With SMSFs now holding more than $622 billion in investments, trustees and members who are in a position to should make a point of boosting their balances ahead of 30 June. But there are plenty more issues to consider, some complex and with their own intricacies, which these new, significant super changes present.
An analysis by BGL Corporate Solutions on anonymous data from 1200 administration firms representing over 60,000 SMSFs found at least 15 per cent of SMSFs would be affected by the $1.6 million transfer balance cap, or 85,000 SMSFs with 160,000 members as at 30 September 2015.
SuperConcepts SMSF technical and private wealth executive manager Graeme Colley admits on some level the industry was preparing for major changes to super.
“The main thing to understand will be pensions and how the $1.6 million transfer balance cap works, and it’s also important to understand the distinction between that and the general $1.6 million balance cap because they both determine separate things.
“I’m seeing confusion with some clients over this at the moment so there’s certainly an education piece that we have to do with them.
“Nevertheless, he says SMSFs may have some advantages over the other super structures.
“It’s all in the one packet so from a planning point of view, that allows you to look in camera, and if there are external factors like a public service pension, then at least it’s only one or two benefits outside, which are reasonably easier to understand in terms of their impact on the fund,” he explains.
“Whereas if it’s a client with a number of retail or industry super funds, it might be all that more difficult to get the information and be ready at 30 June as best you can.
First port of call: contributions
In order to take full advantage of the current, more favourable contribution rules, topping up SMSFs where possible is expected to result in an influx of contributions ahead of 30 June.
This will certainly be the case for wealthy individuals, Yee says.
“Especially around maximising non-concessional contributions (NCC) as there is an incentive for those with more than $1.6 million in superannuation to do that before 1 July, when the general balance cap applies and restricts their ability to make large NCCs to superannuation,” he explains.
“I also think there’s an incentive to maximise concessional contributions (CC), especially for those over age 50, this year before the cap drops to $25,000 for all individuals. But not to the same extent as the NCCs.
“An interesting suggestion here is that SMSFs may see borrowing as a viable way to boost their balances.
“People could borrow in order to put money in, but it generally would depend on the state of returns,” says Grant Abott.
“However, you really need to think about what’s the benefit to you because while you can only put the $540,000 in this year, you can still put $300,000 in subsequent years so it’s not the end of the earth.
“There could be some people who will go out and borrow, but I wouldn’t think it’d be too common.”
Crystal Wealth Partners executive director Tim Wedd says if clients are selling a small business to take advantage of the small business tax concessions, it’s important to get the timing right between contributing NCCs and capital gains tax (CGT)-related contributions under the new regime as the $1.6 million total super balance cap will count CGT contributions.
The $1.6 minion question
Arguably the biggest surprise in the government’s 2016 budget package was the introduction of a $1.6 million transfer balance cap, altering pensions from being generally a set-and-forget structure to one that now requires careful planning.
Determining whether pension balances over $1.6 million should be brought back to accumulation phase or be taken out of the super environment requires extensive analysis, and advisers have been prompted to look at clients who are already over $1.4 million and making assessments of what will be done ahead of 30 June.
According to Wedd, there are multiple issues to consider around this change, for example, determining whether a fund has one member somewhere in pension phase over $1.6 million in benefits and if this can lead to the fund losing segregation for tax purposes.
“This will be an important conversation for those affected and whether the CGT relief needs to be adopted,” he explains.
“However, the other less talked about issue around this segregation aspect is what we call ‘member account’ segregation, which has nothing to do with the tax changes.
“Rather, it’s about keeping a member’s account separate in a fund, which doesn’t mean it also has to be ‘segregated’ for tax purposes. For example, one member who is near a $1.6 million balance may choose lower growth options compared to another fund member who invests more aggressively.
“This will lead to different appreciation in the respective account values that may assist keeping all members under the $1.6 million cap and thus the fund still totally tax-free.
“He says this may also help those who want to put in more contributions while their balance is under $1.6 million, however, it will require case-by-case assessment.
Yee adds for the higher-end clients with large super balances, this could be a good value-add exercise for advisers to assist clients to cherry-pick assets between accumulation and pension accounts.
“There are suggestions that this segregation exercise will be better achieved by having two SMSFs— one for accumulation and one for pension,” he says.
“The other potentially time-consuming exercise will be the resetting of cost bases of relevant assets under the CGT transitional period from 9 November 2016 to 30 June 2017,
“A lot of time can be consumed in this exercise, unless the adviser has sophisticated software in place.”
As a result of the work that needs to be done in reviewing and amending SMSFs comes an estate planning opportunity, which will allow this often overlooked area to have greater prominence, Abbott reveals.
“Making wrong decisions will have a significant impact on the estate,” he warns. “The government is basically saying you can have $1.6 million on the pension side.
“So whether you’re rolling back into accumulation or taking it out, either way you need to look at it from an estate planning perspective because this money is generally not going to be used up in their life, bar aged-care costs, but essentially it’s going to be passed on to the next generation.
“So it’s an opportunity for the smarter advisers and accountants to talk about estate planning, but in order to succeed they must get up to speed with the new rules and ensure they let their clients know.”
The dangers of complacency
“Wedd says ultimately it the complexity of the new rules that is concerning for many trustees.
“This may lead to them not addressing the issues before it is too late. Expect a late rush in June 2017 and calls to the trustee’s accountant, in many cases, who will need to be licensed to provide advice,” he predicts.
Time is ticking
From now until 1 July, Yee says there will be much self-education required of SMSF advisers and trustees on the new super rules and how to make best use of the current and incoming rules.
Abbott says he hadn’t seen evidence of proactive advisers and accountants tackling these issues head on before the Christmas break.
“It’s a really hard one because there’s going to be at least 60,000 to 70,000 people who’ll be impacted by these laws and you just wonder, a lot of these people are looked after by accountants and if they breach the licensing rules, will that have a great impact?” he poses.
“The complication around most of the legislation is the administration side of it. It’s a nightmare. But I think the government’s going to keep tightening the rules as to how much can go into super.
“So it’s a value-add for advisers and particularly accountants because the best thing about the situation is that there’s a time frame on it, so you have to do something, otherwise there will be huge penalties.
“While there’s a lot of work to be done in the space of 10 or 12 weeks, SMSF strategies don’t have to be complicated —you can do quite a lot with modelling.
” As a starting point, Wedd recommends current retirement planning strategies be reviewed, as well as considerations around transition-to-retirement plans, estate planning nominations, contribution levels, fund balances and splitting or equalising benefits between couples, not to mention trust deed reviews to make sure the fund’s deed can cope with the new rules.
“I think it will be very challenging now as the government has removed the ‘simple’ from the previous Simple Super reforms,” he says
“We are back in the midst of complexity, which will make it very difficult for the uninformed trustee to know what to do without proper advice. The SMSF sector will be overdrive in 2017.”
Reference: This article is extracted and abbreviated from ‘The Premier Self-Managed Super magazine’
