SMSF Association pointed out in its first submission regarding this policy, and it has made more than one. However, the bill still has not been amended to correct this quirk. It led association chief executive Peter Burgess to question whether any of the politicians actually read any of the industry feedback they receive.

Getting back to the conference, in contrast shadow treasurer Angus Taylor did show up and presented in person and this made a difference just in terms of that perceived care factor. Don’t get me wrong, he didn’t say anything we didn’t expect, but at least he was there.

And none of us are swallowing his criticism of the government without question as the coalition is not averse to poor policy either, dare I mention the transfer balance cap.

But Taylor’s presence exacerbated the perception Jones is not really prepared to even engage with the SMSF space, let alone seriously listen to it, and that spells trouble for all of us.

Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au Senior journalist Jason Spits Journalist Todd Wills Sub-editor Taras Misko Sales and marketing sales@bmarkmedia.com.au Publisher Benchmark Media info@bmarkmedia.com.au Design and production AJRM Design Services

2 selfmanagedsuper

WHAT’S ON

SMSF Professionals Day 2024 Inquiries: Vicky Zhao (02) 8973 3315 or email events@bmarkmedia.com.au

To have an upcoming event featured on the What’s On page, please contact darin.tyson-chan@bmarkmedia.com.au.

SMSF live Q&A – June

Heffron

6 June 2024 Webinar 2.00pm-3.00pm AEST

Inquiries: 1300 Heffron

SMSF Clinic

VIC

The Auditors Institute

21 May 2024 Rendezvous Hotel Melbourne 328 Flinders Street, Melbourne

Inquiries: (02) 8315 7796

NSW

Auditing the release of benefit payments

23 May 2024 Rydges Sydney Central 28 Albion Street, Surry Hills

9 April 2024 Webinar 1.00pm-2.00pm AEST

QLD

Homing in on downsizer contributions

28 May 2024 Hotel Grand Chancellor Brisbane 23 Leichhardt Street, Spring Hill

Accurium Inquiries: 1800 203 123 or email enquiries@accurium.com.au

Mastering SMSF property taxation 3 April 2024 Webinar 2.00pm-3.00pm AEST

ECPI war stories 4 April 2024 Webinar 2.00pm-3.00pm AEST

Critical audit issues for SMSF property investments 10 April 2024 Webinar 2.00pm-3.00pm AEST

Steering clear of legal issues for SMSF real estate 17 April 2024 Webinar 2.00pm-3.00pm AEST

SMSF hot topics 4 June 2024 Webinar 2.00pm-3.00pm AEST

23 April 2024 Webinar 1.00pm-2.00pm AEST

Payment of death and disability benefits 7 May 2024 Webinar 1.00pm-2.00pm AEST

23 April 2024 Webinar 1.30pm-2.30pm AEST

2024 Post Budget Webinar 15 May 2024 Webinar 3.00pm-4.00pm AEST

Quarterly Technical Webinar 30 May 2024 Webinar Accountants 11:00am-12:30pm AEST Advisers 1:30pm-3:00pm AEST

Windups – Tips and Traps 6 June 2024 Webinar 11:30am-1:00pm AEST

When the ATO audits an SMSF auditor

Institute of Financial Professionals Australia

21 May 2024 Webinar 1.00pm-2.00pm AEST

Inquiries: 1800 203 123 or email info@ifpa.com.au

Regulatory changes in SMSF auditing

2024 Super Quarterly Update

4 June 2024 Webinar 1.00pm-2.00pm AEST

6 June 2024 Webinar 12:30pm-1:30pm AEST

DBA Lawyers Inquiries: dba@dbanetwork.com.au

SMSF Online Updates 12 April 2024 12.00pm-1.30pm AEST 10 May 2024 12.00pm-1.30pm AEST 7 June 2024 12.00pm-1.30pm AEST QUARTER I 2024 3

NEWS

Opposition recognises super belongs to Australians

By Darin Tyson-Chan

The federal opposition has revealed the approach it will take to future superannuation policy and regulation, emphasising one critical element all governments need to recognise.

“As we develop further policy, the first principle we will apply throughout is that superannuation is Australians’ money. Not the government’s money, not the Prime Minister’s money, not the Treasurer’s money, it is Australians’ money,” shadow treasurer Angus Taylor confirmed while presenting to attendees at this year’s SMSF

Association National Conference in Brisbane.

“And as research has pointed out [recently] when it comes to super, Australians trust themselves first, the funds second and the government last. That is a message that needs to be heeded by the government.

“Australians make long-term decisions about their super [and] Australian governments should be extremely cautious about raising taxes on Australian super, watering down consumer protections on APRA (Australian Prudential Regulation Authority)-regulated funds and trying to direct retiring savings to meet political goals, not the goals of the individual

investor.”

He stressed superannuation policy needs to be conservative, measured and responsive to the actual gaps in the system rather than the “whims and objectives” of the government of the day.

“It’s essential that we don’t just preserve Australians’ retirement incomes, but that we maintain the confidence in superannuation as an institution,” he said.

He acknowledged retirement is an individual experience and as such a one-size-fits-all solution is not practical and highlighted the importance of the SMSF sector in this context and the opposition’s commitment to it.

“We need policy that delivers

choice, informed options and the advice and adviser network to deliver the best outcomes in retirement. Self-managed super funds are an integral part of that choice,” he said.

“Self-managed super was a key component of the original [retirement savings] act that was legislated in 1993 and it will remain critical under a future coalition government.

“And just as [the Howard and Costello] government supported the sector, so too will a future coalition government act to support choice, individual flexibility and simplicity of regulation for Australians who choose to utilise it.”

Div 296 TSB calculation, preparations confirmed

By Darin Tyson-Chan

The ATO has confirmed how the redefinition of an individual’s total super balance (TSB) for the purposes of the proposed new Division 296 tax will be applied.

“An individual’s total super balance will be calculated from the sum of the total super balance values of each of their superannuation interests and that total super balance value will be determined using a method or value prescribed in the regulations for the withdrawal benefit,” ATO superannuation and employer obligations assistant commissioner Peta Lonergan told attendees of the Institute of Financial Professionals Australia 2024 Annual Conference held in Melbourne.

Lonergan also revealed additional detail on the calculation, representing a

4 selfmanagedsuper

modification to the current framework.

“Now the TSB changes will remove the link to the transfer balance cap and it will apply to working out an individual’s TSB from 30 June 2025 onwards,” she said.

According to Lonergan, the regulator is currently working to make the implementation of the new measure as easy as possible for superannuants.

“To minimise the impact on funds and members, we are looking at the most costeffective way to ensure we have the necessary data to administer this calculation. So that [will mean] leveraging existing reporting requirements where possible,” she revealed.

“The ATO is considering the administrative options for the measure at the moment and we will be consulting with key external stakeholders once the policy parameters are finalised.”

During her presentation, she took the opportunity to also inform practitioners as to

Peta Lonergan the current status of the current non-arm’slength expenditure (NALE) rules.

“I did want to give you a quick update about the draft Taxation Determination 2023/1, [which] outlines our view about how NALE and CGT (capital gains tax) interact,” she said.

“We did receive a fair number of responses during the consultation period and we’re still working through that feedback. We do expect to issue a final tax determination soon so keep an eye out for that.”

NEWS IN BRIEF

Illegal access link quantified The ATO has revealed the magnitude to which SMSF establishment is contributing to its most concerning area of compliance failure, being the illegal early access of super benefits.

ATO superannuation and employer obligations assistant commissioner Peta Lonergan noted: “Did you know about two-thirds of illegal early access behaviour we’re concerned about relates to individuals entering the system with no genuine interest to run a self-managed super fund?

“Unfortunately, this is often facilitated by promoters who are charging a large fee.”

With regard to combatting this behaviour, Lonergan recommended SMSF practitioners and their clients use the regulator’s existing resources, such as the fact sheet on its website, and confirmed the ATO is continuing to take action to address the issue.

“We have a very strong compliance program. So we do contact a lot of new entrants and make sure that they understand what their obligations are,” she said.

She also acknowledged the extent of the role practitioners were already playing in the sector’s efforts to eliminate the problem.

“We are pleased to say we have seen an increase in professionals reaching out to let us know about arrangements they are concerned about,” she said.

More auditors sanctioned The Australian Securities and Investments Commission (ASIC) has taken action against 15 SMSF auditors, resulting in conditions being imposed on the registrations of 13 auditors and the voluntary cancellation of two over concerns they were performing in-house audits.

The corporate watchdog stated it sanctioned the auditors after receiving referrals from the ATO following a review of audit firms that undertook both accounting and auditing work for SMSF clients.

The enforcement measures are related to concerns financial statements for SMSF clients were prepared by the same firm that also conducted the audit, in breach of the auditor’s independence requirements.

The conditions emphasise the restriction on performing in-house audits, require an independence review of all SMSF audit clients and notification of the measures to their professional association.

One auditor has applied to the Administrative Appeals Tribunal for a review of ASIC’s decision to impose conditions on their registration.

“Independence is fundamental to auditors to protect the integrity of the SMSF industry. SMSF auditors should carefully consider their structure and any services provided to audit clients to identify and evaluate independence. ASIC will take action where appropriate to reinforce the independence requirements,” ASIC deputy chair Sarah Court stated.

Fund aged care with super A government-appointed taskforce has released a report recommending older Australians with higher levels of superannuation help fund aged-care services.

The Aged Care Financing Taskforce, chaired by Aged Care Minister Anika Wells, recommended that: “It is appropriate older people make a fair co contribution to the cost of their aged care based on their means.”

In making the statement, the taskforce explicitly referenced super, noting: “Generally, older people are expected to be wealthier than their predecessors, largely due to the maturing superannuation system.”

The report added the proportion of people over 65 who would access

the age pension would fall by around 15 percentage points by 2062/63 and of those receiving a pension, fewer would receive it at the full rate due to the increased accumulation of income and assets.

“These superannuation trends, combined with high asset wealth through the family home and other investments, mean increasingly people still have accumulated wealth and income streams when they need to access aged-care services,” it stated.

“As a result, there is more scope for older people to contribute to their agedcare costs by using their accumulated wealth than in previous generations.”

New level of IFPA membership The Institute of Financial Professionals Australia (IFPA) has announced it is providing a new platinum membership that will build upon its existing offerings.

“This premium tier of membership is designed to go beyond the extensive benefits of our professional membership,” IFPA chief executive Pippa McKee told delegates during her welcoming speech at the industry body’s 2024 conference held in Melbourne recently.

“Platinum offers you more than just your membership. It’s a way to fully immerse yourself in everything that IFPA has to offer.”

McKee pointed out some of the benefits of the highest level of membership include unlimited access to the webinars IFPA hosts, access to all tax and superannuation groups where individuals can participate either in person or online, complimentary admittance to the body’s annual conference and access to the CPD (continuing professional development) Pro package.

This last feature will provide members with over 40 hours of CPD content to assist them in satisfying their continual education obligations.

QUARTER I 2024 5

SMSFA

We all gained from levelling up

PETER BURGESS is chief executive of the SMSF Association.

6 selfmanagedsuper

There was a welcome first for the SMSF Association at this year’s National Conference.

At the Thought Leadership Breakfast on the opening morning, seated alongside the usual suspects, such as Heffron managing director Meg Heffron, was Brighter Super chief executive Kate Farrar. It marked an unprecedented situation as an Australian Prudential Regulation Authority (APRA)-regulated fund executive had never graced our premier event in a speaking role before and it was with a little trepidation that the invitation was extended.

However, we need not have worried. I suspect no one left the breakfast thinking it would be all sweetness and light between our super sector and the APRA funds in the future – as Farrar bluntly said, we are competitors – but it did demonstrate we could occupy a podium together and intelligently discuss issues of mutual concern.

What I think we all realised is there is more that unites us than divides us and both super sectors can learn from each other. I suspect the fact APRA funds are in a far more competitive environment, as well as having to address how they handle members’ accounts in retirement, is making them more amenable to speaking to our sector where retirement income strategies are our bread and butter. At the very least, if this forum helps start a process where civil discussions, even on policy issues where we strongly disagree, are the norm and not the exception, then it will be an initiative from which all superannuation sectors will benefit.

This year’s breakfast forum was, in my opinion, one of the more enlightening discussions we have had over the years since this event started in 2015. The topic, “Holding up the mirror – what the SMSF sector does well and where it needs to level up”, was just what we needed to get the conference off to a flying start, with our moderator, Class chief executive Tim Steel, ensuring the considered views of all four panellists were fully aired.

It dovetailed neatly into the overarching theme of this year’s conference – how we can level up and grow together. The concept of growing together is a unique feature of our conference (and our super sector) as we bring together many different professionals who work cooperatively for the benefit of the client. Whether they

be accountants, auditors, lawyers, financial advisers, stockbrokers, actuaries or SMSF administrators, achieving the best outcome for the client is their common goal.

These professionals become advocates for each other and a potential referral source for new business, with this collaboration clearly on display at the conference. It’s what makes this event so valuable for delegates, an assertion not only backed by the anecdotal evidence I received during and after the conference, but by the empirical fact this year’s event was one of our largest ever.

From my perspective, my biggest disappointment, again, is that I simply couldn’t get to enough of the sessions. All the feedback I have received is the speakers went the extra mile to ensure their sessions were stimulating, educational and topical. The conference committee puts a lot of effort into getting informed speakers addressing topics relevant to SMSF advisers and by all accounts they succeeded in spades.

Sessions such as Hopgood Ganim Lawyers partner Brian Herd’s on enduring powers of attorney, RSM Australia SMSF services director Katie Timms’ covering the holding of farm assets within a fund and Bluestone Home Loans head of specialised distribution Richard Chesworth’s discussing lending and financing were examples of topics that attracted keen delegate interest.

But learning is not limited to plenary and concurrent sessions or workshops as it was evident conversations with peers outside the sessions were also invaluable, be they about client issues requiring a fresh insight or using artificial intelligence.

Also worthy of mention was announcing the winner of the 2024 SMSF Association Chair Award, Aaron Dunn, and our first-ever joint winners of the SMSF Association CEO Award – Naomi Kewley and Marjon Muizer – the co-authors of the association’s SMSF Specialist Auditor accreditation modules. It was fitting recognition for their outstanding contribution, not only to the association, but also the broader SMSF sector.

Next year we are back to Melbourne with a fresh theme, agenda, speakers and, no doubt, challenges.

I hope to see all our 2024 delegates sign up again and for those who chose not to travel to Brisbane to put Melbourne in their diaries for 2025. It will be worthwhile.

CPA

A broader retirement approach worth consideration

RICHARD WEBB is superannuation leader at CPA Australia.

The $3.5 trillion superannuation sector, often hailed as the cornerstone of Australia’s retirement income system, finds itself highly visible in various opportunistic policy debates, with housing affordability emerging as a particular concern in recent years. As legislators grapple with defining the purpose of super, there is an attraction in extending the system’s role beyond mere financial preparation for retirement and applying it as a solution to broader societal and economic issues.

At the heart of legislation currently before parliament lies the intent to provide clarity and coherence to the superannuation landscape. By enshrining the core objective of super in law, policymakers aim to ensure savings are earmarked for members’ retirement years, rather than whatever occupies policymakers’ attention in the short term. This move towards legislative certainty seeks to offer better predictability and stability, with the hope it will benefit Australians across all walks of life who are diligently planning for their retirement.

However, this is not a shield of invulnerability.

The practical implementation of such a legislative measure poses significant challenges. Despite the establishment of mechanisms to flag non-compliant bills or regulations, there remains a gap between intent and execution. The reality is that even if a red flag goes up on a bill, it can still receive royal assent, potentially undermining the intended purpose of the objective.

The objective itself could still be amended or repealed by a future government. This susceptibility underscores its fragility as a legislative safeguard, leaving the system vulnerable to shifting political winds, as well as substantial legislative risk for Australia’s superannuation fund members.

Complicating matters further is the intertwined nature of other policy areas with retirement planning, most notably housing. For many Australians, homeownership is not just a personal aspiration, but a fundamental aspect of retirement security. The family home has long been linked with Australia’s retirement income system, explicitly forming part of the non-super savings pillar of Australia’s three-pillar retirement income model.

Consequently the prevailing assumption is retirees will enter their post-working years with a property already secured.

Yet, as housing affordability continues to deteriorate and homeownership becomes increasingly out of reach for younger generations, the viability of this assumption is called into question. Recognising this societal shift is imperative as projections indicate long-term decline in homeownership rates among future retirees. Failure

to address this trend risks exacerbating inequality in retirement outcomes, with non-homeowners disproportionately disadvantaged.

Recalibrating the retirement income system to better accommodate the needs of non-homeowners is therefore an increasingly important priority. While concessions for non-homeowners exist within the system, their adequacy remains a subject of debate.

The findings of the 2009 Harmer review highlighted deficiencies in this regard, yet subsequent reforms to address these have failed to fully materialise.

Enhancing concessions for non-homeowners within the retirement income framework could mitigate some of the challenges associated with housing unaffordability, thereby improving retirement outcomes for this growing segment of the population.

However, future potential strain on the superannuation system extends beyond housing.

The recent discontinued policy proposal to enable domestic violence victims to access their own super underscores the system’s broader societal implications.

The proposal’s requirement for victims to have the ability to use existing superannuation holdings raised equity concerns, particularly for those from financially disadvantaged backgrounds. Moreover, the notion of using one’s own retirement savings to address immediate emergencies highlights systemic flaws in Australia’s social safety net.

Women’s superannuation balances, in particular, serve as a poignant indicator of broader societal inequities. While factors such as parenthood, caring responsibilities and workplace discrimination, both age and gender based, contribute to the gender super gap, these are causes that originate outside the superannuation system itself. Policies aimed at addressing these discrepancies, such as the recent announcement on extending super to government parental leave payments, represent positive steps forward. However, they only scratch the surface of more profound systemic issues, since the gender superannuation gap is caused by the wage gap between men and women, along with other matters.

We welcome efforts to clarify the role of superannuation, but these efforts must be accompanied by broader reforms addressing systemic challenges.

The necessary commingling of retirement planning with broader societal and economic issues necessitates a broader approach to retirement policymaking. By acknowledging and addressing these interconnections, policymakers can pave the way for a more equitable and sustainable retirement system that benefits all Australians.

QUARTER I 2024 7

IFPA

The rise and fall of caps and thresholds

NATASHA PANAGIS is head of superannuation and financial services at the Institute of Financial Professionals Australia.

8 selfmanagedsuper

The latest average weekly ordinary time earnings (AWOTE) data for the December quarter 2023 has confirmed the contribution caps will increase on 1 July 2024, which is great news. However, not all caps and thresholds will go up.

The general transfer balance cap (TBC) will remain at $1.9 million for 2024/25 as the relevant Consumer Price Index figures were not enough to trigger a $100,000 increase to $2 million. This is because the contribution caps are linked to wage growth, reflected by AWOTE, whereas the general TBC is linked to inflation. The inconsistency in how the contribution caps and other thresholds are indexed highlights the nuances of our superannuation system, which can lead to such unexpected outcomes where not all caps and thresholds increase at the same time.

We now also know the non-concessional contribution (NCC) cap will be increasing as it is a four-times multiple of the concessional contributions cap. However, the fact the TBC will remain unchanged will result in flow-on effects for other measures such as the bring-forward requirements relating to NCCs. In short, the total superannuation balance (TSB) thresholds that determine eligibility to use the bring-forward rules will decrease on 1 July 2024 as these limits are determined by subtracting a multiple of the NCC cap from the general TBC. The last time the contributions caps increased was on 1 July 2021, but back then both the contribution caps and the general TBC rose at the same time, which meant all the TSB thresholds went up as well.

The lowered TSB thresholds may affect certain individuals’ eligibility to use the bring-forward rules if they already are close to a current TSB threshold.

Further, advisers will double check a client’s TSB at 30 June 2024 before recommending the use of the NCC bring-forward provisions in 2024/25 to ensure they do not inadvertently exceed their NCC cap due to the reduced thresholds. It can be

a simple mistake to assume the TSB thresholds will remain the same when in fact they will reduce.

The inconsistency in the superannuation system in how various thresholds are indexed causes such complexity and I haven’t even touched on the complications of proportional indexation when it comes to an individual’s personal TBC. Many industry stakeholders, including the Institute of Financial Professionals Australia (IFPA), have argued it would be better to have these thresholds indexed under the same formula, such as AWOTE, to ensure consistency across the system, but I suspect this won’t happen anytime soon given the government’s jam-packed agenda.

Before the 1 July 2017 changes to superannuation occurred, it was much simpler as individuals under age 65 were able to make NCCs of $180,000 a year or $540,000 every three years regardless of their TSB. Since the amendments on 1 July 2017, individuals have no longer been eligible to make NCCs if their TSB is over the general TBC of $1.9 million (originally $1.6 million). We also saw the TSB eligibility thresholds to determine whether a superannuant can use the bring-forward rules come into effect at this time. Despite the fact the age eligibility criteria to make contributions back then was more stringent, the simplicity of being able to make an NCC, including under a bringforward arrangement, was more straightforward.

Another IFPA wish list item is to streamline certain thresholds, such as removing the three-tier TSB thresholds in order to use the bring-forward rule as it will reduce the complexity involved, particularly if an individual is close to the relevant TSB threshold. It may be worth having one single threshold that is aligned with the general TBC, where individuals with a TSB below the general TBC will be allowed to use the three-year bringforward rule. This streamlined process will simplify the retirement planning process for many Australians. Again, this ask is most likely a long shot, but as the saying goes, if you don’t ask, you’ll never know.

CAANZ

Accountants a critical advice component

TONY NEGLINE is superannuation and financial services leader at Chartered Accountants Australia and New Zealand.

The last few months have been incredibly busy with various submission deadlines and other government consultations.

Recently, Chartered Accountants Australia and New Zealand has been working closely with a range of other professional associations to share ideas and where possible make joint submissions.

We regularly work with CPA Australia, the Financial Advice Association of Australia, Institute of Public Accountants and SMSF Association.

For financial advice matters we work with all the above associations, as well as eight other organisations. Collectively this group of 13 associations is known as the Joint Associations Working Group or JAWG. Some might argue accountants don’t belong in the financial advice space. Everyone is entitled to their view, but I disagree. It makes perfect sense for the accounting professional associations to have a say in the financial advice space for the following reasons – we have members who are full-time financial advisers; we also have members who together with other advisory services, such as tax and audit, provide part-time financial advice services. Further, many of our members have clients whose financial affairs are impacted by the financial advice provided by a related or unrelated advice business and lastly we have members who are clients of financial advisers.

We also have many members in public practice who do not have any involvement with a financial services licensee and struggle with the unreasonable restrictions current policy settings place on their working lives.

The current government has made it clear it wants to expand the provision of financial advice. This is a worthy aim and the new class of adviser, currently officially known as a ‘qualified adviser’, may go some way to plugging the very large unmet consumer advice needs. The existing cohort of financial advisers, and the newer less-qualified advisers, will not solve the market’s supply and demand problems.

This is especially the case for SMSFs where research over the years has consistently shown there is a large unmet advice need.

We think accountants in public practice also have a role to play and for some time we have been encouraging successive governments to be bold in

amending the law.

Government regulation makes the Australian retirement landscape incredibly complicated – superannuation, taxation, age pension, aged care, estate planning and so on do not easily relate to each other. On many occasions they are often diametrically opposed to each other. Constant changes to policy settings add another layer of complexity. It is impossible for any consumer to work their way successfully through these rules and get everything right or even mostly right. All this complexity has been created because government laws have been developed in silos and without much consideration for the impact on other policy areas.

I often think most consumers end up being Frodo entering Shelob’s lair in The Lord of the Rings, but without the light of Eärendil or his sword Sting.

Only the government can untangle this mess.

Maybe this is seen as an impossible and thankless task. In our view if we don’t have some serious simplification of the retirement policy settings, then Australia may not adequately cope with the ageing population we will face in the next three or four decades.

In our pre-budget submission we again reiterated our opposition to the government’s additional tax applying to total super balances of at least $3 million.

One aspect of this policy we do not like is the taxation of unrealised capital gains with losses being carried forward to future years.

Seventy per cent of our members have told us they do not like this aspect of this policy.

There are many associations that support additional tax on higher superannuation balances. If this must be put in place, then our preferred solution is that withdrawn lump sum benefits for individuals with at least $3 million in superannuation should be taxed at a higher rate. This additional tax should not apply to death benefits paid to non-dependants as they already face additional tax.

We think our solution is the simplest and least disruptive policy and removes the problem of taxing unrealised capital gains.

And obviously the $3 million threshold should be indexed every 1 July. We think it should be indexed by movements in average weekly ordinary time earnings like many other superannuation thresholds.

QUARTER I 2024 9

IPA

The wider implications of pay day super

TONY GRECO is technical policy general manager at the Institute of Public Accountants.

10 selfmanagedsuper

The Securing Australians’ Superannuation package unveiled in the 2023/24 federal budget promises to revolutionise the landscape of super contributions in Australia.

However, transitioning to this new regime requires careful consideration and a willingness to address existing inefficiencies.

Starting in July 2026, pay day super (PDS) will aim to synchronise superannuation contributions with employers’ payroll cycles, marking a significant departure from the existing system.

While the initiative holds the potential for enhancing superannuation compliance that will benefit employees, crucial consideration should be given to the reforms needed to ensure its effectiveness.

Under the current system, more than 60 per cent of employers pay their superannuation guarantee (SG) contributions quarterly, leading to delays and potential underpayments. PDS will aim to rectify these issues by integrating super payments into regular payroll processes.

One of the primary concerns lies in the readiness of existing systems to support real-time superannuation payments. Process efficiencies must be improved and known issues must be addressed before implementing PDS. The Institute of Public Accountants’ (IPA) pre-budget submission highlights the need to thoroughly examine existing processes, such as SuperStream, clearing houses and remittance processes, to ensure seamless integration with the new regime.

Failure to address these issues risks introducing unnecessary complexity and hindering the success of PDS. Transitioning to more frequent SG contributions may burden employers, particularly small and medium-sized businesses, financially. Higher processing costs and cash-flow implications must be carefully managed to prevent adverse effects on businesses, especially during the transitional period.

A staggered implementation timetable, similar to the single-touch payroll process, could alleviate some of these concerns by providing businesses with adequate time to adapt to the new

requirements.

The current penalty regime for late or underpayment of SG also needs a major revision.

The SG charge model is deemed overly complex and punitive, discouraging employers from rectifying the problem themselves. A fairer and proportionate penalty system must be introduced under PDS to incentivise compliance while differentiating between accidental errors and deliberate non-compliance.

In light of these considerations, the IPA made several recommendations in its pre-budget submissions that can help ensure the successful implementation of PDS: 1. Process efficiencies: Prioritise the resolution of existing inefficiencies in superannuation payment systems before transitioning to PDS. The joint bodies’ submission provides valuable insights into areas requiring improvement and streamlining.

2. Penalties: Revise the penalty regime for late SG payments to make it simpler and more proportionate. The new regime should encourage voluntary reporting and rectification of errors while deterring deliberate non-compliance.

3. Compliance and cash flow: Consider a staggered implementation timetable for PDS, especially for small and medium-sized businesses. This approach would allow businesses adequate time to adapt to the new requirements and mitigate cash-flow impacts.

Additionally, the ATO should be able to exempt certain employers from compliance on a case-by-case basis, particularly those facing exceptional circumstances.

By implementing these recommendations, the government can ensure a smooth transition to PDS while maximising its potential benefits for both employers and employees.

Addressing existing challenges and designing a system that promotes compliance, efficiency and fairness in superannuation contributions is imperative.

Ultimately, the success of PDS hinges on comprehensive reforms and careful consideration of its implications across all sectors of the economy.

REGULATION ROUND-UP Deductibility of advice fees ATO Taxation Determination 2023/D4

Louise Biti Director, Aged Care Steps Aged Care Steps (AFSL 486723) specialises in the development of advice strategies to support financial planners, accountants and other service providers in relation to aged care and estate planning. For further information refer to www.agedcaresteps.com.au

When finalised, draft Taxation Determination (TD) 2023/D4 will replace TD 95/60 to outline the ATO view on the deductibility of financial advice fees.

The ATO has stated the TD does not represent a change in the tax commissioner’s view, but is merely an update to reflect legislative changes since the original TD was released in 1995.

A tax deduction for advice fees can still only be claimed under section 8-1 of the Income Tax Assessment Act 1997 (incurred in gaining or producing assessable income) or section 25-5 (cost of managing tax affairs).

The TD does, however, provide some clarification on apportioning fees.

for the inquiry include: • impediments (both regulatory and tax) to the innovation and purchase of insurance products in retirement, • the interaction of health insurance, life insurance, general insurance and social security supports to retirement outcomes, • the role of fintech platforms and technology, • policy options to support greater choice and quality of life in the retirement income system, and • progressing the Retirement Income Covenant.

The chair of the committee highlighted the focus on insurance in super and aged care with an interest in the merits of an aged-care insurance product to help make aged care financially viable.

Digital execution of declarations Proposed increase for penalty units

The Statutory Declarations Amendment Bill 2023

2023/24 Mid-Year Economic and Fiscal Outlook

The passing of the Statutory Declarations Amendment Bill 2023 at the end of 2023 gives clients two digital options to authorise statutory declarations, in addition to the standard paper option.

This is a federal government bill and only covers commonwealth matters (for example, taxation and social security). State-based declarations still need to be authorised under the relevant state rules.

Clients wishing to use the electronic options can either: • create and download a digital commonwealth statutory declaration through myGov using their myGovID, or • complete a commonwealth statutory declaration for digital execution on the Attorney-General’s website.

This option needs to be witnessed in person or via video link on the website.

Further information is available on the myGov website.

Under the Superannuation Industry (Supervision) Act, monetary penalties may be applied to trustees for errors and breaches.

The monetary value of a penalty unit is currently set at $313, with indexation applied every three years.

Last December’s Mid-Year Economic and Fiscal Outlook statement included a proposal to increase the amount to $330 per unit (indexed). This increase is still pending legislation.

Loose diamonds not a collectable or personal use asset ATO QC73738

An article published on the ATO website confirms natural diamonds held in loose form (not mounted or used in any way as adornment) are not considered to be a collectable nor a personal use asset.

Therefore the storage and insurance requirements for those asset types do not apply. However, standard investment rules regarding appropriateness of the investments and sole purpose test continue to apply.

Superannuation in Retirement review The federal government is continuing to consider the challenges around superannuation and how it can support Australians throughout retirement.

A discussion paper, titled “Superannuation in Retirement”, was released in December (with consultation closed on 9 February) to seek views on how to support: • members to navigate the retirement income system, • funds to deliver better retirement income stream products, and • greater access to lifetime income products.

The Senate Economics Reference Committee has referred an inquiry into improvements for the retirement system – Improving consumer experience, choice and outcomes in Australia’s retirement system. This inquiry is due to report by 30 June 2024. The terms of reference

Thresholds indexing 1 July November AWOTE figures

Contribution caps will increase from 1 July 2024 with the concessional contributions cap increasing to $30,000 following the release of the November average weekly ordinary time earnings figures.

Superannuation objective Superannuation (Objective) Bill 2023

The Superannuation (Objective) Bill 2023 is currently before parliament and aims to create some stability for super.

It will define the objective of superannuation as “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.

Members of parliament who introduce new bills or regulators who create new regulations that relate to changes to the superannuation system will be required to issue a statement of compatibility.

QUARTER I 2024 11

FEATURE

There is an irrefutable trend involving an increasing number of people being disqualified from performing the role of an SMSF trustee. Todd Wills explores this phenomenon and the factors driving it.

12 selfmanagedsuper

FEATURE A WORRYING TREND

With establishment rates not abating year-on-year, SMSFs continue to enjoy a significant level of popularity as a retirement savings vehicle. However, a troubling trend has emerged recently, being a rising number of trustee disqualifications by the ATO for noncomplying behaviour.

By the end of 2023, no less than 751 SMSF trustees found themselves on the Disqualified Trustees Register, marking a 33 per cent surge from the previous year. Clearly, the intentions, conduct and behaviour of individuals choosing to establish SMSFs are increasingly coming under the regulatory microscope.

The size and scale of this trend has not gone unnoticed. SMSF Association chief executive Peter Burgess used his address at the industry body’s 2024 national conference to highlight the rising number of disqualifications as a development with significant ramifications for the integrity and reputation of the sector and issued a call to action for stakeholders to tackle the underlying causes.

“We have seen a significant increase in the number of individuals being disqualified as trustees [and] we are on track to break another record this year in terms of disqualifications. I think what these numbers are telling us is we need to do more as an industry to try to weed out these individuals to make sure they don’t end up with a self-managed super fund,” Burgess said at the conference in Brisbane in February.

Causes for concern One observation seemingly shared within the industry is that more individuals are viewing SMSFs as a means to tap into their superannuation monies earlier than legally entitled.

ATO data released at the SMSF Association National Conference 2024 illustrated the extent of this issue, indicating a total of $637 million in superannuation savings had exited the

system prematurely and illegally through SMSFs during the 2020 and 2021 financial years. Moreover, two-thirds of the total super monies that were at risk were attributed to newly established funds.

According to ATO SMSF regulatory branch assistant commissioner Justin Micale, having access to this data has shaped the regulator’s approach to addressing trustees who have illegally accessed their entitlements.

“We know from our data that the majority of SMSFs do the right thing, but we also know for those that aren’t, it does have a significant impact on the system.

The growth in disqualifications does reflect the fact that we’ve scaled up our compliance actions in direct response to our concerns about increasing levels of illegal early access occurring across the sector,” Micale says.

“We see illegal early access play out in three main ways. Firstly, we see people entering the system with the sole intent of raiding their retirement savings. There’s never really any intention to actually run an SMSF. “We also see existing trustees who stop lodging an SMSF annual return because they’ve illegally accessed some or all of their retirement savings. And the third group we see is existing trustees that lodge, but have illegally or inappropriately accessed some of their super. That is often reported to us as loans.”

However, as SMSF Association head of technical Mary Simmons points out, the desire to unlock access to super may not be the sole driver contributing to trustee disqualifications and the problem might be more widespread.

“You might have someone who’s gone bankrupt or they’ve been convicted of dishonest conduct and under the law they are a disqualified person and they can’t be a member or trustee of an SMSF. Those individuals are not part of this register that is maintained by the ATO,” Simmons notes.

“And then there’s another pocket which contributes to the spike: tax agents or

“The growth in disqualifications does reflect the fact that we’ve scaled up our compliance actions in direct response to our concerns about increasing levels of illegal early access occurring across the sector.”

– Justin Micale, AT O auditors who have their own personal SMSF lodgement obligations outstanding, because the ATO believes that as professionals, they need to be held to a higher standard when it comes to meeting tax and regulatory obligations.”

The view from the coalface For experienced practitioners working in the sector, the key drivers and Continued on next page

QUARTER I 2024 13

FEATURE A WORRYING TREND

“As soon as you ask the question and then the trustee becomes non-responsive, that’s almost a dead giveaway that they’ve taken the money out illegally. I think more and more, we probably should accept that’s an indicator that something’s gone wrong and get the AT O involved straightaway, rather than waiting until the lodgement deadlines.”

– Meg Heffron, Heffron Continued from previous page

indicators of non-complying trustee behaviour, which may possibly eventuate in a disqualification, are often varied and complex. There is a sense a combination of factors, including inexperience, a lack of technical expertise and understanding of the rules, is contributing to trustees either deliberately or unknowingly flaunting their obligations under the Superannuation Industry (Supervision) (SIS) Act. This manifests itself in a number of ways, including a reluctance to engage with both regulators and professionals, as Heffron managing director Meg Heffron highlights.

“The biggest red flag for me is when trustees become non-responsive. Part of our job is we’ll set the fund up, we’ll set up data feeds, so we’re getting data coming into our systems on what’s going on in the bank account,” Heffron reveals.

“And because we know we’re going to be doing the accounting work at the end of the year, if we see money coming in or going out, we’ll get in touch with the client at the time to ask what the transaction is so we can get a head start on doing the work at the end of the year.

“And as soon as you ask the question and the trustee becomes non-responsive, that’s almost a dead giveaway they’ve taken the money out illegally. I think more and more, we probably should accept it’s an indicator that something’s gone wrong and to get the ATO involved straightaway

14 selfmanagedsuper

rather than waiting until the lodgement deadlines.”

This has also been the experience of Sonas Wealth managing director Liam Shorte, who notes a lack of sound investment knowledge can often lead to the breakdown of a fund.

“I tend to pick up trustees after they’ve made a mistake and have gone into an investment such as cryptocurrency, property development or international shares and they’re trying to pick a winner and the investment has fallen apart,” Shorte explains.

“What we’re finding is trustees put their head in the sand and they don’t do their annual financials. Then the ATO, after 18 or 24 months, is just deregistering the SMSF and disqualifying them as trustees.

“In my experience, many trustees think they’re going to get in trouble for losing their money. The ATO doesn’t care that they’ve lost their money. The ATO just wants them to do their financials and show that the super fund has lost funds.

“That’s the nature of investing. But they seem to put their head in the sand and are afraid to admit it, and then they get one, two or three years behind and suddenly they get themselves in trouble.”

Another common theme that has emerged is of trustees who feel they are capable of managing the affairs of their SMSF independently and without consulting professional advice or support.

ASF Audits head of education Shelley Banton cautions against this approach

as the increasingly rapid changes within the regulatory environment of the sector in addition to the technical knowledge demands could see trustees left behind.

“It’s not compulsory to have an SMSF. There are other retirement vehicle choices out there, but if you are going to have one, you have to obviously swim within the flags of compliance, because as the ATO says: ‘It is your money, but just not yet,’” Banton says.

“There’s a segment of trustees who may be getting into SMSFs for the right reasons, but then find themselves in difficult economic and financial circumstances. They begin looking at their SMSFs and they believe they can dip their hands into that SMSF cookie jar, which is non-complying behaviour.

“Once you start the fund, if there are things you want to do and you’re not too sure those actions are allowable under the SIS Act, that’s where having the experience of a trusted adviser, auditor or a professional team is going to help you the most.

“Because once that horse is bolted, it’s really hard to try and put it back into the corral. You’ve really got to be able to work within the SIS rules, which often have long tentacles in terms of how they interact.

“All the rules interact with each other, which means that you’re not just breaching one aspect of the SIS Act, you’re usually breaching several areas.

If you’re not experienced, you’ve got Continued on next page

FEATURE

Continued from previous page

to then try and get your fund back to complying status and even those actions can often result in breaches.”

It’s also evident SMSFs, as a relatively sophisticated retirement savings vehicle, carry with them a substantial administrative, regulatory and technical burden, which may be too much to bear for some individuals entering the system.

For SMSF Alliance principal David Busoli, the surge in disqualified trustees could also stem from a deficiency in knowledge or competency on the part of the trustee, particularly in cases where individuals are entering the sector from an unadvised environment or failing to seek appropriate support.

“I imagine many disqualifications are related to illegal early access, but not all. I’ve dealt with trustees before where they’ve just been quite hopeless in running their own fund, in particular where there are related unit trusts and companies involved and they’ve mixed them up so much that in the end it’s just become too difficult to distinguish what’s an SMSF property and what’s not. And very simply, their funds end up becoming non-complying and those trustees are disqualified,” Busoli says.

What’s next for the industry?

As some trustees face disqualification and continue to disregard their obligations, it’s natural to wonder about the future regulatory landscape for this sector. Over the past decade, the environment in which

SMSFs operate has undergone significant changes, largely due to compliance challenges.

“When we’re talking about additional measures in the future, what I would say is that our programs never really stand still. We’re always looking for ways to continually evolve them, whether that’s our strategies or the risk detection mechanisms we have in place. Those programs have been ramped up and are definitely becoming more sophisticated, and they will continuously evolve,” Micale states.

“Professionals in the SMSF sector do have a key role to play in helping us address this issue. Whether that involves helping to bust myths about when you can and can’t take your money out, educating their clients about the consequences of doing the wrong thing or warning people about the dangers of scheme promoters, they play a very important role.”

According to Banton, all options to address consistently illegal behaviour by trustees will be on the regulator’s table.

“Anything’s possible. I think we’ve seen a lot of change to SMSFs over the last 12 to 24 months and if this sort of trend does continue, anything could be possible. I would imagine the ATO will be looking at anything and everything to try and reduce the amount of money that’s been illegally accessed through super down to zero,” she notes.

“Certainly they’ve got an education program that they’re about to roll out. For new trustees looking to establish a fund, will that become compulsory education?

“There’s no education directions that are being given out at the moment.

There’s only rectification directions. So we don’t know how that education program is going to be pieced together and placed within their compliance basket.”

While she stresses the need for targeted action to address compliance issues in order to maintain the integrity and strength of the sector, Heffron cautions against a blanket approach, as an ill-thought-out resolution is likely to impact the large majority of participating trustees who seem to have no problems maintaining the compliance of their funds.

“The trouble with anything designed to stamp out an undesirable practice, like increased prevention measures from the regulator or increased legislation, is you can’t just target the bad guys,” she says.

“Anything of that nature affects everybody, so we run the risk if we don’t get on board and be part of a solution, that the natural behaviour of the regulator will be to put more and more barriers to people setting SMSFs up. And that hurts all the people who are doing the right thing.

“If we’re not part of the solution, we’ll end up getting what we deserve.”

It’s clearly evident the industry needs to address the behaviour of a problematic minority of trustees within the system.

However, as long as the misconceived perception exists that SMSFs are the key to accessing the super treasure chest in any circumstance, finding a solution to the matter may still take some considerable time.

“There’s a segment of trustees who may be getting into SMSFs for the right reasons, but then find themselves in difficult economic and financial circumstances. They begin looking at their SMSFs and they believe they can dip their hands into that SMSF cookie jar, which is non-complying behaviour.”

- Shelly Banton, ASF Audits

QUARTER I 2024 15

FEATURE

With the growing number of retirees in the Australian population, the role of superannuation in retirement is under question and, as Jason Spits writes, the proposed answers seem very familiar to many.

16 selfmanagedsuper

FEATURE IF IT AIN’T BROKE

For many in the SMSF sector, government plans to address an issue can often feel like a solution looking for a problem, with the lengthy discussions around non-arm’s-length income and expenditure, and the more recent dialogue regarding the Division 296 tax, adding some credence to the perception.

Having spent much of 2023 working through those two issues by way of a series of short-run consultations (see Issue 44: “People hearing without listening”), the superannuation sector went into Christmas last year considering another Treasury discussion paper, titled “Retirement phase of superannuation”.

It considered the take-up of retirement income products under the Retirement Income Covenant (RIC) and how it could be accelerated by supporting super fund members to navigate the retirement income system, supporting super funds to deliver better retirement income products and services, and making lifetime income products more accessible. (See “Another consultation paper” below.)

While these aims are laudable, there were a few key issues that may raise some red flags for the SMSF space, including a call to look beyond account-based pensions (ABP), heavily used by the sector, to annuities to address longevity needs, and to include SMSFs under the obligations of the RIC.

Why fix it?

This latter suggestion came out the blue with the paper noting SMSF trustees faced the same complex decisions as members of Australian Prudential Regulation Authority (APRA)regulated funds when deciding on how to structure their retirement income, but without “the same entitlement to support that members of APRA-regulated funds receive under the RIC”.

As such, it questioned the approaches SMSF trustees take to manage risk and maximise income, what barriers there are to achieving these outcomes and how the government can assist in improving them.

Unsurprisingly, there is little support for the suggestion SMSFs should be covered by the RIC. This is not new and harks back to the arguments made in 2021, when SMSFs were originally excluded from the RIC, that APRAregulated funds and SMSFs operate in very different ways.

SMSF Association head of policy and advocacy Tracey Scotchbrook says it was natural to ask the question given the wider discussion on retirement income that is taking place, but there is no expectation potential changes are in the pipeline.

“We looked hard at this question again and the RIC policy drivers do not fit the SMSF environment. APRA-regulated funds tend to be more disconnected from their members in comparison to SMSFs where the trustees are the members of the fund as well,” Scotchbrook notes.

“Some SMSFs will need some support and the sector can work with government and regulators to promote education and advice, but SMSF trustees are required to make declarations when setting up their fund about their obligations to the fund and its members.

“The annual compliance checks that have come to the sector via the ATO means every fund has ongoing engagement with its trustees.”

Financial Advice Association Australia general manager of policy and advocacy Phil Anderson also sees the differences between APRA-regulated funds and SMSFs making the latter unsuitable to sit under a regime designed predominantly for the former.

Anderson points out APRA-regulated funds have limited knowledge of their members’ needs and that segments of the superannuation system treat people as part of an aged-based cohort.

“This is very different from the SMSF members, who often have an adviser and their own obligations and there is no reason why the government should apply a default model from one part of the system to another part which acts very specifically,” he explains.

“If people are not ideally suited to being in an SMSF, that is a different issue, but what can be done with an SMSF can’t be done at the APRA-regulated fund level.”

Actuaries Institute superannuation and investments practice committee chair Tim Jenkins also sees little will be gained by extending the RIC to cover SMSFs, but feels there is value in considering some of the guidance measures that are being discussed.

These include regular contact with fund members, providing guidance and education that could be timed as ‘nudges’ to action when a member approaches or reaches a key date or

“We should be cautious about repeating the mistakes of the past and provide exit strategies for fund members who take on any form of retirement income product and this applies to members of APRA-regulated funds as much as it does to SMSFs.” – Natasha Panagis, IFPA event in their life.

“We see a role for government and SMSF service providers to give guidance along the way and to promote the idea that superannuation is a pot of money for retirement living and not a nest-egg to be maintained well into the future,” Jenkins adds.

“The superannuation guarantee model over the past 30 years has encouraged saving and building member balances, but people in any type of fund need reminding superannuation was designed for spending in retirement.”

Where’s the problem?

Jenkins’ comments touch upon an issue raised in the paper, being to encouraging more Continued on next page

QUARTER I 2024 17

FEATURE IF IT AIN’T BROKE

Continued from previous page

people to take up retirement income stream products and shift their thinking away from the view superannuation should be held for as long as possible, often with the intention of passing it on to the next generation.

The paper notes while 84 per cent of retirement savings are in ABPs, these products do not manage the risk of outliving those savings and research has found many people are drawing down only the minimum required, depriving themselves of a better standard of living and subsequently dying with large balances still in hand.

Conversely, only 3.5 per cent of retirement income streams are held in annuities, raising the question of whether this binary, one-sided split in product selection is a problem.

Jenkins says the research cited in the paper about people sitting on pension income is not universally accepted and some run them down before death, adding the uptake of pensions is a good outcome for many and people treating their superannuation as a nest-egg is a separate issue.

“Pensions are a great product because they work for many people, but it is still horses for courses and they may not be suited to every situation,” he suggests.

“The consultation paper said the lack of annuity products was due to a limited supply from product providers, but we would argue it is a lack of demand.”

Institute of Financial Professionals Australia head of superannuation and financial services Natasha Panagis says pensions have achieved widespread use due to their flexibility, while annuities are often complex to understand without advice or guidance.

“Capital is locked away in an annuity and super fund members have to weigh up the flexibility of a pension against the longevity risk offset that comes from an annuity, and this is where advice can consider the pros and cons of each type of product,” Panagis points out.

“This is particularly important when it may be hard to find product providers causing people to view annuities as an alternative option.”

Anderson notes the issue with choice between a pension and an annuity is “the decision people are invited to make is to lock their money away for a length of time for a lower return to address longevity risk and they probably won’t do that unless they understand

18 selfmanagedsuper

the benefits”.

“This comes back to the low levels of financial literacy many people have, which is why we still see people withdraw their super at age 65 and bank it just for the certainty of knowing what it’s doing,” he says.

Avoiding the past Given the lack of awareness around retirement income products existing among the millions of people heading into or already in retirement, the consultation paper put forward the idea of a ‘suggested product’ that could be offered to fund members, as well as industry standardisation around the development of any new products.

This also appears to have little support and Financial Services Council (FSC) chief executive Blake Briggs acknowledges the body’s consumer polling shows many people don’t want to be constrained either by government policy or products.

“FSC research shows that 73 per cent of people wanted to tailor their retirement arrangements to suit their needs and that high-quality affordable advice is central to supporting consumers as they prepare for their retirement,” Briggs says.

“A one-size-fits-all approach is not suitable for retirement and would be rejected by consumers, and the government and superannuation funds need to be careful not to be imposing solutions on their members.”

Scotchbrook and Panagis indicate the SMSF sector is also wary of a top-down imposition of retirement income products and is keen to avoid the formation of legacy products like market-linked pensions that have become very difficult to exit after superannuation rules changed.

“We should be cautious about repeating the mistakes of the past and provide exit strategies for fund members who take on any form of retirement income product and this applies to members of APRA-regulated funds as much as it does to SMSFs,” Panagis warns.

To this point Scotchbrook adds: “Product innovation is useful, but it is at low levels because there is no demand at present for more, but more advice can shift that dial.”

“There is already a shift underway with APRA-regulated funds under the RIC and the proposed changes from the Quality of Advice Review will continue to increase consumer knowledge and confidence.

“We looked hard at this question again and the RIC policy drivers do not fit the SMSF environment.

APRA-regulated funds tend to be more disconnected from their members in comparison to SMSFs where the trustees are the members of the fund as well.”

– Tracey Scotchbrook, SMSFA “Keep in mind, the RIC has not been in operation for that long, but the timing of this paper and the discussions around expanding advice to super funds shows there is an alignment in discussions and the need for better outcomes for many people who cannot access advice.

Sizing up the future These better outcomes are a central theme of the discussion paper and while it puts forward ways to hasten results, it also recognises the scale of the task at hand. It states at present there are 1.6 million people aged 65 and over receiving income from a superannuation product and in the next 10 years a further estimated 2.5 million Australians will Continued on next page

FEATURE

Continued from previous page

move from the accumulation into the retirement phase of their super and information and education will be central to a smooth transition.

These figures underplay the significant change that will be taking place in the retirement income system, as well as in the lives of the individuals concerned.

“There was never going to be an easy process to move this many people from accumulation to pension phase,” Anderson says, adding many will need to have a greater level of financial literacy to make the move.

“They will also need access to advice at a critical time when they are changing financial structures and their life situation and to have confidence in their future plans before they

decide on which product they will choose.”

For Jenkins, the discussion paper raises the prospect of dealing with the current wave of retirees, but also laying the framework for those still to move through the system.

“The real focus of this paper is providing help and guidance and starting it early and carrying that through to retirement. The current environment is not easy for super funds to provide that support and under the rules at present they can’t do so unless the members ask for it,” he says.

Whether this will change remains to be seen, with the period for comment on the paper having closed in early February and a government response still pending, however, Scotchbrook suggests the government can look to the SMSF sector as an example of the

outcomes it is seeking.

“SMSFs are a case study of what happens when members are engaged, advised and calling the shots on what happens as they head into retirement, which APRA-regulated funds could adopt using the nudges suggested in the paper,” she says.

“These would work with their model and we would like to see them applied to SMSFs as well, but there is no single solution. Defaults and mandates are not the right outcomes, but the RIC and the provision of advice are the two levers in the wider system and many funds are still finding their feet on advice.

“Good outcomes will not happen overnight and organic results can’t be forced and we would be concerned if policy was the driver behind member outcomes.”

“A one-size-fits-all approach is not suitable for retirement and would be rejected by consumers, and the government and superannuation funds need to be careful not to be imposing solutions on their members.”

– Blake Briggs, FSC

The “Retirement phase of superannuation” discussion paper, released on 4 December 2023, around 18 months after the commencement of the Retirement Income Covenant (RIC), took its starting point from a joint review by the Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) of superannuation funds’ efforts to meet the RIC objectives.

Those objectives were to maximise retirement income, manage risks to the sustainability and stability of that income and maintain flexible access to capital, and

they were only binding on APRA-regulated funds after SMSFs were excluded by the previous government.

The review found most APRA-regulated fund trustees had not conducted any close analysis of their members’ income needs in retirement and lacked any metrics to assess the retirement outcomes provided to members, leading to the paper’s conclusion that the take-up of lifetime income products was low and the market was underdeveloped.

While the absence of SMSFs from the RIC and the use of pensions were put forward as key areas for consultation, the paper notes retirees are required to decide how they will draw down their superannuation savings during their retirement to cover expected and unexpected living costs.

At the same time, the paper

acknowledges there is a need to transition people from the nest-egg mindset, developed during the accumulation phase, to thinking about superannuation in retirement as capital that should be drawn down and spent.

To this end it stated “minimum drawdown rates are generic settings which are not designed for, and do not lead to, an optimal retirement income for all retirees” and guidance, education and communication, including ‘nudges’ to spur retirees to action, should be part of the retirement income landscape.

In conjunction with this, the paper called for more and better retirement income products and the creation of a standardised framework so these products can be compared across the metrics of cost, risk, expected income and access to capital while offsetting longevity risks.

QUARTER I 2024 19

INVESTING

A shift in emerging markets

Emerging market discussions were once dominated by considerations involving Brazil, Russia, India and China, but John Moorhead writes there is now a changing of the guard.

JOHN MOORHEAD is head of global emerging markets at Maple-Brown Abbott.

Experienced investors will remember the popularity of the BRIC (Brazil, Russia, India and China) economies in the early 2000s, when they were growing strongly and many saw attractive investment opportunities.

The global financial crisis changed a number of dynamics for these countries and with the passage of time and economic evolution today, we coin a new emerging markets acronym for investors to focus on: the BITs, namely Brazil, Indonesia and Turkey. Each of these fascinating and unique economies offers up idiosyncratic investment opportunities driven out of sometimes rapid and unexpected change.

Positive change in Turkey While Turkish President Recep Tayyip Erdoğan’s macroeconomic handbook has been very unconventional and much criticised, recent changes suggest a return to a more stable economic approach,

20 selfmanagedsuper

which could yield attractive investment results for investors prepared to do their research on the country.

Turkey has undergone substantial and surprisingly positive change in the past 18 months. We started to assess Turkey more closely in September 2022 when yearly consumer price inflation hit 81 per cent and Erdogan was losing popularity. But we recognised there was potential for economic change. Few things remain constant, especially in emerging markets, and being able to recognise critical turning points is crucial.

From late 2022, we could see the potential for change coming out of the 2023 Turkish presidential election. Before that, consumer sentiment had plummeted, and the opposition political party had maintained a lead in the polls for over 12 months. To Continued on next page

Overall we have a

Graph 1: Turkey central bank repo rate – dots represent a change in central bank governor

favourable view on

50%

Indonesian equities

Erkan replace by deputy, karahan who maintains course

45% 40%

and we particularly

35%

like the banking

30%

industry, given relatively

Rate cuts in 2021 into rising inflation. Reported inflation peaks

25%

benign competition,

20% 15%

high profitability and

Rate hikes bring inflation under control in 2019

attractive valuations.

10% 5% 0% Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23

Jan-24

Source: FactSet, Wikipedia, 4 March 2024

Continued from previous page

the market’s surprise, Erdogan managed to turn this result in his direction after a tight first round of voting and won power.

The second surprise, however, was far more important: in June last year, Erdogan made a series of relatively wiser appointments to senior economic positions.

The first was appointing Mehmet Simsek as Finance Minister, who was previously in the position from 2009 to 2015 and Deputy Prime Minister from 2015 to 2018 – both periods of conventional and market-friendly policies. The second was appointing Dr Hafize Gaye Erkan, a former co-chief executive and president of First Republic Bank and Goldman Sachs alumni, as the governor of the central bank.

Following that, interest rates were increased for the first time since 2021, when

the central bank governor of the time was removed. In one move, interest rates were raised from 8.5 per cent to 15 per cent.

Markets had some doubt Erdogan would allow this to continue, but rates have since been increased to 45 per cent, as Graph 1 shows. Following that, inflation has modestly stabilised around 60 per cent, but the seeds for change have been planted. On 2 February 2024, Dr Erkan resigned, to be replaced by her deputy Dr Fatih Karahan.

Pleasingly for us and the market, Karahan has continued the course.

In response to this return to economic orthodoxy, the Turkish equity market has since rallied from extreme lows that saw valuations drop to as low as 3.7 times forward consensus earnings in June 2023.

Studying history teaches us the importance of being nimble, and while headline inflation numbers may deter some

investors, we believe what is more important is the direction of change. We see good stock and sector-level opportunities in Turkey as positive change and attractive valuations persist.

Tailwinds in Indonesia The Indonesian equity market has delivered significantly better returns than the emerging markets benchmark over the past three years, but gets less attention than other emerging markets such as India, in part due to relatively low liquidity and diversity.

Indonesia has around 900 listed companies, yet less than 10 trade more than US$10 million per day. In addition, the Indonesian equity market is relatively concentrated, with financials making up over 60 per cent of the MSCI Indonesia Index and consumer-related companies making up a further 10 per cent of the market.

Nonetheless, Indonesia is an attractive Continued on next page

QUARTER I 2024 21

INVESTING

Graph 2: Transactions per capita 60 40 20 0

Years after launch

Brazil

Chile

India

Australia

Mexico

Singapore

Denmark

Sweden

UK

Source: Bank for International Settlements

year’s

Graph 3: Payment transactions 6m

Pix 5.5m Credit card 4.0m

4m

Debit card 3.8m

2m 0 Q1 2019

Q1 2020

Q1 2021

Pix

Credit Card

Ted, Intrabank

Prepaid Card

Withdrawals

Debit Card

Boleto

Transfers, other

Q1 2022 Direct debit

Source:Central Bank of Brazil

Continued from previous page

investment destination offering many positive fundamentals, including similarities to India, such as a young population, rising incomes and increasing infrastructure spending.

In addition, Indonesian equities come at much cheaper valuations. The Indian market currently trades at around 23 times next

22 selfmanagedsuper

earnings while Indonesia trades at around 14 times.

The outlook for Indonesia is also positive.

There are a number of demographic tailwinds for investors, including a young, growing and urbanising population, increasing purchasing power and an emerging middle class.

This is expected to see increasing credit penetration, greater consumer spending and

rising investment capital expenditure, which means there should be significant growth opportunities for local companies.

In addition, private sector growth has been aided by significant reforms undertaken

by President Joko Widodo during his premiership. For instance, banning the export of low-grade resources has led to large foreign investment to build out the value chain from nickel ore to nickel metal and potentially to batteries and electric vehicles in time.

Supply chain modernisation in both the private and public sector, aided by digitisation, has also been a feature. For example, the government has moved all procurement to one ‘eCatalogue’. With an annual purchasing budget of US$120 billion, this not only saves costs with the benefits of buying at scale, but such a structure also reduces the potential for corruption.

At the same time, there are headwinds for investors to be aware of. Historically, macrorelated concerns and currency weakness have been a headwind for Indonesia. Ten years ago Indonesia was considered one of the ‘fragile five’ along with Brazil, India, South Africa and Turkey. Indonesia’s reliance on foreign capital, large current account deficits and low foreign currency reserves put the country at risk of a significant currency devaluation. Over the past decade the government has introduced important reforms with the resulting lower inflation, budget surplus and improved trade balance all contributing to greater economic and currency stability.

Overall we have a favourable view on Indonesian equities and we particularly like the banking industry, given relatively benign competition, high profitability and attractive valuations. We continue to look Continued on next page

Continued from previous page

for opportunities to deploy capital in the Indonesian market.

Consumer finance in Brazil In the past five years, Brazil has experienced a huge boom in new players disrupting market incumbents, including in the banking sector. Brazil has seen doubledigital bank account ownership growth since 2017, with the country experiencing the fastest bank account growth rate across both emerging and developed economies.

Brazilian bank relationships have now reached an incredible level of 1 billion accounts, almost five times the population, and 200 million issued credit cards, almost double the employed population.

Case study: Pix An important tool driving the increase in banking relationships in Brazil has been the rollout of Pix, the free instant payment ecosystem introduced by the Central Bank of Brazil at the end of 2020. Pix became a mandatory requirement for all banks and quickly and materially disrupted the costly and inefficient legacy payment options commonly available. During a recent visit to Brazil, we were impressed by how popular Pix has become for many uses, including payments in the informal sector.

Pix transactions have surpassed those of all other financial instruments, including debit and credit cards, with over 140 million individuals, or 80 per cent of the Brazilian adult population, having either made or received a Pix transaction, being the steepest adoption curve of its kind (see Graphs 2 and 3).

Reflecting the extent of change, Pix has facilitated more Brazilians entering the digital payment system, with almost one in two Pix users making no peer-to-peer digital transfer

in 12 months prior to the Pix rollout. Similar to the United States, where Venmo has become a verb, Pix has become the payment partner of choice for all Brazilians and this has had direct and indirect implications in many sectors of the Brazilian economy.

Caution still required Despite a number of opportunities presenting as constructive, we maintain a cautious view on some narratives and analyse each stock on a bottom-up basis. As we noted, with each Brazilian now having five bank accounts on average, the growth in account openings becomes meaningless and principality, or the source of the primary account balance, is paramount, meaning many fintechs still materially lag incumbents.

For example, Nubank, arguably the biggest fintech disruptor in Latin America, only has a US$8 ARPAC (average revenue per active client), which is roughly one-fifth of Brazilian incumbent banks.

Ultimately, Brazil’s banking relationship pile-on is coming at a cost: revolving credit card portfolios have surged, growing 40 per cent in the past 12 months with a record delinquency of 50 per cent. While this high level of growth rates in lending is normally a flag for caution in the banking sector, at the same time we would note that according to the Bank for International Settlements, Brazilian household debt to gross domestic product sits at 34 per cent. That is about the same as South Africa and India and compares to developed markets that are typically at least 60 per cent and often higher. That leaves a long runway for growth ahead for Brazilian financials, despite the cyclical risks.

In summary Global emerging markets are a dynamic mix of countries, often passing through different phases of their economic development at

Studying history teaches us the importance of being nimble, and while headline inflation numbers may deter some investors, we believe what is more important is the direction of change. We see good stock and sector-level opportunities in Turkey as positive change and attractive valuations persist.

any one point in time.

As the case studies above highlight, tasty macro-level narratives require careful assessment at the industry and company level. We continue to believe that experience, active management and bottom-up research counts when seeking out contrarian opportunities – but also to avoid investment pitfalls.

Our process and experience in dealing with myriad changes across the emerging markets spectrum allows us to efficiently assess the impacts of change across economies small and large and focus on the highest impact investment ideas for our clients.

QUARTER I 2024 23

INVESTING

Specific activity surge Several market factors are indicating an imminent increase in merger and acquisition activity in 2024, writes Dania Zinurova.

DANIA ZINUROVA is portfolio manager of alternative assets at Wilson Asset Management.

24 selfmanagedsuper

Increasing pressure for capital distributions and a more normalised valuation environment look set to bolster merger and acquisition (M&A) activity involving private equity assets in 2024. While 2023 was very much a buyers’ market in private equity, higher interest rates have prompted adjustments in valuations across various sectors in privately owned businesses.

This year there is also more pressure on private equity investors who hold assets acquired during 2018 and 2019 before the onset of the COVID pandemic to return capital to their investors. They can no longer simply hold on to mature investments that are ripe for exits.

As the anticipation of gradual interest rate cuts by the Reserve Bank of Australia (RBA) gains momentum, the pace of this adjustment is expected to be measured, given current rates align with historical norms rather than excessive levels. These unfolding dynamics are poised to foster a more equitable landscape in M&A activity, creating an environment where willing sellers and interested buyers find a better balance.

This trend is particularly pronounced in sectors such as technology, artificial intelligence, food retail and healthcare. Foreseeing a surge in interest from private equity investors in the technology and AI realms, we also anticipate a broader trend of businesses leveraging technology to enhance operational efficiency and streamline their workforce.

Last year we saw some large online retail enablers using technology and innovation as a way to streamline their workforces, which in some cases resulted in improved financial performance for those businesses.

We are also focused on which sectors will remain resilient to the adoption of AI, such as healthcare. Until we have a big technology breakthrough, it is hard to see how healthcare workers will be replaced by AI and technology, especially in niche professions such as surgery and dentistry. Therefore, healthcare businesses continue to present a strong investment opportunity, especially firms on the supply side of the healthcare workforce .

Wilson Asset Management (WAM) Alternative Assets (ASX: WMA) participated in a co-investment with Crescent Capital in Healthcare Australia last year, which is Australia’s main supplier of nurses and

healthcare workers. Many private equity investors still have significant amounts of dry powder, so there is capital available to invest in deals. We expect to see more public-to-private transactions in the year ahead.

In Australia, Slater & Gordon, the world’s first listed law firm, was taken private last year by private equity firm Allegro Funds, which is one of WAM Alternative Assets’ investment partners, in a successful off-market takeover bid.

We see an opportunity for private equity players specialising in carve-outs and restructurings, especially for businesses that have complex organisation structures, where not all of the sub-divisions within those businesses are profitable.

Last year, Allegro Funds invested in the acquisition of accounting giant PwC Australia’s public sector advisory business. Allegro Funds is now investing $100 million in the operation, which has been renamed Scyne Advisory. The domestic market for such deals is not large, with only two or three local players that can execute it in a meaningful way. However, we can potentially see big global private equity players like Oaktree, Blackstone and KKR coming into the local market for these transactions.

In Australia, there has also been a structural shift in the market when we talk about private debt. Ongoing inflows of institutional capital from offshore are providing further opportunities for non-bank lenders to increase their share of lending to private equity investors. The Australian private credit market contains a variety of different loan structures and instruments that provide bespoke solutions to accommodate many different risk and return objectives for institutional investors. We believe the local market will continue to provide a huge opportunity for private lenders.

WAM Alternative Assets is the only listed investment company (LIC) on the Australian Securities Exchange that offers investors access to a diversified portfolio of water rights, agriculture, private equity, real estate, infrastructure and private debt strategies. Typically accessible only by institutional investors, the company provides shareholders with diversified exposure to opportunities, complementary to their traditional investment portfolios. As a LIC, investors benefit from a stream of fully franked dividends, risk-adjusted returns and access to experienced investment partners.

SIAA2024 14-15 May 2024 Grand Hyatt, Melbourne

ADAPT. INNOVATE. THRIVE.

NETWORKING DRINKS 14 May 2024, Spice Market

EN REGISTRATIONS NOW OP 00 and save $200pp.

ril. Enter coupon code Early bird available until 12 Ap

SIAA24D2

REGISTRATION INCLUDES

SPEAKERS INCLUDE Paul Conn President, Computershare Global Capital Markets

9 Lunch and refreshments for the two days

Kate Galvin CEO, Victorian Funds Management Corporation

9 Networking drinks at the Spice Market at the end of day one

Andrew Gregory Head of Advice and Education, UniSuper

9 Opportunity to network with other delegates, sponsors and exhibitors

Helen Lofthouse Managing Director and CEO, Executive Director, ASX

9 Confirmation of SIAA-accredited CPD (almost 15 hours available)

Alex Vynokur CEO, Betashares

9 Access to video recorded presentations postconference.

TO ACCESS THE $200 DISCOUNT

u u u u

Visit www.stockbrokers.org.au/event/siaa-2024 and click on ‘Get Tickets’ Select ‘Login’ > ‘Join’ and enter your personal details in the ‘Register’ box Proceed to your cart and enter the coupon code ‘SIAA24D200’ to redeem your discount Or call 02 8080 3200

Major partner

Gold partners

Silver partners

Bronze partners

Supporter partners

www.stockbrokers.org.au/SIAA2024

STRATEGY

The $3 million conundrum

The proposed Division 296 tax has already prompted discussions as to the merit of continuing to make investments in the super system. Meg Heffron uses some simple modelling to determine if taxpayers should consider building wealth outside of super should the new tax be implemented.

MEG HEFFRON is managing director of Heffron.

26 selfmanagedsuper

While the legislation hasn’t yet been passed (and is in fact stuck in a Senate committee until 10 May), the proposed new tax on members with high super balances has certainly created a storm of interest in the SMSF world.

The key question posed by many clients who already have very large balances is: “Will this tax be so bad that I should take my money (or at least the balance over $3 million) out of super?”

And the answer is, as usual, it depends. But there are definitely some observations we can

make. To make them, I modelled the following client scenario.

It involves a 65-year-old client who initially has $7 million in an SMSF. There are no other members of the fund. The client has a retirementphase pension worth $2 million and the remainder is in accumulation phase. Minimum pension payments are drawn each year.

Their primary concern is whether or not to Continued on next page

Continued from previous page

withdraw $4 million from their fund to reduce their balance to $3 million, largely avoiding the proposed new tax.

I have assumed the tax, now known as Division 296 tax, works exactly as outlined in the legislation currently before parliament.

I also assumed: • investment returns will be the same regardless of whether investments are made within super or outside super with the only difference being the tax environment, • a key factor influencing the calculations is how the investment return is made up between capital growth and income. I assumed 5 per cent income (including the impact of franking credits) and 3 per cent capital growth (but then varied this as outlined below), • inflation is assumed to be 3 per cent a year and all amounts projected into the future are adjusted for inflation.

This means dollar amounts are directly comparable to these amounts today, • amounts drawn as pension payments will be the same regardless of the scenario, and • a key difference between leaving the full $7 million in superannuation versus withdrawing $4 million is that under the remove from super option, earnings and eventual capital gains on the non-superannuation assets will be taxed at non-super rates. To this end it has been assumed: o a tax rate of 30 per cent (plus the 2 per cent Medicare levy) will apply for most people most of the

time on income outside super, or the highest marginal tax rate of 45 per cent plus Medicare will apply for very high rates of income (for example, when capital gains are realised). Given recent modifications to the stage 3 tax cuts, this assumption is perhaps a little conservative (that is, in fact, more tax will be paid outside super than assumed). But importantly, I have assumed wealthy individuals have some means of reducing their income below the top marginal rate most of the time, o members with non-superannuation savings will have some income already, enough to place them in the 30 per cent tax bracket.

In other words, the modelling very deliberately assumes it is not possible to remove wealth from super and have it invested while attracting less than 30 per cent tax.

Individuals who could do that are assumed to have done it already, o they will have the flexibility to arrange structures that optimise tax outcomes, including a family trust with the possibility of a corporate beneficiary, and o the outcome is that income will be taxed at a maximum of 30 per cent and capital gains, when realised, will be eligible for a 50 per cent discount but taxed at 45 per cent plus Medicare. This is imperfect in that it doesn’t contemplate additional applicable taxes if the income was distributed to a company and then later to individuals. Effectively it assumes

The key question posed by many clients who already have very large balances is: “Will this tax be so bad that I should take my money (or at least the balance over $3 million) out of super?

there will be enough individuals around to receive the income or that by the time money is paid out of a corporate beneficiary, the recipients can receive this at no more than a 30 per cent tax rate.

This definitely paints the removing from super option in an unduly favourable light, but it will do for now.

The first scenario Initially, I assumed the member could withdraw $4 million from super without paying any capital gains tax in the super fund at all. It’s as if the fund had recently sold an asset and had the cash available to reinvest – the only question was whether this should be in super or Continued on next page

QUARTER I 2024 27

STRATEGY

One of the most significant features of the Division 296 tax is it brings forward the taxation of capital gains, in effect making super an unattractive place to build up those gains.

Graph 1 Extra wealth if $4m invested out of super $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 $10,000

0

1

2

3

4

5

6

$20,000 $30,000

Continued from previous page

externally.

I also assumed in either case the new asset was purchased now and then sold after six years.

The exact timing isn’t critical, but assuming it is sold at some point is important. That’s because one of the most significant features of the Division 296 tax is it brings forward the taxation of capital gains, in effect making super an unattractive place to build up those gains. But eventually, when the asset is sold, super is actually a far more attractive place to pay tax on realised gains. So we can’t make a fair comparison unless we assume the asset is sold at some point.

28 selfmanagedsuper

Year I then projected two scenarios into the future: • option 1: the entire $7 million remained in superannuation incurring Division 296 tax, versus • option 2: $4 million is invested outside superannuation with minimal amounts of new tax applying.

What the modelling shows Graph 1 shows the difference between the two situations.

If the graph is above $0 at a particular time, option 2 is better at that time.

In contrast, if the graph is below $0, option 1 is better at that time. All figures are adjusted for inflation so are directly comparable to amounts today.

Initially, while the $4 million asset is growing in value, the member is better off if it is held outside superannuation.

That’s because the tax on the income component is broadly the same under both options (in fact, marginally favouring keeping the $4 million inside super as explained in section 3) but the treatment of the growth is different.

Under option 1, Division 296 tax will mean taxes are paid on the growth as it occurs. No equivalent tax applies under option 2.

But this phenomenon reverses when the asset is sold. At that point, growth over the past five years is taxed all at once under option 2. And it is assumed to be taxed at quite high rates, that is, 45 Continued on next page

Continued from previous page

per cent plus Medicare, after allowing for the normal 50 per cent discount landing at an effective tax rate of 23.5 per cent.

In contrast, realising the asset has no impact at all on Division 296 tax (remember under this tax, a proportion of the gain is taxed progressively as it emerges, not when it’s realised) and so the usual superannuation tax rates apply.

At worst this is an effective rate of 10 per cent on the capital gain.

In fact, in this fund, the effective tax rate will be less than 10 per cent because the member has a pension account. By the time the asset is sold, the pension account is projected to represent around 25 per cent of the fund, meaning 25 per cent of the capital gain is exempt current pension income (ECPI) and so entirely exempt from tax.

It is easy to miss this last point as conceptually we typically view the extra $4 million as an amount over and above the fund’s pension account. So in theory, the existence of ECPI should be irrelevant as it only relates to the pension part of the fund.

But remember the ECPI portion is applied to every $1 of income in the fund. In this case we are modelling the impact of simply selling one asset, the one with a value of $4 million purchased at the start. Even though this is notionally the money over and above $3 million and so definitely over the pension account, it still shares in ECPI. The net result is that once the taxes

triggered by selling the asset have been taken into account, the member is actually slightly better off if the entire balance has been left in superannuation from the start. And interestingly, even when option 2 appears more favourable, that is, while the asset is still growing, the difference is modest in relative terms (the graph peaks at $50,000 in today’s dollars, compared to a total wealth at the start of $7 million).

Variations Not surprisingly, this modelling was repeated on a great many different scenarios to see what could potentially change the outcome. My broad conclusions from those extra calculations could be summarised as: • changing the return mix between income and growth, that is, assuming more of the income came in the form of capital growth and less as income, did change the picture. Not surprisingly that scenario favored option 2. But not enormously and the big reversal in benefits at the time of sale was still very evident, • assuming the asset was held for longer than six years didn’t change the overall outcome of a roughly neutral result once the asset was eventually sold, and • allowing for even very small amounts of capital gains tax upfront, that is, if it was necessary to realise gains in order to transfer cash or assets out of super, made it far more attractive to leave the asset in super.

There are, of course, many other scenarios we could model and I will definitely continue to do so.

A final point for context In all of this modelling, the overall result was actually that the two options gave the member a very similar outcome. In other words, for someone with these particular circumstances, the significant tax benefits of super have been eroded so much that it’s no longer critical to maximise exposure to super at all times.

Of course, it’s still very tax advantaged up to $3 million, but the decision is less important for the $4 million over and above that amount.

That makes it far easier for clients to prioritise other things in later life. In the future, for example, will we see clients withdrawing money from super earlier simply because they want to: • reduce the risk of high death benefit taxes, • make their estate planning easier by having more of their assets in a structure that can be better controlled by their will, and • buy assets in an environment where they won’t be forced into realising capital gains at some point (remembering that death is one circumstance where money has to be taken out of super).

I think we will. And we’ll start to see a greater focus on gradually drawing down larger balances over time rather than leaving as much wealth as possible in super. And that’s not such a bad thing.

QUARTER I 2024 29

COMPLIANCE

The complexity of in-house assets

The SMSF in-house asset rules are nuanced and certainly not straightforward.

Shelley Banton examines the rules to which trustees must adhere in order to avoid compliance breaches of this nature.

SHELLEY BANTON is head of education at ASF Audits.

30 selfmanagedsuper

The legislation surrounding in-house assets (IHA) within the SMSF landscape is complex. The core of the regulatory framework requires SMSF professionals to identify whether an asset is a related-party asset, as specified by section 10(1) of the Superannuation Industry (Supervision) (SIS) Act, determine whether it is an IHA, as per section 71 of the SIS Act and then ensure compliance with the SIS Act and SIS Regulations.

Many interpretations exist of how to apply the IHA breaches under SIS Act sections 82, 83 and 84.

The correct approach is crucial, especially since IHA breaches are rated as high risk by the ATO and represent 17 per cent of all auditor contravention reports (ACR) lodged with the ATO by SMSF auditors.

One of the reasons for the regulator’s intense

scrutiny of IHAs is they may be hiding the illegal early release of benefits.

The meticulous process of identifying IHAs within SMSFs requires a comprehensive understanding of the relevant definitions and criteria outlined in the legislation.

Overview of in-house assets Section 71 of the SIS Act does not allow a fund to invest in IHAs exceeding 5 per cent of total fund assets that include: 1. an asset of the fund that is a loan to a related party of the fund, Continued on next page

Continued from previous page

2. an investment in a related party of the fund, or 3. an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund.

A fund can invest in any of these IHAs if the value of the IHA is 5 per cent or less of the total fund assets.

A common mistake is using net fund assets instead of total fund assets, resulting in an incorrect IHA percentage calculation.

Also crucial for assessing compliance and calculating a fund’s IHA ratio is understanding the assets excluded from being an IHA, such as: a. a life insurance policy, b. a deposit with an approved deposittaking institution, c. business real property leased to a related party under a lease or lease arrangement, d. an investment in a widely held trust, and e. an investment in a related entity that meets the requirements of SIS regulation 13.22C. Who is a related party?

Identifying related parties is the first step in determining whether an asset is an IHA: • all members of the fund (as defined by the governing rules), • standard employer sponsors (who contribute under an arrangement between the employer and trustee), and • Part 8 associates of the members or standard employer sponsors (defined under SIS Act Part 8).

While identifying fund members and standard employer sponsors is relatively straightforward, recognising Part 8 associates introduces additional complexity.

A practical tip is to start from the SMSF member and progressively work outward

Underestimating the importance of a trust deed or the corporate trustee’s constitution can have dire consequences for an SMSF. towards the associated entity. It involves tracing members’ connections to various entities and assessing whether they meet the Part 8 associate criteria.

Attempting to work backwards may introduce unnecessary complexity and confusion into the identification process.

Demystifying how sections 70B, 70C and 70D of the SIS Act apply under Part 8 is also essential for accurately identifying related parties of fund members.

SIS Act section 70B Section 70B of the SIS Act provides the answers to who is a Part 8 associate of fund members, including: • relatives of each member and their spouses, • all other members of the SMSF, • all other trustees, both individual trustees or directors of the corporate trustee, • a partner in partnership with each member, • any spouse or child of those business partners, • any company the member or their Part 8 associates control or influence, and • any trust the member or their Part 8 associates control.

The broad scope of relationships

captured under section 70B requires a thorough examination of family ties, business affiliations and, most importantly, companies and trusts controlled or influenced by the member or their Part 8 associate.

The ATO, in particular, is concerned about the control and influence a member or their Part 8 associate may exert over an entity.

Control of a company SIS Act section 70E(1)(a) states a member of an SMSF will be considered to control a company if the entity is sufficiently influenced by the member and/or a Part 8 associate of that member.

The situation occurs where a majority of the company’s directors have become accustomed, obliged or might reasonably be expected to act under directions, instructions or wishes of the member and/or Part 8 associates of the member.

Identifying control requires thoroughly understanding the relevant facts, circumstances and practical testing.

One common scenario is a company with two directors, where one director exerts significant influence despite the appearance of board independence. Annual minutes or other company communications may be valuable in assessing control within such a company.

Control can also manifest when a member or their Part 8 associate holds a majority voting interest in the company, enabling them to cast or control the casting vote or possess more than 50 per cent of the maximum votes.

The company’s constitution serves as a key document in determining the extent of Continued on next page

QUARTER I 2024 31

STRATEGY COMPLIANCE

Continued from previous page

control, providing insights into voting rights and decision-making.

Control of a trust Under section 70E(2) of the SIS Act, an entity controls a trust if:a group in relation to the entity is entitled to a fixed entitlement of more than 50 per cent of the capital or income of the trust if: • the trustee of the trust, or a majority of the trustees of the trust, is accustomed to or under an obligation (whether formal or informal) or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the entity, and • a group in relation to the entity is able to appoint or remove the trustee, or a majority of the trustees, of the trust.

The definition of a group related to an entity widens the Part 8 associate net because it encompasses an individual, a company, a partnership or a trust.

Underestimating the importance of a trust deed or the corporate trustee’s constitution can have dire consequences for an SMSF. These documents serve as critical sources of information regarding control structures, voting rights and trustee removal and appointment within the trust.

Once again, minutes and other documentation may also indicate one or more entities are acting as a group and controlling the trust.

Sections 70C and 70D While these sections of the SIS Act also help identify a related party, they should be applied only after careful consideration.

Section 70C refers explicitly to a standard

32 selfmanagedsuper

employer-sponsor and only applies to SMSFs with such arrangements.

Section 70D covers partnerships and is irrelevant for identifying a Part 8 associate of the member because the member is an individual, not a partnership.

Applying the IHA rules The interaction between the IHA rules and SIS Act Part 8 underscores the legislation’s holistic approach to SMSF compliance.

While a fund may invest in IHAs within the prescribed limits, breaches of the 5 per cent threshold trigger specific reporting requirements in SIS Act sections 82, 83 and 84.

Understanding the nuances of the IHA breaches is essential to ensure SMSF compliance.

Section 82 Where the IHA level exceeds 5 per cent at the end of the income year, the fund triggers section 82 and the trustees must prepare a written plan by the end of the following income year that: a. specifies the excess amount worked out using the formula, b. sets out the steps to reduce the limit of the fund’s IHA ratio to 5 per cent or less during the following year of income, and c. trustees must carry out.

Timing of trustee obligations The timing of the trustee’s response to triggering SIS Act section 82 at the end of the financial year (year 0) plays a crucial role in determining whether a breach of that section exists.

The trustee must undertake action or prepare a plan and reduce the level of

The meticulous process of identifying IHAs within SMSFs requires a comprehensive understanding of the relevant definitions and criteria outlined in the legislation.

IHAs to 5 per cent or less by the end of the following year (year 1) of income.

There is no breach of section 82 in year 1 because it requires trustees to take corrective action in year 1.

Where the trustees fail to meet their obligations in year 1, they will breach section 82 in the subsequent year of income (year 2), with the SMSF auditor reporting the breach to the ATO in an ACR in year 2.

If the level of IHAs reduces to 5 per cent or less in year 1 because of changes to the market value of fund assets, the trustee is still required to meet their obligations under the act.

A change in market values in year 1 does not remove the requirement to rectify a breach triggered in year 0 in line with section 82.

Continued on next page

Timing of auditor obligations Upon signing the audit report in year 1, the auditor requests the written plan from the trustees and outlines their responsibilities under section 82 in the management letter.

However, if the trustees fail to provide a written plan or do not reduce the IHA level to 5 per cent or less by the end of year 1, the auditor must report the breach to the ATO in year 2.

If the year 0 audit is conducted in year 2 for any reason, such as late lodgement, the fund is deemed to have triggered section 82 in year 0 but did not meet the requirements of section 82 by year 1.

Under this scenario, the auditor has no choice but to report the breach to the ATO in year 2.

Section 83 Where the IHA level exceeds 5 per cent at any time during year 0, section 83 will apply as a reportable breach in that year because trustees must not acquire an IHA that exceeds 5 per cent of the market value ratio.

Unlike section 82, which focuses on breaches at a specific time, that is the end of the income year, section 83 addresses breaches that occur at any time during the income year.

For instance, when an asset exceeds the 5 per cent IHA level at any time during year 0 but is subsequently reduced to 5 per cent or less or disposed of before the end of year 0, the fund has still breached section 83.

Again, the SMSF auditor must report the breach to the ATO in an ACR. Lease arrangements While a loan or an investment in a related party can exceed the 5 per cent IHA level during an income year, there is confusion

when the IHA is an asset subject to a lease or lease arrangement.

The problem is understanding whether it is the lease or the asset that is the IHA. In line with SIS Act section 71, the definition says it is “an asset subject to a lease or lease arrangement”, meaning the asset is the IHA, not the lease.

During the year When a related party uses the residential property during year 0, the asset is an IHA from when the related party first uses it until they vacate the property.

Assume an SMSF owns a residential property rented to a related party on 1 September and vacates it on 31 December.

The property is an IHA of the fund from 1 September until 31 December.

Where the value of the IHA asset ratio exceeded 5 per cent during that period, the fund breaches section 83 of the SIS Act and the SMSF auditor must report the breach to the ATO. A section 83 breach will not trigger a section 82 breach because there is no IHA issue at the end of year 0, only during the year.

At year end If the IHA exceeds the 5 per cent level at the end of year 0, the fund still breaches section 83 because it applies at any time of the year.

Essentially, the fund will trigger the requirements under section 82 (which is not reportable in that year of income), but will breach section 83, which is reportable to the ATO. Section 84 SIS Act section 84 requires SMSF trustees to take all reasonable steps to comply with

The broad scope of relationships captured under section 70B requires a thorough examination of family ties, business affiliations and, most importantly, companies and trusts controlled or influenced by the member or their Part 8 associate.

the IHA rules and apply to the fund any time during the year.

The overarching principle guiding the application of section 84 is whenever a section 83 breach exists, a section 84 breach is also reported to the ATO in an ACR. The mechanics of applying section 84 are the same as outlined in the section 83 section above.

Conclusion Navigating the complexities of IHA regulations requires a nuanced understanding of the legislative framework and meticulous attention to detail.

As SMSF professionals continue to navigate the evolving regulatory landscape surrounding IHAs, it is imperative to stay informed about legislative updates, ATO guidelines and best practices in assessing compliance.

QUARTER I 2024 33

STRATEGY STRATEGY

Contributing factors

There are many parameters governing how contributions can be made to an SMSF. Tim Miller points out they all need to be considered when looking to build retirement savings.

TIM MILLER is technical and education manager at Smarter SMSF.

While the 1 July 2022 legislative changes opened up the contribution landscape considerably with the removal of the work test for personal contributions prior to age 75, other factors, such as the transfer balance cap and the proposed Division 296 tax, mean contributions shouldn’t be made just for the sake of it. Rather, they should be made looking at the end game to determine how much members think is appropriate to fund their desired retirement income needs, but also what strategies are appropriate based on family circumstances.

This article highlights a number of contribution strategies SMSF members have available to them that are enhanced when indexation occurs. Further, we will contemplate how some strategies may not be appropriate in all family circumstances.

Contribution acceptance rules

Regulations outline the requirements for the acceptance of contributions and the Income Tax Assessment Act primarily defines the types of contributions, as well as the caps that apply to avail them to concessional tax treatment.

Table 1 outlines the rules for accepting contributions.

A fund may also accept contributions made in respect of a member, received on or before the day that is 28 days after the end of the month in which the member turns 75 years, that are: • employer contributions other than mandated employer contributions, or • member contributions other than downsizer contributions.

Longer timeframes for making contributions The extension to age 75 provides a great opportunity for certain contribution strategies,

The Superannuation Industry (Supervision) (SIS) Continued on next page

34 selfmanagedsuper

Table 1: Acceptance of contributions If a member:

then the fund may accept contributions made in respect of the member that are:

is less than 55 years

(a) all employer contributions, or (b) member contributions (excluding downsizer).

2

is between 55 and 75 years

(a) all employer contributions, or (b) member contributions (including downsizer).

3

is 75 years or older

(a) only mandated employer contributions, or (b) downsizer contributions.

Item

1

Continued from previous page

such as recontribution strategies, as it intertwines directing money into super during the drawdown stage. While recontribution strategies are reliant on satisfying certain conditions of release, including attaining preservation age, other strategies targeting rebalancing between spouses can commence earlier via contribution splitting.

Some strategies are contemplated for the purposes of redistributing wealth between members and others are used to minimise tax for non-tax dependent beneficiaries in receipt of death benefits.

Indexation The indexation of the concessional contributions cap from 1 July 2024 will be influential as it will impact carry-forward unused concessional contribution strategies, contribution reserving,

contribution splitting and, importantly, the non-concessional contribution limit and by extension the three-year bringforward limit.

Impact of indexation on bringforward amounts When the concessional cap is indexed, this results in the non-concessional contribution cap also increasing as the standard non-concessional cap is four times the concessional cap. With the nonconcessional contributions cap being indexed from 1 July 2024 and the general transfer balance cap remaining at $1.9 million, this will reset the bring-forward limits as in Table 2.

There are hazards linked with the indexing of the non-concessional cap, particularly where a member is part way through a live bring-forward period.

Individuals cannot use the increase in the non-concessional cap until any existing

There are hazards linked with the indexing of the non-concessional cap, particularly where a member is part way through a live bringforward period.

bring-forward period expires.

Example Stefanie had a total superannuation balance of $1.3 million at 30 June 2022 and made a $125,000 non-concessional contribution in the 2023 financial year.

This triggered her bring-forward and given her balance, it gave her an entitlement to the entire three-year period, which runs across 2022/23, 2023/24 and 2024/25. Stefanie doesn’t have the cash flow during 2023/24, but comes into some money early in 2024/25. Despite the non-concessional cap increasing to $360,000 for three-year bring-forward purposes, Stefanie is only entitled to contribute a further $205,000 up until 30 June 2025, taking her total to $330,000, not $360,000.

Continued on next page

QUARTER I 2024 35

STRATEGY

Table 2 Total superannuation balance previous 30 June

Non-concessional contributions cap for the first year

Bring-forward period

Less than $1.66 million

$360,000

3 years

$1.66 million to less than $1.78 million

$240,000

2 years

$1.78 million to less than $1.9 million

$120,000

No bring-forward period, general non-concessional contributions cap applies

$1.9 million or more

Nil

N/A

Continued from previous page

Recontribution v spouse contribution This is one of the more significant family dynamic-based considerations.

A single-member fund has no direct need to undertake a recontribution strategy, however, given the likelihood all beneficiaries will be either non-tax dependants and, in some instances, non-dependants, there is some value in rebalancing taxable and tax-free components. For couples without children, the primary reason to consider moving money from one spouse to the other is to maximise exempt current pension income once the members move to retirement phase.

In your traditional nuclear family, both strategies are appropriate as there may be some rebalancing requirements,

36 selfmanagedsuper

but also some taxable component rebalancing requirement. The death of member one will often result in member two receiving the benefit in the form of a pension, meaning the greater the tax-free component that can be transferred to them the better.

The blended family, however, may not be the appropriate structure for spouse contributions. If a two-member fund blends families together, then estate planning is critical and a spouse contribution of considerable size may be problematic if wanting to leave benefits to a child from a previous marriage. So while a couple may be looking at strategies from the angle of their respective transfer balance caps, they also need to think through to the estate piece.

The concessional contribution strategies can be divisive and while there are some great indexation-based

The concessional contribution strategies can be divisive and while there are some great indexation-based opportunities, once the discussion turns to contribution splitting, the nuclear versus blended family discussion is relevant again.

opportunities, once the discussion turns to contribution splitting, the nuclear versus blended family discussion is relevant again.

Carry-forward unused concessional contributions With the ability to carry forward unused concessional contributions from 1 July 2018, we have now reached the milestone where everyone, with a total superannuation balance below $500,000 at the most recent 30 June, has the capacity to use the full five years’ worth of unused amounts. Noting the rules provide for the current year cap to be used first and then unused amounts from year one of the rolling five-year period to be used next, individuals should be looking at Continued on next page

Continued from previous page

their 2018/19 contributions to, at the very least, see if they have cap space they can use rather than lose.

There is no requirement to wait the full five years, it can be used incrementally, and is also available to those who couldn’t make contributions in prior years. While ATO private rulings issued can’t be relied upon by other parties, a recent one confirmed an individual who had come to Australia in 2017 on a partner’s visa, and had not commenced working and contributing until 2021, could carry forward the unused cap from 2018/19 despite not working at that time.

Managing the total superannuation balance is critical and one strategy that can legitimately assist with this is contribution splitting, albeit that splitting won’t impact the splitting spouse’s total super balance until the following 30 June.

Contribution reserves The concept and benefits of contribution splitting were discussed in last quarter’s article, “Evening up the score”, however, as a reminder only concessional contributions can be split to the contributing member’s spouse. That spouse must be under preservation age or between preservation age and 65 and not retired.

The maximum amount that can be split is the lesser of 85 per cent of concessional contributions made during the previous year, or current year as discussed below, and the member’s concessional contribution cap. The concessional cap is subject to the member’s total superannuation balance and previous unused carry-forward cap.

Contributions splitting applications must be made in the year following the contribution, however, the application and

process can occur in the same year as the contribution if the entire member’s benefit is being paid out during the financial year.

Contribution reserving Contribution reserving is the practice where members use the SIS contribution acceptance and allocation rules to get a tax benefit in year one by claiming a tax deduction in that year and then allocating the contribution to the following year, or year two, for cap purposes.

Ultimately the strategy relies on the ability in the SIS Regulations that provide for a contribution to be allocated within 28 days following the end of the month it is received. The ATO, via Taxation Determination TD 2013/22, indicates contributions are deductible in the year they are received, but for cap purposes cannot be counted twice. So for certain contributions, that is, those made in June, they must be counted in the year they are allocated, which can be either year one or year two. This created an anomaly in the event that they were allocated to year two as the contribution needed to be reported in the fund income tax return in the year of receipt to be recognised for deduction purposes.

The result is the regulator has created a process whereby the member, having entered into a legitimate strategy to make a contribution in June for deductibility purposes, would request the ATO to reallocate the contribution to the following year to avoid excess concessional contributions issues arising. The strategy relies on the fund trustee documenting the acceptance of the contribution in June and then documenting the allocation of the contribution in July and the lodgement of the application to reallocate the contribution by the member with the ATO. With the indexing of the concessional cap to $30,000 from 1 July 2024, this

strategy would allow an individual to potentially claim a significantly higher deduction in 2023/24 knowing they have less capacity to contribute in 2024/25.

Example Michael is 67 and still self-employed and makes a concessional contribution of $27,500 in April 2024. In addition to his employment income, he also sells some shares that will result in an increased personal tax liability. Michael contributes a further $30,000 in June 2024. He then lodges his notice of intention to claim a deduction, claiming $57,500 ($27,500 + $30,000) with his fund. At the same time, the fund records it has received the contribution in June and that the amount will be held in reserve to be allocated no later than 28 July 2024. For accounting purposes, the fund simply records the contribution against Michael’s account.

In July, the fund prepares further minutes to allocate the contribution to Michael.

Despite the record-keeping, the financial statements will reflect the contribution in both the income and member statements.

Michael must lodge the request to adjust concessional contribution form with the ATO, preferably at the time he lodges his personal return.

Is there a right amount to contribute?

This is going to be different for everyone and every SMSF is going to set different objectives, which they hope to achieve via a carefully constructed investment strategy.

Regularly reviewing the fund’s strategy means regularly reviewing the contribution strategy. It also means regularly reviewing each member’s estate plan to ensure their contribution, and ultimately pension strategies, help them achieve their and their beneficiary goals.

QUARTER I 2024 37

COMPLIANCE

A new calculation to consider

The calculation of the proposed tax on total super balances above $3 million is not just a matter of adding 15 per cent on top of what members are currently charged. Matt Manning details exactly how the new liability will be calculated.

MATT MANNING is technical consultant at BT.

The federal government has proposed a reduction in the super tax concessions for those with total super balances (TSB) exceeding $3 million. The new tax on super, Division 296 of the Income Tax Assessment Act 1997 (ITAA), is proposed to apply to the 2026 financial year and beyond.

While advisers have ample time to plan for the anticipated changes, many are getting on the front foot and working out which clients might be affected and how much additional tax each one would have to pay. This article briefly describes the operation and features of the proposed Div 296 tax and outlines in detail how to calculate the tax liability via case studies.

Details on the new tax Legislation implementing Div 296, the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023, was introduced into parliament on 30 November 2023.

At time of writing, the bill has not passed through the lower house.

When the bill does become law, from 1 July 2025, affected clients will pay an additional 15 per cent tax on earnings corresponding to the portion of their super balance above $3 million.

Div 296 is proposed to apply to clients whose

38 selfmanagedsuper

TSB exceeds the threshold of $3 million (unindexed) and where there has been an increase in their TSB between June 30 of the relevant financial year and their TSB as at 30 June of the previous financial year adjusted for withdrawals and contributions.

This change in the adjusted TSB is termed taxable super earnings (TSE) and includes unrealised capital gains.

The 15 per cent Div 296 tax rate will apply to the percentage of a client’s TSB exceeding $3 million and is separate from and in addition to the 15 per cent tax that applies to most earnings generated in the accumulation phase of super.

Div 296 tax will be levied on the client as an individual, who will have a choice to either pay the liability personally or from their super fund via a release authority.

There are three exemptions from the Div 296 tax: • those who pass away are not subject to the new tax for the financial year of death, (although an existing anomaly means this exemption does not apply to people who die on 30 June), • those who have ever made a personal injury contribution, as defined by section 292-95 of the ITAA, and Continued on next page

Continued from previous page

• child death benefit pensions, for as long as the pensions exist.

Also, while technically not an exemption category, constitutionally protected schemes and judges’ pensions will be exempt.

However, as TSBs from such schemes are included in the client’s Div 296 calculation, the client’s other super may be subject to the new measure.

Examples of Div 296 calculations are included below. It is important to note, as this article is based on draft legislation, the examples set out below may change depending on the final legislation.

Calculations A client’s Div 296 liability for the 2026 financial year is determined by the following minimum five-step process: Step 1 – Determine if relevant The first step is to determine whether Div 296 tax is relevant. Here there are three possible scenarios: Scenario 1 Step 1 – Determine if earnings exist Is the client’s TSB as at 30 June 2026 greater than $3 million and their TSB as at 30 June 2026, plus 2025/26 withdrawals, less 2025/26 contributions, less their TSB as at 30 June 2025 greater than $0?

If yes, the client will be subject to Div 296 tax for 2025/26 and there are a further four steps to determine their resulting liability.

Step 2 – Calculate TSE for 2025/26 For scenario 1, this formula will always result in positive 2025/26 TSE; that is, more than $0.

• TSB as at 30 June 2026, plus • 2025/26 withdrawals, less • 2025/26 contributions, less • the greater of their TSB as at 30 June 2025 and $3 million.

Step 3 – Reduce positive TSE for 2025/26 by carried-forward negative TSE from previous financial years For 2025/26, the result of step 3 will always be the same as the result of step 2.

This is because a client cannot accrue a TSE loss prior to 2025/26.

Step 4 – Calculate the percentage of TSE subject to Div 296 tax The formula is as follows: (TSB as at 30 June 2026 – $3 million) ÷ TSB as at 30 June 2026 Note that, unlike step 2, in step 4 the $3 million Div 296 threshold is always used.

Step 5 – Calculate Div 296 tax liability.

The formula for this step is as follows: 15% x result of step 3 x result of step 4 Scenario 2 Step 1 – Determine if negative earnings exist If scenario 1 does not apply, is the client’s TSB as at 30 June 2025 greater than $3 million and their TSB as at 30 June 2026, plus 2025/26 withdrawals, less 2025/26 contribution, less their TSB as at 30 June 2025 less than $0?

If yes, there is no Div 296 liability for 2025/26, however, the client will have a TSE loss they can carry forward to future financial years. Determining this carried forward TSE loss requires one further step.

Step 2 – Calculate TSE for 2025/26 For scenario 2, this formula will always result in negative 2025/26 TSE, that is, less than $0.

The client’s 2025/26 negative TSE is: • the greater of their TSB as at 30 June 2026, and $3 million, plus • their 2025/26 withdrawals from super, including pension payments and lump sum withdrawals, less • their 2025/26 contributions to super (net of contributions tax), less • their TSB as at 30 June 2025.

While advisers have ample time to plan for the anticipated changes, many are getting on the front foot and working out which clients might be affected and how much additional tax each one would have to pay.

A client’s negative TSE is the amount that can be carried forward to offset positive TSE in future financial years.

Steps 3 to 5 are not required.

Scenario 3 If neither scenario 1 nor scenario 2 applies, Div 296 tax is not relevant for 2025/26, and steps 2 to 5 are not required.

Case study 1 Adam is age 50 and his entire super is in the accumulation phase.

His TSB as at 30 June 2026 is $12 million and his TSB as at 30 June 2025 is $11.5 million.

During 2025/26, Adam does not receive any withdrawal and makes total concessional contributions of $20,000 prior to deducting contributions tax.

Step 1 – Is Adam subject to Div 296 during 2025/26?

Yes. Adam’s TSB at 30 June 2026 exceeds $3 million and his TSB as at 30 June 2026, plus his 2025/26 withdrawals, less his 2025/26 contributions, and less his TSB as Continued on next page

QUARTER I 2024 39

COMPLIANCE

Continued from previous page

at 30 June 2025 is greater than $0.

Therefore scenario 1 applies.

Step 2 – Calculate Adam’s TSE for 2025/26 $12,000,000 + $0 - $17,000* - $11,500,000# = $483,000

Contributions for Div 296 purposes are net of the standard 15 per cent contributions tax. Therefore [$20,000 total concessional minus ($20,000 total concessional contributions x 15 per cent)] = $17,000. # In Adam’s situation, $11.5 million is the greater of his $11.5 million TSB as at 30 June 2025 and the $3 million Div 296 threshold.

Step 3 – Reduce Adam’s positive TSE for 2025/26 by his carried-forward negative TSE from previous financial years The result remains $483,000 from step 2 as TSE losses cannot be accrued prior to 2025/26.

Step 4 – Calculate the percentage of Adam’s TSE subject to Div 296 tax ($12,000,000 - $3,000,000) ÷ $12,000,000 = 75%

any contributions.

Step 1 – Is Betty subject to Div 296 during 2025/26?

Yes. Betty’s TSB as at 30 June 2026 is more than $3 million and her TSB as at 30 June 2026, plus her 2025/26 withdrawals, less her 2025/26 contributions, less her TSB as at 30 June 2025 is greater than $0.

Therefore scenario 1 applies.

Step 2 – Calculate Betty’s TSE for 2025/26 $4,000,000 + $150,000 - $0 - $3,667,000# = $483,000

In Betty’s situation, $3,667,000 is the greater of her $3,667,000 TSB as at 30 June 2025, and the $3 million Div 296 threshold.

Step 3 – Reduce Betty’s positive TSE for 2025/26 by her carried-forward negative TSE from previous financial years The result remains $483,000 from step 2 as TSE losses cannot be accrued prior to 2025/26.

Step 4 – Calculate the percentage of Betty’s TSE subject to Div 296 tax #

($4,000,000 - $3,000,000) ÷ $4,000,000 = 25%

Step 5 – Calculate Adam’s Div 296 tax liability

Step 5 – Calculate Betty’s Div 296 tax liability

15% x $483,000 x 75% = $54,337.50

15% x $483,000 x 25% = $18,112.50

Case study 2 Betty is age 70 and has super in both the accumulation phase and pension phase.

Her TSB as at 30 June 2026 is $4 million, consisting of $1.5 million in pension phase and $2.5 million in accumulation phase, and her TSB as at 30 June 2025 is $3.667 million, consisting of $1.5 million in pension phase and $2.167 million in accumulation phase.

During 2025/26, Betty receives total withdrawals of $150,000 and does not make

40 selfmanagedsuper

Div 296 tax will be levied on the client as an individual, who will have a choice to either pay the liability personally or from their super fund via a release authority.

Note, despite Adam (case study 1) and Betty (case study 2) having the same 2025/26 TSE of $483,000, Adam’s Div 296 tax liability is three times higher than Betty’s.

This is because the percentage of Adam’s TSE subject to Div 296 is three times that of Betty’s.

This illustrates that, assuming everything else is equal, the more funds a client has in super, the higher their Div 296 tax liability, as a higher portion of their TSE relates to their

TSB amount above the $3 million threshold.

These case studies also illustrate a client’s age and how much of their super is in pension or accumulation phase does not impact the Div 296 calculation. Further, while withdrawals and contributions are included in the TSE calculation, they are not relevant when determining the percentage of a client’s TSE subject to Div 296 tax.

Case study 3 Cameron is age 55 and his entire super is in the accumulation phase.

His TSB as at 30 June 2026 is $3.1 million and his TSB as at 30 June 2025 is $2.1 million.

During 2025/26, Cameron does not receive any withdrawals from or make any contributions to his super.

Step 1 – Is Cameron subject to Div 296 during 2025/26?

Yes. Cameron’s TSB as at 30 June 2026 exceeds $3 million and his TSB as at 30 June 2026, plus his 2025/26 withdrawals, less his 2025/26 contributions, less his TSB as at 30 June 2025 is greater than $0.

Therefore scenario 1 applies.

Continued on next page

Continued from previous page

Step 2 – Calculate Cameron’s TSE for 2025/26 $3,100,000 + $0 - $0 - $3,000,000# = $100,000

In Cameron’s situation, $3 million is the greater of his $2.1 million TSB as at 30 June 2025 and the $3 million Div 296 threshold.

Step 3 – Reduce Cameron’s positive TSE for 2025/26 by his carriedforward negative TSE from previous financial years The result remains the $100,000 from step 2 as TSE losses cannot be accrued prior to 2025/26.

Step 4 – Calculate the percentage of Cameron’s TSE subject to Div 296 #

During 2025/26, Betty receives total withdrawals of $200,000 and does not make any contributions.

Step 1 – Is Debra subject to Div 296 during 2025/26?

No. Debra’s TSB as at 30 June 2026, plus her 2025/26 withdrawals, less her 2025/26 contributions, less her TSB as at 30 June 2025 is $0 or below.

However, as Debra’s TSB as at 30 June 2025 is greater than $3 million, scenario 2 applies and she will have a TSE loss to carry forward to offset any positive TSE in a future financial year.

Step 2 – Calculate Debra’s TSE for 2025/26 $3,200,000# + $200,000 - $0* $3,500,000 = -$100,000

In Debra’s situation, $3.2 million is the greater of her $3.2 million TSB as at 30 June 2026 and the $3 million threshold.

Steps 3 to 5 are not required for Debra.

She has a 2025/26 TSE loss of $100,000 that she can carry forward to offset positive TSE in future financial years. #

($3,100,000 - $3,000,000) ÷ $3,100,000 = 3.23% (rounded to two decimal places)

Step 5 – Calculate Cameron’s Div 296 tax liability 15% x $100,000 x 3.23% = $484.50

Note, despite the large increase in Cameron’s TSB between 30 June 2025 and 30 June 2026, his Div 296 liability is minimal. This is because a client’s TSE does not include the increase in their adjusted TSB that is below the $3 million threshold.

This also illustrates there is minimal benefit in a client’s TSB being slightly below, compared to slightly exceeding, the $3million threshold.

Case study 4 Debra is age 70 and her entire super is in pension phase.

Her TSB as at 30 June 2026 is $3.2 million and her TSB as at 30 June 2025 is $3.5 million.

What’s next It is early days still and it is expected to take several months for the relevant bill to become law.

While the actual rate will significantly vary, for funds in accumulation phase the new measure will not increase the effective tax on earnings rate to 30 per cent. As shown in case study 2, only 25 per cent of the client’s TSE was subject to the new tax, and even case study 1, which involved an extremely high super balance, the 15 per cent Div 296 tax rate applied to 75 per cent of the client’s TSE. Some details that potentially may be worked out as the legislation makes its way through parliament include: • Liquidity issues: Unlike the standard tax on investment earnings, Div 296 tax is also imposed on unrealised capital gains. This

could cause liquidity issues, particularly for those clients whose wealth consists almost solely of illiquid assets such as property.

Under the draft bill, clients who do not pay their Div 296 tax liability will accrue a Div 296 debt and be charged interest at a reduced rate of general interest charge (currently this would equate to 7.34 per cent). Multiple years of Div 296 tax liability and compounding interest may over time effectively result in clients with SMSFs taking the extreme action of selling the fund’s main asset to meet their Div 296 tax obligation.

• $3 million threshold is not indexed: Div 296 tax is initially predicted to impact a small number of Australians with very high super balances, approximately 80,000 by government extimates. If this threshold remains unindexed, over time this number will likely significantly increase as investment balances rise. Also, for members of a couple, upon death of the first spouse, the surviving spouse may find themselves subject to the new tax if they receive their late spouse’s death benefit as a pension.

• Ability to withdraw: Clients who satisfy a condition of release such as retirement may choose to withdraw part of their super to remain under the $3 million threshold, however, this option is not available to those who do not satisfy a condition of release.

• Negative super earnings: Negative TSE can only be carried forward to future financial years. This could result in clients paying significant Div 296 tax on unrealised capital gains, only to then see the value of these assets significantly fall (even to a loss position) and not have the ability to claw back the Div 296 tax previously paid on unrealised gains.

It will take some time for such details to be addressed, however, it is not too early for advisers to discuss the potential changes with clients and plan to adjust their super and tax strategies accordingly.

QUARTER I 2024 41

STRATEGY

Adapting to change

The proposed $3 million soft cap has already got trustees considering their strategies towards making investments via the superannuation system.

Jemma Sanderson recognises some alternative options for high net worth clients and illustrates the value advisers can add with extensive knowledge about other investment structures.

JEMMA SANDERSON is director and head of SMSF succession at Cooper Partners.

42 selfmanagedsuper

The Division 296 tax is on the horizon and despite its introduction, superannuation will remain the preferred investment vehicle in Australia. However, many high net worth (HNW) families may consider alternative structures, particularly in light of the succession position with respect to assets and structures.

The introduction of the Division 296 tax has brought to the forefront many discussions regarding succession, with a holistic review required in order to achieve the intentions and objectives of families. The succession position of many structures is complex and a deep dive is often required to understand exactly who receives what, particularly with respect to control, as control can be the inheritance itself.

It is therefore important we are equipped with the knowledge of the various alternative entities to superannuation for investment purposes. Some areas requiring attention include: 1. The return profile of the investment: a. capital growth, b. income generation, c. investment horizon (short, medium or long term), d. exit strategy,

2. The taxation profile of particular structures to ascertain which might be more appropriate in light of the above return profile, and 3. The asset protection and succession intentions of the asset and the structure.

When does it matter?

Where an asset has high capital growth potential and low income generation, such as residential property, then it may be more appropriate for such an investment to be held outside superannuation to mitigate Division 296 tax on unrealised gains with no or limited cash flow to pay the tax. This is particularly the case where the ultimate intention may be that a child or grandchild can live in the property – an objective that wouldn’t be able to be achieved with superannuation monies.

Where an asset is intended to pass to a particular child as they are running their business from the premises, perhaps such an asset could be acquired within a discretionary trust where the succession is directly to that child, circumventing the estate.

Continued on next page

Continued from previous page

Structural considerations There are other structures that are not superannuation, which have different profiles to consider, and different items to consider in terms of their ongoing activities such as: 1. Ease of operation, 2. Tax, 3. Asset protection, 4. Flexibility, 5. Estate/succession planning, 6. Control, 7. Family law.

The below outlines some considerations with the main alternatives to super, although is not exhaustive, and the underlying governing documents of any structure need to be reviewed in detail to ensure the intended outcomes are achieved.

Individual name Generally HNWs hold assets like the primary residence in an individual’s name and often in that of the low-risk spouse. However, for asset protection purposes, this approach is not ideal.

Further, doing so can mean there will be no assets in the estate if the asset holder passes away and there can be unknown assets such as unpaid present entitlements (UPE). In addition, all income and realised gains are taxable for the individual with no real flexibility.

It is though a simple approach and easy to understand while not very tax-effective.

Discretionary family trust These are widely used for business purposes and often house a business premises or farm.

It is generally the preferred passive investment vehicle outside superannuation.

There are several advantages of using a discretionary family trust. From a tax perspective, flexible distribution of income can be achieved, small business capital gains tax (CGT) concessions will be applicable and a 50 per cent CGT discount can materialise when a distribution is made to an individual.

Being equipped with the knowledge of how other structures operate is of assistance in guiding families through the maze of optimising their wealth accumulation and management.

Outside of tax, benefits available include asset protection if the trust is structured correctly and the passing of control external to the estate ensuring no loans of UPEs owed are to the testator. Protected trust arrangements can also be put in place for beneficiaries where required.

However, family trusts can be disadvantageous too. For example, UPEs can build up over time, resulting in estate planning risks and the possibility of opening the structure up to family law. Further, control can pass to unintended individuals as it can be done external to the estate. In addition, the introduction of new members with a business can be difficult due to trust valuation challenges and the possibility of having legacy liabilities exist and a lifespan limited to 80 years applies, except in South Australia.

With regard to tax, Division 7A can come into play when there is a corporate beneficiary, the principal resident exemption does not apply and reimbursement agreements can trigger section 100A of the Income Tax Assessment Act.

Companies Investing using a company is widely used for business and the preference is not to own growth assets. Often the company is owned by a family trust to allow for more flexibility, with share class and shareholding succession being important elements.

Investing via a company has many advantages, including the structure having

limited liability but no limited life cycle. It is an optimal vehicle for operating a business and it is easy to incorporate new shareholders and to implement succession plans.

Companies have a flat rate of tax applied to them, set at 25 per cent for active companies and 30 per cent for passive ones, and there is no obligation for any profits to be distributed each year.

Unfortunately companies are not eligible for any CGT discount on the sale of growth assets, may have a top-up tax apply in order to pay dividends and are a structure where that can be challenging with regard to small business concessions.

Investment bond Investment bonds have been a structure available to Australian investors for many years, but have tended to be less attractive than super.

However, they are experiencing a revival with more products being available on the market akin to managed funds.

Investment bonds require the nomination of a natural person to be ‘life insured’ and are effectively a life policy. Historically they have been used to fund education as they are a good vehicle to achieve forced savings with a small cash-flow impact and provide the compounding of regular investment amounts over the relevant time horizon.

They are also beneficial for Centrelink purposes as there is no taxable income involved for the individual.

Tax on an investment bonds is levied at 30 per cent on incomes and paid by the product provider. There is no tax payable within the bond on capital gains when changing investments and after 10 years drawdowns are tax-free, but with conditions attached. For example, additional contributions can’t be made after the initial contribution of greater than 125 per cent of the previous year’s investment amount or the 10-year time horizon will recommence, and no drawdowns are allowed over the 10-year period.

Continued on next page

QUARTER I 2024 43

STRATEGY

The introduction of the Division 296 tax has brought to the forefront many discussions regarding succession, with a holistic review required in order to achieve the intentions and objectives of families.

Continued from previous page

Tax on drawdowns is also varied during the 10-year term, with earnings in years one to seven being assessable to the owner with a 30 per cent offset, only two-thirds of earning assessable in years eight and nine, and only one-third of earnings being assessable in year 10.

When the insured person passes away, the bond has to be paid out, but is tax-free to the beneficiary and where the bond is surrendered due to an accident, illness or other disability to the insured individual, the account is paid out tax-free to the owner.

Other characteristics of investment bonds are that a beneficiary can be nominated directly and they can be held within a trust or company or by an individual.

In comparison to super, there is no limit on the initial investment amount and the 10-year investment horizon is considerably shorter than achieving preservation status. There is, however, no tax benefit from the contribution itself, unlike super.

Investment bonds can in fact be used to complement a superannuation strategy as death benefits can be invested in these vehicles. They can also be used in conjunction with other investment structures offering the ability for people to cap their tax rate at 30 per cent if distributions are paid out to a company.

On the negative side, investment menus

44 selfmanagedsuper

could be a limitation for HNW families and careful consideration is needed when selecting the insured person, although this can be changed in situ.

Table 1 Cash holdings

$

Case study

Family Investments Pty Ltd

1,500,000

The Jones family has numerous trusts and companies in place subsequent to the passing of the patriarch. The matriarch, in her mid-70s, has a substantial superannuation balance and manages the investments of the family group with the input of the two children in their 40s with young families. There are some Division 7A loans in place between the family investment company and the main family trust around $1 million. Trusts for the benefit of the children and grandchildren were set up when the patriarch died, using proceeds from superannuation and selling some illiquid/bulky assets.

The cash position across the entities is as in Table 1.

The investment opportunities in Table 2 have been presented to the family.

Generally, using the super fund will be the preferred option for the Jones family given the underlying tax rates on income and realised capital gains. But there are potential problems with this strategy. For instance, capital growth investments generating limited income may not

Main family trust

2,500,000

Child one's trust

550,000

Child one's kids' trust

550,000

Child two's trust

550,000

Child two's kids' trust

550,000

Family super fund

200,000 6,400,000

be ideal in super given the Division 296 tax is levied on unrealised gains.

Also, the liquidity of the super fund may present issues as the matriarch’s minimum pension payments need to be made and the selling down of assets may be a necessary course of action if funds are also needed to make other investments.

The life expectancy of the matriarch must also be taken into account as to the suitability Continued on next page

Table 2 Return profile Income

Capital growth

Time horizon/ liquidity

Private mortgage fund

15% pa IRR

-

1-2 years

$1,500,000

Unlisted property trust

-

Projected 15% to 20%

8-10 years

$400,000

Unlisted property trust (established)

8% pa

Maybe

4-6 years

$500,000

Substantial potential upside

8-10 years

$500,000

Cash holdings

Private company (speculative mining, to try for IPO)

Investment commitment

Private business (Pty Ltd)

20% pa

Potential

8-10 years

$250,000

Rental property

1% pa

Maybe up to 20%

10-15 years

$1,050,000

Commercial property

8% pa

Maybe up to 20%

10-15 years

$1,650,000 $5,850,000

Table 3 Return profile Income

Capital growth

Time horizon/ liquidity

Private mortgage fund

15% pa IRR

-

1-2 years

$1,500,000

Family Investments Pty Ltd

Unlisted property trust

-

Projected 15% to 20%

8-10 years

$400,000

Trust

Unlisted property trust (established)

8% pa

Maybe

4-6 years

$500,000

Family Investments Pty Ltd

Private company (speculative mining, to try for IPO)

-

Substantial potential upside

8-10 years

$500,000

Trust

no income, capital growth (CGT discount)

Private business (Pty Ltd)

20% pa

Potential

8-10 years

$250,000

Family Investments Pty Ltd

Income return, has the cash available

Rental property

1% pa

Maybe up to 20%

10-15 years

$1,050,000

Trust

minor income, capital growth (CGT discount)

Commercial property

8% pa

Maybe up to 20%

10-15 years

$1,650,000

Trust

Capital growth - want CGT discount

Cash holdings

Investment commitment

Preferred structure (after SF)

Why Income return, has the cash Capital growth - want CGT discount Income return, cash is available, growth is potential only

$5,850,000

Continued from previous page

of allocations to investments with a long-term duration in the super fund.

Including the children in the SMSF could be an option, but they may not want to wait until they meet a condition of release to access any of the investment returns seeing they are only in their 40s.

All of these factors mean the Jones family should consider the other structures for their investment dollars.

Table 3 shows how this strategy might work.

The level of cash needed to invest in the optimal structure would be as in Table 4.

What about the funding?

The strategy will require additional funding as Family Investments Pty Ltd only has $1.5 million in cash, but needs $2.25 million. But this can be managed using the Jones family’s existing structures and entities.

Firstly the trust owes the company money so could repay some of this debt, which would also simplify some of the Division 7A

loans.

In addition, where the investment return is income in the company, if that was earned in the trust, the trust may be likely to pay across to the company any such distribution to manage the tax position. Therefore, having such an investment in the company initially where the return profile is like this may make things easier.

Further, the company can be of benefit as it doesn’t have to declare its profit each year and so can retain it.

It is worthwhile looking to a trust structure to hold the investments with a higher and more certain capital growth profile to take advantage of the 50 per cent CGT discount.

However, due to the time horizon pertaining to some of the investments, many families would opt to pay across assets to a company to repay Division 7A loans to simplify their structures and acknowledge any realised capital gain won’t be eligible for a CGT discount.

With regard to the investments that should be held by a particular trust, a suggestion would be each trust could invest an amount

Table 4 Investment company

$2,250,000

Trusts

$3,600,000

Total

$5,850,000

separately into the underlying investments.

To this end, a unit trust could be set up that pools the money from each existing trust for investment purposes. Each of the existing family trusts would hold units in the new trust and that structure would make all of the investments. The existing trusts would then receive a yearly distribution from the new unit trust. However, these arrangements do come with additional complexity.

As has been demonstrated here, being equipped with the knowledge of how other structures operate is of assistance in guiding families through the maze of optimising their wealth accumulation and management, and ensuring the succession of their assets and structures accords with their objectives and intentions.

QUARTER I 2024 45

COMPLIANCE

Rising cap implications

The concessional contributions cap is set to increase from 1 July. Craig Day outlines the impact this development could have on the strategies of certain SMSF members.

CRAIG DAY is head of technical at Colonial First State.

Following the release of the most recent wages data for the December quarter 2023, we now know the concessional contributions cap will rise from $27,500 to $30,000 a year from 1 July.

This also means the annual non-concessional contributions (NCC) cap will increase from $110,000 to $120,000 a year at the same time as the nonconcessional cap is calculated as four times the concessional cap.

As a result, clients may be able to get more into super at the commencement of the new income year. However, advisers will need to be mindful of the details as the changes are not as straightforward as they may seem.

Non-concessional cap using the bringforward rules The increase in the annual NCC cap from $110,000 to $120,000 also means the NCC bring-forward rules will increase from a maximum of $330,000 to $360,000.

However, if a client has previously triggered the bring-forward rule and they are still within their bring-forward window, they won’t get the extra cap to play with as they have already locked in their NCC cap for the duration of the bring-forward period.

For example, if a client triggered the three-year bring-forward rule in the 2023 financial year by making total NCCs of more than $110,000, their non-concessional cap for 2022/23 (Year 1) will have 46 selfmanagedsuper

automatically reverted to three times the annual NCC cap of $110,000, or $330,000. Their NCC cap in the following two years will then be calculated as follows: • Year 2 (2023/24): $330,000 less NCCs made in Year 1 • Year 3 (2024/25): $330,000 less NCCs made in Year 1 and Year 2 combined (assuming the total super balance (TSB) just prior to start of Year 2 and Year 3 is less than the general transfer balance cap applying in that year).

In this case, as the client locked in their nonconcessional cap at $330,000 in 2022/23, they won’t be able to benefit from the increase to the NCC cap until after their three-year bring-forward period expires at the end of 30 June 2025.

In addition, the increase in the NCC cap means it will be extremely important for clients wanting to maximise their NCCs using the bring-forward rule not to inadvertently trigger the bring-forward rule this year (2023/24) by contributing more than $110,000 prior to 30 June.

For example, getting it very slightly wrong and making total NCCs of just over $110,000 would trigger the bring-forward rule this year and lock in their non-concessional cap at $330,000 until after 30 June 2026.

Continued on next page

Continued from previous page

Reduced TSB thresholds for bringforward NCC cap It’s also important to note something a bit strange is happening with the TSB thresholds that determine a client’s eligibility to use the bring-forward rules in 2024/25.

These thresholds are calculated by taking the current general transfer balance cap for the relevant year and deducting either one or two times the annual NCC cap applicable for that year.

And herein lies the gremlin. The combination of the increase in the annual non-concessional cap to $120,000 and the transfer balance cap remaining fixed at $1.9 million means the bring-forward thresholds will actually go down for the 2025 financial year.

This is shown in Table 1, which outlines the NCC bring-forward thresholds and cap amounts for this year and next year.

As a result, it will be important to double-check a high-balance client’s TSB at 30 June 2024 before triggering the bring-forward rule next year to avoid inadvertently exceeding their NCC cap due to the reduced thresholds.

Advisers who want to recommend contribution strategies that include making NCCs of up to $110,000 this year and then larger NCCs of up to $360,000 next year, should also be aware of these lower thresholds and may want to limit any contributions before 30 June to make sure

It’s also important to note something a bit strange is happening with the T SB thresholds that determine a client’s eligibility to use the bring-forward rules in 2024/25.

they don’t affect a client’s ability to make the most of their NCC next year.

For example, suppose a client made an NCC of $110,000 before the end of the financial year and as a result their TSB on 30 June increased to just over $1.66 million. In that case they could only make NCCs of up to $240,000 next year.

Advice implications and the contribution cap increases The contribution caps increase is obviously good news for clients looking to get more into super. However, they shouldn’t be considered in isolation as there are a range of other super and tax changes, such as the super guarantee (SG) increase from 11 per cent to 11.5 per cent and the stage 3 tax cuts, that need to be taken into consideration when reviewing contribution strategies. The implication of these factors can be seen here.

• Client type: Employees who salary sacrifice or make personal deductible contributions up to the concessional cap or due to the stage 3 tax cuts will be able to increase contributions up to the concessional cap from 1 July 2024 .

• Advice requirements: Review salary sacrifice and/or personal deductible contribution levels from 1 July 2024 considering: o concessional cap increasing to $30,000, o SG increasing to 11.5 per cent, and o effective tax-free threshold increasing to $22,575 (if not eligible

for the Seniors and Pensioners Tax Offset (SAPTO)) due to changes to stage 3 tax cuts.

• Client type: Self-employed/ retirees making personal deductible contributions up to concessional cap or due to the stage 3 tax cuts will be able to increase contributions up to the concessional cap from 1 July 2024.

• Advice requirements: Review recommended personal deductible contribution levels from 1 July 2024, considering: o concessional cap increasing to $30,000, o SG increasing to 11.5 per cent (if any part-time employment), and o effective tax-free threshold increasing to $22,575 (if not eligible for SAPTO) due to changes to stage Continued on next page

Table 1 TSB (30 June 2023)

NCC bring-forward period and cap for 2023/24

TSB (30 June 2024)

NCC bring-forward period and cap for 2024/25

Less than $1.68m

3-year bring-forward period

Less than $1.66m

3-year bring-forward period

$1.68m to less than $1.79m

NCC cap: $330,000

$1.66m to less than $1.78m

NCC cap: $360,000

$1.79m to less than $1.9m

2-year bring-forward period

$1.78m to less than $1.9m

2-year bring-forward period

$1.9m or more

NCC cap: $220,000

$1.9m or more

NCC cap: $240,000

QUARTER I 2024 47

COMPLIANCE

Table 2 Salary sacrifice amount

After-tax amount

Pre-tax equivalent

Net contribution

Additional super after 10 years

50% of tax cut

$155 per month

$255 per month

$217

$29,902

100% of tax cut

$311 per month

$509 per month

$433

$59,687

Continued from previous page

3 tax cuts (or $35,813 for singles or $31,888 for members of a couple if eligible for low-income tax offset and SAPTO).

• Client type: Clients who will be under age 75 on 1 July 2024 who have not already triggered the bring-forward rule in 2022/23 or 2023/24, and who want to maximise NCCs under the bringforward rule.

• Advice requirements: Consider delaying triggering the bring-forward rule by not making total NCCs in 2023/24 exceeding the standard NCCs cap ($110,000). The client can then make total NCCs of up to $360,000 from 1 July 2024 (subject to TSB at 30 June 2024).

Note – clients with large TSB balances may need to limit any NCCs this year to ensure the contribution does not cause their threshold on 30 June 2024 to exceed the reduced bring-forward thresholds of $1.66 million and $1.68 million, as this may limit their ability to make larger NCCs next year.

• Client type: Clients who have an SMSF and use the contribution reserving strategy.

• Advice requirements: Clients in this situation should take into account the increase in the concessional contributions cap to $30,000 from 1 July 2024 when determining their personal deductible contribution levels in June 2024.

48 selfmanagedsuper

Case study – Jim Jim, age 61, is currently working parttime earning $46,500 a year and supplementing his income with payments from a transition-to-retirement income stream. He is seeking to maximise his concessional contributions in the lead-up to his retirement at age 65.

In the 2024 financial year, his employer contributes $5115 in SG (11 per cent of $46,500). Jim also salary sacrifices $22,385 in 2023/24 to fully utilise his $27,500 concessional contributions cap.

Assuming no other taxable income or deductions, this strategy reduces Jim’s taxable income to $24,115, which is above his effective tax-free threshold of $21,884 (the point below which there’s generally no benefit in making further concessional contributions).

On 1 July 2024: • the concessional contributions cap will increase from $27,500 to $30,000.

• Jim’s employer will need to increase SG to 11.5 per cent of his earnings.

• Jim’s effective tax-free threshold will increase from $21,884 to $22,575 due to the reduction in the 19 per cent tax rate to 16 per cent.

As Jim wants to maximise concessional super contributions, he needs to review his existing strategy considering these changes. However, instead of simply increasing his salary sacrifice by the amount of concessional cap increase, $2500, he needs to also factor in the fact his employer will be making SG contributions of $5347.50 in 2024/25 and that his effective

The contribution caps increase is obviously good news for clients looking to get more into super.

However, they shouldn’t be considered in isolation. tax-free threshold has increased.

Jim elects to increase his salary sacrifice contributions by $1540 from $22,385 to $23,925. This strategy reduces his taxable income to, but not below, his new effective tax-free threshold of $22,575, while keeping his concessional contributions within the $30,000 cap ($23,925 salary sacrifice + $5347.50 SG = $29,272.50).

Impact of stage 3 tax cuts on cash flow The now legislated changes to the stage 3 tax cuts announced in January 2024, will provide more low and middle-income taxpayers with a larger tax cut from 1 July.

While many people may elect to spend this additional cash in hand or direct it towards their mortgage, pre-retiree clients who have paid off their mortgage and don’t need the additional income to meet their higher living expenses, could consider directing it to super via a salary sacrifice or personal deductible contribution strategy.

For example, a taxpayer with taxable income of $145,000 will receive a tax cut from 1 July 2024 of $3729 a year or $311 a month. If that person, for example age 55, was able to salary sacrifice either 50 per cent or 100 per cent of their tax cut over the next 10 years, their projected super benefit at age 65 would increase as in Table 2.

Therefore, the combination of increased contribution caps and the stage 3 tax cuts could result in significant planning opportunities to increase clients’ contribution levels and their resulting retirement benefits.

Brought to you by

21 MAY | MELBOURNE

23 MAY | SYDNEY

28 MAY | BRISBANE

SMSF PROFESSIONALS DAY 2024

Register now

Sponsorship opportunities now available https://smsmagazine.com.au/events

STRATEGY STRATEGY

Retirement-phase super splits

Retirement-phase super splits

There are a number of ways the splitting of a superannuation benefit between a member and their spouse can be achieved, writes Michael Hallinan.

MICHAEL HALLINAN is superannuation special counsel at SuperCentral.

If a member’s entire superannuation interest is in retirement phase, is it necessary to formally split the interest when super splitting is necessary or desired? Surely, as the interest to be split is no longer subject to preservation standards, can’t the member simply cash out the benefit to the extent necessary and instruct the trustee to pay the cashed-out amount to the spouse? In a formal arrangement a splitting agreement must be entered into, or a splitting order granted, and the statutory entitlement of the spouse arising under that agreement or order needs to be converted into a family law superannuation payment in respect of the spouse. Seemingly so much effort and not to mention the legal fees.

Well, there could be situations where an

informal split is appropriate. However, there are other situations where a formal split is absolutely necessary. The issue is to know when a formal split is required and when an informal split can be used.

If the superannuation interest to be split is constituted by a legacy pension, such as a lifetime pension (Superannuation Industry (Supervision) (SIS) regulation 1.06(2)), life expectancy pension (regulation 1.06(7)) or market-linked pension (regulation 1.06(8)), then a formal splitting process must be used as each of these income streams permits commutations to give effect to the entitlement of a spouse under a payment split. In contrast, if the legacy pension Continued on next page

50 selfmanagedsuper

Continued from previous page

is a flexi-pension (regulation 1.06(6)) and so not subject to commutation restrictions, but is subject to the restriction that the commutation amount cannot exceed an amount determined by applying the pension valuation factors of Schedule 1B), it can be subject to an informal split.

If the superannuation interest is an account-based pension (regulation 1.06(9A)) or an accumulation interest, or a combination of account-based pensions and an accumulation interest, then informal splitting can be used.

In this situation an informal split can be achieved by simply cashing out the pension or accumulation interests necessary to achieve the desired amount, with the member simply instructing the trustee to pay the resulting lump sum to the spouse. The lump sum arising from the cashing out is treated as a superannuation member benefit of the member, and therefore derived by the member, which will constitute non-exempt non-assessable income. The payment to the spouse will be a capital payment. Unless the terms of the superannuation fund provide otherwise, the payment of the lump sum to the spouse will not breach either the SIS payment standards or the SIS minimum benefits standards.

Given the above and assuming the relevant superannuation interest is constituted by account-based pensions or accumulation interests or both, why not informally split? There are two reasons not to take this option. The first and primary reason is the spouse may require the lump sum to constitute a family law superannuation payment. The

less significant reason is the super fund may take advantage of a capital gains tax (CGT) exemption if, in order to pay the lump sum, CGT assets of the fund are required to be sold.

By converting the

The primary reason for a formal split

superannuation splitting

The primary reason for a formal split is to generate a family law superannuation payment. By converting the statutory entitlement that arises from a superannuation splitting agreement or a splitting order into a monetary value for the spouse, the monetary entitlement can then be transferred or rolled over to a super entity chosen by the recipient.

Such a transfer payment is a family law superannuation payment. As such, the payment is treated as a rollover superannuation benefit of the spouse.

Consequently, the transfer payment is not subject to the non-concessional contribution cap and is also not subject to the SIS contribution acceptance regime.

Example Consider Bill and Jane. Bill has a superannuation interest that consists of an account-based pension with a balance of $1.8 million. It has been agreed Jane will be paid $1.2 million from Bill’s superannuation interest.

This division of Bill’s superannuation interest could be achieved informally

by Bill simply requesting a partial commutation of two-thirds of his account-based pension with a direction the trustee pay the resulting lump sum amount directly to Jane. This action means Bill is simply bound by the agreement to exercise his commutation rights and agrees to direct the trustee to pay the resulting lump sum to Jane. In

statutory entitlement that arises from a agreement or a splitting order into a monetary value for the spouse, the monetary entitlement can then be transferred or rolled over to a super entity chosen by the recipient.

this case, Bill’s account-based pension account is now $600,000 and Jane has a bank account balance of $1.2 million.

However, the $1.2 million in Jane’s bank account is non-superannuation money. If she wished to transfer all or a portion of that balance into the superannuation system, she would be subject to the contribution caps as well as the SIS contribution standards. These requirements will frustrate her plan to contribute all or most of the $1.2 million into super.

If the division of Bill’s superannuation Continued on next page

QUARTER I 2024 51

STRATEGY

Continued from previous page

is done formally, then there must be either a splitting agreement or a splitting order. The content of the agreement or order could be either a base amount split, where a specific dollar amount is allocated as the base amount, which would be $1.2 million or, alternatively, a percentage split where the percentage would be 66.6 per cent. While in the case of Bill and Jane there may not, on the face of the matter, be a difference as to whether it is a base amount split or a percentage split, nevertheless there is a difference.

A base amount allocation will give Jane a statutory entitlement to $1.2 million, which will be adjusted by a prescribed interest rate for the period from the operative date until the payment is made. This means any investment loss is borne by Bill and Jane is guaranteed an investment return of the prescribed interest rate. Bill will be entitled to any investment earnings above the prescribed interest rate. If he was to make additional contributions to the superannuation after the operative time, Jane would not be entitled to any portion of those additional contributions.

A percentage allocation will give Jane a statutory right to be paid two-thirds of each splittable payment made from Bill’s superannuation interest. In this situation if the superannuation interest declines due to negative movements in the market value of the assets of the super fund, the decline will be borne by both Bill and Jane in the proportion of onethird to Bill and two-thirds to Jane. Also, if Bill were to make any superannuation contributions to the super fund after the operative time, Jane would benefit from two-thirds of those additional

52 selfmanagedsuper

contributions.

It is usually in the interests of both parties that a clean break be achieved in respect of the payment split and as quickly as possible. A clean break is achieved by converting the entitlement of the spouse under a splitting agreement or splitting order into a family law superannuation payment for the spouse and a corresponding reduction in the value of the super interest of the member.

Transfer balance account impact As Bill is in retirement phase, the ATO will have established a transfer balance account for him. Assuming the accountbased pension commenced after 1 July 2017 with a starting balance of, say $1.6 million, his transfer balance credit would be $1.6 million. It is in Bill’s interest to have a partial commutation of his pension before the split is implemented, whether formal or informal. The partial pension commutation of two-thirds of his income stream will generate a transfer balance debit of $1.2 million that will reduce Bill’s transfer balance account to $400,000.

Whether he can take advantage of this increased transfer balance cap space will depend on his current and future circumstances.

Formal conversion of payment splits Unless and until a splitting agreement or splitting order is served on the superannuation fund trustee, either instruction has no effect on the super interest and does not bind the trustee of the superannuation fund. Once the splitting agreement or splitting order is served on the trustee, the agreement or order becomes effective and binds the trustee and attaches to the

Unless and until a splitting agreement or splitting order is served on the superannuation fund trustee, either instruction has no effect on the super interest and does not bind the trustee of the superannuation fund.

superannuation interest of the member whose super interest is adversely affected by the agreement or order on and from the operative time. In the case of splitting agreements, the operative time is three clear business days after the date of service. If the splitting agreement is served on the trustee on Monday, then the agreement will be effective on Friday, assuming a normal working week exists. In the case of splitting orders, the operative time is the date specified in the order, or if no date is specified, the date when the order is served on the trustee.

Once the splitting agreement or splitting order binds the trustee, the beneficiary will have a statutory right enforceable against the trustee to receive a specific portion of the first Continued on next page

Continued from previous page

superannuation payment, subject to some exceptions that are not presently relevant, made from the member’s superannuation interest which occurs on or after the operative time. The statutory right arises under the Family Law Act 1975 and the Family Law (Superannuation) Regulations 2001. This statutory right overrides the terms of the superannuation trust deed and even the provisions of the SIS Act and Regulations.

The statutory entitlement of the spouse under a splitting agreement or splitting order can be likened to a floating charge over the superannuation interest of the member that crystallises when the first payment is made from the super interest of the member after the operative time.

The statutory entitlement of the spouse is the right to be paid a determinable portion in respect of the first splittable payment made after the operative time from the superannuation interest of the member.

The portion to be paid is, in the case of a base amount split, the base amount adjusted for the period from the operative time up to the date of payment but excluding the date of payment. If the first payment is equal to or greater than the adjusted base amount, the spouse is entitled to be paid an amount equal to the adjusted base amount with the member entitled to the balance, if any, of the payment. In this situation, the statutory entitlement of the spouse is satisfied and the payment split ceases to have any further effect on the superannuation interest. If the first payment is less than the adjusted base amount, the spouse is entitled to the entire payment and the right to the unpaid portion of the adjusted base amount is converted into a statutory right

to receive a portion of each subsequent payment, being a splittable payment, from the superannuation interest until the date of payment.

In case of a percentage split, the entitlement of the spouse is a statutory right to receive the specified portion, in Jane’s case two-thirds, of the current payment and each subsequent splittable payment from the superannuation interest.

Conversion of entitlement to a family law super payment To have a clean break in respect of the payment split, to reduce the investment risks borne by the member (in the case of a base amount split) and the spouse (in the case of a percentage split), it is necessary to convert the prospective or actual statutory entitlement of the spouse into a rollover superannuation benefit for them.

While the splitting legislation provides five methods of converting a payment split interest, only three methods are suitable for SMSFs. The first method is provided by Division 7A.2 of the SIS Regulations.

This method permits the spouse to convert the monetary value of the statutory entitlement into a new membership interest in the fund, to transfer the monetary value to another superannuation entity, or to have the monetary value paid out as a lump sum benefit. The new membership interest option may not apply if the rules of the SMSF expressly exclude this option.

And of course the lump sum benefit payment option is only available if the spouse has satisfied an unrestricted release condition. The trustee is required to advise the spouse of their available options and is given by the issue of a payment split notice to the spouse. If the

spouse does not select an option within 28 days of the receipt of the payment split notice, the trustee may transfer the monetary value of the entitlement to another superannuation entity they have chosen.

The second method is provided by Division 7A.1A of the SIS Regulations.

Here the trustee initiates the conversion process by creating a non-member spouse interest in the fund. The value of this interest is the monetary value of the statutory entitlement of the spouse as at the date the interest is created by the trustee. The spouse then has 28 days in which to select an option of either retention of the nonmember spouse interest to become a full membership interest in the fund (as long as the terms of the fund have not excluded this option), transfer to another superannuation fund or (subject to the spouse having satisfied an unrestricted release condition) payment as a lump sum benefit.

The third option is to convert the statutory entitlement of the spouse into a transfer payment to a superannuation entity chosen by them or, if the recipient has satisfied an unrestricted release condition and if the spouse requests, a lump sum to their benefit. The conversion is achieved by exercising powers conferred on the trustee by the governing rules of the superannuation fund. The conversion is implemented by a deed executed by the trustee, the member and the spouse, with the deed constituting the relevant exercise of the powers.

As a general statement, conversion by means of the third option is generally the most convenient as it only requires one document to be signed by the relevant parties and once signed, the implementation is an administrative function.

QUARTER I 2024 53

COMPLIANCE

Managing temporary setbacks

Trustees often choose to hold income protection insurance within an SMSF. Mark Ellem explores the compliance implications of policy payments when individuals opt for this approach.

MARK ELLEM is head of education at Accurium.

54 selfmanagedsuper

Income protection insurance is often held outside of superannuation due to the fact an individual can claim total and permanent disability (TPD) and terminal illness insurance premiums as a personal income tax deduction. As the individual’s marginal tax rate is likely to be higher than the 15 per cent tax rate applicable to super funds, this strategy provides a greater tax benefit. The same tax benefit can be achieved where the insurance premiums are funded by personal deductible contributions, however, this approach uses an individual’s concessional contribution cap.

Despite the tax advantage, members may still opt to hold income protection insurance inside superannuation, for example, where they are unable to fund the insurance premiums personally. Where income protection insurance is held within an SMSF, it is important to understand the rules pertaining to the payment of a benefit under the temporary disability rules in superannuation law and how the insurance proceeds are taxed in the fund compared to how they

are taxed in the hand of the member.

Taxation of insurance proceeds to the fund I have often seen income protection insurance proceeds included in the assessable income of an SMSF. This is not the correct treatment of them as insurance proceeds received by a superannuation fund fall under the capital gains tax (CGT) provisions of the Income Tax Assessment Act (ITAA) 1997. The CGT event is disregarded under section 118.300 of the ITAA 1997, item 7 of the table in sub-section 1. That is, the fund receives the insurance proceeds tax-free.

Temporary incapacity benefit payment For the SMSF to pay a member a temporary incapacity benefit, in addition to ensuring its trust deed permits this type of benefit to be paid, it must comply with the requirements in the superannuation law. These include having: Continued on next page

Continued from previous page

• the member satisfying the definition of ‘temporary incapacity’ in Superannuation Industry (Supervision) (SIS) Regulations sub-regulation 6.01(2), which requires the member to cease gainful employment, albeit a temporary cessation, • the benefit being paid in accordance with item 109 of the table in SIS Regulations Schedule 1, including that the: o amount of the benefit not being higher than the level of income being earned by the member immediately prior to the event that caused them to be temporarily incapacitated, o benefit paid is in the form of a noncommutable income stream, and o benefit is paid for a period no longer than the period of temporary incapacity, • the temporary incapacity benefit not being funded from a member’s ‘minimum benefits’ (refer to SIS regulation 5.08). The benefit is generally funded by insurance proceeds or from employer salary sacrificed contributions as these do not form part of a member’s minimum benefits. However, consider whether there would be a record of the cumulative employer salary sacrificed contribution for a member, and • the SMSF be required to register as a pay-asyou-go (PAYG) tax withholder and: o withhold the relevant amount of tax from each payment to the member, o remit the PAYG witheld amount to the ATO, and o issue the relevant PAYG summary statements to the ATO and the member.

Member considerations The following are considerations for the member where they wish to be paid a temporary incapacity benefit from their SMSF: • the amount of the temporary incapacity benefit paid to the member may not equate to the amount paid from the insurance

company to the SMSF. For example, if a monthly amount paid under the income protection policy was $10,000, it does not mean this is the monthly amount to be paid to the member as a temporary incapacity benefit, as: 1. the amount that can be paid to the member is limited to the level of income the member was earning just prior to the event that caused them to be temporarily incapacitated. This may be less than $10,000 per month, and 2. there will be PAYG withholding requirements, • the benefit is paid as a non-commutable income stream, that is, there is no entitlement to lump sum benefit payments, • temporary incapacity benefit payments are 100 per cent assessable. The noncommutable income stream is not a superannuation pension. Consequently, there is no reference to tax components nor the age of the member. That is, even where the member is age 60 or over, the benefit is still fully assessable. Further, there is no entitlement to a 15 per cent tax offset, • there will be PAYG withholding on each benefit payment, consequently a net aftertax amount will be received by the member, and • the member will be issued a PAYG summary statement detailing the gross amount paid and PAYG withholding amount. This will be included in the member’s personal income tax return, in the same section for disclosure of salary and wages, and not as a superannuation benefit.

Don’t automatically assume that because the insurance company has paid under the income protection policy that the insurance proceeds can simply be passed onto the member.

The SMSF trustee(s) needs to ensure they can pay a temporary incapacity benefit in accordance with their trust deed and the SIS rules and also consider the PAYG requirements.

For the SMSF to pay a member a temporary incapacity benefit, in addition to ensuring its trust deed permits this type of benefit to be paid, it must comply with the requirements in the superannuation law.

Case study Russ, age 42, is a member of an SMSF together with his parents, Jake and June, and his sister, Marsha. The fund holds two insurance policies in respect of him: a life insurance policy and an income protection policy. The income protection policy has monthly premiums of $850.

In the 2024 financial year, Russ has an accident, and while he is not permanently incapacitated, he will be temporarily incapacitated and unable to work for an expected period of 12 months. It is determined his period of temporary incapacity commenced on 15 January 2024.

Under the terms of the income protection insurance policy held by the fund in respect of Russ, a monthly payment of $15,000, starting in February 2024, is paid to the fund.

Russ’s annual salary just prior to the accident was $150,000 (excluding superannuation).

SMSF benefit payment obligations Firstly, we need to determine if Russ has met a condition of release (COR) as per Schedule 1 of Continued on next page

QUARTER I 2024 55

COMPLIANCE

Continued from previous page

the SIS Regulations. Once that COR is identified, we then need to determine if there are any cashing restrictions. In this scenario, the relevant COR is item 109 of the table in SIS Regulations Schedule 1, temporary incapacity.

It is more than likely evidence would need to be provided to the insurance company to show Russ has met the relevant conditions to be determined as temporarily incapacitated under the terms of the policy. Noting that for any income protection policy taken out by an SMSF since 1 July 2014, it must be consistent with the temporary incapacity COR in Schedule 1 of the SIS Regulations. Such evidence may also be able to be used as evidence by the SMSF trustees to support the decision Russ has met the temporary incapacity definition in SIS sub-regulation 6.01(2).

The COR requires Russ to cease gainful employment, albeit temporarily. Evidence of Russ’s cessation of gainful employment should be retained.

The amount of the insurance benefit cannot be more than the level of income being earned

by Russ immediately prior to him becoming temporarily incapacitated. His level of income immediately prior to the event was $150,000 per year – equivalent to $12,500 per month.

Consequently, the amount of the noncommutable income stream cannot exceed this amount during the period of Russ’s temporary incapacity. It is also worth noting that where Russ is able to partially return to employment that, while the temporary incapacity benefit could continue to be paid, the level of income paid from the SMSF would be reduced to reflect the amount of income paid from his partial return to employment. Once Russ has returned to full-time employment, the temporary incapacity benefit would need to cease.

Assuming there is no record of Russ’s cumulative employer salary sacrifice contributions, his temporary incapacity benefit

56 selfmanagedsuper

would need to be funded from the insurance proceeds being paid to the SMSF. While the monthly insurance payment is $15,000, the gross maximum amount that can be paid to Russ would be limited to $12,500.

However, Russ would not receive the gross amount of $12,500 as the payment will be subject to PAYG withholding. The relevant PAYG withholding table to apply is the same as for payment of wages by an employer.

Assuming a monthly payment frequency and that Russ provided a tax file number declaration to the fund, claiming the tax-free threshold, the withholding amount would be $3636. This means Russ will receive a net monthly payment of $8864 during his period of incapacity. Again, if Russ was to make a partial return to work, his temporary incapacity payments would be reduced accordingly.

As mentioned above, the gross amount of the temporary incapacity benefit is fully assessable to Russ. It is not a superannuation pension, so there is no reference to tax components and no 15 per cent tax offset – it is considered a replacement of wages and is taxed accordingly. Further, the cashing restriction does not permit any lump sum payments so the benefit payment must be made by way of a noncommutable income stream.

For the 2024 financial year, where the SMSF has made five monthly temporary incapacity payments, after the end of the financial year it will issue Russ with a payment summary showing: • gross payments: $62,500, and • PAYG withheld: $18,180.

The net amount paid to Russ in the 2024 financial year would be $44,320.

The gross payment of $62,500, together with the PAYG withholding amount of $18,180, will be disclosed in Russ’s personal tax return at item 1, which is the item at which salary and wages are disclosed. The amount is not disclosed at item 7 for annuities and superannuation streams and, once again, there is no 15 per cent tax offset.

Don’t automatically assume that because the insurance company has paid under the income protection policy that the insurance proceeds can simply be passed onto the member.

Conclusion The common mistakes I see in relation to an SMSF paying a temporary disability payment are: • including the insurance proceeds as assessable income of the fund, • simply passing the full amount of the monthly insurance proceeds to the member, • no PAYG withholding registration, withholding or reporting, and • disclosing only the taxable component of the payments from the superannuation fund in the individual’s tax return as a super pension and claiming a 15 per cent tax offset (Item 7 of the individual’s tax return).

In addition to non-compliance with the SIS payments standards, this can result in the individual being assessed incorrectly for tax purposes. Where an SMSF member wants to have their fund hold income protection insurance, rather than in their own name, be sure to educate them on the rules, restrictions and administration requirements, not to mention the potential additional administration and audit costs.

Brought to you by

SMSF TRUSTEE EMPOWERMENT DAY 2024 SMSF Trustee Empowerment Day is an event that aims to provide individuals who manage their own super fund with the latest market developments and information through an SMSF lens.

Attendees will have the opportunity to learn about the most current legislative, compliance and strategic issues affecting them.

For the first time in the history of the event, the SMSF Association will partner with smstrusteenews in 2024 to provide delegates a full-day seminar packed with plenty of networking opportunities.

17 SEPTEMBER | SYDNEY

19 SEPTEMBER | MELBOURNE

Agenda highlights • Getting money out of super.

• Regulator’s insights from the ATO. • Administrative issues, investment tips and traps, what the ATO is focusing on, including compliance, audit evidence requirements and common administrative/investment errors.

REGISTER NOW

LEARN MORE

www.smstrusteenews.com.au/events

Sponsorships now available.

CHAT TO US NOW

COMPLIANCE

The agricultural affinity

Many farmers are also SMSF members and choose to use their fund to hold the related agricultural property asset. Mary Simmons examines the finer details trustees must consider when embarking on this type of strategy.

MARY SIMMONS is head of technical at the SMSF Association.

SMSFs have long appealed to the farming community. In its submission to the Treasury consultation on the Better Targeted Superannuation Concessions changes, the National Farmers’ Federation opined that the anecdotal evidence suggests more than 30 per cent of Australian farm businesses have SMSFs. With the number of Australian farm businesses approaching 90,000, that’s about 30,000 SMSFs or 5 per cent of the entire 606,000-strong sector.

Future for farming property and SMSFs Research shows primary producers are likely to be adversely impacted by the proposed Division 296 tax.

This is mainly due to the variances in market values and taxation of unrealised gains, impact on cash flow and lack of alignment between market movements and lease yields.

Nonetheless, SMSFs still offer farmers opportunities in terms of their retirement income strategy, estate planning, succession and property management. But there are also some risks and technical challenges needing consideration.

58 selfmanagedsuper

Primary production business or hobby?

Over the years, many farmers have chosen to buy their farmland using their super savings and then lease the land to their farming business.

This is permitted provided the farmland is used wholly and exclusively in the farming operations to meet the definition of business real property (BRP) and all transactions are undertaken on an arm’s-length basis.

However, it means the farmers must be running a primary production business and not a hobby farm.

Some indicators to support the fact a business is being run include the intent to make a profit, the frequency, the size and scale of the farming operation, being organised in a business-like way and maintaining appropriate records, and the execution of activities on an arm’s-length basis.

The business can be run by an unrelated third party, by a member or by a related party.

If the SMSF is in the accumulation phase, it will pay no more than 15 per cent tax on the rental income.

Continued on next page

Continued from previous page

However, if the SMSF is in the retirement phase, the rental income will be tax-free. All along, the farming business continues to get a tax deduction for the lease payments.

Untangling the web of acquiring farmland The tax-effective superannuation environment can be attractive to farmers, but there are many rules SMSF trustees need to be wary of, particularly when acquiring farmland from a member or a related party.

One of those rules relates to the sole purpose test. Under this obligation, the SMSF trustees need to establish the acquisition of the farmland was to provide retirement benefits for the fund members and not, for example, a mechanism to inject funds into the business to enable the farming operations to continue.

The acquisition also needs to be consistent with the fund’s investment strategy. Given farmland is likely to represent a significant proportion of an SMSF’s total assets, trustees need to demonstrate they genuinely believe the acquisition to be in the best financial interests of fund members. The investment strategy also needs to consider any lack of diversification and potential liquidity issues.

A trustee’s decision to buy the farmland must not result in the SMSF providing financial assistance to a member or a relative. For example, questions could be raised if a member who was suffering financial hardship had been unable to liquidate the property and the SMSF was the only willing buyer.

The SMSF trustees must ensure the farmland is acquired on arm’s-length terms. This means the acquisition must be on terms no more favourable to the member (the seller) than if the parties were dealing with each other on a commercial basis.

Similarly, the acquisition must be on terms no more favourable to the SMSF (the buyer) than if the parties were dealing with each other at arm’s length – or tax penalties may apply.

It’s best to ensure the farmland is acquired at

market value, best supported by an independent valuation at the time of sale.

As an alternative to buying the farmland in the conventional way, an SMSF is permitted to acquire the farmland as an in-specie transfer.

This is where ownership of the farm is transferred from a member to the SMSF and the value of the property is treated as a contribution by the member(s) whose balance is increased accordingly.

Where the value of the transfer is greater than the member’s available contribution caps, it may be possible to treat part of the farmland as a contribution and the remainder as a sale.

However, documentation is crucial. It’s important the contract be clear the SMSF is only buying part of the asset and the remainder of the asset is being acquired by way of an in-specie contribution.

Get this wrong and it could be considered a non-arm’s-length purchase tainting all income derived from the farmland forever. This includes any future capital gain. This is not something that can be fixed.

Living on the farm An advantage of primary production property is it can continue to meet the definition of BRP, even if it contains a dwelling used for private or domestic purposes.

However, the size of the dwelling matters.

The exception that allows the wholly and exclusively BRP threshold to continue to be met can only apply where the residential property on the farm does not exceed two hectares and where the domestic use of the land is not the predominant use.

This exception does not distinguish between who uses the dwelling for private purposes and who runs the farming business.

Where an SMSF allows a farmer to live in the premises, it is important this be reflected in a properly documented lease or leasing arrangement in relation to that property. Not only should the rent charged be at market value, but so too should all other terms of the lease arrangement.

The tax-effective superannuation environment can be attractive to farmers, but there are many rules SMSF trustees need to be wary of, particularly when acquiring farmland from a member or a related party.

Where the farmland is being leased to a member or related party, particularly where that person will be living in the residential property, the SMSF trustees will also need to consider the in-house asset rules.

Provided the farmland continues to meet the definition of BRP, then leasing any part of the property, including the house, to a member or related party is exempt from the in-house asset rules.

But must the member (farmer) pay rent to live in the house? To not pay rent will raise concerns with respect to whether the arrangement is at arm’s length and whether the SMSF is providing financial assistance to the member.

The trustee would need to demonstrate any benefit provided to the member is not at a cost or financial detriment to the SMSF and that, somehow, rent-free accommodation does not favour the lessee.

To pay too much rent is also problematic.

Above-market rent will trigger the non-arm’slength income provisions and tax the rent at 45 per cent, as well as taint the underlying farmland Continued on next page

QUARTER I 2024 59

COMPLIANCE

Continued from previous page

forever for capital gains tax purposes.

Holding a primary production property The distinctive characteristics and uses of farms complicates the task for SMSF trustees trying to benchmark related-party transactions against arm’s-length dealings. For instance: Valuations: The value of fund assets must reflect market value. Farmland is no different but presents challenges given the cyclical nature of the industry. It is important for trustees to understand what elements drive the value of their specific farm. This can range from location, crop productivity, produce demand, the state of the economy and government policies.

Lease arrangements: Given the cash-flow volatility of farming operations, farming leases typically deviate from conventional monthly rent payments, favouring annual or biannual lease payments. Furthermore, the returns on farming leases do not correlate directly with shifts in the underlying farmland as compared to other property. This makes it challenging to draw comparisons with an arm’s-length lease arrangement.

Property maintenance: Ordinarily, farmers are responsible for all maintenance work, such as fencing and irrigation, but in an SMSF this introduces unique risks under the non-arm’slength expenditure (NALE) rules.

Needless to say, the specific lease arrangement needs to be referenced, but also a distinction must be made between what is a repair and what is an improvement to the property.

Let’s consider the simple example of a member (the farmer) constructing a fence to improve the land owned by the SMSF. Where the work is conducted by the member, the fund will need to be charged for the work to avoid being caught by the NALE rules. If the fund is not charged for the work undertaken by the member, this may also be deemed to

60 selfmanagedsuper

be a contribution because the value of the land has increased. To add to the complexity, any material used should be directly bought by the fund to avoid breaching the rules on what assets an SMSF can acquire from a member.

Borrowing: Given property prices, some SMSFs may rely on borrowed funds to buy farmland under a limited recourse borrowing arrangement (LRBA). Trustees entering an LRBA tend to have a higher tolerance to risk given the ongoing need to meet loan repayments. For example, given the volatility of farming income, it may be risky to rely heavily on the farm lease arrangement to service the loan. Alternatively, if relying on member contributions to service the loan, an LRBA may be at risk if contributions reduce because of the death or disability of a member.

Exit strategies and estate planning opportunities Farming properties are often considered to be family legacies so there is a strong desire to pass down the property held in the SMSF to the next generation. Such sentiment requires careful exit planning and succession planning.

Where the intention is to keep the farm in the superannuation system, there are a couple of common scenarios trustees face.

The first relates to paying a member a pension. Generally, the amount of rental income generated by the farm will influence how long the asset can be retained in the SMSF. However, as pensioners get older, their minimum drawdown requirements increase so relying primarily on the rental income to cover pension payments becomes less feasible.

The other relates to the death of a member.

The compulsory cashing rules require the trustee to pay out a member’s interest, as soon as practicable, following the member’s death. Although there may be scenarios where benefits may be paid as a death benefit pension, a lump sum payment is often inevitable. This is often due to limits imposed

An advantage of primary production property is it can continue to meet the definition of BRP, even if it contains a dwelling used for private or domestic purposes. by the transfer balance cap, as well as the restrictions on the type of beneficiary who is eligible to receive a death benefit pension.

One option available to trustees is to inject new capital into the SMSF by introducing new members. With up to six members permitted in an SMSF, new members rolling over their super benefits can increase liquidity. This allows the farm to be retained in the SMSF to pass on to the next generation.

An alternative may be to sell the farm to another SMSF where the next generation are members. Where the buying SMSF has insufficient funds, an LRBA may be used to fund the acquisition. This option is only available if the farm still meets the BRP definition, otherwise the new SMSF will not be able to acquire the farmland from a related party.

Another option available is for the trustee to transfer the property out of the superannuation system as a lump sum in-specie benefit.

The timing of the lump sum is important.

For example, if the member is in receipt of a pension, the transfer could be treated as a partial commutation of that pension to minimise any capital gains tax. On the other hand, if the member has passed away, the in-specie lump sum death benefit should occur as soon as practicable.

Finally, any exit strategy needs to be carefully considered alongside stamp duty and capital gains tax consequences.

WE CAN HELP WITH CLIENT EDUCATION Advisers see client education as part of their responsibility but don’t always have the time to fulfil this obligation. A solution can be to white label smstrusteenews. Doing so will keep your clients informed on the major issues shaping the sector and ensure engagement every fortnight.

To explore this opportunity further contact us at info@bmarkmedia.com.au | d.tyson-chan@bmarkmedia.com.au

Tell us what you need

STRATEGY STRATEGY

Adding spice to contributions

Superannuation is already a tax-effective savings vehicle and certain regulation changes mean additional tax advantages can be sought from the environment, Grant Abbott writes.

GRANT ABBOTT is director and founder of LightYear Docs.

The Australian high-income earner pays a lot of income tax with very little relief and the stage 3 tax cuts are not going to help a lot. Is it any wonder the company or family trust with the obligatory bucket company is the preferred vehicle for small and medium-sized businesses.

But some professionals and salary and wage earners cannot position their affairs into these entities as they are stuck with paying a lot of income tax, month after month.

But all is not lost as superannuation can come to the rescue. Super is a choice to reduce salary and wages and pay-as-you-go (PAYG) responsibilities and even beyond the concessional cap of $27,500. With 30 June 2024 looming, let’s look at some spicy super contributions strategies.

Plain spice – prepayment of contributions The commissioner of taxation has advised that members of an SMSF can prepay contributions for the year ending 30 June 2025 in the 2024 income year. If the contributions are concessional contributions, then a tax deduction can be incurred in the 2024 income year while pushing out some concessional contributions to the 2025 income year. This can reduce tax and at the same time maximise monies invested in the superannuation environment.

According to the commissioner, this is achieved through using a contributions suspense account. Unfortunately, it is not for everyone as the big industry and retail funds don’t offer Continued on next page

62 selfmanagedsuper

Continued from previous page

anything so opportune. With the 2024 income year having a $27,500 concessional contribution cap and next year $30,000, a high-income earner can contribute $57,500 of concessional contributions. However, the catch is that at least $30,000 must be made in June 2024 and allocated by accounting entry to a contributions suspense account for allocation by no later than 28 July 2024.

How it works in practice Case study John Smith is aged 45 and his plumbing business has done well this year, with the company sitting on $250,000 of taxable income. The plumbing company has cash to put into super on behalf of John. His accountant tells him the deductible contributions cap is $27,500 and the company can prepay next year’s $30,000 concessional contributions cap. The company does this in June 2024 and claims $57,500 as a tax deduction. John’s accountant includes the $27,500 in the super fund’s books as John’s contribution for the 2024 income year and then uses an ATO authorised contributions suspense account to hold the $30,000 over until the 2025 income year. This ensures John does not breach, but takes full advantage of the concessional contribution caps in accordance with ATO guidelines.

As the contribution is made by a person other than John, it is assessable income of the super fund and post deductions, the taxable income of the fund will be taxed at 15 per cent less any tax offsets, such as foreign tax credits or

franking credits.

Please note, this strategy only works in June of each financial year as the timeline on a contributions suspense account is a maximum of two months. The strategy can be also used for after tax or nonconcessional contributions enabling a member of a super fund to include more than $470,000 of non-concessional contributions, subject to certain terms and conditions, in June 2024.

Further, if John has less than $500,000 in superannuation and has not expended his past five years of concessional contributions caps, then he can make additional catch-up contributions in the current income year.

Getting extra spicy with excess contributions The strategies above are great plain vanilla strategies and no doubt are being used by most SMSF specialists, accountants and financial planners.

Well the five-year catch-up anyway as only SMSFs have the advantage of the contributions suspense prepayment.

Excess concessional contributions The penalties for excess concessional and non-concessional contributions were abolished in 2013, 11 years ago, yet the contributions cap myth of severe penalties for going over the caps still holds court.

As such, a strategy I have long advocated for over the past decade is to go beyond a member’s concessional cap of $27,500. The law states any excess over $27,500 is included in the member’s assessable income less a 15 per cent tax

The penalties for excess concessional and nonconcessional contributions were abolished in 2013, 11 years ago, yet the contributions cap myth of severe penalties for going over the caps still holds court.

offset. This is gold and means at absolute worst a tax deferral as there is no longer any excess concessional contribution charge.

Think of: i) a retiree who has sold a property who can shift some of the assessable gain into 2025 with lower tax rates using the suspense account, ii) a contribution to a spouse who works in the business – note Ryan’s case and ATO guidelines that Part IVA does not apply to the quantum. Again, all deductible this year, but using the suspense account to bring in the excess in 2024 and 2025, and Continued on next page

QUARTER I 2024 63

STRATEGY

Continued from previous page

iii) parents who are over 65, outside of social security and distributing from a family trust to them and they make excessive contributions over both years.

Apart from the above for most of your clients, in an environment where there is 5 per cent plus inflation, would you prefer to pay tax now or in up to two years’ time?

But things get even better as the excess contributing member can withdraw 85 per cent of the excess concessional contribution amount upon assessment with no preservation restrictions, which is great for under 50s.

And section 273 does not apply to excess concessional contributions.

A great tax deferral mechanism Deferring tax payments to a lump sum, payable from the super fund, up to one year after the end of the income year, as opposed to making PAYG payments throughout the year, can offer significant financial advantages. One of the primary benefits is the opportunity for capital utilisation. By contributing for an extended period, you can invest that money in short-term, high-yield opportunities, hopefully with franking credits, thereby generating additional income in a concessionally taxed environment. This strategy essentially allows you to use the government’s money to create a profit in a concessionally taxed environment before you have to part with it.

Moreover, deferred payments can aid in cash-flow management, giving employees and business owners the flexibility to allocate resources

64 selfmanagedsuper

more efficiently. Further, a lump sum tax payment can sometimes offer psychological benefits, as it allows individuals and businesses to better focus on their core operations without the constant concern of weekly tax obligations.

The benefits of deferring tax payments to a lump sum include: 1. Capital utilisation: The deferred payment allows the member to invest the money in a concessionally taxed environment where they would have otherwise paid in taxes, potentially generating additional income.

2. Psychological ease: A one-time payment can reduce the mental load of having to constantly think about weekly tax obligations, allowing you to focus more on your business or investment activities.

3. Strategic planning: The extra time before the lump sum payment is due provides an opportunity for more thoughtful tax planning, potentially uncovering further deductions, spouse concessional contributions or franking credits in the SMSF that may reduce the overall tax liability.

Case study Jim Jones is 35 years old, earns $300,000 a year and is a successful computer consultant with limited ability to shift income. He is a sole trader and with his business humming along, Jim’s tax liabilities are significant. Using the Moneysmart calculator on $300,000 of income (including National Disability Insurance Scheme and Medicare levies), he will pay tax of $111,667.

Jim is also the sole member of the Jones SMSF with $300,000 in superannuation benefits all sitting in cash.

The law states any excess over $27,500 is included in the member’s assessable income less a 15 per cent tax offset.

This is gold and means at absolute worst a tax deferral as there is no longer any excess concessional contribution charge.

Making an excess concessional contribution of $137,000 Step one – using a personal deductible contribution For the current income year, 2023/24, Jim makes a personal tax-deductible contribution of $137,500. At the outset this would reduce Jim’s taxable income to $162,500 and his tax liabilities for the year ended 30 June 2024 to $48,442.

This compares with $111,667 if Jim did nothing. That is a saving from a PAYG level of $66,225, but we have to look at other factors too.

Step two – contributions tax in the fund From the fund’s perspective, the Continued on next page

Continued from previous page

$137,500 in contributions would be assessable to the trustee of the Jones SMSF as taxable contributions per the Income Tax Assessment Act (ITAA) section 295-160. Potential tax payable on these contributions, that is, the contributions tax, is $137,500 x 15% = $20,625.

It is important for the fund trustee to seek to reduce the contributions tax liability. To this end, the trustee could do one or more of the following: • borrow using instalment warrants with any interest to cover the $137,500 of taxable contributions (assessable income) – with a 6 per cent interest rate that would be over a $2 million borrowing, which is unlikely in the SMSF world for a client with this profile, • receive franking credits – to get $20,625 of franking credits the fund would need to receive about $48,125 of fully franked dividends. This is unlikely here as the size of the share portfolio depending on the specific share’s dividend yield would need to be in excess of $1 million, or • a great alternative is if the trustee invests $100,000 in an early-stage innovation company (see later). The trustee then receives a tax offset of 20 per cent of the amount invested, or $20,000. This would reduce any contributions tax liability to $625, but as these are start-up companies, there is risk involved.

Step three – add back excess concessional contributions to Jim’s personal taxes Jim’s superannuation is under $500,000 so he can use any prior unused concessional contribution limits in the past five years. However, in this case we

have not done so, assuming they have been fully used.

So assuming the carry-forward concessional contributions rule is not used, Jim’s personal income taxation position is as follows: • 2023/24 concessional contributions threshold: $27,500, • as Jim is over the $250,000 threshold for section 293 of the ITAA, an additional tax of 15 per cent on the $27,500 applies that comes to $4215, • personal super contributions that are an excess concessional contribution: $110,000. This excess is to be added back to Jim’s assessable income, • any excess concessional contribution is a non-concessional contribution using Jim’s non-concessional contributions cap of $110,000, which is perfect. Of course, he could take advantage of a three-year bring forward of $350,000 made up of $110,000 this year and $120,000 for the next two years, • first personal assessment in March 2025 based on current income of $162,500 is $48,442, • the trustee of the fund lodges its tax return in March 2025 showing excess concessional contributions of $110,000, • amended assessment issued by the ATO to Jim personally once the fund’s and the personal income tax returns are married up in order to tax the excess concessional contribution at Jim’s marginal tax rate (see section 291-15 of the ITAA). There will be an add back of the excess concessional contribution of $110,000 to his assessable income.

There is no penalty, • the amended tax assessment for Jim on the $110,000 is $50,300, but ITAA section 291-15(b) provides a 15 per

cent tax offset on the $110,000 of taxable income, which is $16,500, • so the total tax liability on the $137,500 contribution is $33,800, which is payable at the time of the amended assessment, • Jim’s total additional tax liability is $33,800 + $4215 (section 293 worst case) = $38,015 compared to tax on $137,500 of taxable income being $64,625. So he has saved $25,210, and • however, we must remember he is paying contributions tax on the $137,500 of $20,625, which is why we love franking credits.

The important components of this strategy are: 1. Minor tax savings when the worstcase scenarios are used, that is, full contributions tax and no bring forward of unused concessional contributions.

2. There are no longer penalty taxes such as the excess concessional contributions tax.

3. Instead of paying PAYG in 2023/24, Jim pays his tax as a lump sum from his super in June 2025 or later when the commissioner issues the amended assessment. This is effectively an interest-free loan for that period.

It is important to note at the time of making the amended assessment, Jim may ask the ATO to withdraw up to 85 per cent of his excess contributions and pay his sustainable super tax from his fund. As such, Jim can obtain a payment of $93,500 from the fund, which is nontaxable, to pay his $38,015 tax liability.

The remainder can be used to pay off any mortgage, other liabilities or to add to non-super savings. Of course, he can leave the money in the fund and pay the additional tax bill outside.

QUARTER I 2024 65

COMPLIANCE

Mitigating discount risk

The non-arm’s-length expenditure rules for general expenses have exposed employees and company officeholders receiving a discount for services provided by the relevant firm to their SMSF to ATO penalties. Daniel Butler, William Fettes and Fraser Stead put forward the case to implement formal workplace policies to avoid this risk.

DANIEL BUTLER (pictured) is director, WILLIAM FETTES a senior associate and FRASER STEAD a lawyer at DBA Lawyers.

66 selfmanagedsuper

Advisers, including accountants, financial planners, lawyers and other service providers, should have a staff discount policy where they offer discounted services to an SMSF run by a staff member. A discount provided due to the staff relationship can see the SMSF exposed to significant tax consequences under the non-arm’s-length expenditure (NALE) and by extension the nonarm’s-length income (NALI) rules in the Income Tax Assessment Act 1997 (ITAA). This would not bode well for the staff relationship and it’s best to ensure the risks are communicated to staff members so they are more comfortable having to pay for any service or supplies. Indeed, it is invariably less costly for the SMSF to pay these types of fees than it is to be caught by the NALE or NALI provisions.

This article provides an outline on how to manage NALE/NALI risks and the best method to minimise the risk by ensuring appropriate guidelines and documentation are implemented.

NALE can give rise to a substantial tax liability under provisions in section 295-550 of the ITAA. Under current law, an SMSF incurring a lower general fund expense, for example, for accounting or audit services, is taxed at 45 per cent on all its ordinary and statutory income. Amending legislation still needs to be finalised to reduce this extremely harsh tax impact.

Some relevant background Broadly, if an SMSF derives more income than it Continued on next page

Continued from previous page

would via an arm’s-length transaction, that income is likely to be taxed as NALI under section 295-550 of the ITAA. Conversely, and again broadly speaking, if an SMSF incurs an expense that is lower than an arm’s-length transaction or there is no expense charged, this is likely to give rise to NALE and the SMSF’s income is taxed as NALI. This article focuses on NALE and we discuss the tax treatment of NALI and NALE in more detail below. One point to raise now is the different treatment for general expenses and those specific to a particular asset.

This article focuses on the rules applying to expenses of a general nature.

Why have an SMSF staff discount policy?

If an advisory firm does not have a staff discount policy that is in line with the ATO’s position in Law Companion Ruling (LCR) 2021/2, this is likely to result in NALE for any staff member’s SMSF that obtains discounted services.

NALE can give rise to a substantial tax liability under the NALE/NALI provisions in the ITAA. Under current law, an SMSF incurring a general fund expense at a reduced price, for items like accounting or audit services, or a nil expense where an expense should have been incurred if the parties were dealing at arm’s length, can result in a 45 per cent tax liability. This tax rate would apply to the following: • all of the fund’s ordinary income, • all of the fund’s statutory income, including net capital gains and franking credits, and • assessable contributions received by the fund.

Upper cap on general expense NALE A 45 per cent NALI tax rate also applies even if an SMSF is in pension or retirement phase, meaning there is no pension exemption to the

extent there is NALE/NALI. This outcome is based on the ATO’s view that a lower or nil general fund expense has a sufficient nexus to all of a fund’s income, be it ordinary and statutory in nature. Thus it appears a general expense has a nexus to a fund’s entire activities, which may surprise many tax advisers. In contrast, specific expenses only taint the particular asset, but for the entirety of its life.

Also, when the ATO refers to a staff discount policy, it appears this can relate to employees, partners, shareholders or officeholders rather than being limited to employees as noted in paragraph 51 of LCR 2021/2. It also appears the discount can be limited to a particular class of these stakeholders. This means the drafting of the discount policy can be limited to say the partner or director level if needed.

Although the ATO’s Practical Compliance Guideline (PCG) 2020/5 previously provided some relief, that is, the regulator was not applying its compliance resources to general NALE in the 2019 to 2023 financial years, this transitional compliance approach ceased on 1 July 2023. Accordingly, from 1 July 2023 it is critical discount arrangements are revised to minimise NALE/NALI risks. The best form of protection is to implement an appropriate staff discount policy for each firm, which is properly communicated including training being provided to relevant stakeholders.

Proposed NALE changes On 13 September 2023, the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill was introduced. This bill proposes a cap on the amount of income that will constitute NALE from a non-arm’s-length scheme involving lower or nil general fund expenses. This cap is in the form of a maximum cap of two times the amount of the lower general expense for an SMSF or small Australian Prudential Regulation Authority fund, unless the fund’s actual taxable income is lower.

Under current law, an SMSF incurring a lower general fund expense, for example, for accounting or audit services, is taxed at 45 per cent on all its ordinary and statutory income.

While this proposed change will reduce the severe impact of NALE for general SMSF expenses, these changes are still to be finalised as law. Accordingly, it is strongly recommended firms act now to finalise their staff discount arrangements due to the substantial downside risks.

Further requirements In accordance with the ATO guidance in paragraph 51 of LCR 2021/2, firms seeking to implement a discount policy should ensure the discount is consistent with normal commercial practice and that the same discount is applied to each eligible staff category (for example, employee, director, shareholder, et cetera). Additionally, there is no express ATO guidance in LCR 2021/2 regarding staff discounts being offered in relation to non-SMSF services (for example, unit trusts or companies in which a staff member’s SMSF may be invested).

Conclusion Firms offering discounts without a properly documented staff discount policy are exposing themselves and their staff to significant risk. We therefore recommend an appropriately documented policy be implemented as soon as possible.

QUARTER I 2024 67

SUPER EVENTS

SMSF NATIONAL CONFERENCE 2024

The SMSF National Conference 2024 took place in February with around 1500 delegates making their way to Brisbane to consolidate their technical knowledge and network with their peers.

1

2

3

5

4

6

7

68 selfmanagedsuper

9

8

10

11

12

13

14

1: Peter Burgess (SMSF Association), Kate Farrar (Brighter Super), Linda Elkins (KPMG), Meg Heffron (Heffron) and Tim Steele (Class).

2: Peter Burgess (SMSF Association). 3: Bryce Figot (DBA Lawyers). 4: Tracey Scotchbrook (SMSF Association). 5: Craig Day (Colonial First State).

6: Fabian Bussoletti (SMSF Association). 7: Meg Heffron (Heffron). 8: Clinton Jackson (Cooper Grace Ward). 9: Katie Timms (RSM Australia).

10: Aaron Dunn (Smarter SMSF). 11: Shelley Banton (ASF Audits) and Paul Delahunty (ATO). 12: Daniel Butler (DBA Lawyers).

13: Craig Banning (Navwealth). 14: Melanie Dunn (Accurium).

QUARTER I 2024 69

LAST WORD

JULIE DOLAN PROVIDES SOME OF THE FUNDAMENTAL LRBA RULES

JULIE DOLAN is partner and head of SMSFs and estate planning at KPMG Enterprise.

70 selfmanagedsuper

Over the past six months, there has been an increase in queries about and interest in limited recourse borrowing arrangements (LRBA).

This increase in interest has seen a trend of incorrect information, lack of knowledge and poor execution, which has been a concern.

To this end, there have been common issues and the following are some of the applicable rules and some actions that should be taken to ensure fund compliance.

To begin with, the loan must be applied for the acquisition of a single acquirable asset and for no other purpose. A single acquirable asset is defined under section 67A(2) of the Superannuation Industry (Supervision) Act 1993 as broadly any asset that is not money and that an SMSF trustee is not prohibited from investing in. If the asset to be acquired is a block of land with two distinct titles, and there is no physical or legal impediment to acquiring it as one title, Self Managed Superannuation Funds Ruling 2012/1 states each title will require its own holding trust, loan agreement and contract. The same corporate trustee can be used for multiple holding trusts. This differs to the situation where the property is over two titles and the commercial property straddles both properties and is of significant value.

A review of the contract must be performed to see if other assets are included. If the goods are not affixed and annexed to the asset to be acquired, they are considered fixtures and do not form part of the single acquirable asset. In this instance, a separate contract will be required for the ‘other goods’ and will need to be funded by cash available in the SMSF. An LRBA cannot be entered into to carry out improvements to the asset. Several queries have been about acquiring a block of land under an LRBA and then financing via a separate LRBA to undertake property development on the land. Significant improvements that change the distinctive nature of the property cannot be funded by borrowings and in effect cannot be carried out while the asset has an LRBA attached to it.

Trustees should be aware that for the LRBA exception to apply, the asset must be held on trust (that is, the holding trust) so the SMSF trustee acquires a beneficial interest in the asset.

Each state has its defined wording on contracts, so that there is a reduced risk the relevant state revenue office does not apply double duties, for example, on acquisition and then on transfer to the beneficial owner, that is, the fund. It is strongly recommended to work with a conveyancing lawyer in the state the asset is located in to avoid confusion. It is also important to understand each state has its own order on how the documentation is executed, otherwise there is a risk of double duty applying.

The loan documents need to be reviewed carefully. The concept of an LRBA is that the lender’s right against the SMSF trustee in connection with or as a result of the borrowing or charges is limited to the rights relating to the acquirable asset. In simpler terms, if the SMSF trustee is unable to meet repayments, the lender’s rights are restricted to the asset being acquired.

Therefore, it is important to review the loan documentation to determine whether the loan meets the relevant conditions of limited recourse.

Trustees should have an understanding of the potential tax implications of personal guarantees.

It is not uncommon for external lenders to require personal guarantees from individual SMSF trustees or corporate trustee directors. Should these guarantees be called upon, Taxation Ruling 2010/1 can deem the payment to the lender to be a contribution. The timing of the contribution will depend on whether the guarantor has a right of indemnity against the fund. Therefore it is critical to understand the fine print of any guarantees.

There is some interplay between Division 7A and related-party loans. It is stipulated a party can lend to the SMSF trustee, however, depending on who the lender is, Division 7A can apply to the loan. It is important to understand the payment criteria of these loans as well as the safe harbour provisions on related-party LRBAs. If not correctly executed, the non-arm’s-length expenditure can be triggered and have the income and future capital gains of the fund taxed at the top marginal tax rate.

The ability to leverage into a growth asset via borrowings is a very powerful strategy within an SMSF. However, the process, associated legislation and steps to execute are not without its complexity. If mistakes are made, it can be a very costly exercise to the trustees of the fund.

A discussion of the biggest SMSF issues LISTEN NOW ACCESS VIA YOUR FAVOURITE PLATFORM

“ I NEVER THOUGHT I’D BE HOMELESS.” Like many of us, Megan* never thought it would happen to her – she never imagined she would need to escape a violent relationship; she never imagined her own family would turn their backs on her; she never imagined she and her daughter would become homeless and have to live out of their car.

Right now, there are thousands of Australians like Megan* experiencing homelessness but going unnoticed. Couch surfing, living out of cars, staying in refuges or transitional housing and sleeping rough – they are often not represented in official statistics. In fact, for every person experiencing homelessness you can see, there are 13 more that you can’t see.

Together we can help stop the rise in homelessness.

Visit salvationarmy.org.au or scan the QR code *Name changed for privacy