Assessing the fallout: Repercussions of the SMSF reforms

As the Federal Government’s self-managed superannuation fund (SMSF) reforms finally go from being just proposals to taking legal effect, their repercussions are, and will, become more evident over the coming months.

Regardless of the reforms’ impacts, many in the industry acknowledge change was inevitable. SMSFs had had it good for so long, their tax concessions were a likely target in a time of budget deficits.

Practical consequences

This long after the 2016-17 Budget announcement, the industry has had ample time to discuss and adapt to the changes taking effect this year.

HLB Mann Judd superannuation director, Andrew Yee, is optimistic that the industry will be able to adjust to the changes.

“It’s just a new system to get used to and initially it’s going to be more work,” he said.

There are, however, areas in which the reforms may have an ongoing impact on investment in SMSFs.

The crackdowns on large balances and concessional and non-concessional contributions for instance, could lead to changes that go beyond simply more reporting or administrative requirements.

The introduction of the $1.6 million transfer balance cap (TBC) may mean that SMSF clients begin to keep more money outside the superannuation environment.

Cooper Partners Financial Services director, Jemma Sanderson, believes that, as members try to avoid exceeding the cap, we may see an uptake in people investing more money in their own names or discretionary trusts.

Vanguard head of market strategy and communications, Robin Bowerman, too, thought that the TBC reform might see changes in choices of what to invest in SMSFs.

“For people either over or approaching the cap, what we will see is people perhaps, rather than putting more into super at that level, investing outside of superannuation.”

In this, SuperConcepts general manager, technical services and education, Peter Burgess, warned that on large balances, the TBC may not achieve the Government’s goals with the reforms. In the main, however, it still should.

With assets over the TBC still eligible for quite a good tax rate of 15 per cent though, members who are not substantially over the cap may still be prepared to keep their excess in their funds.

Fifteen per cent “is still a good deal as it is still a very concessional tax rate overall,” SMSF Association head of policy, Jordan George, said.

George thus believed that the main change the TBC may wrought would be with ensuring compliance, as advisers will need to be active in ensuring that their clients’ amount of assets had not accidentally contravened the cap, rather than in impacting balances themselves.

Changes to concessional and non-concessional contribution limits may also affect when SMSF members put money into their funds and what benefits they get for doing so, especially for members older than 50.

Rice Warner found that many trustees plan to up their SMSF contributions once they turn 50. Their disposable income increases as mortgages are paid off and children leave home, making more money available to invest in their retirements.

The research house found that over 50s also tend to feel a more immediate connection with their super balances as retirement approaches, meaning they’re more likely to prioritise their growth.

It makes sense then, that George believes that over 50s will be the demographic most affected by the contribution limit changes.

He warned that, while the tax benefits afforded to concessional contributions once made investing once you passed 50 a sensible approach, advisers and planners would need to consider whether that was still in their clients’ interests in light of the new limits.

That isn’t to say though, that the reforms remove any chance of building up a significant SMSF balance after turning 50.

Burgess pointed to the option of making catch-up contributions as potentially mitigating the reform’s impact.

He said that most people would carry forward contribution space to future years as they would not make contributions every year.

This means that by the time members hit 50, or an age where contributions over $25,000 are possible, they would probably still be able to grow their balances through catch-up contributions.

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According to the Australian Taxation Office (ATO), 29,620 SMSFs were established in 2017. This was a drastic decrease from 2013, when 39,616 were set up. Wind-ups haven’t significantly declined since 2013 either.

This begs the question of whether the recent reforms have led to falling popularity for SMSFs.

George said that increased uncertainty around super had made people put off establishing SMSFs.

“We know from research we’ve completed that when there is uncertainty around legislation, people do hold off from making decisions,” he said.

George said that the SMSF Association had, in regard to the reforms, “advocated very strongly to the Government that people need certainty and super shouldn’t be fiddled with.”

The uncertainty caused by proposed reforms do not mean though, that establishing SMSFs may continue to decline now the changes have been finalised.

“We’ll be interested to see if [establishments] do pick up a bit now we have the rules around SMSFs established,” George said.

In this regard, Sanderson said that the revamped regulation of SMSFs would not necessarily lead to less establishments long-term.

“People haven’t gone, ‘oh because of the new rules I don’t want an SMSF’. The reasons behind setting up an SMSF are still entirely valid,” she said.

Sanderson pointed to a desire for investment control, wanting to do specific planning, reasonable pricing and family planning benefits as such reasons.

Furthermore, although SMSF reforms put pressure on checking compliance, that may not necessarily translate into increased administration costs.

Bowerman was optimistic that fees would not rise, meaning that increased compliance would not impact SMSFs’ appeal that much.

“There’s going to be a fair bit of pressure to lower fees, especially on administrative platforms, so I think competition will bring that down,” he said.

Spreading the blame

George said that, rather than establishment numbers now being low, that perhaps it’s more accurate to think that the volume of people setting up SMSFs four or five years ago was high.

The baby boomer generation hit a point earlier this decade where they were in the right position to establish an SMSF and did so, meaning that a large portion of the population who are interested in having an SMSF are already in one.

As a result, George thought that it was natural to now see less growth in set-ups.

“We will see less growth now. The demographic we’re now seeing the most growth in is people from the age of 35 – 44, and we expect that there would be less people in that demographic who are ready to establish an SMSF than before when most of the growth was coming from people aged 50 – 60.”

Burgess pointed out that while establishments may be dropping, the growth of the sector is still strong as it sees more of the “right people” go into SMSFs.

He caveated this by saying that it is only true “if we subscribe to the view that people with higher balances are more suited to SMSFs.”

Were SMSFs asking for it?

Although there has been heavy debate over some of the reforms, there is generally industry consensus that changes were somewhat inevitable.

Once the Government signalled that it planned to reform superannuation taxation, SMSFs were a likely target.

If you look at federal budget policy since the Global Financial Crisis, and the ten years of deficit we have now experienced since, George said that it was natural that tax concessions would be subjected to increased scrutiny.

The reforms “were always going to impact SMSFs more because those members tend to have higher balances on average than those in APRA (Australian Prudential Regulation Authority)-regulated funds,” he said.

As such, a TBC and limits on concessions in some form were somewhat expected.

In the end, George felt that the Government had landed on “a reasonably balanced package,” especially after the ATO compromised on event reporting requirements.

Yee also felt that the changes were somewhat inevitable, and that SMSF members and trustees were prepared for this.

“Most clients who are affected are probably expecting a change, because they knew the tax concessions were probably too generous,” he said.

“I guess from a macropolitical point of view, they’re understanding of that the Government was doing, so I think they were accepting of the change and the additional work involved.”

Yee pointed out that the members impacted by the reforms are also those most able to deal with their consequences.

“These clients are in the higher wealth category so they can afford to pay for the changes if they’re got more than $1.6 million in benefits,” he said.

More change to come?

With Barnaby Joyce’s resignation adding to the Turnbull Government’s ongoing woes, a change of government could be on the cards. With this could come more change to the SMSF environment.

“If there is a change of government, they may make it less attractive to make your own SMSF,” Yee warned.

A new government could impose a minimum member balance, for example. It may restrict residential property investments, which Yee thought could have “a two-pronged effect with housing policy.”

It could also abolish limited recourse borrowing arrangements, although this would only impact the minority of SMSFs.

Yee was at pains to emphasise that these changes may not happen though.

“I’m only guessing,” he said.

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