22 minute read
The Times They Are A-Changin': SMSF Roundtable - Part 1
Six-member funds, indexation, a legacy pension amnesty and auditor independence standards are issues that grabbed the attention of the SMSF sector in 2021 and will have an ongoing impact into the future.
Selfmanagedsuper’s SMSF roundtable unpacked what these mean in a year when many changes are likely to do more good than harm to practitioners, trustees and members.
This first part of the roundtable covers the budget and superannuation; indexation; auditor independence standards and ECPI calculation.
Participants:
Meg Heffron (MH) - Managing director of Heffron.
Peter Burgess (PB) - Deputy chief executive and policy and education director at the SMSF Association.
Philip La Greca (PLG) - SMSF technical and strategic solutions executive manager at SuperConcepts.
Aaron Dunn (AD) - Chief executive of Smarter SMSF.
Moderators
Jason Spits (JS) - Senior journalist at selfmanagedsuper.
Darin Tyson-Chan (DTC) - Editor of selfmanagedsuper.
The federal budget and superannuation
DTC: This year’s federal budget was a rich one for superannuation and for SMSFs in particular. Is this an indication we’ve turned the corner and can expect more stable and common-sense legislation and regulation from here on in?
PB: I’d like to think there is a period of stability now with the legislation, but it is difficult to say that though. There are a number of measures in this year’s budget which will have a long-lasting impact on the sector. So, in that respect we were very pleased with this year’s budget. There were a number of proposals that we as an association had been advocating for some time and hopefully we will see a period of stability.
AD: Is some of that part of having Senator Jane Hume, who does have a strong understanding of the sector, in government? Having someone that knows their elbow from their armpit does help the sector. In my view that would definitely play favourably as to why we’ve seen those changes now more than in the past.
PB: In all the discussions we’ve had with the government they’ve been very open to looking at ways to reduce red tape, to reduce cost, to reduce complexity in the system. The measures in this year’s budget were very much designed to do that, so you’re right, it does help to have a government that’s very much of that mind.
PLG: There’s been a lot of movement previously to tackle the big picture items, so if you think about all the things that we saw prior to the budget, when we got to this year’s budget it was more about tidying up rather than big vision.
MH: It says something about all of us that we thought it was a good budget, given that it was pretty modest. There wasn’t anything profound or amazing for SMSFs. It was just a good tidy up and yet we’re all celebrating it as good. It’s almost like our expectation is that budgets are always bad for us.
DTC: Should it concern governments that this wasn’t groundbreaking stuff and yet we are all excited about it? What does that say for the governance of the sector when such a small morsel of hope is lapped up so enthusiastically?
MH: It’s a bit depressing isn’t it when you think about superannuation as the engine room for Australia’s retirement savings. Was it an election budget or was it a ray of hope for common sense and better legislation and regulation? Maybe it was neither. The government has got bigger things on its plate in running a country in the middle of a pandemic and it’s not going to frighten the horses with something major on super. There was potential for the government which has just spent a lot of money to take it back from rich people and to categorise SMSF people as rich people. I thought we would see some clawing back of concessions, but we are still in the middle of the storm, which means they have left SMSFs to their own devices.
AD: The real positive aspect that we’ve got out of all this is that we’ve got the government listening to us as an industry and then implementing those changes, whereas historically we made all these submissions and they fell on deaf ears. Whereas this year we have put some recommendations in and they’ve come through in the budget and we have all gone “Hallelujah!”
MH: The proposal to finally do something about legacy pensions affects a tiny proportion of the SMSF population, but it affects them profoundly and often in a really bad way. The promise to do something, I just hope it comes through, and the issue will not get politicised as pandering to rich people who regret decisions they made 20 years ago, which most of us would agree that’s not the case. There’s a glimmer of hope that somebody’s listening to the submissions that have been going in for the last 10 years. What we’ll see is a lot of smaller SMSFs, that have been hanging around because they’re stuck in one of those pensions, will actually get wound up. This issue won’t affect very many people and yet it was the one I punched the air about on budget night.
PLG: I was happy about the residency issue because there was a big inequity in that rule as it stood. The issues about the active member test and the idea that you could contribute to some funds when you’re overseas, but not all, was a strange element. Tidying up that issue around residency, given we have mobile workforces, is another example of what the budget achieved.
PB: From an association perspective, the residency change was one that got me excited. It was one of the lead items in our budget submission to remove the active member test and to extend the central management and control test out to five years and that was exactly what we saw in the budget. Legacy pension change was long overdue and while we advocated for an amnesty, and I understand why you can’t make it compulsory for people to move out of these pensions, not everyone is going to make the move. If this proposal does go through, we are going to be left with an even smaller number of these legacy pensions going forward and even fewer practitioners who understand them.
AD: I was most excited about the SMSFspecific stuff because as everyone’s mentioned, they were advocated for some period of time. The removal of the work test through to age 74 is the most popular opportunity that practitioners will see and when you start to overlay that with the reduction in age for downsizer, the strategic juices just start flowing.
JS: Was there anything left off the table that you would have liked to see in this budget?
PB: The proportional indexation of the transfer balance cap. We were somewhat disappointed not to see that one in the budget. There is also an opportunity to reduce the number of thresholds in the system if we’re trying to reduce red tape and complexity. If you look at all the different thresholds that are there to determine catch-up contributions and work tests and the bring-forward amounts, there’s plenty of scope to simplify them.
AD: I was surprised that the government did not mention anything about the temporary minimum pension reduction, but we did see it proceed with those changes after the budget. I have a foot in both camps around the temporary minimums and continuing down that path and think is it more politically motivated given that we are in an election period and where property prices and the share market are at. On the other side, you’ve got people who are still struggling with tenancy, rent reductions and lockdowns, so they were damned if they did it and damned if they didn’t.
Indexation and reporting
DTC: Indexation is a very significant change and highlights how many thresholds we have at the moment in the super system, and the personal transfer balance cap is a new concept that everybody’s going to have to understand. Are you anticipating compliance breaches due to the way it’s being implemented with the proportions?
MH: If we are talking about people who think they have got $1.7 million but actually have $1.65 million, so they end up putting too much into pension phase, it won’t be a compliance breach. It will trigger action and they will get a scary notice from the ATO and have to wind back a bit of their pension. It will create tension and unnecessary stress, but I am not sure how many people it will affect because it’s only people who had a pension before 1 July 2021 and it started at less than $1.6 million. It’s not going to impact the entire population of pensioners that we have in the system at the moment. It’s a subset of that group who want to put more into pension phase in the future. For someone who’s already converted all of their super into a pension and is never going to have any more to convert into a pension, they might do the calculation incorrectly, but it won’t matter.
Where we will bump into it is in 10 years’ time when a member dies and their spouse takes the super as a pension and have to understand their transfer balance cap again at that point. It will cause some people a lot of unnecessary worry and I don’t think it’s worth doing this proportional indexation. I can’t do the sum of what it would cost us as a taxpaying community to allow everybody to go up to $1.7 million, but it can’t be that much, can it? I’d love to do the sum on the cost burned by individuals and professionals in the industry on complying with that law versus the tax dollars saved by having it in place.
AD: The other big issue this throws up is the way in which reporting is different for SMSFs compared to APRA-regulated funds. We are going to get situations where the ATO’s information is only as good as the information that has been reported already. So, if someone is relying upon that ATO information around the personal transfer balance cap, how confident are we that it is accurate, given that some funds are reporting on a quarterly basis and may not have lodged or on an annual basis that is miles away from being lodged? It highlights the importance of the timeliness of information and the need to be looking beyond the ATO’s records in determining what that indexation might actually look like, because as soon as that information gets repopulated in the ATO system, the proportional indexation is going to have to be updated at that exact same time for the data to be reliable.
MH: We’ll have that problem, which is an acute problem for this year, because the value of the transfer balance cap at 30 June is so critical, or the highest value up to 30 June is so critical, and we’ve probably got until next May until everybody’s done enough reporting for us to be confident on that number. We’ll have the same problem next time if something gets indexed even though that threshold also gets indexed. Do you think we’ll see a time then where SMSFs are moved on to a similar reporting regime to APRA funds?
AD: There was an ATO paper about the options on reporting and the regulator inferred then that it is set for life. Whereas the reality is it’s not going to be a workable framework into the future and we are going to have to come up with a different scenario. So maybe it’s a transition where everyone moves to quarterly reporting and then it may move again into something else.
PLG: Even the quarterly reporting doesn’t work because the issues are around the timings. Quarterly reporting will still not solve your problem when someone rolls from an SMSF to an APRA-regulated fund because you report three months after you do the rollover and the APRA fund reports 10 days after they start the new pension. So, the realities are while you might have a statutory reporting cycle, you’re going to have to report more frequently for certain events just to make sure that the records are true. At the end of the day, the financial advisers have got to rely on someone and if you can’t trust the ATO’s data, I wouldn’t want to say I’m basing it on what my administrator tells me. I’m not sure that if I am a compliance manager at a licensee, that’s going to stand up if I go in front of the Australian Financial Complaints Authority. It’s a dilemma if you view it from the point of a risk compliance manager at a licensee because the first question that would be raised in a dispute would be: “Did you look at what the ATO had?“
PB: It’s no secret that the ATO would like to see SMSFs reporting more frequently – quarterly. I’ve never seen the annual reporting option as a long-term solution, just a transition. As Phil’s pointing out, the APRA funds are reporting much more frequently than quarterly. It’s monthly and in fact some of them are doing it daily. It may well be that even quarterly reporting is a transition phase for the SMSF sector as well. The other issue here, and getting back to proportional indexation, is of course financial advisers don’t have access to those ATO portals. It’s difficult for them to obtain information from the ATO as to what someone’s transfer balance cap is. We’ve got a situation where tax accountants do have access to that information, but may not be able to give advice unless they’re licensed to do so and advisers who are licensed to give advice on pension matters, but can’t access the information.
DTC: Do you think this could be the catalyst for that myGov hiccup to be addressed? Is this another opportunity for one of the parameters that just doesn’t seem to make a lot of sense to be addressed?
PB: We’ve been advocating for some time now for advisers to have readonly access to some of this information they need in order to give advice. Obviously it’s not as simple as that, but we are hopeful we will see a resolution so advisers will have access to the information they need.
PLG: One of the big problems at the moment is technically an adviser could access the information because they are registered as a tax agent with the Tax Practitioners Board, but you can only have one tax agent per client. You can’t have the adviser and their regular accountant registered for one client, which is where the system falls down. If we could cross that hurdle, it solves the adviser’s access problem, subject to funds reporting on time.
PB: It’s not just financial advisers. Administrators want access to some of that information as well. There are situations where clients have got incorrect determinations and trying to help them is very difficult if you don’t have access to the information.
JS: Are we going to see indexation create an additional administration burden and add more cost to SMSFs and is it likely the industry is going to wear the costs?
MH: Possibly, but the complexity or cost comes in people not realising there was something to know and they do something slightly wrong and have to fix things. It will fall into the melting pot of slightly weird things we have to do because the laws are slightly more complicated than they really need to be. Hopefully, one day we’ll have a budget that looks at this as a tidy-up issue and makes the cap $1.7 million for everybody. I would also love to see them, at the same time, forget the complexity around multiple thresholds for non-consessional bring forward contributions and state “if you’ve got less than the general transfer balance cap, you can bring forward and if you’ve got more, you can’t”.
AD: It will depend on the model the practice or the administrator runs. For things like this there’s a fixed pricing this and you’ve got specialist-based businesses, so the knowledge is there. It will get absorbed into the way in which the solution is offered to the trustee, the adviser and so forth. If you look at someone who is a local accountant, they are going to spend time on that and there is going to be a transfer of cost onto the trustee. It goes again to the importance of specialisation because it’s those that work in this area and specialise in this area who will move with the times, take advantage of the technology to mop this stuff up and be able to keep things moving.
PLG: These caps are not SMSF specific. The caps are a super industry issue. We might have slightly more members who currently are affected by it, but that’s at this point in time. Who knows what’s going to happen over the next five or 10 years. How many of the people who are in SMSFs, and are going to get towards the $1.6 million or the $1.7 million threshold, and are always going to be in an SMSF?
JS: On the back of these scenarios will there be enough evidence to have indexation changed?
PB: I think so. There will be a cost associated with this. There always is when we build complexity into the system. The government is very open to looking at ways of reducing complexity and proportional indexation is one obvious area where we can reduce complexity. Also, as Meg said, the bring forward thresholds – what revenue benefit are they bringing? It’s probably marginal, but there’s a lot of complexity associated with the bring-forward thresholds and having to work out what someone’s total super balance is in order to determine how much they can bring forward. All of those things are areas that can be simplified. In our budget submission we identified eight different thresholds that are used and it’s entirely possible to get that down to two.
Auditor independence standards
JS: The amended auditor independence standards are now about to be enforced properly but have been effective since 1 January 2021. Have you seen any major issues arising from this change so far?
AD: The understanding was that it was going to affect up to a third of the SMSF community, so it’s had a profound effect. In terms of the ATO’s guidance, it is the biggest ticket item impacting SMSFs in 2021 because there have been arrangements in place that needed to be recalibrated. Whether they were internal arrangements with Chinese walls, through to arrangements where they were packaged up with accounting and audit services within different businesses, there has been a need to ensure compliance with those requirements. We are starting to see providers put in place mechanisms for people to be able to deal with that. Class and BGL have introduced audit panel solutions to provide some straight-through solutions for people to be able to tap into where it’s needed. The ATO has continued to provide feedback around that and it will be interesting to see what happens now it has moved on from an education approach what will be important over the next 12 months as to breaches the regulator finds and how they are ultimately dealt with.
PB: When the standards were first released, it was a hot topic and our members were raising concerns about what it meant for their business and we were concerned about how disruptive this was going to be for the industry, so were advocating for a deferred start date. For smaller audit firms this has been and will continue to be quite disruptive, but in terms of evidence, we haven’t seen a lot in recent times. This will play out over the next 12 months given that the ATO is now actively enforcing these new standards for any audits that are completed from 1 July onwards.
PLG: The interesting thing is the 20 per cent threshold regarding income being generated from one source because that’s going to hit harder at the smaller end, which is where you normally have those relationships between accountants and auditors. Now, because of this 20 per cent threshold, this is going to require them to diversify this source of income from their clients. It also means that you’ve got the opposite problem because you may not be able to say to new clients that you can do their audits because you can’t go over the 20 per cent threshold. So, the threshold has to be worked through because the impact of it on the audit firms and what business they can or can’t accept from various sources. The big firms have a lot more scale they can work with, but for the smaller firms it is going to be a really tricky issue as to how they manage that 20 per cent threshold.
PB: It is out for consultation and not due to start until 1 July 2023, but we have held some roundtables with our members to get their views on some of the issues they may face with this 20 per cent rule. Before we see it introduced, a lot of refinements will have to occur.
DTC: When this came to light there was speculation around who would really win out of this and who would lose, and those in a prime position were the independent audit firms and specialist audit firms because they are going to be getting a lot of new business now. Have you seen any shifts in client bases or service provision where you could say there has been a gravitation towards a certain type of firm or a certain type of service?
PB: Based on some of the feedback from our members and some of the conversations with industry, there has been a move to the larger, more specialised audit firms. That’s not surprising and seems to be a trend, but we haven’t seen any stats or figures to back that up.
AD: In conversation with different practitioners in the industry, we have seen some of the large ones ramp up with their communications and the resource planning they are putting into it with the expectation that it was coming. It’s the advantage they have where it’s not only the specialisation, but it’s the associated technology that enables them to scale successfully. They can keep themselves at competitive price points that enables them to negotiate deals for a thousand orders to come in and remain competitive.
ECPI calculation method
JS: The consultation period for the new exempt current pension income rules is over. Do you think there’s going to be significant changes to the proposed legislation already put forward, and if so, what will they look like?
PLG: Conceptually what they’re suggesting is fairly reasonable and there’s two parts to it. One is the issue in respect of the disregarded small fund assets anomaly, where you had to get a certificate that told you the fund was 100 per cent in pension phase. That’s really a no-brainer and one of those red tape matters that should never have been in the system. The second one is this issue about giving people a choice that if for some period in the year they had segregated assets but it wasn’t for the whole year, they get an actuarial certificate for part of the year that can be used for the whole year. Everyone accepts it makes sense to be able to do that. The issue is about the choice mechanism and how do you make that choice when you could use one of two methods for the year, and how you do those calculations to decide which method is the best?
MH: The first change totally makes sense and should never have been in the system in the first place. The second change I agree, conceptually, makes sense, but the time for making it was back in 2017. What has happened since is many people have invested time and money in calculating ECPI a particular way. Now we are introducing, if this goes ahead as proposed, a whole new series of decisions for an accountant or an adviser to consider when advising a trustee on what’s the best method to use. Every administrator or accountant in the country is going to be trying to work out for their client what is the best method to use. Again, we’ll just waste a lot of time and money making a marginal difference to somebody’s tax bill, but we’ll feel obliged to do it. That’s a shame because if it happened in 2017 and been done in a simpler way, it would have been applauded. Now, many of us are in this weird situation where we’re actually saying that’s too much choice. Could we make life a bit simpler? Too much choice is not always a great thing.
PB: This has been an interesting topic for the association. We are a pro-choice organisation, but on this particular occasion, and we acknowledge the positive intent behind what the government’s trying to do, but we don’t think providing choice is a good outcome because it will require trustees to do two calculations and in some cases more.
What we said in our submission is that we would prefer to go back to the old proportionate method which was the common approach the industry used before 2017. We agree with the disregarded small fund asset change and this is an opportunity to index the $1.6 million threshold that is used for disregarded small fund assets because it is hardcoded in the legislation, so it’s one of those thresholds that is not indexed.
If we are going to have a choice, then it certainly needs to be clearer in the legislation than it was in the exposure draft as to when you make that election. We couldn’t work out whether you make the election at the beginning of the year or you could make it after the year has finished. Our preference would be that you make the election as to which option you’re going to use after the income year is finished, but it wasn’t clear on that point, so if we are going to have this ability to choose, it needs to be very clear as to when you can make that election.
DTC: How much of a worry is it that the industry noticed that sort of anomaly in the legislation?
PB: I’m not sure it was an anomaly, but in our view it wasn’t clear. Maybe it was clear to others, but this is why there are exposure drafts, why they allow a consultation so they give the industry and others the opportunity to find these anomalies and to point them out.
MH: Presumably the regulators respond to exposure drafts as well. It’s a sign of a healthy legislative process that the government has a policy, legislation is written they feel implements that policy and then the holes in that legislation, which is the execution of policy, are exposed for review where the collective minds of unpaid experts look at it on your behalf.
