SMSF menu for the federal budget

A string of useful changes are called for by SMSFs in the October budget.

The SMSF Association put forward a raft of proposals to simplify the superannuation system. Image: iStock

The delayed federal budget to be handed down on October 6 is shaping up to be one of the most anticipated in years, given the record $259bn in COVID-19 related stimulus and the uncertain economic outlook.

The SMSF Association put forward a raft of proposals to simplify the superannuation system as part of a pre-budget submission released this week.

Their aim is to bring back the common sense approach that seems to have been lost along the way with various aspects of superannuation policy changes to the rules over time by successive governments.

One useful suggestion the SMSF Association makes is to allow professionals to provide “no product recommendation” and “specific single issue” advice.

In practical terms, the accountant could recommend a client make a $25,000 contribution into super to use the pre-tax contribution cap but without recommending or referencing a particular super product.

Another area that could be simplified is around total superannuation balance (TSB) thresholds. Currently, the following different TSB thresholds apply:

• $300,000 TSB for work-test exemption contributions.

• $500,000 TSB for catch-up contributions.

• $1,000,000 TSB threshold for quarterly TBC reporting.

• $1.4m, $1.5m and $1.6m bring forward non-concessional contribution caps.

• $1.6m TSB threshold for non-concessional, spousal, and co-contributions.

• $1.6m TSB threshold for segregated pension assets.

The SMSF association recommends there is a single $1.6m cap and other aspects are streamlined to reduce confusion for people with superannuation in trying to work out what caps apply.

For SMSF trustees who work overseas for a period of time, the SMSF Association wants the residency rules to be improved.

SMSFA CEO John Maroney says: “Large APRA funds such as retail and industry super funds can accept contributions from members while they are living overseas, however SMSFs can fail the active member test if a member makes a contribution from abroad, meaning the fund can be deemed non-complying and taxed at 45 per cent.”

John Maroney CEO SMSF Association.

The typical workaround is to contribute to a retail or industry fund while living overseas so as to not trip the active member test for the SMSF and once the member repatriates to Australia, rollover the balance from the retail or industry fund into the SMSF.

However a better solution is clearly to remove the active assets test so SMSF members can continue to contribute to an SMSF while overseas.

Although the age you can contribute to super has been increased to 67 recently without meeting the work test (40 hours of work over a consecutive 30 day period in the financial year), Maroney says: “The work test is outdated, easy and not relevant in today’s retirement savings system. Now that we have the $1.6m cap total super cap on non-concessional contributions, this is sufficient as a single targeted measure if the government wants to control how much older Australians can contribute into super. Further, coming out of COVID-19, many normally eligible pre-retirees may find it difficult to reach the work hours threshold.”

A key area the SMSF Association wishes to address the inequality between men and women in superannuation balances at retirement. The median retirement balance for men is more than 50 per cent more than women ($183,000 versus $118,556).

Due to differences in work force participation and wages, women on average have less in super at retirement than men.

Although there are current equalisation strategies such as spouse contributions, contribution splitting and recontribution strategies, their scope is limited. Maroney says: “We’d like to see the introduction of a once off spousal rollover system with a higher balance to help equalise balances between men and women.”

Whether or not the recommended changes will be incorporated into the upcoming budget is yet to be seen given the COVID-19 focus on reviving the economy, but simplifying the rules and providing more equality into the retirement savings system would be welcome news for many self-funded retirees.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au