Date posted: 17/07/2018 6 min read

Predictions for the SMSF sector

Tony Negline, Superannuation Leader at CA ANZ outlines five areas of change.

In Brief

  • Constant regulatory change will continue to be the norm in the superannuation sector.
  • The Royal Commission will begin examining the superannuation industry in August.
  • Bedding down of super reforms will continue for the next few years.

The superannuation sector is beset by changes from all sides at present. Constant regulatory change will continue to be the norm but probably at a faster pace. Here are the five areas which Tony Negline, Superannuation Leader at Chartered Accountants ANZ believes are likely to bring about significant change.

1. Bedding down 2016 super reforms

SMSFs have only now completed their first annual returns applying these new rules. There is still quite a bit of confusion about how best to operate under them, and I think the bedding down process and revealing of unintended consequences - which only come about through learned experience - will continue for the next few years.

2. Royal Commission in Banking, Superannuation and Financial Services

The evidence presented to the Royal Commissioner so far has captivated the community, even though there have been few real surprises for those who really understand how the financial services industry operates.

What is becoming clear is that any form of conflicted remuneration has the unsurprising potential to create conflicts of interest and that financial penalties for illegal behavior are thoroughly inadequate.

The superannuation industry, except in passing, has actually not been examined as yet. The examination of super will begin in earnest in early August. At the moment the Royal Commission has a very tight timeframe. It would be very surprising if it wasn't extended by a year or even more.

The whole purpose of this Commission of inquiry is to seek out wrong doing, work out why it occurred and how best to make it stop. To that end there will be a raft of recommendations that come out of the Commission. The government will then have to decide which suggestions it implements and how.

3. Productivity Commission (PC) Superannuation Review

The draft PC review into efficiency and competitiveness of the super sector was published in late May 2018. This draft report was a hard hitting analysis of the super industry, especially how it deals with default funds for new employees, costs and insurance. No part of the super sector was spared criticism.

The government has already decided to legislate several of the PC's draft recommendations, such as the following:

  • Insurance is optional for lower account balances and fund members aged under 25
  • Exit fees banned
  • Smaller account balances have to be compulsorily transferred to the ATO, which will have to work harder to find an active account for each small account member

The PC is expected to release its final report before December 2018. The government will also need to examine this report and decide what ideas it will adopt. Just like the Royal Commission, the repercussions of this Productivity Commission review will be with us for years to come.

4. Triennial SMSF audits

The purpose of the policy is to cut red tape and reduce compliance costs. At the time of writing this policy was still being designed.

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The current plan is for some SMSFs to be eligible to only have their fund examined by an external auditor once every three years. That is, a 36 month audit at one point in time. It will not be compulsory for SMSF trustees to use this policy. They could elect to retain an annual audit.

Right now some administrators and agents use auditors to locate processing and paper-work errors. What practical change will the three year audit create for fund administrators and tax agents? Logically it would seem reasonable that this cannot continue for funds only receiving an audit every third year.

There are a range of funds that will not be eligible to use the three year audit approach. For example, those who have lodged their annual return late or had a, to be fully defined, compliance breach. In addition, funds with certain types of transactions such as related party transactions, collectibles or artwork and so on.

At present it is difficult to specifically know how many funds will fall out of this policy or, to put this another way, how many will be allowed to have their fund audited once every three years. The government has said it does not want to decimate the SMSF auditor ranks so it will be interesting to see how this policy is implemented.

5. Non-arm's length income provisions

There are two proposed changes which commence from 1 July 2018:

i. Non-arm's length expenses (whether revenue or capital in nature) incurred by a superannuation entity in gaining or producing assessable income result in such income being deemed not to be on an arm's length basis and hence will be subject to the non-arm's length income penalty tax.

ii. If the right to income from a trust through a fixed entitlement was acquired on a non-arm's length basis then similarly the non-arm's length penalty tax would apply.

This change has not been legislated, however, this is likely to occur reasonably soon. Importantly, these changes apply to arrangements put in place before and after their commencement date.

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