The current superannuation changes present the most profound adjustment to the strategic landscape for SMSFs since 2007. Like any change, they highlight the importance of good guidance from accountants and advisers for all trustees. In the coming months, there will be a lot of questions asked of anyone advising trustees but also of those of us implementing the new strategies via a compliance or fund administration role.
Five questions I know we will be asked that immediately spring to mind are:
- Which of my clients’ pensions are currently reversionary and should I change anything? The pros and cons of reversionary pensions have changed over the years. Since 2007 alone, some legislative changes have favoured them and some have not. Inevitably there will be a rethink of the best approach for different clients and in fact there is unlikely to be a single answer that is right for everyone. Given that reversionary and non reversionary pensions are treated differently when it comes to the $1.6m pension transfer cap, it will be vital to understand the status of each and every pension to make this call. We expect this will be an important part of our review process this year – identifying clients where a change should be considered and highlighting why.
- Have I done anything that would compromise my clients’ eligibility for the CGT relief? In my view this is an immediate risk that has been significantly under-reported. The new laws do provide opportunities to grandfather capital gains built up in pension funds before 1 July 2017. This is targeted at those who will pay more tax on their fund’s investment earnings in the future – for example those who have more than $1.6m in pension accounts or who are receiving a transition to retirement pension. But the rules are complicated. And for some funds the outcome depends on what happens between 9 November 2016 (the date the legislation was tabled in Parliament) and 30 June 2017.
- Do I actually want my client to take advantage of the CGT relief? Like I said, the rules are complicated! And some clients will actually get a better result if they ignore the grandfathering altogether. It will be a great opportunity for advisers, accountants, administrators to work closely together to get the best possible result. Again, it’s an area where I expect the strategic review process carried out by an administrator will be vital in flagging all of the options for trustees and advisers;
- Does your service support the new reporting requirements? The finer details have yet to be announced (in fact we expect they have yet to be worked out!) but simply reading the legislation and explanatory memorandum makes it clear that there will be a lot more compliance reporting expected in the future. The ATO has already indicated that they expect requirements such as reporting pensions and other events that affect the pension transfer balance cap within 2 weeks. This will be extremely difficult for those SMSFs who have chosen a “year end” administration service where the books are only updated when the tax return and audit are dealt with. Clients using those services might well be ruling themselves out of important new strategies such as treating payments over the minimum pension as partial commutations to “claw back” some of the pension transfer balance cap.
- Does your trust deed accommodate the emerging strategies? These days the fund’s administrator often drives the choice of trust deed. That puts the pressure firmly back on businesses like ours to make sure we’re always thinking about how these documents need to move with the times. Even without these latest changes, 2016 was shaping up to be a year of review. Evolution of death benefit case law and practice over the last few years alone would prompt a trust deed review and in fact we recommended one to all our administration clients this year for the first time since 2007. For those still in doubt, the latest changes provide an obvious tipping point – many new rules will challenge some traditional deeds. For example, the new rules will allow certain death benefits to be rolled over – will an older deed accommodate this new opportunity? They also prohibit some funds from “segregating” their pension accounts and will change the optimal approach for reversionary pensions. Will the current deed allow, for example, a reversionary pension to be added / removed without fully re-setting the pension?
So 2016/17 and beyond are shaping up to be important times for not just the front line – trustees and those who advise them – but also those of us providing support behind the scenes.