Over the last few months, many of our clients have been asking us what they need to do – if anything – following the raft of super changes that were made law in November that come into effect 1 July 2017.
Before I explain our approach for working with SMSF trustees impacted by the changes, I need to provide some context around the magnitude of these new laws.
Sustainable means less tax breaks
These changes will impact SMSF members more than the general population. By our calculation, at least 48% of our clients are directly impacted by the changes. Of this 48% the people MOST impacted and who have the biggest advice need are those SMSF members with pension balances over $1.6m – this equates to approximately 10% of the clients we work with.
The changes fall under a piece of legislation called the “Fair and Sustainable Superannuation Act 2016”. Fair and Sustainable in this context means taking away the generous concessions and tax breaks resulting from Peter Costello’s so-called ‘Simpler Super’ reforms of a decade ago.
The changes of 2007 provided significant opportunities and the advice provided at the time was relatively simple. The changes of 2017 are the opposite – they remove opportunities and they are complex.
ATO expects mistakes
The ATO as the regulator responsible for enforcement of these changes has publicly said they expect errors to be made with the new reforms. James O’Halloran the ATO deputy commission for superannuation has highlighted capital gains tax (CGT) relief as an area professionals are struggling with:
“We think there has been some misunderstanding around CGT relief and how to apply for it. Good intent and genuine application of the relief is the important bit that we look for.”
We agree that the application of the CGT relief is incredibly complex and if applied incorrectly could result in significant future tax liabilities for SMSFs.
Professionals are being challenged
Professionals are also struggling to grasp the complexities hidden in these new laws. In February, myself and key members of our team attended the SMSF Association National Conference in Melbourne. It is interesting to note that this event normally attracts between 1000 to 1100 accountants and financial advisers.
This year there were almost 1700 attendees which demonstrates that advisers are hungry to understand the changes and the impact for their clients.
We attended this event to crystallise our knowledge of the changes – which we did – but we also expected to learn additional strategies from the best SMSF gurus in the country. We were shocked and slightly disappointed that the top SMSF minds in the country are themselves struggling to grasp some of the complexities in these new laws.
I personally attended several specialist workshops where the top technical experts from businesses like AMP, Macquarie and Colonial could not answer a lot of questions asked – the best they could do was “We will have to see what guidance the ATO provides on that matter”
The best technical SMSF experts are struggling with these changes. This means SMSF trustees need to acknowledge they can’t fly solo in dealing with the new laws – advice is needed.
These super changes are different
Most previous rules changes impacting superannuation and SMSFs were relatively simple. For example, in 2007 there was a one-off opportunity to contribute up to $1 million in after-tax money to your SMSF before the introduction of the non-concessional contribution caps. The advice was easy: If you had a spare $1 million lying around, drop it in your SMSF where it can sit in a tax-exempt environment and you can draw a tax-free pension. Simple.
The advice this time around is not simple. For example, if we look at the CGT relief for people with more than $1.6m in their SMSF pension accounts, or those with a transition to retirement pensions (TRIS / TRP), the questions an adviser will need to answer for their clients include:
- Is the SMSF eligible for CGT relief?
- What assets are eligible for CGT relief?
- What happens to assets with unrealised capital losses as at 30 June 2017?
- What method is available to my SMSF (segregated versus proportionate)?
- What method should I use?
- Why is the 9th of November 2016 important?
- Should the SMSF apply for CGT relief at all?
- What assets should apply for CGT relief for?
- If notional capital gain is crystallised at 30 June 2017 should the SMSF defer the gain?
- If the SMSF is planning to sell the asset during the 2017/18 financial year – should the cost base be reset?
The above is just one example of the complexity of the new rules. Even the relatively simple changes – for example the reduction of the non-concessional contribution caps from the current $180k per annum down to $100k per annum from 1 July 2017 are made more complex due to the interaction with a new term named “total superannuation balance” preventing individuals with more than $1.6m across all their superannuation accounts making non-concessional contributions at all.
Confused? You should be!
Who can give you advice?
Another very important aspect with these changes comes down to who can give you the advice you need.
Although on the surface most of the new rules are tax related, the advice needed to best minimise the damage of the changes, and to make the most of any opportunities, must be provided by a licensed financial adviser – not an accountant.
Accountants that are not licensed to give advice on superannuation and investments cannot provide advice on how to best deal with the changes. They are limited to only providing information or analysing the tax consequences of certain actions or strategies. They cannot influence the decisions of SMSF trustees in any way.
Our business is uniquely positioned to assist SMSF trustees in dealing with the changes as we have a team of experts covering SMSF administration, taxation and accounting, strategic advice, investment and estate planning advice all under one roof.
Where SMSF trustees are using an adviser outside of our business, they will need to co-ordinate the different parties and ensure Superfund Partners as the SMSF administrator is providing accurate and up to date information to a licensed adviser to enable the best possible advice to be given.
Generic advice is not good enough
SMSF trustees who need to act in regards to the $1.6m pension transfer balance cap must seek advice tailored to their personal situation. The reason for this is that depending on their personal circumstances, the advice they receive will be significantly different.
Take the following example:
Jean and Mary are friends in their 60s and they each have their own SMSF with a balance of $2 million each. Both are running account based pensions so the entirety of their SMSFs earnings are 100% exempt from tax through to 30 June 2017.
Jean doesn’t have any other income earning investments in her personal name, whereas Mary has a portfolio of shares and an investment property in her personal name that provides her an annual income of $35,000 which she pays tax on.
When you ‘compare the pair’ both their SMSFs are identical, but the advice they would receive should be different when it comes to dealing with the $400,000 that needs to be removed from their pension accounts.
Jean would likely be better off from a tax perspective withdrawing the $400,000 and investing it in her personal name. With the personal tax-free threshold and other tax offsets, Jean would pay very little if any tax each year.
By comparison, if Mary did the same, because of her existing income she would be paying personal tax at her marginal tax rate. For Mary, a better option could be to leave the $400,000 above the $1.6m transfer balance cap in the accumulation account of her SMSF and pay a lower 15% tax on the income generated from that portion of her fund (tax would be paid on approximately 20% of the total $2m within the fund).
The above example illustrates the need for personalised advice to be provided – your SMSF cannot be looked at in isolation. There is no generic advice which can be provided and there are no easy ‘rules of thumb’ to be applied.
The advice can be wide-ranging – covering your SMSF, your personal financial and tax situation, the structure of your SMSF, your investment strategy and your estate planning.
Determining your advice needs
With these super changes that come into effect on 1 July 2017, the advice required will fall into either a simple or complex category.
For example, we consider simple advice suitable for individuals in the following situations:
- You have been making concessional (tax-deductible) contributions above $25,000 per annum (including SGC, salary sacrifice or personal deductible contributions)
- You have been making non-concessional (personal / after tax) deductions of above $100k per annum
- Your applicable personal income is above $250,000 per annum
If you fit into the above categories, you will be impacted by the reduction in the contribution caps (concessional and non-concessional) as well as the reduction in the threshold in Div. 293 tax. The simple advice is to review your contributions where possible and adjust to fit in with the new lower thresholds.
Conversely, we would consider your advice needs to be complex and comprehensive if you fall into the following categories:
- You or another member of your SMSF (i.e. your spouse) have more than $1.6m in pension benefits within your SMSF
- When combined with your spouse you have more than $1.6m held within your SMSF and your pensions are currently set up to be reversionary upon your death
- The total benefits held in all your super accounts combined – including your SMSF and retail or industry super fund accounts are more than $1.6m in total
- You have a defined benefit pension or another type of ‘legacy’ pension including a lifetime complying pension, tax allocated pension, market-linked pension or flexi pension.
- You currently are running a Transition to Retirement Income Stream (TRIS pension) regardless of the balance
- You have $1.4m in benefits in your SMSF (combined pension and/or accumulation) and are planning on making additional personal contributions in the coming years
- You have an anti-detriment reserve in your SMSF
- Your SMSF is segregated and one member in your SMSF has more than $1.6m
Based on an analysis of our clients SMSFs, at least 30% of our clients fall into one of the above categories and will need comprehensive advice on how to get the best outcomes when complying with the super changes.
How to get advice from us
It is important to note that some strategies require action before 30 June 2017, however some items cannot be implemented until after 1 July 2017. For example, where there is an election made to reset the cost base of assets impacted by the $1.6m or TRIS pension changes, this election cannot be made until the lodgement of the SMSF return for the 2017 year.
As mentioned above, we believe at least 30% of our clients will require detailed advice over the coming months. Although we will be working through our list of impacted clients, we strongly encourage you to make an appointment with us to discuss your advice needs.
If you already have an adviser you are working with, you will still need to speak to us to ensure we provide you with up to date information your adviser will need to give you the best advice.
When you meet with us to discuss the impact of the rule changes on you and your SMSF, our initial focus will be on clarifying what impact the new rules have on your circumstances, what additional information we will need and agree on the scope of the advice we will provide you.
Before we commence any detailed advice, work or make recommendations on strategies, we will provide you in writing an outline of the work and applicable costs – both upfront and ongoing costs – for your review and agreement.
If you determine that you don’t want to receive advice, we will ask you to sign a document confirming that you have been offered personalised advice but are choosing to decline. We are committed to working with our clients to achieve the best possible outcomes however we will not be held liable where you or your SMSF incur additional costs, penalties or taxes where you have declined to seek appropriate advice from us.