The Financial System Inquiry (FSI), also called the Murray Inquiry, has released the interim report – pending further consultation before the final report. The interim report is broad, though contains a number of concerns and issues facing the superannuation system and how it supports providing retirement incomes.
Financial System Inquiry – SMSFs
The FSI is concerned about several aspects of SMSFs:
- the high operating expenses of many SMSFs
- if there should be limitations on establishing an SMSF
- reintroducing the prohibition on borrowing
The Financial System Inquiry (FSI) has released its interim report; in December 2013 the Treasurer Joe Hockey gave the FSI the task of:
“…examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth.”
Overall the FSI finds that:
“to date, the Australian financial system has performed reasonably well in meeting the financial needs of Australians and facilitating productivity and economic growth.”
However the FSI also identifies a number of “opportunities and challenges” to Australia in the future, including:
- Future financial crises
- Long term pressure on the Commonwealths fiscal position
- Productivity growth
- Technological change
- International integration
Update: note the potential changes announced in the 2016 Budget.
The three-year bring-forward provision allows some super fund members to use three times the non-concessional contributions cap during a three-financial year period. For example, a member may have a $ 150,000 non-concessional contributions cap, and they could make the following contributions without triggering excess contributions tax:
- Year 1: $ 200,000
- Year 2: $ 200,000
- Year 3: $ 50,000
- Year 1: $ 450,000
- Year 2: $ 0
- Year 3: $ 0
Though, of course, not the full amount of the three-year bring-forward needs to be used once triggered.
Also care must be taken when using the three-year bring-forward, as even small errors can lead to large amounts of contributions tax – in some cases 93% or even higher of the original contributions.
The ATO has released its corporate plan for the coming years, which reveals some of what is in store for SMSFs and the superannuation system in 2014/15.
The ATO corporate plan, which covers the years 2014-2018, is part of the ATOs annual planning, coming after the Federal Budget process and built around the ATOs three strategies:
1. Build a culture that embodies our values and transforms the client experience
2. Simplify interactions, maximising automation and reducing costs
3. Connect with the community and other agencies in meaningful ways
The overall goal of the ATO when it comes to superannuation could be summed up as:
“We want to make it easier for people to be more engaged with planning for their retirement by providing online services and making interactions easier.”
With this in mind the ATO priorities for the superannuation system for 2014-15 are:
“Improving the productivity of the superannuation system through the implementation of consistent data and payment standards.”
“Proactive engagement with individuals throughout their life to prevent lost superannuation and other inadvertent consequences.”
These goals and priorities are reflected in the things the ATO has planned for SMSFs and the superannuation system in this financial year:
- New online tools and resources for SMSF trustees and auditors
- Improving the knowledge of SMSF trustees and professionals
- Using auditor reports and other ATO data to review contraventions
However it was a recommendation of the Cooper Review that this be tightened to further discourage illegal early access of super, with such amounts to be taxed at the top marginal tax rate:
The Government should amend existing tax laws so that:
- (a) amounts illegally early released be taxed at the superannuation non‐complying tax rate; and
- (b) an additional penalty, based on a sliding scale of penalties that takes into account the individual circumstances, should apply.”
The Cooper Review panel came to this conclusion because the amount of tax payable on illegally early-accessed superannuation funds depends on the income of the individual, not the act of breaching the preservation rules and cashing restrictions. Such a person would still have the benefit of the remaining funds accessed early, though there are other penalties available, and so the panel thought that:
“Tax rates and penalties need to be amended to ensure there is both a greater deterrence factor and to ensure that those committing illegal early release do not enjoy the same treatment as those who legally get early release of their superannuation”.
The tax rate applying to non-complying funds is set by section 26(2) of the Income Tax Rates Act 1986 – which currently says: “The rate of tax payable by a trustee of a non-complying superannuation fund in respect of the taxable income of the fund is 45%”. Although this will now increase to 47%, at least temporarily, due to the Budget Levy of 2% being added by the Income Tax Rates Amendment (Temporary Budget Repair Levy) Bill 2014.
The tax rate applying to non-complying funds used to be 47%, but this was decreased in line with the reduction in the top individual marginal tax rate.
It is not difficult to find websites saying that the tax rate applying to non-complying super funds is 46.5%. It is unclear why this is – possibly a confusion with the inclusion of the medicare levy, or with the no-TFN tax rate?
How is the tax paid by a Non-Complying SMSF calculated?
The calculation of the tax paid by a non-complying SMSF as simple as applying the applicable rate.