SMSFs in the firing line

An ACTU push for changes could put SMSFs in a budget tax squeeze.

PORTFOLIO POINT: If the ACTU has its way, SMSFs will become a specific federal budget target as the government moves to get back in the black.

Most of the rule changes surrounding superannuation are aimed broadly at the entire sector, rather than picking on individual parts.

Sure, there are too many changes. And those changes, in recent years, have been overwhelmingly negative. But most of the fiddling has been aimed, indiscriminately, at the whole industry, or every super fund member.

While SMSFs and APRA-regulated funds have some fundamental differences and have obviously different membership bases, no individual sector has been specifically targeted as a revenue source before, in ways other than to clean up obvious rorts (such as some forms of in-specie asset transfers).

That could be about to change, according to the chatter. SMSFs could become a specific revenue target, particularly if lobbying of government by the ACTU bears any fruit.

It was never going to be an easy task to bring the federal budget back to surplus in financial year 2013.

As some economists say, it was predicated on some wafer-thin hopes and some heroic projections. However, the “surplus” has become so central to the government proving it can be economically responsible that backing down isn’t an option.

The promised federal government budget surplus is, by all reports, in deep trouble in its current settings. The mid-year economic update is likely to contain a lot of spending cuts and revenue raising, certainly far more than usual.

It’s no longer just murmurs but open discussion that the $1.4 trillion superannuation sector could become a major target for the government in its bid to balance the budget. After all, there’s lots of money there and it’s “lightly” taxed.

Which makes suggestions such as those recently aired by the ACTU all the more concerning.

The ACTU is lobbying for three significant changes to the rules relating to SMSFs, in a bid to raise an extra $15 billion annually from the sector as revenue.

The most disturbing of the ACTU’s proposals is that SMSFs should be taxed on “unrealised capital gains”, to bring them into line with what happens to APRA-regulated funds.

That is, if a SMSF owned assets that appreciated during the year, then it would have to pay tax on the gains up to June 30 each year.

For example, you own $500,000 worth of shares in your SMSF. They appreciate in value to $540,000 over the course of the year. You have to pay tax on $40,000. That’s potentially $4000 in CGT if the assets were held for longer than a year.

APRA-regulated funds must do this already. They need to because they have got tens of thousands, often hundreds of thousands of members, with members coming and going by the thousands each year. The funds themselves need to pay tax to be able to attribute money to members on an after-tax basis.

However, SMSFs have a maximum of four members. Their membership doesn’t change much year to year. And they have to be audited each year. Tracking the tax liability of individual members is not complex.

There are now 470,000 SMSFs in existence, managing a total of around $420 billion.

Any move to impose ongoing capital gains taxation of funds would be a major blow to the effectiveness of SMSFs.

One of the greatest attractions of a SMSF regards control of investments. And innate in that control is taxation. You can hold on to good investments. You can sell good investments that you think have cantered beyond fair value. You can sell bad ones. You can hold a bad one in the hope it will come good.

And if you have enough quality assets in your SMSF, you can hold out until you turn on a pension to sell, thereby reducing the CGT payable to zero.

In that respect, the ACTU’s plan would both greatly impact on the real value and risk taken by SMSF trustees, but also massively reduce compounding benefits.

It could also cause major liquidity issues for individual SMSFs. If the fund had a geared property in the fund, which appreciated in value by $40,000 in a given year, the fund might be liable to pay $4000 in CGT on top of the other expenses of the fund. And it may have to do that every year.

What happens then if the asset is held to pension phase? It’s now in an environment where it is supposed to be tax free. Do they get a refund of the tax paid? Presumably not. Are future gains only tax free once they are made after the fund becomes tax free? Probably.

This would have a serious impact on the viability of SMSFs.

The other two ACTU proposals don’t carry the same potential for impact. One is urging the government to make compulsory “arm’s length” valuations of assets transferred into super.

This is something that was largely supposed to have been introduced on July 1 this year. In-specie transfers of shares were going to have to go through an exchange so that the price at transfer could not be manipulated, as it has been open to in the past. After the cut-off date, Treasury announced that it was to be delayed by a year because of difficulties in framing the legislation. See my column An in-specie transfer. It is now due to come into effect on July 1, 2013.

The last ACTU recommendation is to give the ATO more money to audit super funds, particularly to find false expenses. Well, if the ATO believed there was widespread expense fraud in SMSFs, it could divert more resources to it. It could do that now, if it believed fraud was a serious threat.

Given the ACTU’s history with setting up the superannuation guarantee for Australian workers, these requests probably warrant closer watching than if they were to have come from some other parties.

While the ACTU claims the three measures could add $15 billion a year to government coffers, Andrea Slattery, head of the Self-Managed Superannuation Funds Professionals Association of Australia (SPAA) disputes the revenue figures.

In any case, any measures that specifically target SMSFs from a tax perspective should be considered the “thin edge of the wedge”.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.

Graph for SMSFs in the firing line

  • The Australian Taxation Office has released its latest quarterly statistics on the self-managed super sector. In the June quarter, the average SMSF balance grew to $917,895, while total assets in the sector amounted to $439 billion, or more than 31% of the total super sector. Of note in asset allocation changes, cash and term deposits now outweigh listed Australian shares – with the former rising above 30% to 30.5% and the latter dropping to 29.9%. There are now a total of 478,263 self-managed funds in operation, with 913,550 total members – a rise of more than 35,000 funds in the financial year and more than 67,000 members. There was also notable growth in SMSF establishment from younger people, with 34.1% of new funds from those under 45, and in lower income ranges, with 47.5% earning less than $60,000 a year.
  • A former AMP financial adviser has been banned from the industry for six years over the early release of superannuation benefits. The Australian Securities and Investments Commission handed down the ban to ex-AMP Financial Planning representative Sim Turudia after it found he had arranged early super release for 35 clients in 2010 and 2011, totalling roughly $1.7 million. ASIC said that “Mr Turudia engaged in misleading and deceptive conduct by manipulating rollover request procedures”, and was alerted to the conduct by AMP in January.
  • The Australian Taxation Office has supported calls for the self-managed superannuation sector to remain under its regulatory responsibility, rather than that of the Australian Prudential Regulation Authority. According to reports, ATO assistant commissioner superannuation Stuart Forsyth told a large SMSF conference that prudential regulation was “not the system we have for SMSFs” and that he didn’t “know how you’d do that across 478,000 SMSFs”. However, Forsyth said there were some concerns about the sector, and that some people had SMSFs who should not.

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