By Nicholas Ali
Executive Manager, SMSF Technical Support
Firstly, Happy New Year to all our readers! I sincerely hope 2022 is the year we start to put the pandemic behind us and begin to get on with our lives.
Secondly, this blog topic got me thinking about some of the issues SMSF trustees and members should consider in the new calendar year.
Therefore, I've come up with three themes for SMSFs in 2022.
Review investment strategy
It's a new year, so perhaps it's time to revisit the fund's investment strategy and make sure all fund investments are fit for purpose. We are not investment experts at SuperConcepts, nor are we licensed to provide financial advice, so any investment decisions trustees make must be made in conjunction with input from suitably qualified and licensed professionals.
Some investment strategy issues for consideration may be fund liquidity – can the fund meet Limited Recourse Borrowing Arrangement (LRBA) loan repayments? Can the fund meet other expenses? If the fund is overweight a particular asset class, it does not mean the fund breaches any investment guidelines, but can the trustees justify this, given superannuation is for retirement savings? How will investing predominantly in one asset provide for members' retirement goals?
Given good long-term investment opportunities, maybe the fund should have the liquidity to buy into a particular asset class?
Another aspect of a fund's investment strategy is insurance. This must be considered as part of any investment strategy review. Australians in general (and younger Australians in particular) are notoriously under-insured when it comes to personal insurance, life insurance, disability insurance, etc. (we tend to insure our possessions, but not the source of income that purchases those possessions, being our lives). An SMSF can be a good option for holding policies of member insurance. There are some helpful strategies for insurance through SMSFs for younger people, so this year might be a good time to explore insurance through your SMSF – especially for that younger cohort.
Perhaps a member is retiring or is in poor health? Can the fund meet its pension obligations or pay a death benefit lump sum? Which is a nice segue to my second key theme of 2022, and that is...
Australia's ageing population
Since 2011 – when the first of the baby boomer generation turned 65 – the percentage of the population of retirement age has increased significantly. The share of the population of prime working-age has begun to fall.
This flows through to the Federal Budget in the form of a reduction in revenue due to lower labour force participation and an increase in spending, reflecting greater demand for government programs that support older Australians.
So older Australians will have to rely more on their superannuation savings during their lifetimes, and they will be living longer than any generation before them. Will their fund run out before them?
Also of crucial importance is estate and succession planning. As our population ages, issues like Dementia and other ailments can affect the trusteeship of a super fund. And there's nothing at law that removes an incapacitated trustee.
If we have a defective trusteeship of the fund – because a trustee cannot satisfy their trustee duties – then the fund may fail the definition of an SMSF. This could potentially make the fund non-complying, meaning half of the fund's capital is lost in penalty tax. So, succession planning is a crucially important theme for 2022.
In the same vein, what happens to member benefits and the fund when they pass away is something that, unfortunately, will become an increasingly likely occurrence as our Baby Boomers hit their seventies. This year I think more people will need to take steps to ensure the proper outcomes occur on their demise, such as, who gets the benefit? How is it paid? Is it better to have money in the super system, or can individuals use the personal marginal tax rates to their advantage? What tax imposts are there (CGT, lump-sum tax)? Are there strategies members should be thinking about how to reduce tax? I think one thing, which we'll touch on next, is changing legislation that allows re-contributions up to age 75.
The third theme for SMSFs in 2022 is the proposed legislative changes, particularly changes to the contribution rules.
At the end of 2021, the government introduced into Parliament the Treasury Laws Amendment (Enhancing superannuation outcomes for Australians and helping Australian businesses invest) Bill 2021, which aims to improve flexibility for Australians preparing for retirement; namely through changes to the contribution rules.
The bill essentially abolishes the work test (40 hours work in 30 days) so Australians aged between 67 and 75 can also contribute to superannuation. Currently, those under age 67 can contribute to super without having to meet the work test. As expected, the new rules also extend to bring forward opportunities until the year the member turns 75. So, someone 74 on the 1st of July would have their 75th birthday to make a non-concessional contribution using the bring-forward rule.
This could provide re-contribution strategies to alter the mix of tax-free/taxable components in a member's benefit for estate planning purposes.
Finally, the budget and election
And my final comment is we have a federal election this year, which is usually preceded by an election budget. Often election budgets have some sweeteners in there, and the superannuation changes mentioned above are an excellent example of that.
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