SMSF rule changes are coming in 2022: What to expect
While the upcoming federal budget may bring yet more changes for SMSFs, here are some of those already in the pipeline for 2022.
Greek philosopher Heraclitus famously said the only constant in life is change. Rarely has that been truer than for the self-managed super fund (SMSF) sector.
While the March 29 federal budget may bring yet more changes for SMSFs, here are some of those already in the pipeline for 2022.
A major change effective July 1 is the ability to make non-concessional contributions from the age of 67 to 74 without meeting the work test.
“This is very significant as it will allow many people to use a withdrawal and recontribution strategy,” says Liam Shorte, director at Verante Financial Planning.
“Here they can withdraw a lump sum from their super, if they have a high ‘taxable component’, and recontribute these funds as non-concessional contributions, which will be ‘tax-free components.”
According to Shorte, some of the benefits include:
- For every $100,000 that is switched from taxable to tax-free, beneficiaries may save up to $17,000 in tax on their death
- It may also provide some with the ability to recontribute the funds to their spouse’s account rather than their own to even up balances and use both members’ transfer balance caps
- It may also provide some protection against future government legislation taxing pensions as they may be more likely to tax the “taxable component” as that is the super guarantee component and salary sacrifice where the member has received concessional treatment of their contributions.
“Depending on their age, they could for example look at withdrawing $330,000 at age 67 and recontributing it using the three-year bring forward rule and doing the same at age 70, and depending on the rules, another $220,000 at 73,” says Shorte.
“All up this could save up to $136,000 in death benefits tax to their adult beneficiaries on their death.”
However, trustees need to be careful when taking advantage of this, Shorte says.
“Care should be taken to keep the recontributions in a separate pension to existing funds to avoid mixing the components and making the second tranche less effective.”
“An SMSF can have as many pension accounts as the member needs. Often there is one that has mixed components and one that has the new tax-free funds. The aim is to only take the minimum pension required from the tax-free pension and use up the one with mixed components first.”
Another measure promoted in the fiscal 2022 budget, which recently became law, is a reduction in the eligibility age for “downsizer” contributions from 65 years old to 60 years old, effective July 1.
For SMSF members nearing retirement, eligible individuals aged 60 years or older can choose to make a downsizer contribution into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home, without impacting contribution caps.
For contributions made prior to July 1, eligible individuals must still be aged 65 years or older at the time of making their contribution.
Downsizer contributions still count towards the transfer balance cap, which is applied when moving super savings into retirement phase and helps determine eligibility for the age pension, as noted by the Australian Taxation Office.
Reporting, ID changes
The latest changes also simplify reporting for super funds, the federal government says.
“[This will] reduce costs and simplify reporting for superannuation funds by allowing trustees to use their preferred method of calculating exempt current pension income where the fund is fully in the retirement phase for part of the income year, but not for the entire income year,” says superannuation minister, Senator Jane Hume.
“This measure will apply for the 2021-22 income year onwards.”
Other changes introduced in the Treasury Laws Amendment (Enhancing Superannuation Outcomes For Australians and Helping Australian Businesses Invest) Bill 2021, which was passed on February 10, included removing the $450 per month income threshold under which employees do not have to be paid the super guarantee by their employer.
Other changes for 2022 include for company directors, including directors of an SMSF corporate trustee, which are required to obtain a director ID by November 30. There are also new compulsory electronic data transmission rules for SMSFs rolling over funds to and from other funds.
Other measures still in the pipeline – yet to be approved by Parliament – include those concerning changes to SMSF residency rules and a two-year amnesty for legacy pensions.
“The former will allow SMSF members to continue to contribute to their SMSF while temporarily overseas,” says John Maroney, CEO of the SMSF Association.
“Under the current rules, contributions are prohibited unless a complex active member test is satisfied.
“The changes to legacy pensions are designed to simplify the retirement system by allowing super fund members in older complex pension products to move to more flexible, contemporary income streams.”
The recent flood disasters on Australia’s east coast may also spur the government to maintain the 50% reduction on the minimum required pensions, according to Verante’s Shorte.
“Otherwise, people need to ensure they have the liquidity to pay the full minimum pensions from July 1,” he says.
“This might be a positive vote winner for retirees.”
While SMSFs closely watch the upcoming budget, a potential Labor government post-May may also spur further changes to the sector, including limited recourse borrowing arrangements.
However, unlike the 2019 election, Labor has indicated it will not be proposing a raft of superannuation changes in May’s poll.
“We took to the last election a bunch of savings out of superannuation, which we won’t be taking to the next election,” Shadow treasurer Jim Chalmers was quoted saying by the Australian Financial Review.
This includes ruling out a $5 million cap on super balances, as proposed by the SMSF Association, the Australian Institute of Superannuation Trustees and others.
Regardless of rule changes, either planned or possible, the SMSF sector appears set for further growth in 2022.
“Amid all this uncertainty, one thing looks certain: the SMSF sector will continue growing strongly, with the number of funds expected to surge past 600,000 for the first time and the number of SMSF investors expected to surpass 1.13 million,” Maroney says.
“SMSFs are not an appropriate or preferred retirement savings vehicle for everyone, but it seems the more unpredictable super becomes, the greater the appeal for individuals to manage their own retirement savings and retirement income strategies.”