A lost super opportunity for SMSFs

You may not know it, but there's money to be had … and it could be yours.

While much attention has been focused on the big superannuation law changes announced in the 2016 federal budget that come into effect in mid-2017, this change has largely flown under the radar.

On 31 December, the Australian Tax Office will be given the power to seize the funds inside any professionally managed superannuation account where the balance is $6000 or less, but only if there has been no activity in the account over the preceding 12 months.

The ATO has identified more than six million super accounts across Australia where the owners are either “uncontactable” by their fund, or where the accounts are classed as “inactive” because there have been no deposits into them for 12 months.

For most self-managed super fund trustees, this law change may seem irrelevant. But that could actually be a dangerous assumption, because there's literally billions of dollars at stake. Indeed, Australia's total unclaimed superannuation funds stockpile is approaching a whopping $15 billion.

And the impending law change could snare SMSF trustees who have held some of their super outside of their own fund for one reason or another, whether that's to have some of their money managed professionally or because of the low insurance premiums available through industry super funds.

If you're in this boat, and haven't really taken an active approach with your secondary super accounts, you may be in a for a rude surprise when the ATO's enhanced powers are turned on.

How you could be affected

ATO data shows that at 30 June 2016, more than 14.8 million Australians had a super fund account. Approximately 43 per cent of these people have more than one super account, with 10 per cent having three accounts and 8 per cent having four or more.

Of the total amount of super funds deemed as lost, around $3 billion has already been transferred into consolidated revenue. The remainder is still being held by super funds because the account balances remain above the current $4000 minimum threshold. The raising of the minimum level by another $2000 will bolster the consolidated revenue account even further from the end of this month.

It has been estimated that when the new laws kick in, the ATO will be able to grab an estimated $220 million in super that falls below the new $6000 threshold. Last year, when the level doubled from $2000 to $4000, the tax office was able to pick up around $197 million.

Funds transferred to the ATO can be reclaimed via the tax regulator's website and other online government portals, but the process for doing so is long-winded. Worse still, funds held in the Government's coffers only earn interest at the rate of inflation, meaning there is a significant lost opportunity cost to the fund's owners.

And another unfortunate consequence is that any insurance policies tied to super accounts that are transferred to the ATO are automatically nullified, because the funds are no longer associated with the insurance originator.

“There are currently around 300,000 people with more than six super accounts, so it's clear many could enjoy a boost to their funds by consolidating missing amounts, particularly balances that have or will soon go to the ATO as unclaimed,” says Martin Fahy, chief executive of Australia's peak superannuation body, the Association of Superannuation Funds of Australia.

For a person who has a $5,000 account taken by the ATO this means a loss of around $225 a year in earnings on average compared to what you would receive if that account was consolidated into your active super account.

ASFA estimates up to 100,000 additional accounts could be captured when the threshold rises to $6000. Last year when the threshold lifted from $2000 to $4000, more than 130,000 extra accounts were transferred to the ATO.

“Fund members with missing or lost accounts are more likely to generate earnings with their balance in a super fund, rather than with the ATO, where balances only attract interest at a current rate of 1.5 per cent per year,” Dr Fahy said.

“Additionally, at least half the inactive accounts, whether it's $2000, $4000 or $6000 are likely to have insurance cover. Acting now can preserve these benefits from being lost.

“Super belongs to individuals and families, so gift yourself and give super a go to boost your savings. Take an interest in your super now, while you may have a bit of holiday time, then reap the long-term rewards.

“In addition to getting your money back from the government there are compound interest benefits from being invested in super.”