Federal budget hoped to bring about SMSF changes
While last year’s budget left SMSFs relatively unscathed, this year’s budget can be a good start to addressing some of the much-needed changes and issues affecting the sector, according to Heffron.
As part of the 2020–21 federal budget, the government announced a raft of new measures for super funds aimed at addressing underperformance and multiple accounts, but there were relatively few measures and policies that affected SMSFs.
With the 2021–22 budget set to be handed down on Tuesday, there could be possible changes to superannuation tax and retirement income further on the horizon, as key legislation and bills affecting SMSFs are still yet to be passed.
In its federal budget submission, the SMSF Association had called on the government to commit towards reducing complexity in the retirement income system.
In a recent online update, Heffron managing director Meg Heffron said while last year’s possible reforms were not addressed, this means that the upcoming budget provides ample opportunity to start making some changes, as none of the current issues affecting SMSFs are going away and will only pile up.
There is still a need to address the residency rules to make it simpler for people moving overseas to keep their SMSF, to deal with legacy pensions (such as complying lifetime pensions) and to simplify the indexation of the transfer balance cap which has created great complexity across the industry this year.
“I expect a lot of other people now feel the same about the indexation of the transfer balance cap, as we’re about to enter the first year of indexed caps,” Ms Heffron said.
“From 1 July 2021, there will be (ridiculously) 101 possible personal transfer balance caps rather than just $1.6 million or $1.7 million.”
On top of the complexities of the transfer balance cap along with super contribution caps, the budget presents a good opportunity to finalise the delay in the bring forward age which has created a difficult and uncertain position for many advisers.
“Don’t announce anything on extending the bring forward maximum age from 65 to 67. No, rather than putting it in the budget, just pass the legislation that is already before Parliament,” Ms Heffron said.
Ms Heffron suggested the proposed changes to exempt current pension income (ECPI) should also be dropped.
This comes as a recent Accurium survey had also revealed that many practitioners are against the ECPI changes ahead of the budget.
“Remember the last budget? The plan was to let trustees that are allowed to use the segregated method to choose whether they used that or the unsegregated method for calculating ECPI. The proposal probably came from good intentions,” she said.
“When ECPI life changed on 1 July 2017, there was widespread criticism of the ATO’s position that funds allowed to use the segregated method were required to do so whenever — as a matter of fact — all member accounts were supporting retirement phase account-based or market-linked pensions. That definitely made life very complicated.”
In some ways, the budget announcement to provide flexibility was designed to allow people to go back to the way things used to be, but Ms Heffron noted that the time for that change was four years ago when the ATO first expressed its controversial view.
“Now, systems have been changed (at great expense), accountants have learnt the new approach (at great expense) and there is little benefit to changing things again. In fact, all a change would do is introduce a whole new layer of complexity,” she said.
Meanwhile, the budget also presents the opportunity to lift the $500,000 threshold for the special “catch-up” concessional contribution rules.
“These are the rules that allow people who didn’t use their entire concessional contributions caps in prior years to use them in future years,” Ms Heffron said.
“These unused amounts can only be carried forward for five years and the concessional contributions cap remains pitifully low — even next year, it will be only $27,500.”
“Currently, only those with a total super balance of less than $500,000 at the previous 30 June are eligible to use these extra cap amounts in a particular year. And the amount is not indexed.
“Why? Why limit a completely reasonable rule (use caps you were entitled to at the time but didn’t use) to those with superannuation balances that are clearly too low to support a comfortable retirement? Why not use the general transfer balance cap instead ($1.7 million from 1 July 2021)?”