Seven of the best for the new year

The commencement of every new year ushers in new legislative arrangements with the potential to impact financial planning advice. Stephen Manassah focuses on seven legislative developments due to unfold over the next 12 months and examines the opportunities and the threats each offers for planners and their clients.

If anything, the amount of legislative change we in the investment industry will have to deal with this year will be even greater than recent years. This means planners must stay on top of their professional development to ensure all advice is current and appropriate.

1. New definition for DIY super

The Government will amend the current definition of 'excluded' superannuation funds, popularly known as DIY funds. They will now be defined as 'self-managed' funds.

A self-managed fund is one with less than 5 members, where all members must be trustees and all trustees must be members. Where there are two or more members, the members must be partners, directors or trustees of the employer sponsor or a family relative. The change is expected to apply from 1 July 1999.

This change will ensure that unrelated parties cannot be members or trustees of "someone else's" superannuation fund. This will reduce the potential for litigation against a trustee by a member and will force members to become responsible for the way their fund is run.

Planners should ensure that all new self-managed super funds are structured to comply with the new definition. Existing DIY super fund structures may need to be revisited.

2. Salary Sacrifice

Some planners have been recommending salary packaging to reduce the value of "adjusted taxable income" for superannuation surcharge purposes. From 1 April, 1999, the effectiveness of this strategy will cease.

From that date, employers must report any fringe benefit items received by an employee on that employee's group certificate. The ATO will then incorporate their grossed-up value after that date in the 1998/99 calculation of adjusted taxable income.

The result is that salary packaging will no longer be an effective strategy to reduce a client's adjusted taxable income.

3. Aggressive tax planning:

Late last year the Commissioner of Taxation flagged his intention to target what he described as a "growing culture of aggressive tax planning" and alluded to some well known schemes. The ATO has also introduced a product rulings system, which will issue binding rulings in relation to income tax and fringe benefits tax law.

Financial planners involved in marketing "tax-driven" investment schemes, especially the traditional agriculture-based investment products and others which produce tax deferral, are advised to study these two developments closely.

4. Excess benefits

The new definition of a "complying" income stream for Pension RBL purposes will prove more attractive because the contract no longer needs to be guaranteed for life if the client has already attained age pension age. Interestingly, the new definition is very similar to the new "asset-test exempt" income stream for social security purposes.

The pension RBL is now a viable strategy for retiree clients who are significantly over-funded against their lump-sum RBL. Some planners are now building strategies based on using a self-managed superannuation fund to pay the complying pension.

5. Self-managed funds - new investment rules

The Government intends tightening some rules on common investment structures for self managed superannuation funds. These include investments linked to an employer sponsor of the fund - usually the family business - and associated unit trusts.

They will now be precluded from placing more than 5 per cent of their assets in investments in "associated parties

The changes threaten some self-managed fund-based planning strategies such as 'geared unit trust' investments. It also prevents them from acquiring assets from an associate of a member.

6. ATO to supervise self-managed funds

Currently, the Australian Prudential Regulation Authority (APRA, formerly the ISC) is responsible for the prudential supervision of self-managed superannuation funds.

From 1 July, 1999, it is expected that the Australian Tax Office (ATO) will take over this role. It will be interesting to see whether the ATO will adopt a different approach to the ISC in fulfilling the role of prudential regulator. Some commentators are expecting a tougher approach.

7. Tax Reform - watch this space

Over the next twelve months we will witness probably the single most profound legislative change impacting advice that most of us will ever see. The program of tax reform will impact many existing strategies which have been developed based on finely calculated arbitrages in the tax and social security systems. New strategies will emerge.

This is one change debate that all financial planners should be following closely.

<I>Stephen Manassah is technical and research director, Deutsche Bank