After the carnage that was the 2016 Budget and a relatively uneventful 2017, what does Treasurer Scott Morrison have in store for us this year? 

Well, as it turns out, a few surprises along with some rather “courageous” revenue assumptions. Read on for our wrap-up of all things superannuation and retirement in this year’s Budget.

3 Year Audit Cycles for “Good” SMSFs

This change certainly won’t warm the hearts of our readers who are also SMSF auditors, but will no doubt be greeted with praise by trustees around the country.

From 1 July 2019, the Government proposes that SMSFs which have a history of “good record-keeping and compliance”, which initially seems to be:

• three consecutive years of clear audit reports; and
• have lodged the fund’s annual returns in a timely manner,

will only need to have their affairs audited once every three years.

While it’s not immediately clear whether each audit report will need to canvas the entire previous 3 year period, we doubt it.

At Pro-Super, we have been intimately involved in every aspect of SMSFs over the years – from deeds to tax, from accounting to law, from administration to audits. In our experience, auditors refer back to, and gain a certain level of comfort with a particular fund from the prior year’s audit. Will auditors now simply ignore the two intervening years which they haven’t seen? Not without a specific legislative leave pass, they won’t!

So, expect that your 3 year auditors will at least want to see a good amount of evidence that the numbers from 3 years ago correlate with the numbers for the current year. It may not be quite as expensive as 3 annual audits, but it will be more expensive.

SMSFs Will Need a Retirement Income Strategy

No deadline on this one as yet, however the Government has announced that it intends to either modify the existing requirement for a super fund’s investment strategy, or potentially introduce a separate requirement, for trustees to develop a “retirement income strategy”.

We feel that it will be a modification to the investment strategy, however it will affect every SMSF. Of course, Pro-Super will let you know when this change is introduced and provide details around what needs to be done in order to comply.

Stay tuned!

Maximum SMSF Members Increased to 6

Most people wouldn’t remember the last time an SMSF could have more than 4 members – we do. The number was arbitrary and set to mimic what was thought to be the most practical upper limit for a functioning number of individual trustees to make a decision.

The irony that this limit was set by bureaucrats and politicians – who typically flock together in far greater numbers to dispense such wisdom – was not lost on some of us at the time. Regardless, it seems that this limit is now set to be lifted.

If this does occur, it would require far greater consideration of corporate vs individual trustee structures. Not only is it more convenient to have a corporate trustee with more than two members (due to most corporation constitutions allowing for more efficient execution of voting and delegation), but the modern penalty regime can apply on a per trustee basis.

Take a breach of the in-house asset rules. Should the ATO wish to apply it, a breach of the in-house asset rules would attract an administrative penalty of 60 penalty units. At $210/unit, that would be $12,600 in total. With a single corporate trustee and 6 directors, the penalty would be exactly that – $12,600.

However, if there were 6 individual trustees, the penalty would be 6 x $12,600 = $75,600. For the exact, same offence!

Worst of all, those penalties are not able to be recouped from the SMSF’s assets.

The moral of the story? Don’t breach important portions of the legislation.

Practical advice? A certain proportion of your clients will breach, so these days a corporate trustee is the recommended option.

Changes to Super Guarantee for High-Income Earners

As successive Government have progressively lowered the deductible contribution threshold, while at the same time increasing the super guarantee contribution rate, it has become inevitable that higher income earners would run into a situation where employers are required to contribute more than the current $25,000 p.a. limit. The Government has addressed this where a person only receives income from a single employer, but what if they receive half from one employer, and half from another?

The result is that an inefficient round-robin of ATO -> taxpayer -> superfund communications, release authorities and ETFs payments are carried out over many months, if not years, in order to collect the extra bit of tax.

After many years of trying, the professional community has now been able to convince the Government that a high income-earner should be able to direct one or more of their employers to reduce their super contributions. Quite how this will work in practice is yet to be seen.

Set for a 1 July 2019 start.

Minor +65 Work-test Concession

This falls into the, “Could have been a good reform, but…”.

The Government is proposing that, if:

• you happen to have less than $300,000 in total super, and
• you are between 65 and 74 years of age, and
• you have NOT met the work test (ie. 40hrs within 30 days), then
• you can make both concessional and non-concessional contributions; but only
• in the first year after you fail to meet that work test.

So, a very weak concession. The Government reckons it will only cost them $3m per year (or 0.001% of revenue) over the course of the forward estimates. That tells you how insignificant it will be.

Knowing how government processes work, this one probably started out as a sound idea of completely abolishing the work test. It then made its way (via numerous committees) to a progressive watering down and eventually, virtual irrelevance.

Due to take effect from 1 July 2019.

No Default Insurance in Large Funds for Some Members

At present, pretty much every large super fund provides its members with a certain “basic” level of life insurance when they join the fund. It might be $100,000, it might be more. If you don’t want that life cover, you need to tick a box on your application form to say, “No, I don’t want this cover”.

Now, however, the Government has decided that certain super members shouldn’t have automatic cover, unless they actually tick a box to agree to that cover. Those members are:

• Those under 25yrs of age and with less than $6,000 in the fund; or
• Those whose accounts are inactive for 13 months.

Pretty hard to argue with that, actually.

The most interesting thing is Treasury’s extravagant estimate of the amount it will save the Budget over the forward estimate – $697m. The forward estimate is a 3 year period, which adds up to $231m p.a. At a 15% super fund tax rate, that means Treasury estimates this minor cohort of the super community is paying something like $1.5bn in insurance premiums each year.

Colour us exceedingly sceptical!