Editorial - Superannuation e-news May 2010

Hard on the heels of the Cooper review's release on SMSFs last week we saw the government's response to the long awaited Henry review. The Cooper review's Self Managed Super Solutions reflects a balanced approach to a system that ‘ain't broke'. It is not in need of major surgery to protect the tax concessions available to SMSFs. We are pleased the views expressed coincide with some of our own and support its main thrust for SMSF trustees to focus their greatest attention on building up retirement savings and to place less focus on issues like related party transactions and investments in collectables. And while the panel would also like to see less of a focus on leverage, it recognises its potential benefits.

The review has carefully thought through the core issues for SMSFs, however it recommends that SMSFs should not be allowed to hold any in-house assets - that is, the current 5% limit on in-house assets should be abolished. If this recommendation is adopted a 10 year transitional period is proposed for existing assets to be disposed of and the acquisition of new in-house assets prevented. The panel has rightly left intact the issue of business real property acquired from related parties with potential arm's length usage by related parties. A prohibition on investments in collectables and of (potential) personal-use assets such as artworks, wine collections, exotic cars and yachts is also sought. While we would contend that the percentage of SMSF trustees invested in such assets is likely to be very small, we believe those who are so invested have special skills or access to relevant skills for these assets and are assiduous about the sole purpose test. If the proposal is accepted, adequate transitional arrangements must be put in place. Separately, we're not convinced of the need for all transfers or sales of listed securities to be made on-market. A ban on off-market share transactions would marginally reduce retirement savings with no tangible benefit. The current Tax Office guidelines have clarified issues of concern, so little is gained by this proposed restriction.

The guiding principles underpinning SMSF were seen to be embodied in the self interest of its members, the need for tax concessions and apart from the services of an auditor, the freedom to use or not use a service provider as the trustee saw fit. However where such a service was sought, trustees needed the assurance of adequate standards. The recognition that trustees face special risks in running their funds strengthened a need for a resources centre to assist and up-skill trustees where necessary. Improvements to the fund registration process reflecting new approaches by the Tax Office to reduce potential fraud and illegal early release was sought. We endorse these views. 

The introduction of Better Super found ready acceptance by the industry at large, with a major outstanding issue being assistance for low account balance holders and low income earners. The Rudd government entered office with a promise to address this issue and the current proposals in the Henry review start the process with a focus on a fairer system. Conceptually, sensible proposals were suggested and accepted by government. The SG rate will be increased slowly to a target of 12%, while the age limit for SG will be increased, to not exceed 75 and align with the current age limit for contributions. A new, low income earners Government contribution for those with incomes up to $37,000 will directly assist low income taxpayers, and the higher concessional cap for those 50 and over will be retained at the end of the transitional period for those with less than $500,000 in super to assist low account balance taxpayers. These initiatives do not begin for a couple of years at least and while a long lead time in the context of super is generally good, where it concerns benefits to low income individuals, delays are counter-productive. We'd prefer they were brought forward.

The door has been left open to a future reduction in the contributions tax. Dividend imputation - crucial for self funded retirees - will be retained, the value of the family home will not be included in means testing for benefits and indexation of age pension will be retained. Negative gearing and the CGT arrangements will also remain.

Finally, the government intends a raft of reforms to apply from 1 July 2012 for the overhaul of financial advice and raise the confidence we attach to it at the retail level. An element includes the removal of the accountants' licensing exemption in relation to SMSFs and for the development of a suitable alternative. This may appear impractical but stay tuned for further developments.