Michael Hallinan

The ATO has confirmed the long held view that a rollover/benefit transfer to an SMSF in respect of a member will be treated as a contribution for the purpose of applying the active member test.

This test is one of three tests which is used to determine whether a complying superannuation fund has lost its residency status and transformed from an Australian superannuation fund to a non-resident superannuation fund.  The loss of residency status will cause a special tax to be imposed on the fund at the rate of 47% on the asset value of the fund (less undeducted contributions).

In short, once a member of an SMSF becomes a non-resident – no contributions, rollovers or benefit transfers by or in respect of the member should be received by the SMSF.

If not, the SMSF may fail the active member test and therefore cease to be a complying superannuation fund.

By Michael Hallinan – Special Counsel at Townsends Business & Corporate Lawyers

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Last night’s Federal Budget announcement allowing excess superannuation contributions to be refunded back to the individuals reflects the ongoing advocacy efforts of the Financial Planning Association (FPA) but represents a lost opportunity to fix a problem facing many Australians.
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“While this reform is expected to reduce the number of occasions where the concessional contribution caps are exceeded and individuals penalised, the measure falls well short of delivering a solution for a very serious problem,” FPA CEO Mark Rantall said.
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“We believe the government could have taken advantage of the strong economic position to embark on a more ambitious tax reform program and whilst the concessional contributions amendments are welcome, there needs to be a substantial rethink of how we engage Australians in contributing to a stronger, long term retirement income position.”
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The FPA has called on the Federal Government to remove the 46.5 per cent excess contributions tax penalty for non-concessional contribution and:
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• Refund excess non-concessional contributions back to the taxpayer
• Provide taxpayer with warning and impose no monetary penalty if it is taxpayers first break of the non-concessional cap
• Impose a monetary penalty (admin fee) on the taxpayer if this is the second/third break of the non-concessional cap

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Nor does the FPA support the introduction of a $500,000 account balance eligibility threshold for concessional contributions. Rather, the FPA has called for:
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• The concessional contributions cap for people aged 50 and over to at least remain at $50,000 but indexed with inflation
• Removal of the Superannuation Guarantee (SG) from the concessional contribution limit

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From 1 July 2011, individuals who breach the concessional contributions cap by up to $10,000 can request that these excess contributions be refunded to them. This refund will only apply for first time breaches of the concessional caps. In effect, individuals will be able to take excess concessional contributions out of their superannuation fund and have it assessed at their marginal rate of tax, rather than incurring a potentially higher rate of excess contributions tax. However, what is not clear is whether individuals who have breached the cap before this measure commences will be eligible.
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The Government plans to complement the other reforms including the increase in the concessional caps for those over 50 (with superannuation balances under $500,000) from 1 July 2012; the gradual increase in the SG rate to 12 per cent; and a new super contribution of up to $500 for low income earners.
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“The FPA looks forward to continuing to work with the Federal Government and Treasury to ensure we achieve the most equitable outcome for both the financial planning profession and the retirement savings of all Australians,” Mr Rantall said.

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The Self Managed Super Fund Professionals Association (SPAA) has today called for a universal increase in the concessional superannuation contributions limit (cap) to $50,000 a year for all individuals aged 50+, so they can plan a comfortable retirement.

SPAA has recommended that a $50,000 annual cap apply to everyone aged 50+ regardless of their current superannuation balance and has rejected a government proposal to only raise the concessional contribution cap for those age 50+ who have superannuation account balances of $500,000 or less from July, 2012.

“SPAA supports raising the concessional contributions cap for individuals aged over 50. However, SPAA believes an arbitrary and unindexed $500,000 balance threshold would be overly complex and impose unnecessary costs while discriminating against people who make voluntary non-concessional contributions from after-tax dollars,” said Andrea Slattery, SPAA CEO.

She said some people may also mistake the threshold figure of $500,000 as adequate. Recent University of NSW research** shows someone on an average wage of $60,000 a year will need $1.2 million at retirement while someone on $80,000 will need $1.6 million – a sum 20 times their incomes.

“As an alternative to the $500,000 threshold, SPAA has recommended the concessional cap be increased from $25,000 to a suitably higher amount for all individuals over age 50 to give them the opportunity to contribute more to super in the years leading up to retirement,” Ms Slattery said.

“If the Government decides to retain the $500,000 threshold, SPAA recommends that only concessional contributions and investment earnings be counted against it. Given that only concessional contributions and fund investment earnings are subject to concessional tax treatment, SPAA believes only the member’s concessional contributions should count against the $500,000 threshold,” Ms Slattery said.

SPAA fears using an arbitrary threshold superannuation balance of $500,000 will impose onerous reporting obligations and complexities experienced under the former Reasonable Benefit Limit (RBL) system. This appears contrary to the Cooper Review’s focus on improving the efficiency of the system.

“Having an arbitrary $500,000 account balance threshold which is unindexed may also result in an increase in the number of individuals inadvertently breaching the contribution caps,” Ms Slattery said.

The Federal Government has announced the annual concessional cap for those aged 50+ will be permanently increased to $50,000 a year as of July 1, 2012. SPAA’s recommendations regarding this proposal are contained in its submission to Treasury on concessional superannuation contributions caps for individuals age 50+.

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Prime Super, Australia’s only national super fund for rural and regional Australia, has agreed in principle to appoint global financial services firm Russell Investments to deliver administrative services to the fund’s 150,000 members, transferring from current provider Pillar Administration.

The new partnership, proposed to begin on 1 January 2012, will allow Prime Super to further strengthen its member and employer services with the addition of some new features.

The new initiatives include intra-fund financial planning for members wanting to discuss investment strategies, insurance, and contribution strategies, ATM access for Prime Super’s pension product and a strong member education program.

Lachlan Baird, CEO of Prime Super, said that while Pillar had provided good service and support to the fund over their eight year partnership, the additional services offered by Russell, and their technological edge, were necessary to help grow the fund.

“The decision to change administrators was not an easy one and we have undertaken a highly competitive and detailed tender process. We’ve also had a good relationship with Pillar over the life of the contract.

“Given our significant growth agenda we felt Russell’s leading edge administration model was best suited to help us achieve our goals,” Baird said.
Mark Blair, Russell’s Managing Director, Industry and Government Funds, said Russell was committed to help Prime Super drive further growth and develop more and targeted member-orientated solutions.

“We developed our administration model so that it can be tailored to the specific requirements of Australia’s largest superannuation funds”, Blair said. “We look forward to working in partnership with Prime Super to meet the individual needs of the Fund and its members.”

Driving growth and efficiencies through innovation

Baird indicated that Russell’s technology package will enhance the operations of the fund and enable Prime Super to significantly improve its online service offering to members and employers.

Russell’s data reporting capabilities were also viewed as a strength and will enable Prime Super more efficient access to fund data and assist with the decision making process for business development opportunities.

“Russell has provided us with a highly consultative approach from the outset. We have been impressed with their strong focus on member needs and innovative solutions.

“A transition plan is now in progress to formalise Prime Super’s in principle decision and we will be working closely with Pillar and Russell to ensure that members and employers have as few interruptions to service as possible during the changeover.” Baird concluded.

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The AMP Retirement Adequacy Index used data for the six months to June 2010 from more than 328,000 AMP corporate superannuation customers.

While overall super balances are up, reflecting a stronger economy and higher investment returns, superannuation contributions are still below 2007 levels at 12.5%, compared to 13% in December 2007.

A drop in discretionary contribution rates via salary sacrifice, which are at their lowest levels since the Index began, contributed to this fall. The biggest falls in discretionary contributions were seen in the 45-49 and 50-54 age groups, which dropped 1% (to 1.7%) and 1.8% ( to 3.3%) respectively.

AMP Financial Services Managing Director Craig Meller said the Index’s findings suggest some Australians who have decreased their super contributions risk compromising on their retirement goals.

“People need to carefully plan their finances, in particular their voluntary super contribution strategy, if they want a higher standard of living in retirement than their parents and grandparents.

“In the aftermath of the GFC people are naturally more cautious, but superannuation remains the most effective long-term savings vehicle – it’s tax effective and has a wide range of investment options, from cash and bank deposits, to property and infrastructure investments and equities,” Mr Meller said.

Other key points for the AMP Retirement Adequacy Index are:

• Overall retirement adequacy has increased just 0.1% to 71.4% mainly due to the increase in expected retirement incomes of 2.3% being offset by a corresponding rise in wages which has increased the level of savings needed for a comfortable retirement.
• Today’s workers can now expect to retire on an annual income of $46,746 per year in today’sdollars, a 2.3% increase to the previous six months.
• Average assets at retirement in today’s dollars rose just 0.4% from $650,737 to $653,108 over the six months due to falls in the value of non-super assets.
• While average balances for women have increased, the gap between female and male balances widened across all age groups, due to significant increases in male balances. The average balance for males was $54,061 compared to just $29,692 for women – a 45% difference.
• Overall contribution rates for customers under 50 are at their lowest levels since 2007. Contribution rates for members aged 20-24 years have fallen 1.3%; 1% for members aged 25- 29; 1.3% for members aged 30-34; and 2% for members aged 35-39 between June 2007 and June 2010.
• People are now in the workforce longer than ever before with a 25% increase in employment for people over 65 years old. The retirement age has increased to 64.4 years from 63.5 years in December 2009.

Access Economics Director Chris Richardson said it is likely the retirement age increase reflects the current environment.

“People delaying retirement is a predictable response to the recent Global Financial Crisis, where reduced superannuation account balances may have induced those nearing retirement to delay actual retirement until financial markets and account balances recovered.

“Whether this trend will continue will depend not only on economic factors but how the next generation of retirees view ageing,” Mr Richardson added.

The AMP Retirement Adequacy Index used data for the six months from January to June 2010 from more than 328,000 AMP corporate superannuation customers to predict retirement adequacy based on 65% of an individual’s pre-retirement income.

Economic forecaster, Access Economics, used this data to measure the implications of the current super data for future retirement incomes.

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John Brogden, CEO of the Financial Services Council, said the decision to double the concessional contribution cap to $50,000 for individuals aged 50 and over with balances below $500,000 would go a long way to delivering Australians an adequate retirement.

“Raising the contribution caps recognises that many people have the capacity to increase their superannuation contributions in their 50s and should not be discouraged from doing so,” Mr Brogden said.

“This measure, combined with the Government’s commitment to increase the Superannuation Guarantee to 12 per cent, will help address Australia’s $897 billion retirement savings gap as well as the pressures associated with an ageing population.”

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The halving of the super contribution caps has resulted in rising instances of people making excess contributions and attracting tax office penalties, but strategies exist to both remedy errors and maximise savings, according to Jemma Sanderson, Principal of Cooper Partners Financial Services. Ms Sanderson was a plenary speaker at the Self Managed Super Fund Professionals’ Association (SPAA) National Conference in Brisbane today.

“With the halving of the concessional contribution cap in the 2009 Budget, minor errors involving employer and self-employed contributions resulting in excess contribution issues are much more common.

“As excess concessional contributions can be subject to up to 93% tax, getting it right is imperative. The ATO is taking a reasonably harsh view with respect to excess contributions, which is evident from recent cases and ATO publications,” Ms Sanderson said.

Errors resulting in excess contributions may typically include: a failure by investors to include their employer’s 9% superannuation guarantee contributions when calculating the remaining $25,000 or $50,000 cap they may have available; a failure to reduce amounts salary sacrificed to align with the reduced contribution cap and a misunderstanding of the timing of superannuation guarantee contributions and/or employer obligations. Problems also arise where there are multiple employers whose SG contributions collectively tip the fund member over their annual $25,000 cap.

Ms Sanderson noted that once an excess contribution is made to superannuation, it’s very difficult under current law to return the amount to the contributor.

“The best strategy is to monitor client’s contributions each year to ensure they are not excessive, as well as educate them on the implications of an excess contribution. If an excess contribution has been made in error, there are few remedies with limited application, but they can be incredibly valuable,” Ms Sanderson said.

Methods of managing excess contributions once they have been made in error include ensuring the allocation between members is correct ; use of reserving (where appropriate), returning contributions and applying for tax commissioner discretion.

Applying for tax commissioner discretion to re-allocate or disregard an excess contribution is  possible in instances where the employer is at fault and the excess contributions were not foreseeable, but these opportunities are limited, and special circumstances must be evident.

For ongoing strategies to manage large contributions, Ms Sanderson recommended savvy use of timing advantages. For example, contributions must be allocated to members within 28 days after the end of the month of the contribution. However, contributions made in June don’t need to be allocated until 28 July – the following year.

“If contributed in June and allocated in July, the contribution is assessed towards the cap in the year of allocation, not the year of contribution,” Ms Sanderson said.

“However, in the case of a self employed person making a contribution in June, the deductibility of the contribution is not affected by allocation to the member, the tax deduction for that contribution can be gained in the year the contribution is made.”

Recently, in submissions to Treasury, SPAA proposed a refunding solution for excess non-concessional contributions and a possible solution to the issue of excess concessional contributions arising from SG contributions from multiple employers.

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The Self Managed Super Fund Professionals’ Association has today predicted a year of clarity for the SMSF sector on issues such as limited recourse borrowing, replacement of the accountants’ exemption and new rules for holding collectables in SMSFs. In new issues, SPAA expects greater Australian Tax Office focus on SMSFs which are paying pensions, while SPAA intends to look for ways to help SMSFs better access wholesale investments.

In a keynote address to the SPAA National Conference in Brisbane today, on key legislative and technical issues impacting on the SMSF sector, SPAA National Technical Director Peter Burgess said SPAA was also optimistic about a resolution to the excess contributions tax issue this year.

“We see 2011 as a year of consolidation following the Cooper Review and consultations on the Future of Financial Advice (FoFA) reforms,” Mr Burgess said.

“We look forward to clarification of the limited recourse borrowing rules, in particular, to a softening in the ATO’s interpretation of them. Currently, SMSFs can only borrow against a ‘single acquirable asset’ and asset improvements are banned. The Queensland floods highlighted the inflexibility of these rules and, unless changes are made to them, or to the ATO’s interpretation, it is difficult to see many SMSFs using them,” Mr Burgess said.

Mr Burgess told the conference that SPAA hopes that some relief will be granted to SMSF investors who have inadvertently contributed in excess of their contribution caps.

“SPAA has already recommended that excess contributions made in error by SMSF members be refunded and that those at risk of excess concessional contributions be allowed to opt out in advance in certain situations.”

Mr Burgess said the introduction of new rules governing collectables and personal use assets from 1 July 2011 are likely to have a significant impact on how those investments are acquired and held by SMSFs.

However, he noted that the government had last year signalled its approval of the SPAA Guidelines on valuing, auditing and documenting of artwork and collectables in SMSFs.

“SMSF auditor registration and auditor independence, as recommended by the Cooper Review, are also likely to be important issues, along with the accountants’ exemption and what will replace it,” he said.

Mr Burgess said a “sleeper issue” for SMSFs this year is the expectation of greater Australian Tax Office attention on SMSFs paying pensions. Fund assets supporting pension payments are tax exempt. The ATO would likely focus on ensuring that only SMSFs entitled to, claim this exemption.

A new issue for SPAA and SMSF investors is how a SMSF trustee might gain access to a wider range of investments through access to wholesale investment markets.

“An issue which has been on SPAA’s radar for some time is the current distinction between wholesale and retail investors and we are pleased to see this issue being discussed as part of the FoFA reforms.”

“SPAA believes existing rules cause confusion and restrict the ability of trustees to access investment opportunities. At the same time, SPAA is keen to ensure SMSF trustees retain consumer protections under the law,” Mr Burgess said.

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