(03) 9020 2905PORTFOLIO POINT: Bruce Brammall chats to ATO assistant commissioner for super, Stuart Forsyth, about some of the burning issues for SMSF trustees.
Funnily enough, I had left specific instructions with my staff should this eventuality ever come to pass. (It was a throwaway gag relating to something else that had happened in the office at the time.)
I had said that if the Tax Office ever called and asked for me, they were to say: “He’s dead! Let the dead rest in peace, you miserable buggers!”
So, a few weeks ago, Barb from the Australian Taxation Office called and asked for me. Despite what I’d thought was a fairly simple line to remember, “he’s dead” became “he’s in a meeting” and “let the dead rest in peace …” became “sure, his email address is …”
The email eventually arrived some weeks later – after news had got around that the ATO was conducting interviews with advisers who had the ears of SMSF trustees. And being the powerful audience that you Eureka Report readers are, ATO assistant commissioner for superannuation Stuart Forsyth wanted to talk to me about your concerns.
In short, Forsyth is the guy in charge of the regulation of SMSFs, a job that was handed to the ATO by the government, who wanted SMSFs handled separately to the rest of super, which is looked after by APRA. Forsyth has been the public servant in charge of SMSFs for eight years now.
He wanted to know what’s concerning SMSF trustees and their advisers. So I raised with him a few issues, including the 93% taxation level for super members that went over their contribution limits, the issue of residential property being banned from in-specie transfers, trustee education, concerns about the growth in numbers of SMSFs and borrowing. And here’s what came out of that conversation.
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Most recently in the news has been two issues regarding super contributions. The first has been the effective 93% taxation rate that applied to those who went over their concessional and non-concessional contribution limits. We have covered that topic here (6/4/11) and Robert Gottliebsen covered your responses to that issue in this column’s slot last week (20/4/11). The second issue was in regards to the cuts to the contribution limits.
On the issue of the 93% taxation of super funds that go over their concessional and non-concessional limits, Mr Forsyth said people shouldn’t hold their breath if they’re thinking that a change of heart on “honest mistakes” would allow them to go back and reclaim the extra tax they have paid, often up to $70,000 for what has been fairly small errors on contribution limits.
Though the taxation penalties might get revamped in the future, if you’ve already made the error and the ATO has been in contact with you, don’t count on getting off, Forsyth said. It’s unlikely that any changes will be retrospective, he said. (Superannuation Minister Bill Shorten has announced that he is reviewing the rules, following recent publicity.)
“Retrospective legislation is not something governments like to do … they (trustees and/or members) should not think that they will be able to go back to three or four years ago to have these things overturned.”
And the reason for that is that super is already a major source of tax “leakage” for the government, a position which is only likely to become significantly worse in the coming years, as more and more super funds and members begin to draw tax-free super pensions (once members are over the age of 60).
“The concessions given to super are one of the biggest budgetary concerns – they are the biggest budgetary concern,” he said, saying that the concessions to super super account for about $22-23 billion annually.
And those tax concessions for super are also the reason for the cuts to contribution limits by the Rudd Government, which came into effect on July 1, 2009, Forsyth said. This was the reduction in the limits from $50,000 to $25,000 for the under 50s and from the temporary limit of $100,000 to $50,000 for the over 50s.
Asked whether the cuts were politically motivated – that is, Labor targeting the restrictions at the wealthy who could afford to make the higher contributions – or budgetary, Forsyth unequivocably said they were budgetary.
In my opinion, given the wide ranging means testing that has been introduced by Labor since coming to power on a number of government handouts, Forsyth’s affirmation that it was budgetary still seems a little hollow.
Last week, Robert Gottliebsen and Eureka readers also picked up on a point that I made last year in regards to the 50-50-500 rule (click here, 19/5/2010) that Labor had effectively reintroduced the reasonable benefits limit (RBL), which was tossed by the Howard-Costello government when they introduced tax-free pensions in 2007.
The 50-50-500 rule is an admission by Labor that it went too far with the cuts. The problem now is whether they are fixing it properly with a bar of $500,000. In Robert’s opinion – and mine – that bar is way too low. Worse, the government has said it will not be indexed.
With the growth in the number of SMSFs being so rampant – about 36,000 a year – I asked about Forsyth’s personal concerns in regards to the quality of the trustees.
He ruled out any education or pre-testing of SMSF trustees as being unworkable. He said the tests would probably have to be online and they could too easily be forged by the same people (accountants and advisers), who were largely helping them to set it up.
But he did say that over the last year, the ATO had contacted about 300-400 super funds that were in the process of being set up and suggested that they should not go ahead with that plan.
“For example, they might be about 40-years-old and have not filed a (personal) tax return for a while … the high risk area is about 1-2% of funds a year and we know they won’t lodge returns.”
A question Eureka readers constantly ask me concerns why the ATO has a black ban on residential property being allowed as an asset that could be transferred in-specie to a SMSF.
“It is seen as high risk, to transfer in residential property … they might transfer it in, then live in it,” which would be a clear breach of the “sole purpose test”. He said the problem stems from the fact that people get so attached to their negatively geared investment properties that they don’t want to get rid of it and the risk of them living in it was seen as too large when the legislation was framed, he said.
Forsyth said there has been quite a bit of interest in borrowing inside SMSFs. “We are trying to get some messages out there about how it must be a ‘single acquirable asset’. Most people seem to be doing it properly,” he said, but there were many areas where the ATO held concerns, particularly when it came to property, as people were trying to improve the property, rather than maintain it or repair it.
Last year, I went into some detail of how you could use negative gearing inside super to have your super fund pay no tax (click here for column on 20/10/2010). At all. Possibly forever. I was not recommending it, just showing how it could be done. And that it was something Treasury Secretary Ken Henry was so concerned about, that he warned the incoming Gillard government about it after the last election.
Forsyth questioned the use of negative gearing inside super funds. Just because it’s there, he said, doesn’t mean it’s a good idea. “Negative gearing into a 15% tax environment does not seem to be making big sense,” he said.
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I was promised that the intrusion had nothing to do with an audit. Probably a good thing, as only a few hours before he arrived, my SMSF accounts arrived from my accountant and I hadn’t had a chance to check them yet.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.