Ten SMSF rules we don’t need in 2013
Some SMSF compliance rules are discriminatory, lack logic and are unnecessary, according to Ken Raiss.
With the Government’s Future of Financial Advice (FOFA) reforms set to ensure financial legislation acts in the best interests of Australian investors, 2013 has raised expectations for the delivery of a fair and updated system.
Yet despite the noise around the steady stream of ongoing pronouncements being made by the Australian Taxation Office (ATO), little attention has so far been given to many existing self-managed super fund (SMSF) guidelines which are in need of urgent reform.
As a relatively young but rapidly evolving model, SMSF compliance guidelines contain more than their fair share of unnecessary and arbitrary rules – some of which are discriminatory, lack logic or simply make the process of providing for independent retirement unnecessarily difficult.
Many of these do not benefit government revenues in any way, making it difficult to find a logical reason as to why they exist at all.
While flaws in SMSF guidelines do extend further, feedback from Chan & Naylor’s clients has highlighted 10 key problem areas which are creating restrictions without cause and require urgent redress.
1. No more than four members
An SMSF must have no more than four members. SMSFs are most often used to provide for retirement income for all family members, yet the limitation of four member positions would not be enough to cater for every Australian family or household.
There should be flexibility with this figure to prevent families from having to leave family members out of the SMSF or having to pay to set up an additional fund.
2. Borrowing for property improvement
An SMSF cannot borrow money to pay for improvements to a single acquirable asset.
Should a trustee require money to improve or renovate a property to a better standard than originally held in an SMSF trust, it cannot be loaned in the SMSF because it is considered to increase risk.
This rule makes little sense given trustees are still allowed to borrow money in the SMSF to purchase that property asset in the first place.
3. Assets with debt
A person must pay to set up separate holding trusts per single acquirable asset with debt.
Instead of adding acquirable assets with debt into the same trust structure, trustees must pay to set up another. This is simply an example of unnecessary red tape.
4. Life insurance rules
Life insurance (which is tax-deductable in super) cannot be moved from an individual name to an SMSF unless the existing policy is cancelled and reissued.
Those who experience a change in circumstances while doing so, such as entering a new tax age group or a change in health, could find their new policy does not provide the same cover as their previous insurance policy or, worse still, cannot be rewritten.
5. Own occupation TPD
If a person is insured in super, they can only claim tax deductions for total and permanent disability provided they are unable to work in any occupation. This should also apply for a person’s own occupation, though currently this is not the case.
6. Related party purchases
It is prohibited to buy residential property or unlisted shares through an SMSF from a related party (such as a spouse or family member) even if supported with a registered valuation.
It is, however, acceptable to do the same with commercial property or shares.
As long as the sole purpose test is passed there should be no limitation from where or whom the asset is purchased if executed at arm’s length and it meets the fund’s strategy.
7. Contributions
After the age of 65, a member is no longer entitled to the three-year average non-concessional contribution. This is age discriminatory.
Anybody should be able to benefit from this non-concessional contribution entitlement irrespective of age.
8. Contribution limits
Once a trustee reaches the age of 75, they may no longer contribute the full super contribution limit of $25,000 per annum but are limited to the super guarantee amount.
Again, Chan & Naylor believes that this rule is discriminatory, especially as more Australians are both living and working for longer.
9. Paying to comply
SMSFs must pay for manual amendments with each change to the SIS Act. However, the big super funds, covered by their associations, adopt legislation changes automatically.
An SMSF deed, through legislation, should automatically pick up any changes to the SIS Act.
10. Penalties
Trustees can suffer destructive penalties of up to 93 per cent on over-contributions. Excessive penalties should be less draconian for genuine errors.
Simply allowing these rules to exist makes a mockery of the message at the heart of the New Year reforms, for it is impossible to explain to a puzzled client how these roadblocks act in their best interests.
Sadly, what is cost-neutral to the government could have devastating effects on the life savings of Australians. It is time the ATO broadened the net for reform to create a fair playing field for those taking the reins for their own retirement finances.
Ken Raiss is the director of property at accounting and wealth advisory group Chan & Naylor.
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