Nicholas Ali

Neo Super, Australia’s leading independent SMSF service provider, welcomes the passing of the Treasury Laws Amendment (Legacy Retirement Product Commutations and Reserves) Regulations 2024.

The legislation, enacted on 7 December 2024, introduces long-awaited flexibility for self-managed superannuation fund (SMSF) members dealing with legacy pensions. These changes allow non-commutable legacy pensions to be ceased, enabling members to roll capital into accumulation accounts, commence new income streams, or withdraw lump sums.

Neo Super’s Head of SMSF Technical Services, Nicholas Ali said, “This legislation represents a turning point for SMSF members trapped in outdated pension arrangements.”

“It not only eases administrative burdens but also provides more equitable options to manage reserves and align with modern superannuation strategies.”

This development addresses a long-standing challenge for SMSF members burdened by inflexible income stream products, such as Market-Linked Income Streams (MLIS) and lifetime pensions, that no longer align with modern superannuation needs.

Key benefits to the change include:

• Exit legacy retirement products within a five-year window.
• Allocate reserves from ceased pensions with greater flexibility, including exemptions from contribution caps when allocations meet certain conditions.
• Move from outdated income streams to more suitable and effective arrangements.

While the reforms are broadly positive, Neo Super advises SMSF members to approach the changes with careful planning:

• Allocations from general reserves must be monitored to avoid breaching non-concessional contribution caps.
• Members should consider the impact on government benefits, as commutation may make previously exempt assets assessable under Centrelink’s Assets Test.
• The five-year grace period requires timely action, especially for funds with complex or illiquid assets.

As an innovative end-to-end SMSF service provider, Neo Super is uniquely positioned to assist trustees and intermediaries in navigating these changes.  From compliance and documentation services to tailored advice, Neo Super ensures trustees and advisors can achieve optimal outcomes under the new framework.

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Nicholas Ali

SMSF administrator Neo Super has welcomed the proposed changes to legacy pensions, saying they are a game changer for SMSF members holding these products.

Neo Super Director of Technical Services Nicholas Ali says: “They offer much-needed flexibility, allowing members to commute their income streams in a way that suits their financial goals while reducing the administrative burden on trustees.

“For years, many of these legacy products have constrained members and driven up costs unnecessarily. This reform will not only simplify the management of these pensions but also provide much fairer and more equitable outcomes for members and their families.

“We identify this is a significant and welcome development, particularly as many legacy pensions have become inflexible, no longer suited to the needs of members, and often expensive to manage.’

The draft Treasury regulations regarding legacy pensions aims to modernise the treatment of non-commutable income streams, such as market-linked pensions, life expectancy and lifetime pensions.

Ali says: “The changes will provide individuals the opportunity to exit these arrangements more easily and efficiently over a five-year period. Additionally, reserves linked to these pensions can now be allocated to a recipient’s member balance without impacting contribution caps, providing further flexibility.

“Reserves in SMSFs created for other purposes can also be allocated to a member, though these allocations will count against their non-concessional caps rather than concessional ones. Importantly, members can use the bring-forward non-concessional contributions provisions, subject to Total Super Balance (TSB) rules.”

The proposed amendments, however, only apply to SMSF members, reinforcing the focus on this superannuation vehicle to provide tailored and strategic retirement solutions.

“This reform could provide considerable relief to many SMSF members, marking a step forward in making the superannuation system more adaptable and user-friendly, he says.

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Nicholas Ali

The fate of the controversial Division 296 Bill, which imposes an additional 15 per cent tax on the earnings of superannuation balances exceeding $3 million, is now with the Senate after the House of Representatives passed the legislation yesterday.

Neo Super Director of SMSF Technical Services Nicholas Ali says this is bad policy in many respects, citing the taxing of unrealised capital gains (especially for farms and small businesses), the refusal to index the cap, its potential impact on venture capital or for addressing an issue that’s been resolved – large SMSF balances – by the introduction of caps in 2016.

“But the unprecedented tax on unrealised capital gains heads the list.

“This sets an alarming precedent in Australia’s taxation policy. This legislation could have far-reaching consequences, not just for the superannuation sector but for other tax policies more broadly. It’s critical that SMSF trustees fully understand the implications as the bill heads to the Senate.”

Amendments proposed by MPs Kylea Tink and Luke Howarth—such as indexing the $3 million cap and replacing the taxation of unrealised gains with an earnings-based tax—were defeated.

The Albanese Government’s majority in the lower house ensured its passage, but its fate in the Senate is far more problematic, with some crossbenchers (as well as the Coalition) having expressed their opposition.

The Government has reiterated that less than 0.5% of fund members, or about 80,000 Australians, would be affected by the new tax. But the refusal to entertain its indexation means that number will quickly grow.

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Nicholas Ali

The Consultation Paper has just been released on the Labor Government’s proposed changes to the tax concessional treatment of superannuation. These proposed changes have caused much consternation amongst those involved in the SMSF sector. Reading articles, the comments section to articles and direct discussions with trustees and intermediaries, one gets the feeling the proposals have confused people greatly.

I’ve even read an article where divorce is recommended to even up member accounts prior to 1 July 2026!

There are several things that need to be mentioned regarding Labor’s announcements.

The changes are just proposed

The first issue to point out is these are incomplete proposals. The Consultation Paper makes this abundantly clear. For example, determining the value of a member’s defined benefit interest for Total Super Balance (TSB) purposes, earnings on defined benefit interests and how to tax defined benefits in excess of the $3m cap are all in their infancy.

There is a lot that needs fleshing out to make these proposals even remotely workable.

Governments often cast the policy net out as far as they can, knowing they will have to drag it in eventually – either a lot, or a little. There have been many issues raised with the proposals, so the government consultation period will be a rich source of food for thought our policymakers can nourish themselves on. What is the final legislative piece may well differ markedly from what is on the table currently.

The start date is a few years away

Whatever the proposal ends up being, it won’t be until the 2026/27 financial year that the tax penalty will be determined. Even then, it won’t be paid by super funds until sometime in the 2027/28 financial year.

There is also a Federal Election some time in the 2024/25 financial year, so if the changes are not what the electorate desires, then people are free to vote against them. One might remember Labor’s changes to franking credit policy prior to the 2018 Federal Election that never saw the light of day due to them never forming government.

There are strategies to reduce the impact of the tax

Even if the proposals pass into legislation unfettered, there are multiple strategies to reduce the impact of the extra tax.

Firstly, equalisation of member accounts will become an essential part of super planning. If one member has, say, $4m and their spouse $1m, then the option should be to even up their accounts as best as possible using a re-contribution strategy. Now that the work test has been abolished, members can make non-concessional contributions up to age 75, including making use of the bring-forward provisions (subject to the TSB and contribution caps).

Secondly, there are other structures that can assist those who will be impacted by the extra tax. Family trusts allow income to be streamed to a multitude of beneficiaries on lower marginal rates of tax (including corporate beneficiaries). Yes, this means withdrawing funds from super and creating a new tax structure but, given the higher rates of tax in the super environment, it might be time to look at this option.

Also, monies can be withdrawn from a member account and then re-contributed back to super for other family members (subject to the member’s TSB and contribution cap limits). This can be done to build super for the next generation (a form of pre-death estate planning if you like). Whilst their account balances may be preserved for some time, this is one way to avoid the 15% extra tax on earnings and any lump sum death benefits tax on the taxable component.

Finally, given people were encouraged to save for their retirement through super, many do not utilise the generous tax-free thresholds afforded to individual taxpayers. Investing in personal names could be a sound strategy, as it also avoids lump sum death benefits tax.

One of the complaints from Government has been super is being used too much as a wealth transfer vehicle, rather than a retirement income stream vehicle. What is proposed could well have the opposite effect – people will plan the transfer of wealth from one generation to the next far more judiciously than ever before. And they will make sure they pay as little tax as possible along the way.

Superannuation will still be the best

A Financial Review article (dated Wednesday, 29th of March 2023) includes BDO analysis showing that even with the proposed changes, superannuation will still be the best retirement vehicle we have.

Whist not as attractive as before, super will still form the backbone of retirement savings for most Australians. They will just have to weigh up whether it will be the only retirement vehicle for consideration, or as part of a suite of investment options and vehicles.

Concluding thoughts

The changes proposed by the Labor Government have the potential to use policy settings that have long-term retirement savings consequences for all future Australians to target a small group of wealthy boomers in the short term.

And the changes will be wonderful for the accounting, legal and financial planning industries. Strategic advice will become more important than ever before.

By Nicholas Ali, Executive Manager, SMSF Technical Support

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Nicholas Ali

Self-managed superannuation (SMSF) education, administration and software provider, SuperConcepts, continues to expand their SMSF offering with the addition of specialist consultation services.

Available to both individuals and professionals, including accountants and advisers, the service follows a basic fee structure and can be commissioned on an hourly basis for $385 (excluding GST).

“Our expert team of SMSF specialists comprise some of the Australia’s most renowned and sought-after technical minds,” General Manager Growth, Annette Sheppard said.

The nature of the SMSF lifecycle means that technicalities, complexities and issues arise periodically, and specialist assistance can be required on an ad-hoc basis.

“These consultation services make the team accessible to those in the industry as and when required,” Executive Manager, SMSF Technical Specialist, Nicholas Ali explained.

Consultation matters may include death, divorce and estate issues, the examination and compliance of asset treatments, remediation services and general SMSF health checks.

“We can help individuals and professional navigate the complexities of SMSFs without the need to have a specialist on retainer,” Ali said.

“By working through issues strategically we can support the decision-making process and, most importantly, ensure compliance.”

Led by Nicholas Ali, SuperConcepts’ technical education team include Graeme Colley, Philip La Greca and Anthony Cullen.

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Shelley Banton

Although a self-managed super fund (SMSF) investment strategy is not an advice document, advisers must ensure that it has not been interpreted as advice, Adam Goldstien, a financial adviser with the financial planning firm Skeggs Goldstien, told the SMSF Association 2021 National Conference.

In his session titled “The rise and rise of compliant SMSF investment strategies: Why it’s more important than ever”, he emphasised that this document must be “trustee driven”, with the role of the adviser to ensure trustees comply with the rules by “guiding, directing and leading them”.

It was one of the most watched sessions at the National Conference, with Goldstien co-presenting with Nicholas Ali, Executive Manager, SMSF Technical Support at SuperConcepts, and Shelley Banton, Head of Education, ASF Audits. The session’s underlying theme was the importance of tailoring an investment strategy to a fund’s circumstances and the need for trustees to be able to demonstrate that they have considered all the relevant requirements.

Goldstien said: “Investment strategies are not a plan; they’re a strategy. The document should be no more than four to five pages and ideally include an introduction that explains the purpose of the document, a section on the fund’s profile (which helps to link the strategy back to the fund’s unique circumstance), and sections on the investment objectives and investment strategy.

“It should incorporate the trustee’s best answers, using their words, to questions about risk, diversification, liquidity, liabilities and insurance. There should also be a section that explains when the strategy should be reviewed.”

The importance of formulating an investment strategy came to the fore last year when the ATO released new guidelines on what should be included in an SMSF investment strategy. This followed an ATO mailout to more than 17,000 trustees in 2019 who, according to the regulator’s records, had 90 per cent or more invested in a single asset or asset class – hence the aptly titled session, “The rise and rise of compliant SMSF investment strategies”.

Goldstien said: “Asking trustees a series of ‘what if’ questions is a good way to assist them to properly consider things such as liquidity, diversification and risk.

“The adviser also has an important role to play in educating trustees on how to properly formulate and implement an investment strategy. Trustees should be encouraged to reference sections of their trust deed in their investment strategy to demonstrate they’ve considered the circumstances of the fund.”

Ali reminded delegates that investment choice did not override the trustee legislative requirements and Banton explained that COVID-19 was no excuse for not complying with the asset ranges stated in a strategy. “It’s acceptable for trustees to put in place a short-term strategy if they find themselves in a difficult situation, but it must be documented,” she said.

Shelley also explained that although it was not necessary to have asset ranges in an investment strategy, just saying the fund can invest in cash and other assets is insufficient. “All material assets should be listed, and the trustees should be able to explain how investing in those assets will achieve the fund members’ retirement goals.”

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