SUPERANNUATION’S IMMUTABLE RULE OF CHANGE
There have been three interesting recent developments in the world of self-managed superannuation. All three developments are still of a “watch this space” nature, but they are useful markers as we start to sketch out the shape of super in 2021.
Is an indexation of the Transfer Balance Cap on the horizon?
The introduction of the Transfer Balance Cap (‘TBC’) in 2017 is one of the most significant superannuation reforms of recent years. The TBC is a limit on how much superannuation can be transferred from a member’s accumulation account to their tax-free retirement phase account. It also has some bearing on how that member may make contributions to their fund.
Currently, the TBC is $1,600,000 for all Australians. This threshold is to be indexed according to inflation and adjusted in lots of $100,000 from time to time.
The ATO has now indicated that the very first indexation of the TBC may take place on 1 July next year. This will occur if the CPI figure for the December 2020 quarter is 116.9 or higher (for reference, the CPI figure for the preceding quarter was 116.2).
If indexation occurs, things will start to get interesting. There will no longer be a single TBC figure for all Australians. Instead, a member who starts their first retirement phase income stream on or after indexation will be entitled to a TBC of $1.7m. Conversely, members with a transfer balance account who have previously met or exceeded the current $1.6m cap will not be entitled to indexation. Members with a transfer balance account but who have not met the $1.6m cap will be subject to a proportionate methodology and have a new TBC somewhere between $1.6m and $1.7m. The ATO will perform this calculation.
There’s a sting in the ATO’s announcement, though. It noted that late and retrospective reporting of member balances may cause it to go back and adjust or cancel any proportional indexation of the TBC. This, coupled with the fact that advisers will for the first time have clients with a variety of TBCs instead of a uniform $1.6m, may mean that the 2021-2022 year will witness a significant increase in inadvertent excess contributions. If indexation occurs, advisers will need to review their processes to ensure they are on top of this issue.
Another year, another promise of 6-member SMSFs
Few reforms have had as many false dawns as the proposal for 6 member SMSFs (the long-mooted Div 7A reforms come to mind as a possible rival contender).
6-members super funds have been on the Government’s policy radar since at least 2018. Although previously stuck in Parliament and prorogued before the last election, legislation to effect the change is now before the Senate, which referred the matter to its Economics Legislation Committee. The Committee has now recommended the Senate pass the Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020, meaning the changes should become law. The Committee anticipated benefits of greater control and flexibility coupled with reduced costs (on a ‘per person’ basis).
Of course, there are potential downsides to increasing member numbers. In our experience, those who bemoan the current four-person limit on SMSFs often do so in the context of trying to bring a second generation into the fund. This may occur for several reasons. Firstly, it may be done with a view to improving the liquidity of the fund where the first generation has invested heavily in a single asset and does not have the cash necessary to pay income streams or meet other payment obligations. As a rough rule of thumb, these arrangements may be detrimental to the younger generation’s efforts to establish their own long-term super strategy. Secondly, a younger generation may be brought in for alternative estate-planning and control purposes.
A concern is that an increase in SMSF member numbers means a greater risk of dispute between those members. The majority of SMSFs have a basic “mum and dad” structure. Add the kids and the risk of a dispute increases exponentially (particularly given different generations may have different short and long terms objectives at any given point in time). In any event, six people should be more likely to generate an argument than just two. Trustees should review their deeds to see how disagreements are to be managed, and whether a majority can prevail over the minority. Minority members have some protections (for example, SIS Reg 6.29 prevents a member being rolled out of a fund against their will), but the SMSF deed will go a long way towards determining the resolution of disputes.
New draft legislation confirms Best Interests means Financial Best Interests
One time-honoured solution to member disputes is to remind parties that, as trustees, they are subject to legal and fiduciary obligations to act in the best interests of all the beneficiaries of the fund. These rules are set out in multiple places, including trust law, the governing rules of the fund, and in section 52B of the Superannuation Industry (Supervision) Act. This section inserts certain trustee covenants into the governing rules of super funds, regardless of whether the deed expressly includes those obligations or not.
Significant covenants including trustee obligations to:
- act honestly;
- exercise reasonable care, skill and diligence; and
- discharge trustee powers in the best interests of the beneficiaries of the fund.
This latter covenant is particularly prone to breach when SMSF members are divorcing.
In November, Treasury released exposure draft legislation for its ‘Your Future, Your Super’ package. This legislation will clarify existing best interests duties to make clear that they refer to the best financial interests of members. Although this legislation is more targeted at industry and retail super funds, it will apply to SMSFs as well. In particular, payments by SMSFs to third parties will be subject to this obligation.
Arguably, then, this exposure draft provides timely protection against disputes arising in newly minted 6 member SMSFs. Trustees were already required to consider the financial interests of members (see the UK case of Cowan v Scargill, in which trade unions wanted an English pension funds to invest in the local coal industry in order to protect the livelihoods of fund members who were mineworkers, notwithstanding that better investment returns were available elsewhere). Nonetheless, anything that clarifies trustee’s duties to members is welcome news.
KIN Partners has extensive experience working with SMSF trustees and advisers, including in relation to estate planning, superannuation borrowing, in-house assets and related party transactions. If you would like to discuss your SMSF matter, please contact Sophie Cohen (email@example.com) on 0411 866 505 or Christian Chenu (firstname.lastname@example.org) on 0417 015 997.