Christine St Anne: We're at the SMSFs Professionals' Association or SPAA National Conference, and today I'm joined by AMP's Peter Burgess, who was recently called the superman of SMSFs. Peter, lovely to see you.
Peter Burgess: Thank you, Christine. Thank you for having me.
St Anne: Now, Peter, your topic was on key legislation in SMSFs. So, we could begin by asking, you'd mentioned that 2013 was a rollercoaster year in terms of legislation. So, what part of the legislation did the new government end up keeping?
Burgess: Yes. Well, it really was a rollercoaster ride in my view for self-managed super fund trust deeds. We started the year with a number of changes which were slated to come into effect from 1 July, 2013. Many of those changes didn't eventuate, and during the course of 2013 we also had a number of announcements, many of those didn't eventuate either. So, by the end of the year we were pretty much back to where we started from.
So, what we know as a result of the consultation phase that the government has been through, we now know the measures that they are looking to proceed with. So, these are measures previously announced by the government; the previous government, so we have some certainty now as to which measures are proceeding.
So, new penalties, for example, for trustees, is one of the measures which we know that the government is keen to proceed with. So, we were expecting that measure to be introduced in the parliament very soon for this to start from 1 July, 2014.
St Anne: And on that area of the new penalties for the – and to the ATO, so what does that mean exactly, because you'd mentioned that that could be meaning that SMSFs could look for a new corporate trustee. So, I just wanted to know if you could explain that a little further, Peter.
Burgess: Yeah, so assuming they put in the measures the same as what was previously introduced in the parliament last year, because they did introduce a bill to give effect to the stopped penalties from 1 July, 2013, but that lapsed with the calling of the election. So, they're going to need to reintroduce this measure. So, assuming it is the same as what they did last year, what that will mean is three additional powers that the ATO will have to take action against trustees who breach the rule.
So, a direction – a rectification direction, so they'll be able to direct the trustees to actually rectify the breach, a power they don't currently have, and education direction is where they can direct the trustees to undertake some education; and finally, a sliding scale of administration penalties. So, the ATO will have the ability to impose penalties which are more appropriate to the severity of the breach.
So, in relation to corporate trustees, individual trustees, what's interesting is the way those administration penalties will be levied. If you have a corporate trustee, for example, and you file to produce financial statements, then the penalty for that is $1,700, but it's levied at the corporate trustee, once on the corporate trustee. If you have individual trustees, each individual trustee will incur a $1,700 penalty.
So, if we ever needed another reason to have a corporate trustee, I think there's another one in terms of the way these penalties will work.
St Anne: Now, on the very topic or area of excess contributions that there's more changes in there and you'd mentioned in your speech about comparing the new and the old, so what exactly is now the new requirement?
Burgess: Yes. Well, in 2013 there was a number of changes enacted to the tax treatment of excess concessional contribution. So, that's changed. So – and these are – a lot of these changes are effective 1 July, 2013. So, when it comes to excess concessional contributions, they are now added to your assessable income and taxed at your marginal rates. Under the old system, it used to be a 31.5 per cent tax rate. We don't have that anymore.
So, it really went – when we talk about concessional contributions, there is no such thing as excess contributions tax anymore because the excess is just automatically added to your assessable income.
So, that was quite a significant change and a good change, because for people on low to middle incomes, under the old system they were paying effective rate of 46.5 per cent tax on their excess concessional contributions, and in many cases, it was an inadvertent mistake. So, the new system is certainly a lot fairer in that respect, yeah.
St Anne: Now, Peter, can you give us an example – and I've to refer to my notes here – on the latest on excess non-concessional contributions?
Burgess: Yes, yes, yes. Okay, excess non-concessional contributions, I guess the big news here – and the coalition has been very public about their desire to address the disproportionate penalties that apply to excess non-concessional contributions. So, severe rates of excess contributions tax applying to these excess non-concessional contributions. In many cases, it's an inadvertent mistake. We know the Commissioner has a very narrow interpretation or definitely, the legislation has a very narrow interpretation of what constitutes special circumstances.
So, the coalition is very keen to address that. So, we're not sure how they'll do that, but what was interesting is, last year, in February last year, whilst in opposition, the coalition did try to amend the rules around Commissioner discretion to give the Commissioner greater powers of discretion. And they also – and that was intended to cover inadvertent mistakes. So, where the client acted on advised by the advisor or the fund just made the contribution the wrong use, those type of things would constitute an inadvertent mistake and the Commissioner would be able to exercise discretion in those cases.
So, they tried to amend the rules last year. So, is that an insight as to what we can expect this year? Is this the way the coalition is intending on fixing this problem? If they are, we would work on that. My only concern is that it might result in a significant increase in the number of discretion cases coming before the Commissioner which may clog up the system.
So, I guess as an alternative to that, perhaps we could think about refunding excess non-concessional contributions in a similar way that we now do it for concessional contributions. Personally, in my view, I think it's inevitable that we will get there at some point.
St Anne: And finally, Peter, of course, property has been a big issue with SMSFs and we had minister Arthur Sinodinos touch upon that. So, is that going to be something that the government and SPAA will be focusing on?
Burgess: Yeah, look, I think what we heard from the minister today was also consistent with what I've been hearing from Treasury and that there is no intention to review these arrangements at the moment. So, the two-year review which has been much anticipated but now long overdue doesn't appear to be occurring. The Treasury haven't been instructed to commence their review. I think what's more likely given that we've got the financial sector review now that any type of review of these arrangements will be incorporated as part of that review. We heard from the minister today there is no intentions to do a standalone review of these arrangements. It will be incorporated into this sector review as will the licensing of these arrangements. And we think that's important that we do get this sorted out. We actually encourage a review of these arrangements to address the licensing issues and so forth.
St Anne: Well, Peter, looks like certainly 2014 another rollercoaster year. Thanks for giving us the insight to rather complex part of SMSFs. Thank you, Peter.
Burgess: Thank you, Christine.
St Anne: Thank you.