In its pre-budget submission, the IFPA said the tax system is no longer fit for purpose and there are areas of the super system that should be reviewed including Non-Arm’s Length Income, legacy pensions and the newly introduced Division 296 tax.
The association’s pre-budget submission sets out 10 tax-related recommendations along with 16 super and financial services proposals that it believes could lead to a simpler, fairer and more equitable system for all Australians.
Its key recommendations include simplifying and streamlining several super thresholds by consolidating them for various super measures to $1.9 million, as well as having consistency in how the thresholds are indexed.
Other proposals include the abolition of the work test for personal deductible contributions, streamlining the personal deduction process, and making changes to the death benefit system.
It also restated its objection to the proposed Division 296 tax on superannuation balances above $3 million and the non-arm’s length expense (NALE) rules that relate to super funds.
In its submission the IFPA stated the death benefit settings of the super system should be reviewed as they no longer meet the needs of modern society, recommending instead that death benefit lump sums should not be limited to two payments.
“Having a maximum of two lump sums per dependent poses a problem where the surviving trustee wants or must pay multiple transfers of death benefits, such as different parcels of shares or other fund investments to the beneficiary or to the legal personal representative (LPR),” it said.
“Where the deceased member has directed the trustee to make certain transfers to their beneficiary or LPR, the trustee is required to comply with the direction. This means each cash payment, or in-specie transfer of shares or investments to the beneficiary or LPR will be treated as a separate lump sum.”
It continued that in this situation, if the death benefit consists of more than two lump sums, the requirements of regulation 6.21 of the SIS Regulations would be breached and said this was “unnecessarily restrictive, often impracticable, and superfluous”.
In a related issue, the IFPA said that binding death benefit nominations should not lapse after three years but should apply until they are revoked or replaced and that “informal” BDBNs should be allowed if they show a clear intention to deal with super benefits.
“The case law in this area shows many BDBNs failing on minor technicalities due to an emphasis on the importance of form over substance,” it stated.
It continued in the submission that the legacy pension amnesty should be extended and the limit of two years is unnecessary.
“We believe the ability for recipients of these income streams to fully commute the income stream should be ongoing,” it stated.
Additionally, the IFPA stated it did not believe the SMSF quarterly reporting regulations which came into force on 1 July 2023 were necessary and suggested there should be a single set of annual reporting deadlines for all SMSFs, which would also assist with streamlining reporting arrangements.
“This would reduce red tape and allow SMSFs to complete all their reporting at once such as tax return, financial statements and TBAR,” it stated.
“Considering around 93 per cent of SMSFs only have one or two members, the move to a more frequent reporting regime will increase the SMSFs reporting and administrative obligations, remove flexibility and add more red tape for the majority of one to two-member funds.”
Finally, the IFPA made six key recommendations regarding the NALI/E legislation including the NALE rules be repealed so the law (295-550 Income Tax Assessment Act 1997) is brought back to its pre-1 July 2018 terms, and instead use existing regulatory tools to deal with non-arm’s length dealings.
It continued that SMSFs should be exempt from the NALE regime like APRA-regulated funds and the two-times multiple concept should not be legislated.
Furthermore, it said consistency was needed between general and specific expenses and that NALI/E should be made proportionate and only the additional income over and above an arm’s length income or the underpayment of expenses should be subject to the NALI tax rate of 45 per cent.
