Whilst the 2018 Federal Budget may have felt like it was a quieter year for superannuation, especially after the number of changes made in the two prior Budgets, there are still a number of proposed changes for advisers to contemplate when talking to clients.
Indeed, some of the changes announced this year may actually have broader implications for clients than those from the past.
At the outset though, it is important to remember that at this stage these proposals still need to pass through the parliamentary process before changes take effect, and it is possible that the final version of the measures may differ to what has currently been announced.
However, the Government has already started some consultation on these measures and it will be interesting to see how many make their way into parliamentary processes.
So what are the changes and what sort of impact could they have?
Expanding SMSF membership
From 1 July, 2019, it is proposed to expand the maximum number of members of a self-managed super fund (SMSF) from the current level of four to a new maximum of six.
While this change may have little impact on many existing superannuation funds, for those with larger family groups this could present a new opportunity to set up a single SMSF to cover all relevant members.
Or where the size of a family has required multiple SMSFs to have been established, it may be possible to merge them into one.
For some small business owners who have been considering the option of establishing an SMSF to own business premises, this expanded membership opportunity may allow greater flexibility in achieving these goals.
An example of where this could occur is in farming families, where an SMSF has been used to take ownership of the property, which is then leased back to the family to run.
With changes that took effect from 1 July, 2017 that reduced the ability to make contributions into superannuation once you had accumulated at least $1.6 million, the ability to include new members may make the transfer of business property something to consider once again.
It can also assist in the ability of an SMSF to continue to hold business property, even where the ownership of the operating business passes from one generation to the next, with new members joining the fund potentially being able to grow balances over time that cover the market value of any property held in the fund.
With the expectation that most SMSFs will no longer operate with segregated assets, this is an outcome that could now be achieved.
Naturally though, introducing more members, and therefore more and new trustees, can bring added complexity to the operation of the SMSF, with more member accounts to be maintained, and fee considerations.
It will also be important to ensure that there are clear guidelines for all trustees about the decision-making process, as more trustees could lead to more differences in opinion on how the SMSF should operate.
Whether or not your clients plan to expand membership of an existing SMSF, it is also a good reminder of the need to carefully consider the trustee structure they have in place for the SMSF.
Whilst many SMSFs have been established with individual trustees, which is generally an easier and more cost-effective choice for initial establishment, the on-going operation of a SMSF is generally better with a corporate trustee structure.
Not only does a corporate trustee structure provide greater administrative ease in the appointment of new directors (as new members joining the SMSF), but aids in providing a clearer ownership of assets – making it easier to identify what is owned on behalf of the SMSF and what is owned personally. Clear separation of assets has historically been a focus area of the Australian Taxation Office (ATO).
Importantly, it is always possible to change from one trustee structure to the other.
And naturally, any decision to expand the membership of an SMSF beyond the existing maximum of four members can only be done after a review of the SMSF’s trust deed as it is entirely possible that an existing SMSF trust deed may have a specific clause restricting membership to a maximum of four members.
Reduced SMSF audit requirements
The Government has announced it intends to amend the law so that SMSFs with a good compliance history will only need to be audited once every three years, instead of the current annual requirement.
Current indications are that a SMSF will be deemed to have a good compliance history if it has three consecutive years of a clear audit result and its tax returns have been lodged on time.
Due to commence from 1 July, 2019, this has the potential to reduce some of the on-going administrative and day to day management costs for SMSFs.
However, the removal of this annual audit requirement does not mean clients can afford to relax when it comes to operating their SMSF.
In fact, it may be even more important to ensure SMSFs are professionally managed on an on-going basis to retain that strong compliance history into the future. In the unlikely event that an issue was identified in a future audit, there is a risk that the penalties that could be imposed dating back to the time of the error could become significant.
For new SMSFs, the annual audit requirement will apply for at least the first three years of operation.
Changes to insurance through superannuation
Announcements around insurance in superannuation largely (although not exclusively) relate to younger members, those with low balances, and those who have not actively chosen to hold certain insurances via their superannuation. And again the changes proposed aren’t due to commence until 1 July, 2019.
The announcements made are designed to prevent superannuation balances being eroded (or diminished) by the current compulsory ‘opt-out’ insurance arrangements that an individual may not actually require.
Under current superannuation laws, where a superannuation account is opened for a person (generally via an employment relationship to receive superannuation guarantee contributions from an employer) and the individual has not exercised choice to select their own fund, they will generally be regarded as a default member.
Default members now have their contributions made to, and invested in line with, a MySuper product.
By law, MySuper products are currently required to offer death (or life) cover and total and permanent disability insurance on an opt-out basis, meaning there is automatically a set level of cover available, and therefore premiums deducted from a superannuation account, until steps are taken to change it.
For some, this insurance may be a duplication of insurance already held elsewhere, whether in a superannuation fund or held outside superannuation. Or it may not be at the level of cover required in the event of future claim.
And for default members, while they receive ongoing reporting from their superannuation fund on performance, their account balances and insurance arrangements (and applicable fees), many don’t actually notice it, or in some cases, understand it.
The changes announced in the 2018 Federal Budget have the purpose of amending the law from 1 July, 2019 so that these defaulting insurance arrangements on an opt-out basis cannot be applied in three specific scenarios:
- The first is for a new account opened by a person under age 25 where a MySuper product is first held;
- The second is for members (of any age) whose balance is less than $6,000; and
- The third is for accounts that have been inactive for 13 months of more.
There will be some considerations, particularly how the rules apply to existing accounts with a low balance, or whether there has been no activity on the account for a period of time, and this is where the final version of the legislation will be important to understand.
What is most important though is the fact that clients can continue to hold insurance through their superannuation if that is what they desire.
For many, holding insurance through superannuation is a preferred option, as premiums are paid from within the account rather than being a personal expense.
But if held though superannuation, it’s important to understand that there needs to be some alignment between the event that causes a policy to be paid out, and a required event for money to be released from the fund to a client at the time when you actually need it.
And for those who this measure could apply to (if and when it’s legislated), it will become even more important to consider your individual insurance needs.
The fact it will no longer be offered on a default, opt-out basis in the future could potentially lead to some people being under-insured if they fail to actively take out insurance.
One-off relaxation of work test
Often, a dilemma that advisers face when talking with clients is that a client is suddenly in positon where they could make a contribution to super after the age of 65, which they couldn’t have done earlier. For example, they may have received an inheritance.
In many cases though, the client has ceased work and is therefore ineligible to contribute to super.
This brings up the constant question of whether the client can then find gainful employment sufficient to pass the work test, and what actually constitutes gainful employment. With a change proposed to take effect from 1 July 2019, this issue may disappear (for one year anyway).
The Government is proposing to amend the contribution rule requirements to allow a person aged 65-74 to make a contribution to superannuation without meeting the work test, the first time during that age bracket in which they don’t satisfy the work test.
While this helps the client to make the contribution at a time when they are able to do so, it doesn’t mean that discussions about the work test are no longer required.
If the client is able to secure gainful employment to meet the work test requirements, this should be considered. If you can meet the work test (for example) in the year you turn 66 and make a contribution, then you would still have this “no work test contribution” option available for the following year.
When combined with possible contribution opportunities from the downsizer measures (which whilst non-concessional in nature, don’t count towards the non-concessional cap), it can allow retirees to substantially increase their superannuation balances after age 65.
Introduction of a retirement covenant
The Government is proposing to introduce a new retirement covenant, requiring trustees to “assist members to meet their retirement income objectives throughout retirement by developing a retirement income strategy for members”.
Importantly, this covenant is also intended to apply to SMSFs.
While the introduction of this covenant should be positive in that it requires trustees to consider options available in the fund for members as they move to retirement, like MySuper for accumulators, this clearly has the greatest benefit for disengaged members.
Those seeking advice generally are already making active decisions about how to best structure their accumulated superannuation savings when they move into the retirement phase.
Extending this requirement to SMSFs who, arguably, should have the most engaged members given the associated trustee requirements, there is a risk that if not properly managed, SMSF trustees in the future could be deemed not to have met their regulatory obligations, leading to a qualified audit outcome, which results in the loss of the concessional audit opportunities referred to earlier in this article.
Discussion opportunities with your clients
Overall, it is arguable that while there were less major changes around superannuation in this year’s Federal Budget, for the changes that were announced, even though still subject to consultation and passage through parliament, there are opportunities for advisers to engage with clients about what it could mean for them, and what steps might be taken in the future.
Bryan Ashenden is head of Financial Literacy and Advocacy at BT Financial Group.