By Graeme Colley
2019 will be an interesting year as far as superannuation goes. There’s an April federal budget, a looming election, plus a number of legislative changes – some currently before parliament, some in the wings and one that has just been passed into law. Here are the changes to keep an eye on.
It’s proposed that the maximum number of members in an SMSF be increased from four to six.
Where an SMSF investment is not at arm’s length, income earned on that investment is taxed at a penalty rate of 45%. This rule is being extended so that so that when the underlying investment is at arm’s length, yet expenses relating to the investment are not (i.e. the expenses are non-arm’s length), then the investment income will be taxed at the penalty rate. The ATO has published a draft Law Companion Ruling 2018/D10 signalling how the proposed legislation would operate.
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. So far so good. However, 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 (in this case fees and interest) 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 fund’s non-arm’s length income and taxed at 45%.
Currently, some high-income earners risk exceeding their concessional contributions cap of $25,000 owing to superannuation guarantee (SG) contributions, particularly where they have multiple employers. The change will allow employees to apply to the ATO to have an employer reduce SG contributions, to avoid breaching the cap.
Example: Dr Sid Surgeon is employed as a visiting medical officer at three hospitals. As he earns above the SG maximum income threshold each quarter from each hospital, the combined 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 the cap.
Under the current SG legislation, it is possible for an employer to offset their SG liability for an employee with any salary sacrifice payments the employee has elected. New legislation, which has been sitting in parliament for some time, would disallow this.
Example: Acme Services has hired Yvonne and must pay her $7,000 annually in SG contributions. Later on, Yvonne enters a salary sacrifice arrangement of $10,000 annually. The amount that is salary sacrificed cannot count toward Acme’s SG obligation of $7,000.
This legislation will increase penalties on employers who fail to comply with their SG obligations, enable the ATO to issue employers with education directions, or directions to pay the SG charge, and will strengthen the penalties on directors for non-compliance.
The legislation currently in the parliament covers exit fees, insurance and inactive member accounts and was announced in the 2018 federal budget.
Exit fees on super withdrawals will be banned, and limits will be placed on fees that can be charged for MySuper or choice products where the balance of a member’s account is less than $6,000.
The ability to provide insurance on an opt-out basis will be curbed. Superannuation funds cannot provide death, total and permanent disability or income protection insurance on an opt-out basis where:
This may impact SMSF members who also have super in industry/retail funds with insurance attached. If the account balance in these industry/retail funds falls below $6,000, then the insurance may no longer be accessible.
Inactive low-balance accounts are required to be paid to the ATO and any amounts received will be consolidated in some situations.
An anomaly which occurred from the time the superannuation changes commenced on 1 July 2017 has now been corrected. 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 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, age 60, is married to Jayne, age 56. He’s in receipt of a TRIS which nominates Jayne to receive a reversionary pension upon his death. 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.
The amended legislation now allows Jayne to receive the TRIS as a reversionary income stream. The balance of the pension will not be counted against her transfer balance cap account until 12 months after Mike’s death.
SMSFs that have a good compliance track record would be subject to an audit every three years, instead of every year.
Where an SMSF holds vacant land, expenses associated with that land will not be allowed as tax a deduction. Draft legislation was released by the Treasury in October 2018 for comment and has not yet entered parliament.
Law Companion Ruling LCR 2016/12 deals with the concept of total superannuation balance. An updated version of the ruling was issued as a draft for public review, with feedback due 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.