Run your own super fund? This is what to watch out for in 2023

First published in the Financial Review on 27 December 2022.

With government proposals to cap large super balances, there are four key issues to consider.

There will be no shortage of issues for self-managed super funds to grapple with in 2023. The debate around capping excessively large superannuation balances – and any policy initiative on this front by the Labor government – is likely to head the list.

Labor recently floated the idea of capping large superannuation balances, with $5 million widely suggested as a cut-off point. At this number, it has been estimated about 16,500 individuals would be affected, most of whom would be in SMSFs.

Although it would affect a minority of SMSFs, and some members of APRA-regulated funds, it is likely to cause angst in the SMSF community as another instance of the sector being targeted by the government.

Although this proposal has superficial appeal to some groups, the SMSF Association’s position is that the issue is not the large balances but the tax concessions they attract that should be the focus of any concern. In terms of addressing this issue, it is a subtle but very significant distinction.

There are four other important factors to consider. First, large balances are a legacy issue that the 2017 changes, which placed clear limits on contributions to superannuation funds, and the amounts that can be held in the tax-free retirement phase, will remedy over time.

Second, if any decision is made to restrict the retention of extremely large balances, it will be critical to give SMSFs adequate time to manage the restructuring that would be needed, especially when large illiquid assets are involved. Consideration should also be given to the impact such asset sales would have on relevant investment markets.

Third, any cap must not adversely affect the vast majority of SMSFs with moderate balances, including members of the same SMSF who may have balances well under the cap. It’s conceivable that the forced sale of fund assets to reduce a member’s balance below the cap may have a knock-on effect on other members in the fund.

Last, but certainly not least, no decision should be made on this issue before an agreed objective for superannuation is in place.

Other issues likely to affect DIY super funds include the outcomes from the Quality of Advice Review, financial adviser education standards, non-arm’s length expenses (NALE) and legacy pensions.

The Quality of Advice Review, which handed its report to the government just before Christmas, is likely to have an enormous impact on the advice industry and, by extension, the many SMSFs that use specialist advisers in running their funds.

If the proposal paper released in August is largely followed, it will give the advice industry a pathway to focus on consumer outcomes and not be burdened with excessive regulation.

An excellent example was the suggestion to remove the requirement for statements of advice, allowing the profession to provide financial advice in a way that suits the customer. There was also a focus on advice needing to be commensurate with the level of complexity and the number of issues being addressed. Simple, single-issue pieces of advice should be able to be delivered through a simple letter of advice.

Significantly, the role of accountants in giving advice was included in the terms of reference. This is critical as the various services provided by accountants, including tax agent services, need urgent reform because there is a significant misalignment between the provision of certain tax agent services and what is classed as personal financial advice.

A consultation paper about financial adviser education standards was released in August after a commitment before the May federal election to review the system by Assistant Treasurer and Minister for Financial Services Stephen Jones. It’s an important initiative for SMSFs as any steps made to improve adviser education (and this could include an experience-based pathway as opposed to tertiary qualifications) can only be a positive. It’s good to hear the Assistant Treasurer commit to consult further on these proposals early in 2023 with the aim of legislating the changes by mid-2023.

It’s hoped that the government will have non-arm’s length expenses on its policy agenda in 2023. The existing legislation creates unintended financial consequences for affected superannuation funds and their members. Although this is an important issue for SMSFs and their advisers, it’s worth noting NALE has implications for all superannuation funds.

For those SMSF members planning to work overseas, the federal government’s decision to proceed with the reform to the SMSF residency rules is welcome. This will relax the residency requirements for SMSFs by extending the central control and management test safe harbour to five from two years and remove the active member test.

Finally, what the SMSF sector would like to see addressed in 2023 are legacy pensions. It’s understood to be on the government’s policy agenda but not a priority. For members trapped in these legacy products and unable to exit, this is an issue that needs attention as these pensions are complex, overly restrictive and, in many cases, are no longer fit for purpose.

Opinion piece written by
John Maroney, 
SMSF Association