CAANZ

Take heed of key changes

TONY NEGLINE is superannuation leader at Chartered Accountants Australia and New Zealand. There are some key changes coming to the superannuation industry regulatory environment and everyone working or involved in the super sector needs to know about these issues.

The first change is in relation to the non-arm’slength income and expense anti-avoidance provisions. These legislative provisions were re-cast in 2019 with a 1 July 2018 commencement date. At first blush these new rules were said to be targeting super funds not acquiring assets for an arm’s-length price and for SMSFs using non-arm’s-length limited recourse borrowing arrangements.

However, a 2019 draft ATO Law Companion Ruling, LCR 2019/D3, casts these provisions very widely and says many relatively benign arrangements could potentially be caught. For example, super fund administration services performed by related entities for anything other than an arm’s-length price will likely see all the income of a fund, including pension income, face penalty tax of 45 per cent.

This wide interpretation potentially impacts many super funds where trustees, or their related parties, provide services to those funds. To be more specific, it will potentially impact many Australian Prudential Regulation Authority-regulated super funds. It will also affect many SMSFs that are run by accountants, auditors, solicitors, property developers, tradies and a host of others.

In late March 2021, the ATO announced it would not apply its resources to ensure compliance with its interpretation of the law before 1 July 2022.

However, as it stands now, any non-arm’s-length arrangement on foot after June 2018 should be reviewed to see if the penalty tax rate should apply.

We will hopefully see the ATO’s final interpretation of these rules before July this year. It may be that the ATO believes the black letter law leaves it no choice but to apply higher tax rates on many super funds. If that is the case, then the super industry will need to approach the government to seek legislative amendments to have the law narrowed to no more than its original intention.

The second significant change to the superannuation regulatory landscape is the Your Future, Your Super initiative. In the 2021 federal budget the government proposed three policy changes to the retirement savings environment – socalled employee stapled funds (which would assist in reducing the number of multiple super funds employees may join as they move from employer to employer), annual performance assessment of super funds and adjustment of the trustee duty to act in a member’s best interest into an obligation to act in a member’s best financial interest.

Chartered Accountants Australia and New Zealand and CPA Australia made a joint submission about these rules to the Senate Economics Legislation Committee. The accounting bodies argued the employee stapled fund policy has merit, but we had concerns about the other two policies, especially because at the time of writing the regulations governing how these provisions will work had not been released in draft form.

We are particularly concerned about the change for trustees to act in beneficiaries’ best financial interest as opposed to best interest because the revised requirement is a lower threshold. For example, it may be in a beneficiary’s best interest to pay a death benefit from a fund, but it may not be in their best financial interest.

The government also proposes to amend the law for regulated super funds to require trustees to prove they acted in beneficiaries’ best financial interest for every trust expense and investment. For a large fund this will impose significant recordkeeping requirements.

The final significant change to the regulatory framework governing superannuation is the amended auditor independence standards. As many will know, the revised accounting standard has applied from January 2020. By virtue of the Superannuation Industry (Supervision) (SIS) Act and Regulations, the ATO has a duty to check SMSF auditors comply with this new requirement – refer to SIS Regulation 9A.06. The ATO has announced it will commence checking compliance with this duty with effect from 1 July 2021.

The ATO has written a very good guide on how it intends to interpret this revised accounting standard.

Accountancy practices only have a short time frame in which to make any adjustments to how they deal with the audit of their clients’ SMSFs. I encourage SMSF accountancy practices to consider trying different solutions before making a long-term decision. For example, give one-third of your funds to a large SMSF audit entity, one-third to a collective referral source and one-third to a single referral source.