Federal Budget Deep Dive – Proposed SMSF Changes

As part of the recent Federal Budget, the following proposed changes will impact our SMSF and Small APRA Fund (SAF) clients:

SMSF and SAF Residency Changes Delayed: While the Labor Government have agreed to continue with the changes to SMSF Residency Rules as stated in the Liberal 2021-22 Budget, these changes will not commence until to the income year commencing on or after the date of Royal Assent, instead of the original proposal date of 1 July 2022.

Once implemented, the current rules around Central Management and Control of the fund will be extended, allowing a SMSF to meet one of the three residency requirements, even while the trustees of the fund are overseas for a period of up to 5 years (currently 2 years).

If the SMSF were to lose its residency status, it will lose it concessional tax treatment and be taxed at the highest marginal tax rate of 45% (instead of the super rate of 15%). In addition, in the year residency is lost, the SMSF’s income for the year will include the market value of all fund assets (less an after-tax contributions) as at the start of the year, meaning the fund could lose up to 45% of its overall value in tax as a result.

Removal of Active Member Test: While the Labor Government have agreed to continue with the changes to Active Member Test as stated in the Liberal 2021-22 Budget, these changes will not commence until to the income year commencing on or after the date of Royal Assent, instead of the original proposal date of 1 July 2022.

The Active Member Test required that SMSFs and SAFs with Active Members had at least 50% of the total market value of funds, or the sum or withdrawal benefits payable to active members who were Australian residents for income tax purposes, making the action of having contributions paid to an SMSF while working overseas more complex than needed.

Reduced Audit Requirements Scrapped: In Liberal’s 2018-19 Federal Budget, a proposal was made to allow SMSFs with three years of consecutive clear audits, on time tax lodgements, and overall compliance, to more for annual auditing to auditing every three years, saving the fund time and expenses.

Unfortunate Labour have announced that they will not be proceeding with this proposal, resulting in SMSFs being required to incur the expenses of annual audits, regardless of their historical management and record keeping.

Penalty Unit value change: From 1 January 2023, each penalty unit will increase from $222 to $275.

While this isn’t a change specific to SMSFs, in the event that a trustee is investigated by the ATO and are found to have acted inappropatiaptlu, issuing fines is one of the options available. Examples include not meeting their duty to keep meeting minutes (10 penalty units – increasing from $2,220 to $2,750) or lending to members or relatives using money from the SMSF (60 penalty units – increasing from $13,320 to $16,500).

For more information on penalty units, and the other tools available to the ATO when dealing with Trustee misconduct, visit  https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/How-we-deal-with-non-compliance/

To find out if these changes impact on your SMSF please reach out and book a time to discuss this with one of our advisers.

While a range of general budget proposals around super and taxation will impact SMSFs, this article has only covered off on the changes that are more specific to SMSFs.

For more information on other proposed super and taxation changes be sure to keep an eye on the blog section of our website. The easiest way to do this is to follow us on social media or subscribe to our electronic mailing list.

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