In this episode of TaxVibe, Robyn chats with Liz Westover, Partner and the National SMSF Leader at Deloitte, about the current state of play with self-managed superannuation funds - including the latest legislative changes, the array of contribution caps, and tips for those considering setting up a SMSF.
Host: Robyn Jacobson, CTA
Guest: Liz Westover, FTI
In this episode of TaxVibe, Robyn chats with Liz Westover, Partner and the National SMSF Leader at Deloitte, about the current state of play with self-managed superannuation funds - including the latest legislative changes, the array of contribution caps, and tips for those considering setting up a SMSF.
Host: Robyn Jacobson, CTA
Guest: Liz Westover, FTI
Robyn Jacobson, CTA:
Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate of The Tax Institute and your host of today's podcast. We love the vibe of tax and here at The Tax Institute, we do tax differently.
Robyn Jacobson, CTA:
I'll be chatting with some of the tax professions great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Liz Westover, the Partner and National SMSF Leader at Deloitte.
Robyn Jacobson, CTA:
Liz is responsible for the firms' SMSF service offering, providing compliance and advisory services to the firm's clients. Liz has extensive experience in superannuation and has strong capabilities on the technical application of superannuation and associated tax laws. She is a regular commentator on superannuation issues with mainstream and social media and has also blogs and articles on superannuation and related issues for many years.
Robyn Jacobson, CTA:
Liz has been heavily involved in superannuation policy development and advocacy, regularly liaising and consulting with government, regulators and stakeholders on technical, legislative and policy matters. Liz is a Fellow at The Tax Institute, a Fellow Chartered Accountant, CA SMSF Specialist and holds a Master of Legal Studies from the University of New South Wales and a Bachelor of Business from the University of South Australia. So in this big week of The Tax Summit, Liz, welcome to TaxVibe.
Liz Westover, FTI:
Thank you, Robyn. Lovely to be here.
Robyn Jacobson, CTA:
Great to talk to you and look, we did have a chat earlier in the week. You've already run your session for The Tax Summit. And in terms of this week, you're one of more than 100 speakers at our event, The Tax Summit: Challenge Accepted.
Robyn Jacobson, CTA:
So as we are emerging from a very long COVID period and particularly, you and I in Melbourne where we have been locked down more than any other city in the world, how important is it for you, as a practitioner, to be able to reconnect with your peers, even if it's in a virtual environment at the moment?
Liz Westover, FTI:
Critical, Robyn, I think. And these online sessions and virtual sessions and things like that, they do become difficult and that craving to be face-to-face with people is almost palpable at the moment, especially as the end is in sight for us.
Liz Westover, FTI:
But it does make these online events even more critical than before, simply that we're not face-to-face with our peers and our clients and our staff members. So we've got to stay up to date and we've got to get that information through some forum, and I think The Tax Summit has been one of those vital forums for us to be able to do that.
Robyn Jacobson, CTA:
Well, it's been great to have you as part of it. So I thought we'd have a chat today about of course your pet area, self-managed superannuation funds. Can we start with what's the latest on the legislative front?
Robyn Jacobson, CTA:
We sometimes think that tax law moves very quickly and it's constantly changing and there's less going on in the super space, but when we start to work through the legislative changes in super, it's not a short list. So can you touch on some of the key changes that we've seen recently?
Liz Westover, FTI:
Absolutely. And you're spot-on. As I started to put this session together and I said, "Oh, my goodness. What am I going to talk about? There's not that much that's been happening." But as I started to collate it all, it became very apparent that there were lots of changes and some of them quite meaningful. I think probably one of the key ones that we've seen is the ability to increase the number of members in a self-managed super fund from four to six came through in the 2018, '19 Federal Government Budget.
Liz Westover, FTI:
I don't think anybody particularly asked for it, but I think now that it's here, people are really starting to see value in it, and I've certainly had a lot of inquiries from my clients asking, "Okay, can I now add the kids?" and so on and so forth. So I think it will be quite useful and people will make the most of it.
Robyn Jacobson, CTA:
That change has been a long time coming, hasn't it?
Liz Westover, FTI:
It has but it is now effective from the 1st July 2021. So we're off and running. But probably a couple of things to think about and number one is, think about why you're adding extra members in the first place. And we've always said this, whether it was four members or six members was your maximum, think about who is in your fund.
Liz Westover, FTI:
Because those people that are in your fund have a lot of control over your benefits and particularly in payment of death benefits and so forth. And those people have a say in how that fund is run. So if you want to bring the kids in, that can be well and good and there might be some really good reasons why you do that, but those kids have just as much say in how that fund is run.
Liz Westover, FTI:
They have a lot of visibility about your own benefits as a parent. They'll know what you have. So if those sort of things, you'd rather keep separate from your kids then perhaps you don't want to bring them actually into the fund and if you want to help them, you might set up a separate fund.
Robyn Jacobson, CTA:
Because of course the main rule that the member in a self-managed fund, of course, has to be the trustee as well.
Liz Westover, FTI:
That's right. All members are trustees and all trustees, members. And of course payment of death benefits generally in an SMSF death benefit, in the absence of any binding death benefit nominations, remaining trustees decide who receives those death benefits. So do you want your kids to decide who gets your benefits? Do you have blended families in the sense of who's making decisions, who's going to have control where you want those benefits to go to?
Liz Westover, FTI:
Think about who's coming into your fund and who actually has the control. But in a practical sense, there's probably a couple of other things to think about is check your trustee. Always check your trustee. And a lot of practitioners in this area is, "Check your deed, check your deed, check your deed. Read the deed."
Robyn Jacobson, CTA:
Liz, it's interesting that you say that because we ran a podcast recently with Paul Hockridge and we were talking about trust and unpaid present entitlements, and repeatedly throughout that discussion, he said exactly the same thing. So because a super fund is a trust, there's no escaping the deed.
Liz Westover, FTI:
No, that's exactly right. So I've had some clients already talk to me about increasing the number of members, adding members, and what we found is with some deeds, they're actually hard-coded, restricting the number of members in the fund. In fact, the first inquiry I received from a member, I had a look at the deed. Sure as eggs, there it was, no more than four members in the fund.
Liz Westover, FTI:
So it's hard-coded into his deed. So no matter what the law says, his deed says he actually can't have more than four members. So if we want to increase the members, if we're going to put in member five and six, then we actually have to get a deed update and to a deed that allows those additional members to come through.
Liz Westover, FTI:
But the other practical side of it too is trust law, so state-based trust law. Most states actually restrict the number of individual trustees of a trust to four. So in actual fact, if you're going to have more than four members, again, coming back to all members are trustees, and all trustees are members, if you want more than four trustees, you have to have a corporate trustee.
Liz Westover, FTI:
So you can certainly have six directors of a corporate trustee but you can't have more than four individual trustees. So corporate trustee, check your deed, think about you who you want as members of your fund.
Robyn Jacobson, CTA:
Very good. There's been another change and this is to do with making non-concessional contributions, and it's called the bring-forward rule so you can access two future years' worth of your non-concessional contributions cap. Can you run through the changes that are affecting people here?
Liz Westover, FTI:
Yeah. Not a huge change other than the age for which you can bring forward those contributions. So previously, it was maxed out at age 65. So if you're above age 65, you might still have the ability to make contributions if you're passing the work test, but you couldn't use the bring-forward provisions. Once you're over that age group, it just wasn't available to you.
Liz Westover, FTI:
So previously, we've seen changes to the work test. So that no longer applies up to the age of 67. And so now these new changes allow bring-forward provisions up to the age of 67 as well. So bit of alignment there between the work test and the bring-forward provisions and giving people a renewed opportunity. So my tip in that is probably go back and see which of our clients might actually have a renewed opportunity to make some last contributions into your super.
Robyn Jacobson, CTA:
There's been a very technical change and this relates to where you've got someone in pension phase and then calculating how much of their income is able to benefit effectively from a tax exemption and actuarial certificate. So would you like to run everyone through that?
Liz Westover, FTI:
Yeah, absolutely. So we have this circumstance where you might have a fund that is wholly in pension phase for the whole year, but a member of that fund has a total super balance. So that's their balance within that fund and any other superannuation holdings they have, if they have a total super balance of more than $1.6 million.
Liz Westover, FTI:
What that meant was that that fund had what we call disregarded small fund assets. And the law says that if you are one of these types of funds with these disregarded small fund assets, is that you can't segregate your assets, which means you can't use the segregated method for calculating your exempt current pension income.
Liz Westover, FTI:
You are required to use the proportionate method to calculate it. And part of the proportionate method meant you had to get an actuarial certificate. Now, if you've got a super fund that is wholly in pension phase for the whole year, then what's that actuarial certificate going to say? 100%. Of course, it's going to say 100%.
Liz Westover, FTI:
So we have this red tape where people who are clearly always going to be fully exempt or be able to claim 100% exempt current pension income, were required to get an actuarial certificate and the cost that was associated with doing that for no added benefit whatsoever.
Liz Westover, FTI:
So the requirement to get that actuarial certificate has now been removed. If you're in that bucket, no longer have to get an actuarial certificate. So a really good practical, sensible movement in this piece of legislation.
Robyn Jacobson, CTA:
So not every amendment we get is an unwanted one.
Liz Westover, FTI:
No, that's right. That's right.
Robyn Jacobson, CTA:
Another change is coming through and in fact, there's a lot of talk about this outside the super space. I'm referring to the DIN, the Director Identification Number. Its genesis was in concerns about phoenix activity and people illegally moving around companies and using false names.
Robyn Jacobson, CTA:
And astonishingly, when you apply to be a director of a company, or you notify ASIC that you're going to be a director, you could basically tell them anything. They never verified the information you gave them. So now we're going to have this verification process and every company director's going to have a DIN. Why is that relevant to self-managed funds?
Liz Westover, FTI:
Well, the issue is that it equally applies to any body corporate that is registered under the Corporations Act and that applies to trustee companies as well because they are registered with ASIC under the Corporations Act. So any director of a corporate trustee of a self-managed super fund is going to have to have a Director Identification Number or a DIN as you said.
Liz Westover, FTI:
So we equally have to pay attention to this matter. Individuals only have to have one DIN across all of their directorships. So if you are a director in another entity, perhaps your own business and so forth, you can use the same DIN for your SMSF, but I imagine for a lot of practitioners out there, there's going to be a little bit of coordination that goes on around this one.
Liz Westover, FTI:
Interestingly, directors have to apply for the DIN themselves. It's not something that we can actually do for them. But clearly, they may not be aware that this is coming or in fact that it's here and that they will need it. So a little bit of coordination around making sure that they do get one or that they actually have one. And there are some dates that were released I think only last week around these transitional arrangements.
Liz Westover, FTI:
So big thing, big date for me really is that if you become a director for the first time between the 1st of November this year and the 4th of April next year, then you've got 28 days after your appointment to get a DIN. So in other words, if you're setting up a self-managed super fund with a corporate trustee, and I think there is a real trend towards using corporate trustees now for SMSFs, if you're doing that now, you are squarely in this regime.
Liz Westover, FTI:
Just really pay attention if you've got anyone that's setting up new funds. If you are in fact increasing your numbers from four to six and you've got an extra director coming in for the first time, they're going to need a DIN.
Robyn Jacobson, CTA:
And a couple of other tips to pass on, existing directors have until November next year to get a DIN.
Liz Westover, FTI:
That's right. Yes.
Robyn Jacobson, CTA:
And if you become a director from April next year, you have to get your DIN before you are appointed as a company director.
Liz Westover, FTI:
That's exactly right. And I think April is going to be upon us very, very quickly.
Robyn Jacobson, CTA:
Yes, it will.
Liz Westover, FTI:
So I think firms really need to get their systems and their processes in place to identify who actually needs one of these DINs and making sure that their clients actually get them.
Robyn Jacobson, CTA:
One more tip and I can almost hear some of the groans already coming through from our listeners. The best way to do this is using a myGovID. And as you correctly say, you can't do it as an agent on behalf of your client.
Robyn Jacobson, CTA:
So they'll have to do it themselves. But myGovID is the best way to do this. Not myGov. That is different. You need a myGovID which is the identification process through, typically, a smartphone. There will be alternatives through telephone and paper but there will be delays, not as efficient and your experience is going to be much better if you do it through the myGovID.
Liz Westover, FTI:
And do you know what? My tip in that space will be I plan to do my own very quickly, as soon as I can. Simply because if I've been through the process myself, I can talk my clients through it. So I would strongly suggest that perhaps we take care of our own affairs first and then we're in a better position to help our client.
Robyn Jacobson, CTA:
Make sure the plumbers don't have leaky taps.
Liz Westover, FTI:
That's it.
Robyn Jacobson, CTA:
All right. And one more change that's worth noting of significance and that's to do with minimum drawdown rates.
Liz Westover, FTI:
Yeah. Look, this was another COVID-19 relief measure. So we saw an extension of the 50% reduction, the mandatory minimum that needs to be withdrawn and that's been extended up until 30th of June FY '22. So we've got this extra year of just reducing what we're required to withdraw from, from pensions. My tip there really is around when you apply the percentage, make sure you have the percentage first and then apply that reduced percentage to your opening balance or closing balance.
Liz Westover, FTI:
So you're doing closing balance to work out what your mandatory minimum actually is. The risk is if you apply the larger percentage of the old percentage and then halve the resulting figure, you may end up with this anomaly where you've actually paid less... rounding can force you to pay less than your mandatory minimum.
Liz Westover, FTI:
And it might sound like rats and mice but it can make a difference and it can detrimentally impact on your fund. So just be careful, apply the percentage first or reduce the percentage first and apply that against the balance.
Robyn Jacobson, CTA:
Okay. Good advice. Let's move onto the caps and gosh, there's an array of them. I've certainly written content about this previously and listed out all the superannuation caps we have in the system and it's quite extensive. Is it really necessary that we have this many limits and this many sets of rules to keep on top of?
Liz Westover, FTI:
Look, I don't think there'll be anyone that would argue that simplicity would be a much better way to go. And I think indexation, particularly around the transfer balance cap, is going to cause a lot of problems. And it is going to cause a lot of errors to be made and whilst we might have a handle on it around this first round of indexation, I think the next round of indexation is going to put people in a whole world of pain just trying to work out what their personal transfer balance cap is.
Liz Westover, FTI:
So previously, we haven't really been concerned about the difference between a general transfer balance cap and a personal transfer balance cap because it was all one and the same. It just didn't really matter. So we used this generic transfer balance cap. Now we need to start talking about what the general transfer balance cap is versus a personal transfer balance cap.
Liz Westover, FTI:
And that'll be different for different people depending on what they have or haven't done already around income streams. Basically, if a new transfer balance cap and your general transfer balance cap is the $1.7 million, if you are now commencing an income stream for the first time, your personal transfer balance cap will be the same as the general cap and that's $1.7 million.
Liz Westover, FTI:
But if you have previously commenced an income stream, so prior to the 1st of July 2021, you previously commenced an income stream, your personal transfer balance cap will not be the general transfer balance cap. And in fact, if you had previously used 100% of that $1.6 million cap, your personal TBC is $1.6 million and you have absolutely no ability to use the indexed amount to commence any future income streams.
Liz Westover, FTI:
And then if you are somewhere in-between that, then your ability to use any of the indexed amount, will depend on the proportion of the previous cap that you've actually used. So if, for example, you used 75% of the previous cap, so you commenced an income stream of, say, $1.2 million then you've got 25% unused cap. So you apply that 25% against the indexed amount, 25% of $100,000 gives you $25,000. So your new personal transfer balance cap will be the $1.6 million that you previously had, plus $25,000 of the indexed amount. So 1.625 is your personal transfer balance cap.
Liz Westover, FTI:
So a little bit confusing already, so imagine how it's going to look when we have indexation again and we're trying to work out what proportions people have actually used of previously indexed amounts and so forth. So gee, I wish we had some simplicity around that.
Robyn Jacobson, CTA:
Liz, it's hard to point to any other cap, threshold or limit anywhere in the tax or superannuation law that is indexed but the indexation isn't provided to everyone. So if you think about everything else that has increased out there from year to year, all taxpayers, all classes of taxpayers who come under that particular set of rules, benefit from it.
Robyn Jacobson, CTA:
But in this particular case, it's only those who had started a pension and not fully exhausted the 1.6 to begin with and that's a proportionate amount, or you get the ones, of course, who never started an income stream till later and they get the full benefit. But everyone's going to have their own special personal transfer balance cap. The complexity in the system's going to be extraordinary.
Liz Westover, FTI:
Absolutely, absolutely. And I think it's only going to get worse. And that is compounded too because we often use, previously, that $1.6 million as a reference point for other measures. So for example, your ability to make non-concessional contributions. And in fact, in some areas of law, and in the one we talked about previously about actuarial certificates, that is hard-coded at $1.6 million.
Liz Westover, FTI:
That amount, when you talk about a person's total super balance in terms of determining whether they have disregarded small fund assets, that's hard-coded, that $1.6 million. It's not indexed. So now not only do we have some thresholds, they all started from this one reference point, but now some are going forward, some are not, some are played differently to different people in different ways. Of course, it's going to get confusing and people will make mistakes.
Robyn Jacobson, CTA:
We've also got, for good reason, delays in reporting by self-managed funds of the transfer balance account data known as the TBA. And they, of course, report on a quarterly or an annual basis depending on the size. But the delay in getting that information to the ATO then results in of course that then delayed passage of information back to the members.
Robyn Jacobson, CTA:
And where I'm hearing this is particularly becoming a problem, is you've got people giving advice to individuals on how much they should contribute or what their fund should do with the options available to them, who don't necessarily have access to that data that is on myGov, which is the individual's own account, or through online services for agents which is only available to tax agents.
Robyn Jacobson, CTA:
Now those agents, of course, shouldn't be giving advice on super. So we've got this category of people like lawyers, people like self-managed fund administrators and financial advisors who are almost at the front-end of giving the advice but it's the agents, the tax agents who have access to the data through [OSPA 00:19:27] who are dealing with the tax implications if they happen to get it wrong.
Liz Westover, FTI:
Yeah. And you're spot-on, Robyn. And we often talk about tax agents but there is often a difference between the tax agent for the fund and the tax agent for the individual. You actually have to be the tax agent for the individual to be able to get access to that information. So you're absolutely right. This is a cohort of people who need the information and can't actually access it.
Liz Westover, FTI:
It is a real challenging area. I think APRA-regulated funds have a much tighter timeframe within which to report but nevertheless, it still takes time to do calculations and work out what's going on to be able to report that information.
Liz Westover, FTI:
Self-managed super funds, in particular, we often don't do the accounts until May or June, the year after the end of financial year. So there is a huge delay in all of this. But I'd also say that if you're in an SMSF, you've got access to that information more readily or to find that out before you make decisions around commencing income streams and so forth.
Liz Westover, FTI:
So if I'm looking after an SMSF client, my first point of call is what other funds have you got? Let's check that out. Let's check what the valuation is and then determine what capacity or what balance we actually have to commence an income stream out of the self-managed super fund.
Liz Westover, FTI:
So yes, it's challenging to get the information but it's not impossible. And I think we just have to make sure that we get the right relevant timely information before we advise the clients about commencing income streams.
Robyn Jacobson, CTA:
I think it also illustrates the importance of getting proper advice. Now self-managed, you do have to take responsibility for trustee decisions that you make but equally, you've got to make sure you're getting the right advice because we all know that you can't cry foul later and say I didn't know or I wasn't aware of the laws and how they operated because it's not going to get you anywhere.
Liz Westover, FTI:
Yeah, absolutely. Absolutely.
Robyn Jacobson, CTA:
All right. So moving onto some other issues, can you give us an update on what's going on with SuperStream?
Liz Westover, FTI:
Oh, heavens. Yes. So look, SMSFs have been familiar with SuperStream for a little while and their notion of having an electronic service address. We've had to be in that regime for quite some time where a super fund was receiving employer contributions.
Liz Westover, FTI:
So employers have been legally obliged to use SuperStream to make those contributions and that meant if an SMSF was receiving them, they had to have an ESA to be able to receive those contributions. So we're kind of familiar with these concepts. And I would suggest most funds would have an electronic service address.
Liz Westover, FTI:
What's new around all of this is that from the 1st of October this year is that rollovers in and out of self-managed super funds must now be undertaken by SuperStream as well. So APRA funds will not roll over into an SMSF and [inaudible 00:22:08] via SuperStream and equally, SMSFs in-between themselves, can't actually do it.
Liz Westover, FTI:
It's all got to be done via SuperStream. And that means technology is going to play a big role because that's exactly what SuperStream is. It is a data and payment standards around employer contributions and rollovers in the super industry that's done electronically for consistency around payments and the associated data that comes with it.
Liz Westover, FTI:
So we absolutely have to be involved. Now, it's not always as easy as you think and timing is everything, and getting it wrong can be quite problematic as well. So there are 20 penalty units which is $4,400 per trustee if you actually get this wrong. So main thing to remember is that once full information is received requesting a rollover, you actually have three days to roll it over. And that applies to self-managed super funds as well.
Liz Westover, FTI:
So if you are looking at rolling over from a fund, be very careful about when you pull the trigger on getting that rollover done. You don't want to go to your new APRA fund and request it because once that comes through, you've got three days to do it. And I would suggest that most funds are going to take a lot longer than three days to actually bring member records up to date to determine a balance and be able to process that rollover back out of the fund.
Robyn Jacobson, CTA:
So if you're a trustee of a self-managed fund, where's the best place to go to look for information on these ESAs?
Liz Westover, FTI:
Yeah. Look, there are a couple of points around that one. So as I said, most SMSFs are going to have an electronic service address. Anyone that uses the three major software providers, they all provide an ESA service. There's probably a dozen or more providers already around ESAs, but not all are compliant with rollover.
Liz Westover, FTI:
So there are a number of ESA providers out there that are capable of doing employer contributions, they are not yet capable of doing SuperStream rollovers. So speak to your provider and your ESA and there is also a list on the ATO website that'll tell you who the providers actually are and what they're capable of doing, either employer or rollovers. And if you're looking at rollovers, you may need to change your ESA provider to be able to actually facilitate a rollover.
Robyn Jacobson, CTA:
For those who are not yet compliant for rollovers, would you expect that they will be at some point? It's just a case of them catching up?
Liz Westover, FTI:
I believe so. I believe there are a lot of providers out there who are taking steps to become capable around rollovers, but that's a business decision for them as to whether or not they actually do that. The other thing to remember about SuperStream, Robyn, is it's not mandatory to have an ESA.
Liz Westover, FTI:
If you are not receiving employer contributions and you're not making rollovers or receiving rollovers, you don't have to have an ESA. It's not mandatory to do that. The ATO will be processing a number of their release authorities through SuperStream as well, so you will be receiving DIV 293 excess contribution release authorities and so forth via SuperStream.
Liz Westover, FTI:
But again, if you don't have one, they will still issue those by paper. So it's not mandatory to have one unless these events are actually happening in relation to your fund.
Robyn Jacobson, CTA:
But like most things, I'm thinking of Single Touch Payroll and myGovID and all these other digital initiatives. It is designed to make life easier and more efficient to deal with the government.
Liz Westover, FTI:
Look, and I think it will eventually. It feels a bit clunky at the moment, and I think that's because it's a new process, we're not getting information in the way that we used to. And even at the moment, there is a flow of information into the fund, but we don't have that document that we normally get. So like a rollover benefit statement. We don't have it yet and it's making sure that we get it so that we've got complete files so that we can prove it to the auditor. Those sorts of things.
Liz Westover, FTI:
So it's still finding our way around it. We've started doing our first ones already and we're just really taking our time in terms of dotting the Is and crossing the Ts to make sure that we get all the right information and certainly, if we're requesting rollovers. So now I can go and request a rollover from an APRA-regulated fund, is making sure you've got the authority from your client to do that.
Liz Westover, FTI:
Because the last thing you want to do is process a rollover for their full balance when they didn't actually intend for their full balance to come over and you've just blown up all their insurance in their APRA-regulated fund. Make sure that you're getting those authorities signed to actually process the rollovers.
Liz Westover, FTI:
But equally, you've got to make sure that the ATO actually has up to date information for the fund. So it must have obviously the member details, so particularly around if you're adding members and you're trying to do rollovers, make sure that you give the ATO time to update their data so that when the APRA-regulated fund checks, it's all good.
Liz Westover, FTI:
They can say, "Yes, that person is a member of this fund and it's all correct." The fund has to have an ABN, they have to have a unique bank account and of course, they must have an electronic service address. So you've got to just line up all your ducks before you press the go button.
Robyn Jacobson, CTA:
So it sounds a bit like the toddler's walking but still needs to be a bit steady on their feet.
Liz Westover, FTI:
I'd say that's quite a good analogy, yes.
Robyn Jacobson, CTA:
Okay. Now, we could talk for a long time about this but with the limited time we've got, can you identify the main concerns the profession has with NALI and NALE? And I've not yet found a way to distinguish audibly between the two. So non-arm's length income, NALI with an I, and non-arm's length expenses, NALE with an E.
Liz Westover, FTI:
I hear you on that one and it's NALI or NALE, I'm not sure. But I absolutely agree with you on that one. In a real nutshell, what they're saying, is non-arm's length expenses. So if you're not paying enough or you're not paying anything for services to the fund, or that the fund receives, then it's going to invoke non-arm's length income provisions.
Liz Westover, FTI:
And that means income associated with that or has a sufficient nexus to those expenses will be taxed at the highest marginal tax rate of 45%. The real concern in the industry at the moment, because this isn't new law, this has been around since 2018. So the real concern in the industry at the moment is the Law Companion Ruling that came out recently from the Tax Office.
Liz Westover, FTI:
And in particular, the real sticking point around this is the ATO has a view that general expenses has a sufficient nexus to all of the income of the fund. So when we talk about general expenses, we're talking about accounting fees, audit fees, financial advisor, investment management fees. Those things that don't have a particular nexus, in the way a property manager would to a property. You've got that direct link.
Liz Westover, FTI:
We're talking about things that apply really to the whole fund. So if they are deemed to be non-arm's length expenses, then we have a problem for all of the income of the fund. So the ruling has been widely criticized by the profession and rightly so. I don't think that they have really made their case around sufficient nexus between the general expenses and the income of all of the fund and I certainly don't think that that was what was intended when this legislation was brought in.
Liz Westover, FTI:
So needless to say, there's a strong push and quite an aggressive push by industry against these reforms and I think Minister Hume said at The Tax Institute Super Conference that they are well aware of this issue and that in fact, they would be looking at it. No promises or anything like that by any means but at least we know she's aware of the issue.
Liz Westover, FTI:
And hopefully, we'll see some change, but I think for us as practitioners, how many of us are used to getting our firms to do our own funds? How many financial advisors are used to providing their services to their own funds? And we've seen a very gray area arise. It's not been clear where the line is actually drawn on trustee providing services in your capacity to a trustee, versus providing services in your capacity as an individual.
Liz Westover, FTI:
And this is where I kind of struggle with it is because I'm skilled at what I do, why can't I do that for my fund? And why do I have to pay for those services when anybody else who's not a tax agent, can legally still do all their own accounts and lodge their own tax return and in fact, they can't charge for that service. But because I am a tax agent, I must. So I really struggle with that a little bit and I just don't think that is consistent with our overriding drive to increase retirement savings.
Robyn Jacobson, CTA:
And there's a real tension also between the SIS Act which regulates what funds can do which says you can't charge for your services as a trustee and this rule which is saying you must charge otherwise, you'll have a NALI problem.
Liz Westover, FTI:
That's right.
Robyn Jacobson, CTA:
And I know it's a great concern to the profession about does that mean I have to charge or does that mean I can't charge for my accounting services? I would draw everyone's attention to the examples that I think it's around example six to 10 in the ruling which is 2021/2. It's a Law Companion Ruling, an LCR, where it does talk about if I'm a trustee who's an accountant versus I'm a trustee who's an electrician.
Robyn Jacobson, CTA:
And it seems to go with this argument if I'm providing accounting services then that's a trustee capacity, so it's okay if I don't charge for that. But if I'm providing electrical services to my rental property that's in my fund, then if I don't charge for that, I would have a NALI problem. And it is gray, it's awkward.
Liz Westover, FTI:
Absolutely. And it's all well and good to give examples where there is extreme differences between the two scenarios but as we all know, in real life, that is rarely the case. And you can imagine a whole heap of scenarios that are somewhere in the middle and people not knowing how to actually apply it.
Liz Westover, FTI:
The other thing in that ruling too which I think people should pay attention to too, is they talk about acquisition of an asset is really important in this context. So if acquisition of an asset is deemed to be not on an arm's length basis, then the asset is actually tainted for life, and that includes capital gains.
Liz Westover, FTI:
So that's actually huge. So get your financing wrong, don't do the purchase at a market value, you've tainted the asset for life. All of the rental income or the dividend income, whatever it might be, including ultimately your capital gain.
Liz Westover, FTI:
And we also know that typically what people do is there might be a... when an asset is acquired by the fund, let's say it's a business real property, there might be a portion of a purchase and a portion that's done as an in-specie contribution. And this ruling makes very clear that if you do not document correctly then that document actually says that you might have non-arm's length expenses, regardless of the fact that you might journal an in-specie contribution within the fund.
Liz Westover, FTI:
So even though you think you've done everything right, maybe you think you're doing it the way we've always done it in the industry, you could be causing your clients to actually have non-arm's length expenses and around an acquisition of an asset, tainting that asset for life. So it is critical that the documentation around acquisition of assets where it includes an in-specie contribution component is documented correctly and meticulously or we're going to have a problem.
Robyn Jacobson, CTA:
A lot of work has been done by The Tax Institute in conjunction with the other professional bodies, and I'm not just referring to the traditional accounting bodies either. We've been involved with superannuation industry groups, it's a really broad group of organizations that have been working together. So it'll be interesting to see in the months ahead and we do hope that the government does listen to the concerns of the profession.
Robyn Jacobson, CTA:
But there's one piece around the ATO's interpretation of the law through this final ruling and there's another piece around the policy that of course the treasury and the government are responsible for. Now maybe there's a tweak that could be made to the legislation itself which is merely to clarify how the law was intended to work, and maybe if that could be done and remove something like a problem where there's $100 discount on electrical work done on my rental property, shouldn't taint all of the income earned from the $10 million worth of my assets in my fund and all my future capital gains forever either. It's just nonsense.
Liz Westover, FTI:
When you think about it, the genesis of this legislation was really around limited recourse borrowing arrangements that had related party loans. And at the time, people were doing it with 0% interest rates. The safe harbor provisions actually took care of that. So we've now got this piece of legislation that's come in with a fairly disproportionate approach to something that's already been resolved.
Liz Westover, FTI:
But moreover, it not only affects self-managed sup, it actually affects APRA-regulated funds as well. And I'm sure that from these little old LRBAs way back when to now having what could be a catastrophic impact on APRA-regulated funds, it's not right. And that's what I mean by what I said earlier is I don't believe this was ever the policy intent.
Robyn Jacobson, CTA:
Well, let's hope that this is rectified because as you say, the impact on not just the self-managed sector but the APRA-managed funds as well. The profession's aware of this, the sector's aware of this, there's such unanimous agreement that this needs to be fixed and we can only hope that the government... Well, we know they're listening. We hope they do something about it.
Liz Westover, FTI:
Well, all I can say, Robyn, is in all your efforts, you are very much backed by the profession as well as to get some resolutions around this one. So thank you very much.
Robyn Jacobson, CTA:
Thank you. That's good to know. All right, just as we wrap up, what would be your top tips for someone who has or is considering setting up a self-managed fund? Now you could write a book on this but what would be your top three tips?
Liz Westover, FTI:
I think some of my points from earlier is if you're setting up a fund, think about who you're in the fund with. Who has control? Who you want in it? Who has visibility? All those sorts of things. I think for anyone, and this is probably not just around people setting up a fund, anyone who's in a fund as well, is think about your exit strategy as well.
Liz Westover, FTI:
I think that has become critically important and I am still amazed by the number of people who think that superannuation is dealt with as part of their will and not understanding that actually, super is dealt with quite separately from your will, unless you specifically direct it to go into your estate and then it will be distributed as part of your will.
Liz Westover, FTI:
So I think that's the missing piece. And also too is that super also effectively has death tax. So a bit of planning around that exit strategy as well and understanding is that if you have a taxable component in your self-managed super or within any super, a taxable component that's paid to an adult beneficiary, adult child, will be taxed at 15% plus Medicare on the taxable component, which for some big funds, that can add up to millions of dollars that you're going to hand over to the Tax Office if you don't.
Liz Westover, FTI:
And there's planning that we can do around this. There's absolutely planning. And that's part of having an exit strategy for your fund. And probably my only other tips is just dot your Is and cross your Ts. Just make sure you've got your deeds, you get your deed from a reputable provider that gives you a lot of flexibility about what you do within your fund.
Liz Westover, FTI:
Fill in your forms and moreover, make sure as a new trustee of a fund, you actually understand the roles and responsibilities that you have in running your own fund. The ATO requires you to sign an ATO trustee declaration form. Read it, understand it and if you've got any questions, speak to your advisor.
Robyn Jacobson, CTA:
Liz, my observation about what happens when you die, you'll know the figures better than I will, the total amount that's held in superannuation at the moment.
Liz Westover, FTI:
We're at $3.3 trillion is currently sitting in superannuation at the moment. SMSFs have about 822 billion.
Robyn Jacobson, CTA:
822 billion. Okay. And we know that we've got an aging population. Now follow me through here with joining all those dots. Aging population with a significant amount held in super, we've got the introduction of the transfer balance cap, which one of the effects is you can't retain amounts in super beyond death unless it's in a pension.
Robyn Jacobson, CTA:
And the pension through the transfer balance cap is limited in terms of the assets that we can hold in it. So it's not like you can die and just leave the rest of it sitting in an accumulation account. So my point is it's ultimately going to have to exit the fund through death benefit payments.
Liz Westover, FTI:
Yes.
Robyn Jacobson, CTA:
Now if you've got, say... And I'm being conservative. I know some people have far less but you might have a $5 million fund, $10 million fund, a $15 million fund. Once that money comes out, we've got very strict rules on how much can go back in. $25,000 or now $27,500 a year or you've got your $110,000 as a non-concessional depending on age et cetera.
Robyn Jacobson, CTA:
It's going to take you a lot of years to get that amount back into the fund if that amount is coming out. So my point is we're going to see a massive shift of wealth in the decades ahead out of the superannuation environment into... ?
Liz Westover, FTI:
Absolutely.
Robyn Jacobson, CTA:
Is it held privately? Is it held in trust? Is it held in companies? What does that do to revenue collections because what might have been taxed at 15% or 0% depending on how the amount was held in super, versus how that income is taxed outside the super environment. I think this will be fascinating to watch.
Liz Westover, FTI:
Look, it absolutely will. And I think the big funds, those SMSFs that have got big balances, they're legacy products. As those people die and we cannot get those volumes of balances into super anymore, we're not going to see many of those big funds. But that means there's a lot of planning that goes around those particular ones.
Liz Westover, FTI:
And what I would say is, and I'm doing a lot of work with my clients at the moment around this, is where they've got business real property in the fund, so the business succession can actually depend on their ability to manage what's going on in their fund. So I've got situations where there's a very chunky asset that's held in the fund, it's being used by the family business.
Liz Westover, FTI:
If one of those members dies, we actually have to get it out the fund. It cannot stay in the fund anymore. How do we do that, to your point earlier? Ultimately, we might want it held in a family trust but you can't pay it out from the fund to a family trust. So does the family trust have assets to actually purchase that asset? So a whole heap of planning that goes on around just getting benefits out of super.
Robyn Jacobson, CTA:
Well, there'll be no shortage of work in the years ahead for the profession, that's for sure.
Liz Westover, FTI:
No, it's almost a semi-profession itself for SMSFs, isn't it?
Robyn Jacobson, CTA:
Absolutely.
Liz Westover, FTI:
It's very busy.
Robyn Jacobson, CTA:
Liz, thank you for your time. I think again, you've highlighted not just the complexity ongoing in the super space but the volume of changes. It never stands still and always a challenge to keep on top of what's going on, but thank you for your insights.
Liz Westover, FTI:
My pleasure.
Robyn Jacobson, CTA:
Thank you for listening to this episode of TaxVibe. I've been chatting with Liz Westover, Partner and the National SMSF Leader at Deloitte. To keep up to date with TaxVibe, be sure to subscribe, rate and review whenever you listen to your podcasts.
Robyn Jacobson, CTA:
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Robyn Jacobson, CTA:
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