Self-managed superannuation funds (SMSFs) have been hit by a surprise in the Budget which will require accumulation funds to allocate all contributions, and fully vest benefits in a given member, while defined benefit funds will be required to have at least 50 members.
The second condition will also apply for funds providing defined benefit pensions with the moves being labelled as tax avoidance measures in the small and non-arm’s length superannuation sector.
The Government has stated in the Budget Papers that “the measure will target arrangements that avoid limits applying to tax concessions and social security means test and that allow superannuation to be accumulated for estate planning purposes.”
However Assistant Treasurer Senator Coonan’s office has added to this stating the “changes will address schemes involving the forfeiture of superannuation benefits, contributions to reserve accounts, and the use of defined benefit funds and defined benefit pensions”.
Under the changes SMSFs will need to have 50 members or more if they pay a defined benefit, that is complying pension as opposed to an allocated pension.
Funds can still offer allocated pensions and market-linked income streams, as well as defined benefit pensions where these are purchased through a life company.
The changes however will not apply to those existing defined benefit funds or those already paying a defined benefit pension.
The Government has put out confusing signals as to when the changes will occur with the Budget papers stating the measures will be effective from the date of gazettal of the enabling regulations while Coonan’s office says they will take effect from last night.
The changes are being regarded as devastating for the SMSF sector with a number of heavily promoted strategies involving forfeiture of benefits, RBLs and asset test exemption no longer valid for the funds.
Garrisonshead of technical services Keat Chew says the changes are a warning against using aggressive strategies in SMSF and have instantly shut down a number of popular moves in the funds.
“The Government has clearly indicated that it will be placing closer scrutiny on more aggressive strategies that have previously allowed individuals with significant superannuation benefits in self-managed super funds to meet means tests for Government pensions or qualify for tax concessions.
“Based on yesterday’s announcement, it’s possible that we’ll see the Government further rein in the flexibility of self-managed super funds in the future,” Chew says.
HoweverDeutschehead of technical services Peter Haggstrom says this is the big ticket item in the Budget and will “cut a swathe through financial planning practices and other businesses which have been structured around advising on how to run defined benefit pensions from self-managed funds”.
Haggstrom says the value of planning businesses working in this area may be affected by the moves as will the value of an SMSF in some contexts.
