As it’s Valentine’s Day, it’s time to have an honest conversation with yourself, you’ve had your ups and downs but can you continue to go on this emotional rollercoaster? It’s time to decide whether you should ‘break-up’ with your self-managed super fund (SMSF).
The law surrounding SMSFs is changing faster than ever. In 2017, a transfer balance cap was introduced, along with severe penalties for breaking the rules. Meanwhile, a 2018 Productivity Commission report suggests that any SMSF with a balance of under $1 million is not cost effective.
It's hardly surprising, then, that the establishment rate for SMSFs is in decline. In 2017, 30,636 SMSFs were started but 10,382 were wound up, giving a net rate of 20,254. This is the lowest figure since 2013. In 2018, that figure has declined even further.
The reason people choose SMSFs is because they are seen as the “do-it-yourself” option. Indeed they used to be known as DIY funds, and the costs of an SMSF are certainly minimal when you are genuinely doing it yourself. However, expenses are driven up through the cost of administration, advisors, accountants, lawyers and whoever else may be necessary. These expenses will only increase as SMSFs become more complex.
It begs the question - with regards to your SMSF, should you stay or should you go?
If you stay in your SMSF
2017 signalled a profound resetting of the rules for SMSFs:
- The $1.6 million transfer balance cap introduced a ceiling on the tax-free amount in pension mode.
- The concessional (pre-tax) contribution cap was lowered to $25,000 a year for everyone (it was previously $30,000 a year for those under 50 and $35,000 for those above).
- After tax-contributions were capped at $100,000 depending on total super balance.
Having said that, the Productivity Commission was able to ensure some semblance of stability, when it found there was no reason for regulatory change for SMSFs, while self-directed funds were not included in the banking royal commission.
However, tough action will still come, it'll just be from the Australian Tax Office (ATO) instead. The ATO is continually dialling up enforcement activities - the law has been in place for many years now, so its tolerance for mistakes is getting thinner and thinner.
In addition, there is more SMSF legislation on the horizon. If passed, the proposals will impact non-arms' length income (NALI) and limited-resource borrowing arrangements (LBRA). The NALI amendment will require all aspects of related-party transactions to be conducted on commercial terms. If they are not, the income derived from the arrangement (or even the expenses saved) will be taxed at the top marginal tax rate (rather than the concessional rates of 15 per cent or even less that usually apply to income earned in SMSFs), as will any capital gain.
The second proposed legislative change relates to LRBAs. If passed, an SMSF member's share of liability of a loan entered into after July 1, 2018, will be included in the calculation of their total super balance. In funds with several members, any outstanding loan amounts will need to be apportioned and added to each member's balance. This may affect a member's ability to make further after-tax contributions.
If you leave your SMSF
There are two main options when leaving your SMSF:
- Move to a retail, industry, corporate, government, small APRA fund, or
- Take the money and invest it outside of super.
It always takes time for these things to be processed, which means you'll be out of the market for a while. However, the greater consideration should be the implications for insurance, tax and social security payments.
For example, some super funds enable you to replace your insurance with like-for-like terms. But many do not. The older you are, the more health issues you will have, leading to a less advantageous insurance deal. Likewise, you may lose access to some social security payments - an important consideration for those in pension phase.
Finally, super still has very advantageous tax outcomes (zero per cent on earnings from pension-phrase assets, while earnings from accumulation assets are taxed at 15 per cent). If you leave your SMSF, you will also be leaving these advantageous tax terms behind.
As with all relationships, only you can decide to stay or go. SMSFs have many advantages, but you need to be willing to keep abreast of the changes. The more you outsource, the greater the cost of your SMSF.