The new limits on the amounts clients can have in pension accounts and contribute to super mean SMSF advisers increasingly need to look at alternative approaches and structures for clients seeking to build wealth for their retirement.
Peter Hogan, head of education and technical at the SMSF Association, says the reforms have eroded tax advantages out of the superannuation system and reduced the appeal of SMSFs as the sole way to fund retirement income streams.
Speaking to Professional Planner about his upcoming presentation at the SMSF Association Technical Roadshow, Hogan addresses July 2017 changes that made super no longer the obvious retirement savings choice for many clients.
“It’s still the first port-of-call for a large group – as the $1.6 million cap is an aspirational goal for many pre-retirees – but there is another client group who want to save more and will now need to consider alternatives,” he says. “They are looking for investment opportunities that complement their SMSF savings.
“The impact will not be felt just by clients in the future, but also current clients with over $1.6 million in their account who have rolled money back into their accumulation account and are seeking to invest it elsewhere.”
The estate-planning rules also mean excess funds over the $1.6 million cap get pushed out of super on the death of a member.
“This means some clients will want to act now to save their spouse problems on their death,” Hogan says. “Advisers will also find they are dealing with spouses left with a large death benefit they need help to invest.”
Hogan warned that the shift to include alternative structures in a client’s retirement savings plan represented new territory for many non-accountant SMSF advisers. “It is very much tax-driven rather than super-driven, as has been the case in the past,” he says.
Typical structures SMSF advisers will need to consider in the future include family trusts, private unit trusts and private or family companies. While many of these will have no super fund involvement at all, advisers will also need to consider situations where there is SMSF involvement.
“A lot of people are attracted by the opportunity to invest in these or other structures using their super funds,” Hogan says. “But there are questions for advisers about how you structure these arrangements and the traps involved for SMSF trustees looking to use these types of strategies.”
Advisers will need to navigate a number of tax and super rules and issues when an SMSF considers taking an interest in another structure, especially if the fund is seeking to invest in property. Particular areas of concern include in-house asset rules, shareholder distributions and non‑arm’s length income.
“There are significant issues under Division 7A of the Tax Act as an assessable dividend of a shareholder of a private company that attempts to make a tax-free distribution of profits to the shareholder will be deemed by the ATO,” Hogan warns. “There are a number of issues for advisers when distributing profits to family members in structures where there is a mix of non-super and super investments.
“Non-arm’s length income also needs to be considered in these structures, as there are lots of potential traps that need to be avoided.”