My wish list: 3 changes SMSFs need that won’t blow a hole in the Federal Budget

By Meg Heffron, Managing Director, Heffron SMSF Solutions

If accountants ever needed reminding that 2020 is indeed a strange year, look no further than the fact that the 2020 Federal Budget will be brought down on Tuesday, 6 October rather than the traditional “second Tuesday in May”.

Like many in my field, I depend on the budget to add spice to my technical training sessions. After all, we all like to have something new to talk about.

Minister Hume has talked up the possibility of some “superannuation reforms”, but it seems likely that these will relate to whether or not compulsory superannuation levels increase to 10% as planned and possibly changes to the rules about default superannuation choices.

What about changes that impact SMSFs?

Given the unprecedented level of Government spending, inevitably the point will come when politicians turn their minds to how to pay for it all. And it’s easy to imagine that any additional taxes raised to foot the bill might be skewed towards those who have wealth already – often SMSFs and their members. A knee jerk response by Government could well be steps such as re-introducing tax on superannuation benefits, reducing tax exemptions on funds that provide pensions, increasing tax on superannuation contributions etc.

But a few factors give me hope that we may not see a raft of new taxes directed at superannuation or SMSFs.

One is the Government’s rhetoric around growing, rather than taxing, our way to economic recovery. This is a nice political slogan but also suggests that if there are new taxes on superannuation, we won’t see them in October.

I suspect they will come next year at the earliest and possibly even later.

Another is the airing of historically scandalous ideas like “we can print money without creating inflation at the moment”. Not since I completed my economics degree nearly 30 years ago have I heard terms that include “monetary theory” bandied about so frequently – although, a sign of the times, now it’s “modern monetary theory” and I suspect the concepts and conventional truths are a little different to ECON110 at university in the 80s. Should these ideas seep into the political response to our new spending, we would again see little appetite for big tax hikes on superannuation right now.

The superannuation issues I would most love to see in the 2020 Federal Budget actually have nothing to do with the current crisis. In some ways, now would be an ideal time to deal with them. They don’t really cost much (if any) money and they address inconsistencies in our system.

My Budget super wish list

There are three:

  • Deal with residency. In an increasingly globalised world, it is ludicrous that Australians re-locating overseas face such challenges around retaining the Australian residency of their SMSF. The rules make it hard, if not impossible, for them to keep making contributions while they are not Australian tax residents and the central management and control test often forces them to put someone else (who cannot be paid) in charge of their key retirement asset until they return. Often the only practical solution is to wind up their SMSF. There must be a better way.
  • Deal with legacy pensions. We have a small and shrinking cohort of SMSF members with “defined benefit” pensions. These were set up in the late 1990s and early 2000s for very good reasons – often to do with social security or tax planning. Superannuation rules have changed profoundly multiple times since the last time new pensions like this were available in SMSFs and yet these members are trapped in a structure they set up at least 15 years ago. I suspect the youngest SMSF member with a defined benefit pension is currently at least 70 and most would be well over 80. Let them simplify their affairs and transfer to modern account-based pensions.
  • Simplify indexation of the transfer balance cap. At some point in the next few years this will increase from $1.6 million to $1.7 million. But not for everyone. Anyone who has used (say) 80% of their $1.6 million limit already will only receive 20% of the $100,000 indexation. Once the limit increases, there will be 100 different possible transfer balance cap amounts for any individual. This will increase to 200 when the standard cap increases from $1.7 million to $1.8 million a few years later. This and other features of the system betray a classic overemphasis on limiting tax concessions for the so-called “wealthy” without stopping to think about whether the additional complexity is worth it.  Simplify things. Make the new, higher cap applicable for everyone. Will we really suffer terminal losses in tax revenue if every wealthy person is allowed to convert an extra $100,000 to pension phase every time the cap increases?

If I can’t have those 3 things, I’m crossing my fingers and hoping for nothing! Only a couple of weeks till we find out!

This article was first published in Thomson Reuters’ Weekly Tax Bulletin.

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