This chapter considers the views expressed in evidence received by the Senate Economics Legislation Committee (the committee) on the Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 (the bill).
The committee received nine submissions: seven from organisations and two from individual submissions. The majority of submissions supported the objects of the bill; however, a number of concerns were raised as well.
Inspector‑General of Taxation and Taxation Ombudsman
In its submission to the inquiry, the Inspector-General of Taxation and Taxation Ombudsman (IGTO) noted that increasing the maximum allowable members of SMSFs from four to six will 'improve tax simplification and reduce costs for the Australian Tax Office (ATO) and taxpayers alike'.
The IGTO also emphasised that SMSFs are commonly used by families and, currently, larger families wanting to utilise these vehicles must spread their superannuation across multiple funds. The IGTO stated that, not only does this 'invariably increase the compliance costs for those taxpayers', but also noted that 'an unnecessary increase in the number of SMSFs will also create undue administrative and resource impacts for the ATO in educating and regulating the industry'.
The ATO receives $259 from the annual supervisory levy that is paid by all SMSFs. The IGTO predicts that the bill, when enacted, will create a reduction in the number of SMSFs reducing total levy revenue to the ATO who uses the funds to regulate the SMSF sector. The Explanatory Memorandum's (EM) statement on the financial impact of the bill suggests that there will be no impact on revenue over the forward estimates.
Finally, the IGTO undertook a keyword search on complaints received since 1 May 2015 relating to SMSFs and found no evidence that people are complaining about the restrictions on the number of members.
CPA Australia and Chartered Accountants Australia and New Zealand
Whilst agreeing that current membership limits may restrict choice and flexibility for larger families, in their joint submission to the inquiry, CPA Australia and Chartered Accountants Australia and New Zealand (the Accounting Bodies) did not believe this to be a first-order issue. Summing up they concluded that '[w]e expect the number of five and six member SMSFs to be modest'.
The Accounting Bodies highlighted a number of common problems which they envisage with increased membership: 'ability for majority of members to override the wishes of the minority; … [e]lder abuse including when a power of attorney is in place; … potential for such [death benefit nomination] disputes to arise is increased'; compliance with residency rules; and governance of funds.
In addition, the Accounting Bodies consider the following issues to be made more complex:
Additional complexity in matching investment risk and return requirements of additional members with the assets of the fund;
Increased risk to members of the fund by conflicts of interest involving other trustees; and
Increased complexity in the event of fund dissolution due to members leaving the fund, including events involving marital and familial estrangement.
Association of Financial Advisers Limited
The Association of Financial Advisers Limited (AFA) note the targeted nature of the bill, stating that, as 93 per cent of SMSFs currently have only one or two members, the expansion of the maximum membership to six is unlikely to impact the vast majority of funds, with the benefits accruing to larger households.
Notwithstanding this, the AFA supports the bill, stating that it expects the reform to be beneficial in the following ways:
Allowing larger families to participate in the one SMSF.
Better enabling the establishment and continuing operation of intergenerational SMSFs.
Increasing the level of funds within individual SMSFs to better enable diversification and participation in additional investment opportunities.
As most SMSF costs are fixed, increasing the number of members will result in a reduction in the per member operating costs and therefore making SMSFs more cost effective and also more suitable for members with lower investment balances.
The AFA also indicated it had thought about the risk of negative outcomes and unintended consequences resulting from the bill. Although acknowledging there are risks involved in intergenerational SMSFs, the AFA believes that those risks are already present and unlikely to be made greater as a result of the bill. In conclusion, the AFA stated that it is 'not aware of any additional risks or other problems that may arise specifically as a result of this legislation'.
Further, the AFA considers 'the signing of financial statements by both corporate and individual trustees … appropriate'.
Although noting that any decision by a trustee to add an extra member should always be planned and accompanied by specialised advice, the SMSF Association believes the bill will provide additional flexibility and choice in the superannuation system.
In addition to improved flexibility and choice, the SMSF Association stated that the reform may lower superannuation fees; improve the ability to pool balances and invest in a greater choice of assets; increase engagement; and improve estate administration and exit plans.
In relation to integrity and administrative issues, the SMSF noted that, given its targeted nature, it does 'not expect the option to add more members to an SMSF to create any substantial integrity or administration issues for the SMSF sector as a whole, rather it should just provide additional flexibility for those in a position to utilise it'.
Self-managed Independent Superannuation Funds Association
The Self-managed Independent Superannuation Funds Association (SISFA), a SMSF advocate established in 1988 to represent the interests of trustees and industry, supports the object of the bill to increase the number of members in a SMSF from four to six. Specifically SISFA stated that it:
… believes this change will be beneficial for larger families who want to invest their super benefits together. In particular, it will allow such SMSFs to lower costs and increase their scale and efficiencies to better enable such family members to provide for their retirement. For example, where some families currently have multiple SMSFs due to the four member limit, they will now be able to have a single SMSF.
Professor Susan Thorp
Professor Susan Thorp, Professor of Finance at the University of Sydney Business School, answers three relevant questions with reference to two co-authored journal articles.
Firstly, Professor Thorp is of the view that raising the maximum number of members will not change the net establishment rate of SMSFs, providing evidence that the net establishment rate is 'slowing' and the fact the current limit does not appear to be constraining the majority.
Secondly, according to Professor Thorp three groups are likely to favour a higher maximum member limit for SMSFs:
Financial professional's business could benefit from more SMSFs and higher asset value SMSFs;
Members with lower accumulations as 'expense ratios could fall with more members'; and
Older SMSF trustee-members can be helped by younger family members for fund administration and to manage risks.
Thirdly, in response to whether or not it is beneficial to house more superannuation assets in SMSFs, Professor Thorp made two points: when increasing the number of members, systemic risks should be considered because the SMSF sector is not prudentially regulated; and 'SMSF member-trustees are not generally more capable than large-fund members'.
Professor Thorp noted that 'SMSFs are vulnerable to all kinds of household-level shocks, including divorce, ill health and death of partners'. In closing, Professor Thorp stated this amendment warrants 'close consideration'.
Mr Pat Murphy
In his submission to the inquiry, Mr Pat Murphy implored the committee to support the increase in membership numbers. Specifically, he stated:
I implor[e] you to increase the member numbers and make provisions so that family members and partners may join with their parents in providing retirement benefits. The administration cost of fund establishment and years of administration are very expensive cost[s] to bear because of the restrictions.
Australian Council of Trade Unions
The Australian Council of Trade Unions (ACTU) opposes the bill, stating that it will 'exacerbate the misuse of superannuation as a vehicle for tax avoidance and intergenerational wealth transfers'.
The ACTU believes the government should focus its efforts elsewhere, noting that, based on ATO figures only four per cent of SMSFs currently have three or four members. Further, the ACTU claim that the bill will not improve the retirement savings of workers, but will, instead, promote superannuation as an estate planning tool.
By promoting the use of SMSFs, the ACTU is also concerned that the government has ignored the deficiencies raised by the Productivity Commission (PC) in its final report entitled Superannuation: Assessing Efficiency and Competitiveness (superannuation report). In particular, the PC's statement that, 'smaller ones [SMSFs] (with less than $500,000 in assets) perform significantly worse on average'.
In conclusion, the ACTU stated:
This Bill is simply another attempt … to prioritise the wealthy with more generous SMSF rules to make it even easier to transfer their wealth to the next generation. The result will be an even greater gap between the worker's retirement outcomes and the already wealthy that will extend into the next generation.
Super Consumers Australia
Super Consumers Australia (SCA), a not-for-profit consumer organisation advocating for low and middle income people in Australia's superannuation system, also opposed the bill:
'we don't believe … [the bill] will make a meaningful contribution to delivering better member outcomes in an environment where barriers to accessing un-conflicted financial advice persist'.
The SCA provided two reasons for its opposition to the bill:
The majority of people do not belong to SMSFs and SMSFs are unlikely to be appropriate for most people[—relationship between SMSF balance size and returns, significant administrative and compliance obligations and systemic risk]; and
Conflicts in financial advice persist and financial advisers stand to benefit from the expansion of SMSFs.
SCA highlighted the finding in the PC's superannuation report that SMSFs 'with over $1 million in assets, are broadly comparable with APRA-regulated funds'.
With reference to ATO data, SCA also noted 'there does not appear to be evidence of any demand to increase membership of SMSFs from four to six members'.
In conclusion, the SCA suggested that the Bill be delayed until the 2021 review by ASIC—recommended in the PC's superannuation report—is conducted and the findings considered.
The committee acknowledges the differing views towards the objects of the bill and the fact that most submitters were supportive of the bill's provisions. Some submitters suggested that there is not a significant demand for increasing the maximum number of SMSF members in a fund and hence no need for the amendments to be made. While noting these views, the committee considers most objections to be more general in nature rather than significant concerns.
The committee notes that the SMSF sector has grown considerably since the 1990s to represent approximately one third of Australia’s total $2.76 trillion retirement funds. Recognising the obvious benefit to Australians, particularly families who number more than four members and manage their own superannuation, the committee sees efficiencies in the bill's amendments. As such, the committee is of the view that families should have the option to establish a single SMSF together if they wish to thereby reducing administrative costs.
The changes provide families managing joint superannuation funds with greater control and reduced costs, which in turn will increase the need for greater financial literacy and accountability to effectively manage those investments as trustees. The committee is broadly supportive of measures that increase individuals' engagement with their retirement saving and encourage improved financial literacy.
The committee notes that as the main regulator of the SMSFs, the ATO receives an annual supervisory levy of $259 for each SMSF fund to cover its costs of regulating the sector. These costs include annual compliance activities to ensure trustees comply and understand the rules on contributions, benefit payments and superannuation investments. The committee notes that the EM states the bill will have no impact on revenue over the forward estimates.
While SMSF trustees should already be familiar with their prudential responsibilities, the committee encourages the ATO to maintain its level of engagement in assisting and educating the sector as the changes associated with the bill are brought into existence.
The committee recommends the bill be passed.
Senator Slade Brockman