Reducing super complexities crucial, says SMSF Association

“The superannuation system is complex,” SMSF Association CEO John Maroney said.

“Since 1 July 2016, the legislation and complexities in administering superannuation accounts, particularly for SMSFs, ha[ve] significantly increased. There are now numerous thresholds, caps, indexation methods and limits that require constant monitoring and reporting.

“With transfer balance cap (TBC) indexation now occurring on 1 July 2021, we believe it is imperative that a simpler method of indexation is implemented. Additionally, the total superannuation balance (TSB) thresholds should be streamlined.

“The superannuation system is not only difficult for trustees and members, but also their advisers who must be privy to information which, in many instances, they are unable to access in an accurate and timely fashion.”

To address this complexity, the association stated they have made three key recommendations including removing or simplifying TBC proportional indexation, reducing the number of TSB thresholds along with providing SMSF advisers and administrators access to ATO portals.

This echoes similar calls from Heffron managing director Meg Heffron, who stated there needed to be a rethink in the approach regarding transfer balance caps that was causing unnecessary roadblocks.

Mr Maroney said that one way to address the complexities associated with proportional indexation would be to lock in a member’s TBC at the time they first start a retirement phase income stream. 

“Although this option may cause some minor inequities, we believe these are acceptable to avoid the cost and confusion proportional indexation would cause,” he said.

“Alternately, if the government wishes to retain proportional indexation, the rules could be simplified by reducing the number of bands (currently 0 per cent to 100 per cent) of proportional indexation to five or some other appropriate number.”

On the issue of TSB thresholds, Mr Maroney said the solution is to reduce the number of thresholds.

“As the system stands, there are multiple differing thresholds for individuals to be aware of when accessing certain superannuation concessions. Additionally, some of these are indexed and some are not,” Mr Maroney said.

“Not only do individuals find this confusing, but it also increases the risk of inadvertent breaches of the contribution caps and TBC, leading to time-consuming and often costly remediation.”

This would include increasing the work-test exemption TSB threshold to $500,000 to align with the catch-up contributions threshold along with phasing out the $1 million quarterly TSB threshold within two to three years.

Furthermore, the SMSF Association recommends removing the $1.4 million and $1.5 million TSB bring-forward non-concessional contribution (NCC) thresholds and index the segregated pension threshold with the indexation of the general TBC.

Increasing efficiency and cutting technical red tape 

The SMSF Association will also seek to continue to prioritise red tape reduction and legislative improvements, particularly in relation to the technical nature of superannuation legislation. 

Two key areas the association will look to focus on include improving SMSF residency rules and providing a practical approach to non-geared unit trust investment breaches for SMSFs. 

The association recommended removing the active member test and providing ATO discretion along with extending the temporary absent exception for the central management and control test from two to five years.

“We suggest that the two-year temporary absence exception for the central management and control of a superannuation fund to be in Australia should be extended to a five-year exemption,” Mr Maroney stated.

“The existing two-year exemption is too short in the context of modern work arrangements, where executive and other staff are often expected to commit to an overseas placement of greater than two years.

“We believe that the active member test does not provide any additional integrity to the superannuation system, as the establishment and central control and management tests already ensure that only Australian-based superannuation funds can benefit from the superannuation tax concessions.”

In regard to the non-geared unit trust investment breaches, the SMSF Association believes the practical administrative nature of dealing with breaches to the strict criteria causes an unnecessary cost to SMSF trustees. The association stated it would recommend allowing trustees to implement a plan to rectify the breach before the end of the following financial year.

The SMSF Association will also bring its support for the MYEFO announcement which will enable retirees with legacy pensions who have been unable to commute amounts in excess of their transfer balance cap to undertake the necessary partial commutation.