Many SMSF members are “blissfully ignorant” of how recent changes to super could affect their estate and should seek specialist advice, the SMSF Association has said.
The association’s head of technical, Peter Hogan has raised a flag over the new rules which mean that upon the death of a spouse, the surviving SMSF member could inadvertently exceed the transfer balance cap (TBC) of $1.6 million.
The rules came into effect on 1 July 2017.
“The end result can be that where an SMSF is paying pensions to two spouses who are comfortably within their respective TBCs of $1.6 million, and one of them dies, the surviving spouse can suddenly exceed their TBC,” he said.
“It is an outcome of the new superannuation regime that has received little attention and the association is concerned that many SMSF members and their advisers are ‘blissfully ignorant’ of the impact of these changes regarding the payment of death benefits.”
Continuing, Mr Hogan disputed the notion that any excess above the surviving spouse’s TBC can be automatically moved into an accumulation fund.
“This is wrong,” he explained. “The rules for death benefits have changed in that any excess above the recipient spouse’s $1.6 million cap ‘inherited’ because of the death of a spouse must be paid out of superannuation as a lump sum; transferring it to an accumulation fund is not an automatic option under the new regime.”
Further, Mr Hogan said there could be “many instances” in which the death of a spouse could trigger a death benefit to exceed the TBC – and not just for SMSFs with balances that are already worth more than $1.6 million.
“This is not just a problem for SMSFs with large pension account balances already exceeding the $1.6 million cap,” he warned.
Noting that while members can plan for this outcome, Mr Hogan stressed that they still “need to receive specialist advice addressing their fund’s particular circumstances” in order to obtain the best result possible.
“This may mean that members who have addressed their estate planning needs in the past will need to review those plans in the light of the changes that took effect on 1 July 2017.”
Earlier this week, the chief executive of education resource and advocacy group, Protecting Seniors Wealth, told Nest Egg’s sister site, SMSF Adviser, that the super reforms could leave older Australians more vulnerable to financial abuse as they navigate the new landscape.
Anne McGowan explained that as SMSFs may need to consider reshuffling their fund’s strategy, “that in itself will leave them open to financial abuse because it will be easier for financial predators to access those other funds”.
Ms McGowan continued, noting that as “there is so much money in SMSFs”, the growing pile leaves SMSF trustees vulnerable to abuse.
But there’s some good news too
According to the SMSF Association’s CEO, John Maroney, the new rules make it easier for SMSFs to make tax-deductible voluntary contributions.
“The opening up of voluntary superannuation contributions… will effectively have the same result as employees making salary sacrifice contributions,” he said.
“But some employers choose not to allow their employees to salary sacrifice, so this decision by the government does give employees greater flexibility if they want to contribute more money into their superannuation up to the $25,000 cap.”
He explained that prior to 1 July; the option of making tax-deductible voluntary superannuation contributions was essentially limited to the self-employed.
However, with the new rules, an employee earning $100,000 and receiving $9,500 annually in a superannuation guarantee payment can now contribute an extra $15,500 to super at the concessional tax rate.
“This gives individuals far more flexibility over the timing and control of their contributions up to the $25,000 cap, as well as being able to utilise catch-up contributions once they begin,” he continued.
“It also avoids the problem of having to enter into a salary sacrifice agreement with their employer that can involve unforeseen clauses detrimental to the employee’s interests and avoiding the issue of employers either failing to pay or paying late.”
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