SMSF compliance: the latest changes explained

Garreth Hanley:
This is With Interest, a business Finance and Accounting News podcast, brought to you by CPA Australia.

Aidan Ormond:
Hi, I'm Aidan Ormond, and today we're talking to CPA Australia's superannuation lead, Richard Webb. We'll be asking him about the key changes happening to super this year from SMSF, which is self-managed super funds, to NALI, non-arm's length income, and new legislation, as well as what you can be asking your advisor about this year. Welcome to With Interest, Richard.

Richard Webb:
Thank you, Aidan. It's good to be here.

Aidan Ormond:
Well, it's great to have you and so much going on with superannuation at the moment. This is actually a busy time of the year for super and a lot of our listeners will be reporting on their SMSFs, and I think this week a lot of people might have seen a bit of a hit in their super balances, but we'll get back onto that a little bit later. Richard, let's start with what people need to keep in mind between now and when they report.

Richard Webb:
Thanks, Aidan, and I think that a key issue this time around for SMSF trustees is going to be valuations. The assets in funds are of course needing values for the end of the financial year. Obviously, this is an issue every year, but with the proposed implementation of the new Division 296 tax on earnings on total super balances of more than $3 million coming into effect from the 1st of July next year, the need to ensure that valuations are correct is even more important than it was before. The ATO repeatedly advises trustees that valuations should be conducted at market value wherever possible.

However, there are times where these might be difficult to obtain, for example, where the fund holds illiquid or thinly traded assets. Unlisted assets also fall into this category, and some of these can be really tricky to get valued such as business, real property, or unlisted shares. The ATO recently noted that around 16,500 funds have not updated certain asset values for three years or longer. If your fund falls into this category, and even if that represents a fair assessment of the asset's values, you should be thinking now of obtaining additional evidence to support your valuations. There is a strong likelihood that your fund may have been flagged by the ATO as a high risk, and your fund's auditor may also be asking more questions about these valuations.

Additionally, the pending arrival of Division 296 could mean that there are other pressures on the fund. So, when you're doing your reporting, pay close attention to your cash flow because if you think you're likely to be someone who is affected by the new tax when it is implemented, you need to know now. It is possible that funds which are currently not in need of much in the way of liquidity might see that situation change if their members are likely to be assessed for the new tax. Remember, your fund's liquidity situation is a required part of your investment strategy and reviewing this should be the logical next step after reviewing your projected future cash flow needs.

Aidan Ormond:
Richard, there's been some changes to NALI since last time we had you on the podcast. What's happened and who is impacted? Can you give us a quick overview of NALI for those who you might not know?

Richard Webb:
Sure, Aidan, and I appreciate that this is probably a while since we've talked about that here. Superannuation is a concessionally taxed environment and there are protections put in place so that when assets move in or out of that environment, it's done in a way that isn't unfair, whether that be artificially moving more assets than what is allowed under contributions caps or gaining tax advantages.

There is a requirement that when funds move assets in or out of the fund to related parties, and this could be in acquiring or disposing of assets or just incurring ongoing expenses or fund income, that this be done at an arm's length, that is a commercial rate, not some sort of mates rate. Now, back in 2019, there was a draught ruling issued by the ATO that made things very complicated for super funds in respect of general expenses. These, by the way, are expenses that apply to the fund generally, not to specific assets of the fund. Some of this was pretty damaging, For example, a few dollars’ worth of photocopying, if it wasn't recouped from the fund by the trustee, could easily have resulted in the entire fund income being taxed at 45% and It wasn't just SMSFs who this applied to, a large APRA-regulated fund could just as easily been caught out.

This was pretty major. As a result of pressure from CPA Australia and others, there was legislation passed through Parliament which fixed up a lot of these issues. In addition to exempting APRA-regulated funds from the specific and general expense provisions, SMSFs had their exposure to the non-arm's length tax rate for general expense breaches limited to a maximum of twice the amount of the breach. I should add that we are aware that there are still issues in respect of breaches due to specific expenses. Our discussions with the ATO and Treasury regarding these are ongoing.

Aidan Ormond:
Oh, that's so interesting about the printing, Richard. Good point, but NALI isn't the only change this year. What other changes have gone through Parliament and are there more on the horizon?

Richard Webb:
Yes, thanks, Aidan. We recently saw the first tranche of changes go through Parliament in response to last year's quality of advice review. This had a number of provisions in it designed to implement the less controversial parts of the review, but one of these turned out to be a bit more controversial than we thought. The review highlighted that there were often uncertainties in relation to whether a request for advice fees to be charged to a member's account was legal.

The legislation clarified this, however the language of the change, together with the approaches of the regulators, suggested that some funds may adopt a zero-risk approach to fee requests. This could be problematic since it would mean that for some funds they would request a copy of the advice, which advisors would have to spend some time redacting and trustees would have to spend time reviewing, before determining that the fee request met the sole purpose test, the best financial interest duty, and this is before even considering the fund's policy on allowing fee requests.

Obviously, this is potentially expensive for all and could even cost members of the fund who are not obtaining advice. So we’re glad that this provision was edited in the bill with a view to looking at it again later on, but there are recommendations from the review that are even more likely to inspire spirited debate. We are presently awaiting draught legislation to be issued by Treasury on this. The subject matter of this draught legislation includes the new category of advisor, changes to advice documentation, and the advisor's best interest duty and the use of nudges in superannuation, and I'll stop there.

Aidan Ormond:
That's really interesting. Lots to look forward to, and speaking of looking forward, what about indexation, Richard? Do you have the figures handy for say the coming financial year?

Richard Webb:
Oh, absolutely, Aidan, and of course, this is always a topic of great interest to our members. The main figures that I think our listeners will be interested in are the indexation of the concessional and non-concessional contributions caps which go up this year. The concessional cap, which includes your superannuation guarantee, salary sacrifice, and deductible contributions goes up to $30,000 this year. The non-concessional cap, which includes post-tax and spouse contributions, goes up to $120,000 this year.

Ironically, the total superannuation balance limit on contributions, which affects whether one can contribute non-concessional contributions or not, which is presently $1.9 million, is not going to go up due to indexation this year. This could cause some issues for anyone who is seeking to use the bring forward rule on non-concessional contributions, particularly if they're close to the $1.9 million figure and have been relying on last year's contribution limits. If you're in that situation, I would get some advice on how this could affect you. It's always important to know which figures are indexed and how they move because as we can see, not all of these move at the same time.

Aidan Ormond:
It's good to see those caps going up as well. Very, very good to see. So obviously, there's a lot going on in the super space and we can't give any advice, and as always, if you're looking for advice, please seek out a financial advisor. That said, what will you ask your advisor this year, Richard, to ensure your super is in good and working order for you?

Richard Webb:
Aidan, I think that folks can benefit from doing basic stuff this year, looking at your superannuation balance frequently and not just once a year when your statement arrives in the mail. If you're in an APRA fund, why not sign up with that fund to use their online service to see your balance occasionally? Also, if only to see if you're eligible to make superannuation contributions this year, check out the ATO's part of the government's myGov website.

Your total superannuation balance at the end of the previous financial year will soon be available there depending on when your fund reports and should be able to give you an idea of where you are at as at the 30th of June. If you're in an SMSF, updates at myGov can be a little slow, particularly where the total superannuation balance figure is concerned, but I'm guessing that our listeners who already have one of these are probably keeping a close eye on asset values anyway. Another thing to do might be to review your insurance. Have you got enough? It might be a little while since you last looked at your insurance arrangements.

If you're in an APRA fund like say an industry fund, you could have unitized insurance. For most people, this means that your coverage reduces as you get older whilst being charged the same premium, but what if you've moved house and you owe more money on a larger mortgage than when you became a member of your current fund? This question is also a good one if you took out a fixed level of cover. Do you currently have a enough death and TPD insurance? What about income protection? I'd be almost certain that a number of our listeners are in higher paid roles now compared to when they last looked at this type of insurance.

Another thing to look at is your death benefit nomination. What type is it? Is it binding or nonbinding? Has it expired or is it nonlapsing? What about the beneficiaries you nominated? Are they up to date? Lastly, have a think about costs, including fees if you're in an APRA fund or your fund's running costs if you're in an SMSF. It's never too early to shop around and you could find that you save a bundle very quickly. I can't stress also, Aidan, this is the kind of thing that you should be getting advice on and now is as good a time as any to review all of these.

Aidan Ormond:
Great information there, Richard, and a great reminder on insurance as well. A really good point. Obviously, the elephant in the centre of the room at the moment is in relation to stock markets at the moment. There have been some pretty large falls this week and I'm pretty sure many of our members will be feeling quite anxious about the value of their super at the moment. I know I am. What does this downturn mean for investors like them and how should they be responding to this situation?

Richard Webb:
Aidan, it's completely natural to feel concerned during periods of market volatility, but it's also important to remember that market fluctuations are a normal part of investing. Not panicking is crucial because making impulsive decisions based on short-term market movements can often lead to unfavourable outcomes. Historically, markets have shown resilience and the ability to recover over time. Whereas, we have a whole history of data showing that investors who make knee-jerk decisions in the wake of shocks like these often expose themselves to the risk of a missed upside. For most investors, there is usually a reason why your investments are structured the way that they are, whether this is if you are using your superfund's default option or if you have chosen your own investments.

Revisiting why your investment is structured the way it is can often remind you of what it is that you might expect from your investment in the intervening period between you putting it away and spending it. Have a look at your long-term goals, your risk tolerance, and any other reasons which you might have behind your investment choices. If your portfolio was designed with those factors in mind, it is likely built to withstand short-term volatility while aiming for long-term growth, but most importantly, consulting with your financial advisor can offer personalised guidance tailored to your specific situation now. Your financial advisor can help you reassess your strategy, ensure it aligns with your long-term financial goals, and provide the support you need to navigate through certain times, which is, I guess, where we are today.

Aidan Ormond:
Great information there, Richard, and super is such an important topic. Richard, thank you for your insights you've shared with us today.

Richard Webb:
Thanks for having me on, Aidan. It's a pleasure to be here.

Aidan Ormond:
For more information about superannuation, including links to additional resources, you can refer to the show notes for this episode. With Interest is a regular podcast. If you like today's show, you could subscribe on your favourite podcast app by searching for CPA Australia's With interest. I'm Aidan Ormond. Until next time, thanks for listening.

Garreth Hanley:
You've been listening to With Interest the CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business, and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode and we hope you can join us again for another episode of With Interest.