SMSFs - the less change the better

Cartoon by Nicholson from "The Australian" newspaper: www.nicholsoncartoons.com.au

Rumours  abounded prior to the recent Mid-Year Economic and Fiscal Outlook (MYEFO) that Treasurer Swan was looking to fill a hole in the Budget by attacking the superannuation industry one way or another. Changes to capital gains tax had been mentioned by various commentators.  We saw the significant labour union and industry super figure in Bill Kelty come out and make a strongly worded statement via the weekend papers that the government should "be very careful" when tinkering with the superannuation system.  As it's turned out the only measure to hit  self-managed funds is the increase in the SMSF levy from $191 to $259, which equates to around $32 million a year in extra revenue.

An additional pleasing measure for self managed fund trustees and their advisers to know about is the government's move to amend the law as it relates to the tax exempt status of fund income earned on investments used to support pensions.

The government decision overturns a draft ruling made by the Tax Office last year and will allow the pension earnings tax exemption to continue after the death of a pensioner until the deceased member's benefit has been paid out of the fund.

Andrea Slattery, CEO of the SMSF Professionals Association of Australia said on 22 October 2012:

This is excellent news for the thousands of SMSFs in the pension phase which could otherwise have faced significant capital gains tax bills on the payment of death benefits.

The new law will apply for the 2012-13 tax year.

Trustee Penalties - Self Managed Super laws

The Government has released draft legislation which introduces administrative consequences and penalties for trustees of self managed superannuation funds (SMSFs) and the accompanying explanatory material which will apply from 1st July 2013.

The Cooper Review had found that the existing penalty regime applicable to trustees of SMSFs limits the Commissioner of Taxation’s (the Commissioner’s) ability to achieve optimal regulation of the SMSF sector. It concluded that additional tools (both punitive and educational), in conjunction with its existing powers are required to give it more flexibility to deal with non-compliance with the law. In exposure draft stage, the legislation gives the Commissioner powers to issue rectification directions, educational directions and administrative penalties to individual trustees and directors of corporate trustees who contravene the SMSF rules.

Currently, the Commissioner has the following options to rectify non-compliance:-

• making an SMSF non-complying for taxation purposes;
• applying to a court for civil penalties to be imposed. A person may also face criminal penalties for more serious breaches of the law;
• accepting an enforceable undertaking in relation to a contravention; and
• disqualifying a trustee of an SMSF.

These could all lead to members suffering a penalty arguably disproportionate to the breach. Applying current penalties can be costly and time-consuming. The Commissioner is unlikely to use the existing range of powers except in cases of significant non-compliance with the law. The absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening conduct by simply rectifying the conduct when it is detected. This may be appropriate in certain circumstances, but the Explanatory Memorandum to the draft legislation states "it is not appropriate that trustees can continue to contravene the law and for their actions to have no consequences".

The new legislation will allow the ATO to levy penalties upon the trustee (i.e. personally payable by the individual person who committed the breach) and which must not be paid or reimbursed from assets in the SMSF. These penalties could range from monetary fines (up to $6,600) through to attending educational courses that relate to their responsibilities as a trustee.

It is intended that the range and type of remedy and penalty will give the ATO greater flexibility and additional tools to regulate SMSF trustees.

This is going to become a greater issue in the context of SMSFs taking a greater proportion of the superannuation industry in Australia.  Disaffected investors are moving into SMSFs at a great pace as the big listed funds are looking at woeful performance results.  Robert Gottliebsen wrote recently:

In a vast number of cases individuals have found they are able to tailor their investments to their own needs and slash their costs. The strong performance of bank deposits has been a major factor in self managed funds doing well.

From minor amounts a decade ago, self managed funds have captured an incredible 35 per cent of the market and look set to take half of all superannuation.