The 2018 Budget Edition - SMSF relevant changes

From the perspective of a self managed superannuation fund this year’s budget changes are fairly tame and few in number.  In fact, there are three relevant substantive changes, none of which are negative.  Additionally, there are a number of changes intended to improve administrative procedures.  This issue of SUPERCentral news will concentrate on the substantive issues - their benefits and their downsides.

Possibly, the Government is looking for ways to differentiate itself from Labor on superannuation - championing self-funded super investors - by changes which are not revenue costly but which have positive impacts - whether, as to contributions or as to administration.

Again, possibly, this is the first time since 2007 the Coalition has made not unfavourable changes to super!

SMSF member limit to increase from 4 to 6

Currently, a self managed superannuation fund can have only 4 members.  The Government has proposed that the maximum number be increased to 6.  This change will commence from 1 July 2019 and will affect 2019/20 and following financial years.

How is this change beneficial?

There seems to be 4 responses to this question.

First - it will dampen the effect of fee erosion on SG contributions.  Consider a family group with 2 parents and 4 children.  Currently only 2 children could be members of the family SMSF with the other 2 children having to be members of another fund.  If those other 2 children are working part-time their SG contributions are going to be relatively small and liable to be consumed by fees in industry funds/retail funds.  Under this proposal, those part-time working family members will be able to join the family SMSF and have their current super balances and future SG contributions directed to the family SMSF, thereby avoiding the fees associated with industry/retail funds.

Second - it may permit self managed superannuation funds to become even more suitable as an asset holding vehicle for business associates, as 6 business associates can be members.  Consider a small professional firm with 6 partners.  Under this proposal, all 6 partners can be members of the same SMSF which can be used as the acquisition vehicle for the business premises of the firm.  With 6 members, the total concessional contribution inflow will be $150,000 pa as against the current $100,000 pa with only 4 members.

Another example could be where the super fund holds a business critical asset.  Permitting another 2 individuals to join the fund will increase the contribution inflow to the fund which could be used (at least in the short term) to permit the financing of any income streams payable from the fund.  This may preclude or defer the time when the business critical asset needs to be sold to satisfy the fund’s cashflow needs.

Third - it may permit a self managed superannuation fund to tip the balance of the central management and control of the fund to be in Australia, if 4 members are Australian residents and 2 members are not Australian residents.

Fourth (and lastly) - with 6 members rather than 4, the total tax liability of the self managed superannuation fund is likely to be greater and, consequently, there will be more tax liability of the fund against which franking credits can be refunded.  Should the Labor proposal to limit the refundability of excess franking credits be implemented, there should be less franking credits lost, all things being equal. 

Are there downsides to the 6 member rule?

To match the 4 positives, 4 negatives will be considered and assessed.

First negative - “More chefs in the kitchen – greater likelihood of failed soufflé.”  The greater the number of individuals to agree, the greater the likelihood of no agreement, is a truism.  However, this negative can managed either by the children appointing their parents as their Super Attorneys  - so the children are members but not trustees.  Alternatively, the various family members could, strangely, be able to get on and to manage the fund in their best collective interests.  Possibly, the best response is - if in doubt, don’t admit the child as a member. 

Second negative - a child having access to the bank account of the superannuation fund where the child has various issues.  This risk was clearly shown in the Triway super fund case.  In this case (discussed in detail in SUPERCentral News of 15 June 2011) a child was a member of his parents’ super fund and had access to the bank account of the fund.  The child (improperly and without authority) removed money from the bank account for recreational reasons.  First, in a multi-member fund, there should be at least 2 signatories to the bank account (in the Triway case, only one signatory was required).  Second, if the child has personal issues, then the child should not be admitted as a member.

Third negative - children outvoting the parents and preferring their interests at the expense of their parents’ interests.  First, 2 or more trustees cannot by exercising their powers “appropriate” the super balance of another trustee.  Additionally, most super governing rules have weighted voting provisions which are intended to override the “low balance” members outvoting the “greater balance members”.

Fourth and last negative - having different generations, in possibly different superannuation stages (early accumulation as against retirement stage) may give rise to different priorities as to investment strategies.  Different investment priorities can be easily accommodated by the fund having two (or more) investment strategies – one appropriate for early accumulation stage  -  and a second strategy appropriate for retirement stage.  The early accumulation stage strategy could apply to the children’s super interest while the retirement stage strategy could be appropriate for the parents. 

Work test exemption for individuals 65-73 making voluntary contributions

From 1 July 2019, the work test for making voluntary contributions will be modified.  Currently, the work text applies once an individual attains age 65.  In short, the test is that voluntary contributions can only be made if the individual satisfies the “40 hours gainful employment within 30 consecutive days” test.  This test must be satisfied in respect of each financial year, before voluntary contributions can be made in respect of that financial year.  Once an individual attains age 75, voluntary contributions can no longer be made.

It is proposed that an individual in respect of the first financial year in which they do not satisfy the work test will still be able to make voluntary contributions if their total superannuation balance is less than $300,000 (presumably immediately before the start of that financial year).

This is a beneficial change as it will permit the transfer of super balance between couples where one member of the couple has a high balance (over $1.6m) while the other member of the couple has a very low balance (less than $300,000) and does not satisfy the work test.

Voluntary contributions include non-concessional contributions and also concessional contributions.  Consequently, it would be possible for the low balance member of the couple to contribute $125,000 a year ($100,000 of non-concessional contributions and $25,000 of concessional contributions – assuming the low balance member has sufficient non-personal exertion income against the $25,000 concessional contributions can be offset).

Three yearly audit cycle for SMSFs with good compliance history

The Government proposes to relax the current annual audit requirement for SMSFs.

Where the SMSF has a history of 3 consecutive years of clear audits (unqualified audits) and has lodged their annual returns in a timely fashion (presumably always by the due date), then the SMSF will only require a mandatory audit every 3 years.

This change could be a mixed blessing.  Audits are a useful prudential mechanism for SMSFs and often detect issues which can be readily rectified (assuming they are detected relatively early).  So having an audit every only third year, while reducing annual costs, may be at the risk of prudential management of the SMSF.  Further, SMSFs will still have to prepare financial statements and prepare and submit their annual returns each financial year so the saving may not be as significant as first thought.  Also, the cost of the audit for the third year may be significantly greater as the auditor may still have to review matters and events which have occurred in the two financial years since the last audit.

Finally, this change may place auditors in a difficult position.  The client (the SMSF) may be concerned to limit costs so that the third year audit only relates to the third year.  The auditor may, in the proper exercise of their professional judgement, consider that it is necessary to look into and review matters which relate to the preceding two unaudited years.