Super changes under the microscope

The coming year will be an interesting one as far as the super goes. There are some of the changes currently going through parliament, some waiting in the wings and the rest that we haven’t even seen yet.

Keeping up to date with the super changes will be a challenge for everyone especially in the first half of this year, and don’t forget there’s a budget planned for April and a possible Federal election soon after that. Who knows what they may bring?

That said, here’s some of the proposed super changes I think you should keep your eyes on:

Legislation currently before the parliament

Even though the politicians in Canberra may not be sitting now there is still legislation waiting patiently to be passed.

1. Transition to Retirement Income Streams with a reversion where the survivor does not meet a specified condition of release.

This legislation will correct an anomaly which occurred from the time the superannuation changes commenced on 1 July 2017. The anomaly was that if you were in receipt of a transition to retirement income stream (TRIS) which provided a reversion to your surviving dependant on your death it was not possible for it to be paid unless the dependant also met specific conditions of release. The proposed change will now allow the reversion to be paid without it being credited to the deceased’s accumulation account and used to commence a new death benefit pension.

Example:

Mike, who is in receipt of a TRIS, is age 60 and his wife Jayne is 56. The TRIS nominates Jayne to receive a reversionary pension. Mike dies of a heart attack. Under the current legislation as Jayne does not meet a condition of release it is not possible for the reversion to be paid to her. Instead the capital value of Mike’s pension will be credited to an accumulation account and Jayne can then decide on whether to receive the benefit as a death benefit pension or withdraw the amount as a lump sum.

Amendments to the legislation, if passed, will allow Jayne to receive the TRIS as a reversionary income stream and the balance of the pension will not be counted against her transfer balance cap account until 12 months after Mike’s death.

2. Income earned on investments to be treated as non-arm’s length income where expenses are not on an arm’s length basis.

Income that is earned by a super fund on investments which is in excess of non-arm’s length transactions is taxed at a penalty rate of 45%. These rules are being extended so that income earned by the fund on transactions which incur expenses that are not on an arm’s length basis will also be taxed at the penalty rate. The Australian Taxation Office (ATO) has published a draft Law Companion Ruling 2018/D10 on the proposed operation of the proposed legislation, currently in the parliament.

Example:

The Harbourview SMSF acquired a commercial property at market value from a non-related party. It has been leased on an arm’s length commercial basis. The purchase of the property was financed by a limited recourse borrowing arrangement (LRBA) from a family company which is a ‘related party’. The loan for 90% of the value of the property was interest free and repayable at the end of 25 years.

As the loan to the SMSF did not incur expenses consistent with an arm’s length dealing the rental income earned by the fund will be taxed as non-arm’s length income. The income (less deductions attributable to the income) will be included in the SMSF’s non-arm’s length income and taxed at 45%.

3. Superannuation Guarantee opt-out where employees with multiple employers exceed the $25,000 concessional contributions cap.

Currently, some high-income earning employees with multiple employers may exceed their concessional contributions cap of $25,000. The change will allow employees to apply to the ATO to have an employer reduce superannuation guarantee contributions, so they will not go over their concessional contributions cap.

Example:

Dr Sid Surgeon is employed as a visiting medical officer at three hospitals. As he earns above the superannuation guarantee maximum income threshold each quarter from each hospital the combined super contribution is more than his concessional contributions cap of $25,000. He has decided to arrange with two of the hospitals to reduce the amount they will contribute to super for him. He then applies to the ATO for approval of the reduction so that his employers’ contributions will not exceed his concessional contribution cap.

4. Salary sacrifice contributions and employer superannuation guarantee obligations

Under the current superannuation guarantee legislation, it is possible for an employer to offset the amount of an employee’s salary sacrifice contributions against that employee’s superannuation guarantee liability. This legislation will ensure that only contributions made by an employer that are in addition to salary sacrifice contributions will be counted against the employer’s superannuation guarantee obligations for the employee. This legislation has been sitting in parliament for some time.

Example:

Yvonne has decided to salary sacrifice $10,000 and have it contributed to her super fund. Her employer has a superannuation guarantee liability of $7,000 for her. The employer will be required to make a contribution of $7,000 to Yvonne’s super fund in addition to her salary sacrificed amount so that it can be offset against the employer’s superannuation guarantee liability.

5. New superannuation guarantee penalties

This legislation will increase the penalties on employers who fail to comply with their superannuation guarantee obligations and allow the ATO to issue employers with education directions or directions to pay the superannuation guarantee charge and strengthens the penalties on directors for non-compliance.

6. Bans on exit fees, opt-in for insurance and consolidation of inactive accounts

The legislation currently in the parliament covers exist fees, insurance and inactive member accounts and was announced in the 2018 Federal budget.

Exit fees on withdrawal of super benefits will be banned and limits will be introduced on the amount of fees that can be charged for MySuper or choice products where the balance of a member’s account is less than $6,000.

Insurance will not be permitted on an opt-out basis in some circumstances and superannuation funds cannot provide death, total and permanent disability or income protection insurance on an opt-out basis where:

• the member is under the age of 25 years and begins to hold a new superannuation account on or after 1 July 2019;
• the member’s account balance falls below $6,000; or
• the member’s account has not received a contribution for 13 months and is inactive.

This may have an impact on members of SMSFs who hold member accounts in industry or retail funds for purposes of accessing insurance cover as their account balance may fall below $6,000.

Inactive low-balance accounts are required to be paid to the ATO and any amounts received will be consolidated in some situations.

Proposed legislation that’s not yet in the parliament

7. Number of members of an SMSF increase from four to six members

The bill has not been introduced into the parliament at this stage but there is a proposal to increase in the maximum number of members in an SMSF from four to six members.

8. Three yearly audit for SMSFs that have a good track record

There could be a possible change to permit SMSFs that have a good compliance track record to be audited at the end of every three years rather than annually, though this bill has not been introduced into the parliament.

9. Disallowance of deductions for expenses relating to non-income producing vacant land

Draft legislation was released by the Treasury in October 2018 to no longer allow expenses associated with holding vacant land owned by SMSFs and individuals which is held for the purpose of earning assessable income as tax deductions for comment, however no legislation has been introduced into the parliament.

A revised ATO Guideline

10. Amended Law Companion Guideline

A draft amended Law Companion Guideline LCG 2016/12 DC on the total superannuation balance was issued on 14 January 2019 with comments required by 22 February 2019.

The draft now includes comments on amended legislation which will increase a person’s total superannuation balance account where the fund entered into an LRBA on or after 1 July 2018. The amendments do not apply to LRBAs entered into prior to 1 July 2018, including those that were later refinanced.

Where to now?

Now it’s just a matter of wait and see as to which legislation will be passed by parliament prior to the impending election or where that doesn’t happen, whether the government (whoever that may be) will reintroduce the legislation after the Federal election.