Professionals / SMSF / SMSF Strategy

What changes lies ahead with the Cooper & Henry Reviews for SMSFs?

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With the release of the Henry Tax Review due out before the federal budget in May 2010, and the Super System Review Panel currently working through submissions on the Phase Three Issues Paper, there will be plenty of discussion about what we will be, should be and won’t be recommended to shape the superannuation industry moving forward.

I thought I’d put down my thoughts and view on what changes I would like to see out of these reviews that affect SMSFs:

  1. It ain’t broken… so don’t try to fix it!
  2. Increase the concessional contribution caps
  3. Remove the work test to age until post age 75
  4. Abolish the 10% rule
  5. Remove the limit of 4 fund members to make it a ‘family fund’.
  6. Bring fairness into super fund tax rates for low income earners
  7. Allow for residential property to be transferred from a related party
  8. Remove the inequality for SMSFs of anti-detriment amounts counting as concessional contributions
  9. Require approved auditors to be registered to improve professional standards.
  10. Introduce a special purpose trustee company as the mandatory trustee option

1. It ain’t broken… so don’t try to fix it!

A significant message from many submissions on the SMSF sector is that that industry is in fairly good shape.  As the saying goes, “if it ain’t broke, don’t try to fix it!!”  Whilst there are some changes that need introducing to ensure that the system remains robust (with the projected growth), the level of self-interest and self-direction of individuals wanting to take control should be seen as a positive sign for the SMSF industry moving forward.

2. Increase the concessional contribution caps

The halving of the concessional contribution caps was a serious ‘kick in the guts’ for many working Australian’s making contributions to help fund their own retirement.  With the Rudd Government having significantly overstated the effect of the GFC on our economy, there must now be some very strong rationale to reinstate the concessional contribution limits back to the amounts introduced with Simpler Super on 1 July 2007.  Remembering that for those over 50, the government has reduced the transitional timeframe to make concessional contributions by 20%.  Maybe they should also consider extending the period to adequately compensate those disadvantaged by the law change?  Unlikely…  however it is an election year, so I’d be expecting a good news budget, with superannuation a likely benefactor.

3. Remove the work test to age until post age 75

It seems somewhat ridiculous that as we encourage people to work longer that older working Australian’s have a separate set of work tests to allow them to provide for their own retirement.  Why not make it simpler super (sounds familiar?) and allow people up to age 75 to avail themselves of the ‘bring forward’ rule to contribute up to $450,000 without a work test.  With an aging population, there must be a growing number of baby boomers with older parents who may leave behind an amount in their estate that some individuals won’t be able to contribute into super because they are already over 65 years of age.

4. Abolish the 10% rule

With the introduction of the Reportable Employer Superannuation Contribution (RESC) rules, this is now most likely the stupidest rule within tax law affecting superannuation.  Not only have we had a halving in contribution limits for the current financial year, but for a range of individuals they have been hamstrung in claiming tax deductions from their trade, profession or vocation as they may have also received some employment income (with SGC attached).  I have seen a range of medical professionals go from operating companies, back to sole traders and now back to a company structure because of this very rule.  With less than generous concessional contribution limits, does it really matter where the assessable income is sourced?  If I have $15,000 of SGC and salary sacrifice, why can’t I claim up to a further $10,000 as a concessional contribution to offset other assessable income such a capital gains?  It’s nonsense and needs to be fixed!!

5. Remove the limit of 4 fund members to make it a ‘family fund’.

I’m not sure as to the original science of determining four members for a SMSF? Personally, being someone who took on board the former Treasurer, Peter Costello’s comments about “one for Mum, one for Dad, and one for your country”, I’m one of the unfortunate group now that cannot include all family members within my SMSF.  Whilst the concept of a ‘small fund’ must remain, surely it can expand to adequately cater for direct family members?  I believe moving forward that the family unit will come to embrace SMSFs further and make investment decisions together (even more so than today).  Let’s not create a ‘black sheep’ concept for family members with SMSFs.

6. Bring fairness into super fund tax rates for low income earners

It has already been recognised within reports issued by the Henry Tax Review that inequality exists with low income earners and tax on superannuation contributions.  There needs to be an incentive for low income earners to be encouraged to contribute into super, but with super tax rates at similar or higher levels than personal tax rates there is little to encourage additional savings.

7. Allow for residential property to be transferred from a related party

Section 66 prohibits the acquisition of an asset from a member (or related party).  There are exceptions within the section to allow for acquisitions of listed shares, widely held trusts, business real property (BRP) and in-house assets (up to 5%) held by members.  BRP by way of definition allows for both active (in your own business) and passive commercial property investment as it must be used “wholly and exclusively in one or more businesses”.  If an exception exists for commercial property to be acquired from a member for investment purposes, then why is it discriminatory against residential property?  If there are concerns about sole purpose (i.e. inappropriate use), then why can’t a clear framework be introduced to ensure appropriate governance around this matter.  I could see SMSFs becoming a significant benefactor of any change to the acquisition from member rules with residential property.

8. Remove the inequality for SMSFs of anti-detriment amounts counting as concessional contributions

The ATO’s view on allocations from a reserve within a SMSF for the payment of an anti-detriment augmentation (amount) appears to have created an unlevel playing field for SMSFs against larger public offer funds.  The NTLG Super Technical Sub Group in June 2009 discussed this matter and the ATO expressed that such an amount from reserve to the member’s account for the additional anti-detriment amount, unless it meets any of the exceptions contained within tax law on reserves (i.e. fair and reasonable, 5% of account balance), then the amount would be treated as a concessional contribution.   Doesn’t seem fair to me, where the same rule can be applied in different ways between public offer funds and SMSFs.

9. Require approved auditors to be registered to improve professional standards

The professionalism of auditors continues to be a challenge for the industry.  The statistics from the Cooper Review continue to be somewhat damning for the SMSF professional to try and step out of the ‘strike zone’ of public-offer funds.  With a 51% of auditors auditing less than 5 funds, there is a need to consider a new mandatory registration regime to increase professional standards and competency for those holding themselves out as SMSF auditors.  It is the profession that have themselves to blame for any compulsory registration – when you have 11% of fund auditors having audited their own fund and not have any disciplinary action from their professional body (what I would presume), then maybe it’s time to have a rethink of improving standards.

10. Introduce a special purpose trustee company as the mandatory trustee option

One of the most surprising statistics I read from the Cooper Review – Phase Three Issues Paper was the small number of funds using a corporate trustee.  90% of funds within the last 2 years established an SMSF with individual trustees, which I found staggering.  The primary driver for this must have been cost, which means the Cooper Review needs to put forward a recommendation to create a special purpose trustee company for SMSFs and make it compulsory to adopt moving forward.  An annual ASIC fee of $50 could apply for administrative purposes.  There are a range of benefits of a corporate trustee over individual trustees – refer to blog, “Which Trustee Structure is right for me?”

So, there you have it… I’ll be watching to see how the next couple of months unfold with recommendations from the Cooper and Henry Review, and any changes announced on budget night.

I’d be interested to hear of any thoughts from readers about their wish list of changes that they would like to see for SMSFs.

PS.  Don’t forget to complete my poll on what impact you think the Cooper Review have on SMSFs.

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