Trustees urged to take careful approach with budget dilemmas
SMSF trustees who risk financial ruin by responding to budget announcements have been told that in some cases it may be best to hold off taking immediate action, with the proposals still facing numerous hurdles.
DBA Lawyers director Daniel Butler said there are many trustees faced with the decision as to whether to make a contribution in order to save their livelihoods in the hope the legislation doesn’t come through, or to respond to the proposals now and suffer the resulting “financial wreckage”.
“There are a lot of instances where people need to act to put more money in to save the day, to ward off the exposure to losing their deposit or being sued, or to fulfil the obligations for a LRBA that the ATO is putting a lot of pressure on them to resolve by 30 June,” said Mr Butler.
“[For example,] what about those casualties where the government has wreaked havoc where the trustees have made a property purchase? Are they supposed to walk away and lose their deposit and say 'sue me for the difference'?”
Mr Butler said SMSFs that have entered into contracts and transactions to buy investments may be in default of such contracts and stand to lose deposits and suffer considerable loss and damages by taking action on the budget proposals.
SMSF trustees attempting to fix related-party LRBAs are another group that could potentially face financial ruin by responding to budget changes now, he said.
These trustees will require considerable cash flow before 30 June 2016 in order to get their related party LRBAs on arm’s-length terms.
“For these SMSFs to comply with the ATO’s recently released Practice Compliance Guideline PCG 2016/5, relevant SMSFs need to make the entire outstanding 2016 FY payments of principal and interest on non-arm’s length loans before 30 June 2016,” he said.
SMSFs impacted by the GFC or scandals such as Storm or Trio may also face adverse consequences, he said.
Mr Butler said clients who might suffer financial ruin or serious consequences as a result of relying on these announcements need to carefully consider how they should proceed.
“Should they rely on an announcement on which the government may get rolled, and the opposition is not supporting?” he said.
“Do they rely on something which still has many hurdles ahead of it? Firstly, the government must be re-voted into office; if they get voted into office, then there could still be opposition to getting the proposals through Parliament; and even then, it’ll likely be twisted and convoluted before it gets into final law.
“Trustees are in a real predicament. Some trustees [will] have to move forward and make contributions for fear of losing considerable money, for fear of being financially ruined for life,” he said.
If clients do choose to ignore the announcements for the time being, however, it is very important they are aware of the penalties they could potentially face by doing so, Mr Butler said.
“If they exceed their cap then they’re going to have to be willing to accept the consequences that follow, [should the proposals become legislation]," he said.
Some trustees are at their “wit's end”, with their whole financial security and financial future dependent on what they can do with their super.
“We’ve got a very unforgiving and uncaring government, who wants to apply retroactive legislation for up to nine years,” he said.
“It just doesn’t fit well with these people who are law-abiding citizens who have never had ill-intent and now they’re getting slammed by the government.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.