2024 SMSF Roundtable: Confronting current hurdles

Developments in the SMSF sector in the past year around the Division 296 tax, non-arm’s-length expenditure and pension payments have created new hurdles for advisers and trustees to clear and provided the framework for the selfmanagedsuper 2024 SMSF Roundtable, which considered the impact these issues are creating now and into the future.

Participants

Shelley Banton (SB) - ASF Audits head of education.

Peter Burgess (PB) - SMSF Association chief executive.

Meg Heffron (MH) - Heffron managing director.

Liam Shorte (LS) - Sonas Weath director.

Moderators

Darin Tyson-Chan (DTC) - selfmanagedsuper editor.

Jason Spits (JS) - selfmanagedsuper senior journalist.

Division 296 tax

DTC: What better way to start than with a discussion about the Division 296 tax. There have been quite a few recent developments, but where are we at right now and where do we see this headed?

PB: The SMSF Association is doing everything we can to get the relevant schedules removed, or at least amended, to address some of the egregious aspects of this legislation. We’ve been having discussions with the Senate crossbenchers and I’m yet to meet one of them that supports this tax. The bill is still in the parliament. It hasn’t passed the lower house and there’s been no indication from government they’re prepared to consider amendments. It would be difficult for the government to walk away as it has $2.3 billion in revenue attached to this measure baked into the forward estimates. I suspect they are in negotiation with the Senate crossbench and are aware this is going to be a difficult bill to get through the Senate and to expedite that are having discussions on possible amendments. I hope those amendments are not just about indexation as there are some other aspects of this bill which lead to unintended consequences and unfair outcomes that need to be addressed.

MH: Half the reason we’ve got this legislation is because we haven’t had compulsory cashing for so long. It used to be compulsory and once you got to a certain point you had to start taking your super out, but it’s kind of too late now. The horse has bolted. I don’t think the government is going to shy away from imposing extra tax on people with more than $3 million. Every method has its flaws, but the one they’ve come up with is probably about as bad as you could possibly think of. They’ve quite successfully come up with the dumbest approach. If we had compulsory cashing all the way through, it would have needed some tweaking when we got the limit on pensions and for compulsory cashing to be in a form that recognised some other forms of pension and didn’t give you any exempt current pension income or something like that. It’s such a shame we’ve ended up here because of a problem created years ago when the government took away compulsory cashing.

SB: There’s nothing fair or equitable or even simple about this particular approach. I don’t think anybody really opposes the philosophy of taxing those higher balances within super, but it’s the methodology they have taken which has left the industry reeling because it’s unprecedented. We will be one of the first countries in the world to be adopting the taxation of unrealised capital gains and it hasn’t worked over in the US. They looked at it and walked away from it. How it’s going to play out for us remains to be seen, but I don’t think this is the way forward. There are other methods and what the SMSF Association has come up with in regards to a deeming rate rather than the current methodology is at least better than nothing or better than what we’ve currently got.

MH: Liam, as an adviser, is this starting to impact the types of assets you recommend people hold in their SMSF as opposed to elsewhere? I would see anything that is volatile is not going to be attractive in an SMSF anymore for somebody impacted by Division 296.

LS: Almost definitely. We’re seeing people involved in venture capital or cryptocurrency or any of those very volatile sort of arrangements looking to exit. They have no choice because anybody investing in crypto knows they can get a huge uplift in one year and the next year could see an 80 per cent drop and they don’t want to get caught with capital gains one year and not having enough then to pay the tax the next year. The issue I’m worried about is the older SMSF trustee who has a difference in balance between them and their spouse and they have $3 million or $4 million in their super, but most of it is in one name and they never took the opportunities to do a recontribution strategy and rebalance.

They also tend to be the same people where a property hasn’t been revalued for three or four years and the husband has got $3 million and the wife has got $1 million, but when they revalue the property, it’s probably going to be $6 million and they are going to be totally affected by this. I don’t blame them because they were concentrating on working with what they had and inside the rules, while some small accountants and auditors who don’t do many SMSFs are letting through stuff like this that they should not let through.

SB: This is where valuations are becoming more critical, especially for those around that $3 million mark, because we’re going to see a lot of focus and pressure on valuations over the next couple of years. People are going to increase the valuations over the next two years and then take a massive drop and looking at using different methodologies to suit their purposes, depending on how the assets are going. For auditors it places additional pressure, especially on those complex assets, which are difficult enough to value without having these sorts of additional complications added to the equation.

DTC: Peter, do you ever get the feeling too much weight is being put on the SMSF sector to fight this tax and get a better resolution or perhaps the best resolution of all of not having this tax introduced?

PB: Given the SMSF sector is the area that’s going to be impacted mostly by this tax, I don’t think it’s a surprise that it has been left to us to go hard on this, but it’s been encouraging that other bodies have come forward and support the push against this tax. We’re not the only ones involved and other associations have voiced their concerns and we saw the Joint Associations Working Group come out with a statement opposing this tax so we’re not the only voice out there. It’s been a hard slog and nothing’s been achieved yet, but we’re encouraged by the fact the bill is not being debated in this sitting of parliament and that’s a clear indication there are some negotiations going on behind the scenes. The surprising thing for us was that Treasury had not considered any other option. It was pretty clear when this consultation paper came out they hadn’t considered or modelled any other way in which this tax could be introduced. There are other ways they could have gone about clawing back these concessions for people with high balances and that’s why we’re fighting as hard as we can to get these schedules out of the bill so that we can have consultation with government on other ways which don’t involve things like taxing unrealised capital gains.

SB: It may well be the thin end of the wedge because we don’t know if this gets accepted as the new norm within superannuation where it’s going to end up within the tax community.

PB: The precedent that this sets for future tax reform has been a concern for the Senate crossbenchers. Things like negative gearing are things which the government is reluctant to touch, but it’s not out of the question that they start to tax unrealised gains on investment properties. That’s the concern some have as to what’s next if we have this type of tax in the super environment.

LS: It’s also stopping small business owners thinking about putting their business premises into super. When we talk to them in terms of protection for bankruptcy, the superannuation fund has been a very good way for small business owners to protect their premises in case their business doesn’t go well. Now if they keep the property outside of super, that’s going to become available to creditors, so it has a knock-on effect throughout the whole industry.

PB: How do they fix the problem? The government and Treasury can address indexation, but what about fixing the taxation of unrealised capital gains? We put forward some amendments which would be the simplest way to take some of the severity away, but the only way you can address it is to go back and start again. We’ve always maintained that if we’re going to have a tax on earnings, the only way you can avoid taxing unrealised capital gains is to base it on actual taxable earnings and because we’re moving away from that, we are seeing these unintended consequences and unfair outcomes emerging. So we’ve been trying to get the conversation back to actual taxable earnings.

DTC: If we went to an actual earnings model, I’m sure other parts of the superannuation sector wouldn’t find that palatable because SMSFs have got the information at hand, whereas Australian Prudential Regulation Authority (APRA)regulated funds would have to reconstruct that information.

MH: It would impose an administrative burden on other funds that is greater than the burden that would be placed on SMSFs. Would it incentivise people to have an SMSF over another fund? I don’t know that it would because it’s the same concept. If every fund is treated in the same way, then whether you have your portfolio of shares in your SMSF or in your retail fund won’t make any difference. The biggest barrier to having an actual taxable earnings model is administrative complexity because that’s just not how large funds work.

PB: Treasury made it quite clear in their consultation paper as to why they’ve gone with the unrealised gains approach because large APRAregulated funds are not able to track actual taxable earnings at the member level. So either a proxy for actual taxable earnings, which is a deeming rate, would apply to all funds, or those funds that can report actual taxable earnings should be able to use actual taxable earnings. I’m not sure it’s an option that would be considered seriously by government and Treasury because they may feel it gives SMSFs an advantage over APRA-regulated funds and they don’t want a different approach for different sectors.

MH: To be fair, we’re usually the ones arguing for not having different systems for different sectors so you can understand why they wouldn’t want one system for SMSFs and a different system for APRA-regulated funds.

PB: At our national conference in February, David Barrett from Macquarie presented a session where he modelled the use of actual taxable earnings versus the Treasury’s proposed approach over the life of someone in a fund, and found you actually pay more tax under an actual taxable earnings approach, but the big difference is you will always have liquidity to pay the tax on capital gains. That’s another reason why we have put forward this proxy rate because you pay less tax under that modelling. That could be a problem for Treasury and government if they do move to a proxy as they will get less revenue from this measure. However, we’ve always maintained the government should be prepared to give up some of that revenue in order to address the egregious aspects of taxing unrealised capital gains and take some of the heat out of the discussion. It’s also the reason why we would not want a deeming rate any higher than the 90-day bank bill. If it’s going to be the 90-day bank bill plus three or seven percentage points, that’s not something we would support. In fact, our modelling suggests people will be worse off under that model than they would under the current model. So we agree to a proxy, but it can’t be any more than the 90-day bank bill because what we’re trying to achieve with the deeming rate is it’s supposed to be a proxy for actual taxable earnings. We’ve made that point very clear to the teal independent members of parliament and to the Senate crossbench that if it is going to be a proxy rate, it has to be for actual taxable earnings, not something any higher.

DTC: We’re getting closer to the proposed start date for the Division 296 tax, so are you seeing distinct ways SMSF trustees are responding to this issue?

LS: They are looking for solutions and at options. We’re looking at the options of whether property comes out of a fund, whether part of a property comes out of the fund and what do we do with accumulation balances. A lot of the talk now with older clients is do we start the intergenerational wealth transfer now because of this rather than waiting till later or doing it within their estate. For a few clients in their late 80s we’re taking money out and making non-concessional contributions into the fund for their children, so that more and more the fund becomes owned by the children. In most cases, we’re making sure that whatever happens, the parents have got more than enough to live comfortably and rather than waiting and leaving the money inside super, we start moving it onto the next generation. A lot of the next generation are hitting 60, so we’re taking it out of pension or accumulation in their parents’ name, and we’re only one or two years away, in some cases, from getting it into pension phase in their children’s name, so it’s working pretty well.

SB: Liam, are these going into new funds or you’re adding the kids into the mum and dad’s fund?

LS: Where there’s a small business or a business property in mum and dad’s fund, or if it’s a family business, then we are adding them into the fund. What’s happening then is, over time, more of the value of the property is held in the kids’ names. These are people who see it all as family wealth and the parents were struggling to find a way to pass money to the next generation because they’re not too sure they wouldn’t blow it, but they love the idea of taking it out and putting it back in and owning part of the business premises.

MH: What I’m hearing more is about death benefit taxes and estate planning and those things have always been a big issue. The challenging part of that conversation was saying to mum and dad if you want to start moving wealth to the next generation, or taking it out of super, you are deliberately making yourself poorer during your own lifetime because investing in super is so much more attractive than investing outside super. If the Division 296 tax is introduced in its current form, I don’t think we will see investing outside super as massively more attractive than inside super. They will be neutral for that bit over $3 million. For all these 80 year olds not taking $1 out of super because of its 15 per cent tax rate, we can say to them whether you have it inside super or outside super it’s all the same. We may find that unlocks a very useful conversation about that it’s not a bad idea to start taking money out in some kind of steady, regular, sensible fashion as you sell things and because of the form of the Division 296 tax we see them taking that steady process to winding down their super, which they might not have done in the past. Given that we’ve not had compulsory cashing for ages, and since 2017 we’ve had a cap on what they can put in in pension phase, they’re not even taking 5 per cent of their whole balance. The rest is just sitting there, building up, and there’s been no driver to take the money out, but now there might be because they’re going to pay some extra tax, but it may not be any worse than it would be if they took the money out and invested it outside.

LS: This is the first generation that’s really living a lot longer than their parents so they’ve always been afraid of funding the later years if they live longer. We’re trying to have this estate planning conversation with them, saying you may not have inherited much from your parents, but when you did, they were around 75 and you were around 40. Now, however, if you live into your 90s, your children will be in their 60s before they inherit your money and do you think that’s the right time for them to be receiving the money? So it’s just having that conversation about whether to do that intergenerational transfer first.

NALE

JS: Moving onto the issue of nonarm’s-length expenditure (NALE), are there any ongoing concerns around the general expenditure provisions rules that came into effect on 1 July of this year as well as the retrospective nature of it going back to 1 July 2018?

LS: One of the problems is most financial planners know nothing about non-arm’slength income (NALI) or non-arm’s-length expenditure and are caught off guard. I also hear from accountants that clients have usually done these things before the end of the financial year and they only find out with hindsight about what’s happened and some of them let people get away with things they should not be doing as trustees. So it’s not just retrospective to 2018, but things people have done 10 to 15 years ago and got away with are now going to be caught under these new rules and it’s going to be a big wake up for a lot of people. As an adviser I think the financial planning side needs to learn more about it because it’s not something that’s been on the radar for most financial planners.

MH: With NALE there are specific and general expenses and many of us have been focused on the general because the original position was going to be infinitely worse where a small underpayment of your accounting fees could taint all of the fund’s income, which was crazy. The final wrap-up of that penalty being much smaller made sense and because we’ve all been focused on general expenses, people forget the treatment of specific expenses goes all the way back to 2018 and is often a bigger problem.

PB: We are in a much better position now than before the amendments were introduced where with general expenses all the fund’s income was being taxed as NALE and now we just have a bill of two times the shortfall, which in many cases is just a nuisance. The good thing about these amendments was it was made clear the rules don’t go back beyond 1 July 2018, unlike the original proposals that brought in the NALE rules where you could have a situation of an expense incurred prior to 1 July 2018 that could give rise to NALI even today. It was made clear in amendments that’s not the case for general expenses, but also for specific expenses, which is good, but the issue with NALE on specific expenses is still a live issue and we’re doing what we can to get Treasury back to the table because the job is not done. The most blatant example is the way NALE is applied to capital expenses. It doesn’t seem right to us that you could have a property that’s been held by an SMSF for many years and prior to being sold there was some renovations and for whatever reason they weren’t done on an arm’s-length terms, and therefore all the capital gain is taxed as NALE. How is that possible? This is the new frontier in the battle with NALI and how can we deal with these type of issues because that is still punitive and needs to be addressed.

JS: Given the time it took to get the general expense rules settled and into law, what’s the likelihood the specific expenses and the capital gains issues are going to get dealt with in a timely manner?

PB: It’s going to be a long, hard road for sure and it doesn’t seem like this is an issue that is on the priority list for Treasury at all. When we’ve raised it with them, they did not see this as an issue in terms of specific expenses. Until such time we start to see some real cases coming through, it’s going to be difficult to get the attention of Treasury and government.

JS: Going back to this idea of a lack of awareness around NALI and NALE, are we going to see some retrospective bookkeeping to go back and identify some of these issues in the past?

SB: With general expenses, in terms of when it starts, how are we going to know what is arm’s length and what’s not in terms of a general expense? It’s not our job to sit there and really scrutinise every single expense and ask is this on a commercial basis or not simply because there’s so many other factors that can be brought into that equation. There could be a discount policy. It could be somebody who’s offering services from their home that doesn’t have the same sort of expense from someone who’s renting an office in the CBD. It’s not up to us to be across those particular issues. So by and large, if it’s not reported in the financials, and it stands out so there are no accounting expenses, we might ask that question. Then again, it could well be that the fund hasn’t had their returns lodged for a couple of years and you don’t see those expenses within those particular accounts each and every year. So there are a whole lot of practical issues that need to be put into place here and thought about in terms of general expense NALE. Specific expense NALE hasn’t stopped either and we’re seeing a lot of focus from the ATO in the areas of property and property development. One of the things which provides confusion is how general expense NALE applies when you’ve got a contract or an invoice that’s in the fund’s name and it’s acquired an asset, such as property, but the fund has only paid a portion of that and there’s been an in-specie contribution made personally by the member. We’re not saying that is not a contribution. What Law Companion Ruling (LCR) 2021/2 says, and also the amendments made to Taxation Ruling (TR) 2010/1, is that a particular issue triggers the NALI provisions because that invoice being in the name of the fund, which has not paid the full amount, means an asset has been acquired at less than market value. To get around that there needs to be additional documentation put in place which states you can either have that listed on the purchase contract or you can have a separate document, which is a minute or a resolution, stating you know what the split out is, and then you can see the contribution being taken up by the fund. There is a lot of confusion because people are asking does that mean if a member pays an accounting fee personally, they can or can’t take that up as a contribution? Well, that’s not the case and we’re talking about a very specific situation here in the examples in the LCR, about property contracts, but we’ve still got a lot of confusion. We need more clarification and more guidance from the ATO to make sure that people aren’t doing the wrong thing unintentionally.

DTC: Shelley, do you have any indication the ATO has recognised this and might come out with more guidance if that’s what’s really necessary?

SB: They’re certainly aware of it and we’ve raised it in our professional stakeholders meetings, and that’s been registered in the minutes published on the ATO website. We’re waiting to hopefully get some more guidance from them to help us navigate through this so that we’re not unintentionally missing something or our clients are unintentionally finding themselves in a situation where they are triggering NALE when otherwise they shouldn’t be.

PB: From what we understand, the ATO will be coming out with some updated guidance and have to update LCR 2021/2 because that still talks about the legislation prior to it being amended. We hope there’ll be some extra examples as to how some of these things will apply, including the material use of business assets, as those type of things can be quite subjective. Whether we do see any more examples I’m not sure, but from what we understand, later this year, we should see some updated guidance coming out. It might be in draft form and I’m not sure whether it will be made available for public or industry consultation, but the word we’re getting is there will be some updated guidance, which they have to do anyway because the law has been amended. In regards to that ruling on the contribution Shelley was talking about, that will probably come out, but we’re not expecting it to be retrospective in terms of the way they’re going to apply that in-specie contribution strategy Shelley mentioned. There was some concern this new position the ATO has taken as a result of these changes to legislation could be retrospective where you’ve purchased a property partly by an in-specie contribution and partly as an acquisition, but from what we’re hearing it won’t apply prior to the rule being finalised.

SB: It is strange they’ve put a draft version of the new ruling on contributions out, but nothing’s been done on LCR 2021/2. The timing of that, once again, just leaves us with a little bit more confusion than what we what we need to have really.

LS: We definitely need those examples to take to the trustees because when you talk now it just goes right over their heads unless you can actually give them those specific circumstances and examples they can grasp. We need a multitude of them to cover as many things as possible so that we can say, ‘look, this is a case similar to what you’re trying to do and you can’t do it’ or ‘if you do it, this is what will happen’. Otherwise it just doesn’t sink in for the average person. They don’t understand the jargon. They don’t understand the way the legislation works. We’ve got to put it into plain English for trustees.

SB: I’ve already had conversations with accounting clients who respond they don’t know what the problem is. They’ve just made a personal contribution and they are allowed to do that and I’m not saying they can’t do that, but just please give me this other bit of documentation which is going to help everybody out. They don’t understand and more material from the ATO as soon as possible would be better than the situation we’re currently in.

LS: Often the issue is that accountants have already made a commitment to the client and so they’re trying to implement it any way possible, and that’s squeezing the auditor to try and fit a square peg into a round hole, which just doesn’t happen.

Taxation Ruling 2013/5

DTC: There was a recently released update to TR 2013/5, dealing with the operation of income streams where the minimum pension for one particular income year was not satisfied, but complied with in the following financial year, that was significantly different to its draft version. Was that a big surprise?

MH: It certainly was to me. Did you have advanced warning, Peter, that the final version would be very different to the draft?

PB: No, no, we didn’t have advanced warning.

MH: And that’s pretty profound, I think, and certainly raises an awful lot of questions for me.

SB: I was taken aback by the update because it’s just put a whole new layer of complexity on what we have to check during audit, thanks very much. We’ve come the full circle. Pensions used to operate like this and then they didn’t so we have to drag out those old skills again and we’ll have to oil those old wheels to get them moving again, but we’ll do it.

MH: And I wonder why the ATO has chosen this course of action. The way it used to work is if you failed your minimum pension obligation, you lost your ECPI (exempt current pension income) for that year, but as long as you did everything right the following year, that income stream automatically restarted. So it was bad for that year and you got punished for the compliance breach, but there was no lingering problem. Whereas my read of what we have now is you’ll basically lose your ECPI until you realise you failed last year’s minimum pension requirement, which could be nearly 12 months into the following year, and then you will have to formally end and restart your pension and that creates a whole lot of other problems. So I wonder who thought this was an important change to make.

LS: I wonder if it revolves around the integrity of the TBAR (transfer balance account report) because if you’ve got to restart the pension or stop the pension, then there has to be a TBAR to say the pension stopped on 30 June of the previous year and then a new TBAR will have to be submitted within the first quarter. But if somebody hasn’t done their accounts till March or April the following year then they will be well behind.

MH: So why not just impose penalties for late lodgement of TBARs?

LS: Right. Now we’re going to have to say to our clients if you don’t make your minimum pension payments, not only will you lose a year of ECPI, but because your managed fund holdings don’t provide financial reports until October or November each year, it’s probably going to be February or March before we discover you haven’t covered the minimum pension.

DTC: Peter, do you have any idea as to why this change was considered to be so important?

PB: From what we understand, it was because of the transfer balance cap rules which were introduced in 2016/17 and they had to update this ruling to accommodate the new cap and the new debits and credits. I think that was the reason for it.

MH: But we already have rules that say if you fail your minimum pension obligation, you’ve got to submit your TBAR again. So why did we feel the need to have this extra step of you’ve got to formally commute and restart the pension in order to get your ECPI back, which is the thing that creates the complexity in my view.

SB: Well the new requirements are just penalising members further because then they’ll be mixing their taxable and tax-free super components together for no apparent reason apart from aligning with the TBAR rules. So I’m not sure where it’s going to end up.

LS: Well I think I’ll end up getting clients to write a memo to their trustee on 30 June every year saying I want to move my entire balance from accumulation into pension phase, regardless of whether their SMSF assets are already all in pension phase, just in case an income stream has to be cancelled and restarted in the event of not satisfying the minimum pension obligation.

MH: Do you think that’ll work, Liam? I would have thought you’ve still got to formally commute your old pension because at that moment it isn’t in accumulation phase. It’s being treated like it is for tax purposes, but it isn’t until you stop it and restart it.

LS: As far as I could read it, it was saying you can’t start the new pension until the trustees request it. So if you’ve got a request on file, it can act as a safety measure that might be just something we put in place for clients.

SB: So I’m assuming it’ll be along the lines of the member stating if I don’t meet my minimum pension and if I don’t do this, then make sure my pension is commuted as of this date and restarted on this date and I’ll put the paperwork in at a later time. The more interesting question is how the administration software advisers are using is going to deal with this.

DTC: So will this create a significant additional administration burden for SMSF trustees and increase the cost of running their funds?

LS: It will because trustees are going to need an extra set of financial statements for the date you restart the pension as, in a lot of cases, it won’t be 1 July. They’ll also have to revalue all the assets and that means getting new valuations. So there will be considerable costs and time involved not only for trustees, but for each of the professionals advising the fund.

SB: More unnecessary red tape is what we’re looking at here.

MH: It makes you wonder how it will affect things like grandfathering for the Commonwealth Seniors Health Card or the age pension. For social security purposes an income stream is not considered to be terminated just because the SMSF hasn’t met the minimum pension, it is considered terminated if no drawdowns have been made. So one of the saving graces of the approach we had before was you could underpay the minimum and lose your ECPI, but you didn’t necessarily lose grandfathering because technically the pension continued. So if we have to forcibly stop it, then people will lose any associated grandfathering as well.

LS: No doubt, and look grandfathering is becoming less and less important as time passes, but still for some people not being able to receive the Commonwealth Seniors Health Card is really important because they love it.

PB: That’s what has really caught us off guard. We didn’t expect that we had to formally cease the failed pension before we could start a new one. So what the ATO is saying is once you’ve failed the pension standards, that pension can never again be a retirement income stream. It’s like those SIS (Superannuation Industry (Supervision)) regulation 13.22C unit trusts where once you blow it up, it can never be a 13.22C unit trust again. We have raised these issues with the ATO and what we’re really pushing for here is to confirm if this is the interpretation moving into the future, that’s okay, but let’s not make it retrospective. If it was applied retrospectively, I think that would cause a lot of issues for the industry. We don’t have any decision on that request, but hopefully the regulator will agree to it.

DTC: So what sort of effect will TR 2013/5 have on the way advisers operate with regard to compliance procedures?

LS: It means advisers will have to prepare a new pension agreement that is standard if we have to restart an income stream. But if it does happen, I’ve got to prepare a SOA (statement of advice) to move into pension because the restarted income stream will be considered to be a new product. So I’d have to put together a full SOA for it and I’m sure my clients are not going to pay for that. They’re going to think I’m the professional and I should have made sure this didn’t happen to them. There are many knock-on effects. For example, who is going to tell Centrelink the individual’s social security status has changed?

MH: Also, what if the trustees do put in place the automated request we were talking about before, but as it happens they made contributions expecting to claim a personal tax deduction for them? By following your proposed procedure you’ve got them back into pension phase, but you’ve ruled out their chances to claim a tax deduction for the contributions because they started a pension before lodging an Income Tax Assessment Act section 290.170 notice. So even the solutions we might come up with will potentially create other problems. I just wish this was not the interpretation used and I don’t really understand why it has changed. I take your point, Peter, that it was for TBAR requirements, but we had these obligations even under the old interpretation where for SIS purposes there was still a pension in place, but for tax purposes there wasn’t. I thought that fitted okay with TBAR requirements.

JS: So will advisers now have to make a greater effort to ensure SMSF clients meet their minimum pension obligations?

LS: It’s something we’re definitely going to have to take a look at. In the past I’ve never forced clients to use a bank account that I could view, like the Macquarie Cash Management Account, meaning a lot of them were able to use a facility of their choice, such as a Sydney Credit Union account, for their SMSF. As financial planners it’s a lot harder to get access to those accounts that are not fed into Class, SuperConcepts or BGL software. It meant in some situations I was flying blind. So a change like this means I’m going to have to tell clients I don’t care what bank accounts you use, but I want to be able to access the one you pay the pensions from so I can check you’ve paid the minimum pension. I know a lot of administrators are building in a system of alerts where, towards the end of the financial year, advisers will be informed as to the amount of money the member has drawn down from the fund in relation to their minimum pension. I think that’s going to provide the solution to allow us to trigger a warning to clients to take their minimum pensions.

SB: This could also see an increase in the number of accountants and administrators adopting the practice of performing daily reconciliation of those data feeds instead of using a weekly or monthly cycle simply to overcome this issue.

LS: It will make quality data feeds even more important.

DTC: Will the updated TR 2013/5 result in improved compliance with minimum pension requirements due to the severity of the consequences of not doing so?

MH: I don’t think so because compliance with this obligation was already pretty good. Some instances of non-compliance in SMSFs happen because people don’t pay enough attention to the rules. But I think people who have pensions try to take their obligations seriously, but sometimes just make an honest mistake. I think the consequences of not satisfying the payment standards, even before this change, were already pretty severe – you lost your ECPI for a whole year and given how valuable that is, it was already a very strong disincentive. So if this change in interpretation was all about providing a stronger disincentive, I don’t think we needed it and I don’t know this will suddenly make people more compliant.

Auditor responsibilities

JS: Is too much responsibility being placed on SMSF auditors whereby they are now expected to detect and guard against improper actions outside of their legal or professional remit?

SB: Trustees need to take responsibility for their obligations in terms of maintaining a fund and operating a fund and making sure that it’s compliant at the end of the day. From our point of view, we’re there to check compliance with SIS and make sure that we undertake an independent and objective audit. All of our processes and procedures, and what we do during the audit is outlined in our terms of engagement letter. So if we look at NALI and NALE, for example, while we might find a fund has a compliance issue of this nature, it’s a Part A qualification at the worst because the tax calculation has been materially misstated. That’s the extent of it. It may be included as a management letter comment, but we don’t actually inform the ATO about something like that. It’s up to the tax agent to include the item in the tax return and we don’t audit the SMSF tax return. We’re very happy to perform an audit without the tax return so from our point of view there’s a limit to what we can do from a compliance perspective and we’re trying to do the best we can. The legislative changes make our job more difficult every single year, but that doesn’t mean we should be monitoring trustee behaviour – what they’re doing and why they’re doing it. Our role is very black and white. If it’s a compliance issue, we either have sufficient appropriate audit evidence on file or we don’t, and if we’ve got conflicting evidence, then we’ll undertake further procedures and go back and ask more questions. We’ll evaluate that and we’ll come up with our logical conclusions and our audit findings as a result. It’s not up to us to determine what the trustees are doing and why they’re doing it. We need for the trustees to tell us that and to provide us with that evidence. So even though it seems these separate responsibilities are merging together, I still see it as being very separate and distinct lines. Trustees need to take responsibility for their obligations in terms of maintaining and operating an SMSF and making sure it’s complying.

DTC: Some recent court rulings seem to have placed more onus on auditors to detect all SMSF compliance issues. Is this an attitude being reflected by sector stakeholders in general?

SB: With everything there are varying degrees. We’ve always had clients who use us as the reviewer from an accounting perspective, which is not our job. Auditors and any SMSF professionals who are not doing the right thing should be held accountable and have the applicable penalties applied to them. We’re seeing a lot of change in the audit industry and auditor numbers reducing. That’s not necessarily a bad thing, especially when you look at a reduction in the number of practitioners who previously were undertaking a small number of audits, but there are still a lot of them out there. The legislation is making it harder and harder for auditors to keep on top of all the rules and for individuals who just perform audits for one or two funds it would be a very difficult situation to manage. We’re at a point where serviceability is still absolutely being maintained and I don’t think that’s an issue from an audit perspective. It also means we’re starting to rely more and more on technology to fulfil the more mundane tasks within the SMSF audit so we can focus on the compliance aspect more fully.

JS: Some auditors are expressing concerns they feel their professional judgment is increasingly being questioned. To eliminate this perception should the ATO provide a formal template as to what an audit should include and cover or are SMSFs too bespoke for something like that?

SB: The ATO already provides on their website a fairly comprehensive auditor checklist from both the compliance perspective and the auditing standards. If you have an ATO review, you’re going to be scrutinised from a compliance perspective, but also in the context of satisfying the auditing standards. So that sort of information is already available on the ATO website. In terms of professional judgment, a lot of auditors just have the audit evidence on file, but they don’t actually draw their logical conclusion from this evidence. So then it’s not just enough to have the audit evidence on file. In these situations you’d have say, for example, I’ve looked at the rent for this lease that’s been renewed, it’s a lease for a related party, I have this market valuation of rent online and it is being charged at arm’s length and I’m okay with this arrangement. In contrast you can’t just say it’s a new lease and just put the lease agreement on file and the process is finished. You actually should have a logical progression in your audit file which will give someone else, who is an independent third party, the ability to have a look at that file, understand where you’ve got to with your audit findings and the associated conclusions without that person having any knowledge of the fund in the first place. So I’m not too sure where the professional judgment issues are arising from.

JS: Is the audit contravention report (ACR) a good default mechanism? Should the auditor file one where for instance they have doubt over a fund’s compliance?

SB: I don’t think any auditor would be issuing an ACR without probable cause and sometimes it is just the auditor opinion at the end of the day. An ACR does not make the fund non-complying and it’s not penalising the fund in any other way. It’s just a mechanism to inform the ATO about a potential compliance issue. Also, the ATO does not necessarily have to agree with the opinion recorded on an ACR. For example, we might lodge an ACR because we don’t have sufficient audit evidence. There may be a situation where an SMSF asset has been acquired from a related party, but we can’t establish if it is business real property because we can’t gather enough information. Here we’re not saying that it’s not business real property in our ACR, but rather we can’t confirm the transaction is in compliance with the SIS Act. We’re supposed to be reporting a contravention as to where it may have occurred, is occurring or may be occurring in the future. We also have to inform the ATO about anything it needs to be aware of in its role as the sector regulator. So we’ve got a very broad sphere as to what we need to report to the ATO that means we may have to lodge an ACR, not flippantly, but certainly from the point of view that we can’t confirm compliance with regard to a certain area.

Health of the sector

DTC: There has been a significant increase in trustee disqualifications recently, with the number increasing from 252 in 2021/22 to around 750 in 2022/23. Is this a trend we should be worried about or is it just evidence the ATO is being more effective in its compliance activities?

PB: I think there is a greater focus of the ATO nowadays than perhaps it has been in the past, but you’re right, there have been some big increases in the number of trustees being disqualified. But I think what has us more concerned at the moment it how many SMSFs are being set up without professional advice. We saw some figures released from Investment Trends recently indicating establishments of this sort are at an all-time high. Worryingly, new trustees seem to be getting their advice from the internet, family and friends, and so forth. Perhaps there is a joining of the dots there as to the number of SMSFs set up without professional advice and why we are seeing more trustees being disqualified. Perhaps it’s happening because these people are setting these funds up without having an understanding of what’s involved. That’s a concern for us and something we are really trying to address is to make it easier for people to access specialist SMSF advice because it is obviously important they get that advice. So that situation probably has us more concerned at the moment.

DTC: Are we seeing any situations of buyer’s remorse from individuals who have received specialist advice before establishing an SMSF?

LS: There are certainly people that come to us and say running their own super fund is all too hard and I think there is a COVID effect with regard to a greater number of people coming to this realisation. That’s because there were a lot of young people who set up SMSFs online using a low-cost provider just to invest in bitcoin or participate in market trading as they were at home for 24 hours of the day and controlling their super was something they had time to do. Two years later a lot of those individuals have never answered an email from those online SMSF administrators, meaning they’ve got themselves to the stage where the ATO is classifying the fund as noncomplying and shutting them down. But the latest thing we’re seeing is the fallout from the UCG, or United Global Capital, case. Around 1247 SMSFs were affected. It involved cold callers who contacted individuals and offered a superannuation review. If the offer was accepted, they were passed on to another general advice company and eventually they were encouraged to establish an SMSF that in turn invested in a property fund associated with UGC. As a result, you’ve probably got 1200 people there that should never have been in an SMSF in the first place. So I am attracting trustees who have got themselves into trouble and my practice is trying to fix it. In many cases it just entails approaching the ATO and admitting the individuals should never have started an SMSF and we’re going to exit them from the fund, but we just need time to do so. I have to say from my point of view it cost me a fortune in time, but you don’t want to leave people stranded where they will ignore the situation for four or five years and face a bigger problem that will result in severe penalties.

SB: So what’s the solution to this problem? There will always be a percentage of bad actors out there, but it just seems like a lot of people are looking for the short-term quick return and will believe the first charlatan that really might come along.

LS: The ATO is carrying out checks and about 27 per cent of SMSFs and a fair few of the funds set up by people who were not appropriate to do so have been stopped now. But a lot of it comes down to the fact people should be getting advice from an SMSF specialist. In the case of the UGC, individuals were being told the advice was coming from a superannuation specialist, but when I made the complaint on behalf of the client I was told he was only a practitioner providing general advice with no financial planning qualifications at all. So he actually couldn’t give them the advice to roll their benefits over into an SMSF.

PB: It’s unlicensed advice in many cases and that’s a real problem. We need to get on top of that because unlicensed advice is an issue.

DTC: Should it give the industry any comfort the Australian Securities and Investments Commission has declared poor SMSF advice will be one of its areas of focus for the coming year?

PB: Well we’d like to see the regulators stamping out unlicensed advice. As I said, that is an issue. As you know, from our perspective, it is important that people get advice from an SMSF specialist. This is a specialist area. It’s the important decision they’re making and they should be getting advice from a specialist practitioner.

LS: We did think having the ATO bring out their new education programs might make a real difference in helping people decide whether an SMSF is appropriate for them. But it’s being delivered in a very ordinary way. It really is designed for the punishment of people who have broken the rules – in other words the rectification. The regulator did such a good job on the video series it produced, but I think this initiative doesn’t hit the mark. In this day and age you have to engage with people and almost gamify the way you do it and this I think was the total opposite. It’s just rote learning a document so I think the ATO needs to step up on that side of it.

Impact of INFO 274

DTC: In December 2022, ASIC eliminated the suggested minimum balance threshold of $500,000 for SMSF establishments in Information Sheet (INFO) 274, replacing it with the ability for advisers to use their professional judgment as to whether an individual is appropriate to be a trustee of this type of fund. Investment Trends research has found this change has not made any difference to fund set-ups. Is this a surprise?

MH: That makes sense if establishment is moving away from advisers and is becoming more informed by the internet. In that scenario what ASIC says in that information sheet won’t tend to make any difference.

LS: When someone comes to me the one thing I have to consider is whether it is in their best interest to set up an SMSF. I spoke to people recently who had $270,000 in super who were told they could acquire a property in an SMSF. When I assessed the situation I told them they would be far better off buying their first investment property outside of super where they could get some negative gearing benefits. Further, I said we could then build up their knowledge levels of superannuation and their contributions before committing to owning a property in an SMSF. They had almost been completely pre-sold on the internet to buy a property in Townsville using an SMSF.

PB: Realistically we were never expecting to see the removal of the thresholds ASIC previously had in place was going to open the establishment floodgates. All we were doing, from the SMSF Association’s perspective, was challenging the $500,000 threshold the regulator had included in its material previously. But it was never a matter of removing the threshold with a view doing so would open the floodgates to setting up SMSFs. As we know there are many other factors to consider besides an individual’s super balance before it can be deemed appropriate for that person to establish an SMSF.

LS: You’re right, Peter, it isn’t about their superannuation balance. I’ve got some SMSF clients with between $170,000 and $200,000 in super, they only invest in broad and sector-specific exchange-traded funds and they use a low-cost administrator. As such, the fees for their fund is competitive with any industry or retail fund in the industry and they’re engaged, meaning they’re making higher contributions at an earlier age and as a consequence they’re doing really well.

DTC: Is professional indemnity (PI) insurance also neutralising the impact of INFO 274 on fund establishments, seeing some policies will not cover advisers if their SMSF clients have super balances that are below $500,000?

LS: I know with our PI if the client has a lower balance, I have to justify their situation. I’ve got to complete a suitability questionnaire and explain why they have an SMSF. But like we discussed earlier, the amount of money they have in super is not really an issue. The important thing is what they’re trying to do with their retirement savings and what they’re trying to achieve. Those factors are much more important than their current balance.

PB: It’s all about best practice at the end of the day. We can’t control what the PI insurers have in their policies, but we can control best practice and putting material out promoting that.

MH: I think one of the things that is quite significant about ASIC’s change of direction there is at least we no longer have a firm statement from such an important regulator implying a magic number that was quite high. So I think the change to INFO 274 is still important.

PB: I’d agree with that.