The 2020-21 Federal Budget is all about jobs, jobs and jobs. COVID-19 has resulted in the most severe global economic crisis since the Great Depression. This Budget provides an additional $98 billion of response and recovery support under the COVID-19 Response Package and the JobMaker Plan.
With the budget focussed on supporting small business and tax cuts, it meant SMSFs were left untouched for the first time in a long while. However, superannuation as a whole, is rarely left untouched and this year’s Budget was no exception with some structural reform focussed on large superannuation fund performance and costs being announced.
The big question now is, what impact, if any, will these structural changes to superannuation, the personal income tax cuts and the small business support measures have on SMSFs now and into the future?
Firstly, what are the measures to be aware of?
‘Stapled’ superannuation accounts – A new default system
From 1 July, existing superannuation account will be ‘stapled’ to a member to avoid the creation of a new account when that person changes their employment. Employers will pay super to their employees existing superannuation fund if they have one, unless they select another fund.
A ‘YourSuper’ portal
The Australian Taxation Office will develop systems so that new employees will be able to select a superannuation product from a table of MySuper products through the YourSuper portal. The YourSuper tool will provide a table of simple super products (MySuper) ranked by fees and investment returns.
Increased benchmarking tests on APRA funds
Benchmarking tests will be undertaken on the net investment performance of MySuper products, with products that have underperformed facing stringent requirements. Products that have underperformed over two consecutive annual tests will be prohibited from receiving new members until a further annual test that shows they are no longer underperforming.
Strengthening obligations on superannuation trustees – Large APRA funds
By 1 July 2021, trustees of large superannuation funds which are regulated by the Australian Prudential Regulation Authority (APRA) will be required to comply with a new duty to act in the best financial interests of members. This new duty will require the trustees to demonstrate that there was a reasonable basis to support their actions being consistent with members’ best financial interests.
Personal income tax changes brought forward
The Government will lower taxes for individuals by bringing forward its ‘stage two’ tax cuts that were due to start in July 2022.
Businesses to access temporary tax incentives and deductions of eligible assets and improvements
The Government will offer “temporary full expensing” to businesses, to encourage them to invest. Effectively, businesses that make new investments will be able to write off the entire cost in one year, rather than having the asset depreciate over several years.
The Government are also broadening access to small business tax concessions, introducing a new JobMaker subsidy for hiring younger individuals and a loss carry back for firms who are now unprofitable.
The structural changes, do they affect SMSFs?
The superannuation changes announced in the Budget are purely focused on APRA regulated superannuation funds. They are designed to assist members to identify poor performing funds, reduce instances of duplicated accounts and ensure trustees always act in the best financial interests of members. However, this does not mean that these changes will have no impact on SMSFs.
Firstly, a focus on ensuring new superannuation participants are able to choose a fund that is performing well and is cost-effective is good for all sectors. A more robust superannuation system means bigger balances, more competition and a healthier retirement. Given the vast majority of SMSF members start off, and may still be members of a APRA regulated superannuation fund, it would be naïve to ignore these changes as irrelevant. The SMSF sector will benefit in the longer term if younger individuals start building larger balances and start to regard an SMSF as a cost-effective vehicle that is appropriate for them.
On 1 July though, the new default system where funds are ‘stapled’ to a member shouldn’t affect SMSF members when it is implemented. This is because the stapling of accounts will occur for those individuals who do not choose a superannuation fund. SMSFs by definition require choice and so will not form part of this system. However, more relevant to SMSFs is the recently legislated Your Super, Your Choice Bill which allows trustees to continue to choose an SMSF for their SG payments which may have otherwise been restricted by an enterprise bargaining agreement.
Going forward, underperformance will be the hot topic in the superannuation world. Although reforms are solely focussed on APRA fund benchmarking and tests to see if they are serving their members appropriate returns, greater comparison with SMSFs will occur.
Hopefully, with greater transparency and understanding of the net investment performance of their APRA regulated superannuation fund, it will make it easier for individuals in these funds to properly compare the advantages and disadvantages of switching to an SMSF. It should also make it easier for SMSF trustees to identify underperformance in their own fund.
And the tax cuts?
Approximately 50% of SMSF trustees own a small business or have owned one in the past, so many SMSF members stand to benefit indirectly from the small business support measures announced in this year’s Budget.
With the personal income tax cuts being brought forward, the tax advantages associated with making salary sacrifice contributions to superannuation may be reduced. This is because the difference between the tax that would be payable on the amount sacrificed to super, and the tax that would be payable if the individual instead received that amount as personal income, is less.
However, depending on your circumstance, making salary sacrifice contributions to superannuation may still provide a very useful tax benefit, so it would pay to seek professional advice before deciding to make any changes to your current contribution arrangements.
Similarly, some individuals, who have access to their retirement savings, may feel its no longer beneficial to retain their balance in a superannuation fund. This may be because any tax savings associated with superannuation are now being offset by the associated costs. However, its important to consider capital gains tax in this decision as certain assets invested outside of superannuation may be subject to capital gains tax when eventually sold. Generally, no capital gains tax is payable if the asset which is disposed of is held inside a superannuation fund and the asset was supporting the payment of pensions to members.
Individuals who hold a Commonwealth Seniors Health Card, or are receiving Centrelink income support payments, may also need to consider how withdrawing their superannuation balance may impact their entitlements going forward.
In most cases, where an individual has retired, a decision to withdraw their superannuation balance is irreversible so it would pay to seek professional advice before doing so.