Super slugged by SLAB

Thousands of small DIY superannuation funds could be hit with capital gains tax (CGT) when they are forced to restructure to comply with proposed laws.

And, it could become much more risky for individuals to remain as trustees of their super funds if the culpability test is removed, as proposed.

The draft legislation - the Superannuation Legislation Amendment Bill No. 3 (SLAB 3) - is expected to come before parliament in August 1999. A Senate sub-committee has already recommended that the bill be passed without amendments.

However, the Australian Society of CPAs has warned that if SLAB 3 does become law, it will prevent certain people from being in an excluded DIY super fund together.

At the moment, an excluded fund must have four or fewer members. There are more than 180,000 of these funds and they are popular with families, small business people and professionals.

CPAs superannuation spokesperson Noelle Kelleher says: "Talking to various practitioners, people estimate that at least 50 per cent of their funds will require some form of restructuring."

The new laws will require all members to be trustees, all trustees to be members and all members to have either a family or business link with each other.

"You may have members in the same excluded fund who may not be related or in business together such as same sex couples or very good friends," Kelleher says.

"You might also have a situation where a family member might not want to take on the responsibility of being a trustee. In these cases, the fund will either have to appoint an approved trustee or else some members may have to leave the fund."

Kelleher notes that appointing an approved trustee could be costly. Alternatively, if members are forced out of the fund, they might have to dispose of assets, which could trigger a significant CGT liability.

"The government believes existing CGT relief for super funds is good enough, but this only applies when a super fund changes its deed," she says.

"This relief doesn't apply when assets are sold when a fund restructures, for instance to merge with another fund or to comply with new Government legislation."

Another concern about SLAB 3's proposals is that the culpability test will be scrapped for self managed funds - a move which could make it much more risky for individuals to remain as trustees of their super fund.

Tower Trust's manager of superannuation services Peter Burgess says under the current legislation, trustees - and the compliance status of a fund - are generally protected unless it can be shown that they were a party to a breach of the regulations governing the fund.

He says the withdrawal of the culpability test increases the possibility that all trustees will be penalised even if they were not party to an inappropriate action by another trustees.

"For instance, if one trustee of the fund is fraudulent or negligent or does something else to breach the regulations, the other trustees can be forced to share responsibility," he says.

In such a case, the compliance status of a fund can be withdrawn. Non-complying funds have to pay 47 per cent tax on interest earned, instead of the usual 15 per cent, he says.