Reforms of Australia’s superannuation system saw a reduction in contribution caps, making it more restrictive for people to contribute into superannuation. These changes also introduced restrictions on the amount people can use to commence an income stream account and will now necessitate the lump sum payment of death benefits outside of the super system. Together, these factors will require SMSF practitioners to look for strategies and structures outside of super.

When people have surplus money to invest, strategies using superannuation have been maximized, money is being forced out of their SMSF, an SMSF may no longer be an appropriate savings vehicle for them, they have a terminal illness or for estate planning purposes – therefore other structures and strategies will need to be considered.

While superannuation remains a tax effective strategy for retirement savings, I believe high net wealth individuals may need to complement their superannuation savings with other structure and strategy opportunities.

What are some of the alternative strategies and structures that practitioners might want to consider for wealthy SMSF clients to complement their SMSF savings?

Generally, the other options for investing include owing assets directly, jointly with another person or entity or with the use of a company or trust structure. Each of these ownership structures for investment purposes comes with distinct advantages and disadvantages compared to SMSFs and each other. The most appropriate outcome may be a combination of some or all of the above, depending on an individual’s own circumstances.

Some structures will enable ready access to funds, differing capital gains discount rates (no discount for companies, 50 per cent discount for individuals), different tax rates (company tax rates versus individual marginal tax rates), control and flexibility can vary with each and the compliance/regulatory requirements can vary significantly. The ability to transact with related parties is much easier outside of an SMSF as well.

There are a number of options available for clients to consider as investment alternatives to SMSFs, regardless of the level of their wealth. One of the most significant advantages of saving within super is the concessional taxation treatment available. The trade-off for accessing these concessions however is that your money is locked away for a long time – generally until retirement. One of the attractive features of investing outside of superannuation is ready access to those funds. If an individual thinks they will need to access those monies prior to retirement, then another investment vehicle that enables earlier access may be better suited to them.

Investors need to review the features of other investment vehicles and consider which best suit their needs now and into the future.

Importantly, however, advisers need to be aware that other options are available. They may not need to know all the details around other investment options but they do need to know they exist and at least have a broad understanding of the features of each. In this way, they will know when to refer their clients to colleagues or other advisers who specialise in these areas.

There are other times when individuals may consider that an SMSF is no longer appropriate for them and in many cases, they will need their advisers to assist them in reaching these conclusions. Cognitive decline can impact on an individual’s ability to manage their financial affairs including their SMSF. At these times, an APRA regulated fund may be better option for them. The death of a spouse may necessitate the closing of an SMSF and rollover to another fund where the surviving spouse no longer wants the responsibility of running an SMSF. Removing benefits from super may be beneficial in times of ill or declining health, particularly where death benefits are likely to be paid to adult children who will pay tax on benefits received. In all these cases, alternative structures will need to be considered to ensure the best outcomes for clients.

Have you seen many SMSF clients look to include their adult children in their SMSF following the introduction of the First Home Super Saver Scheme? What are some of the risks that need to be considered with that?

The vast majority, an estimated 70 per cent, of SMSFs have a membership structure of two people with a further 23 per cent of SMSFs only having one member. Typically, an SMSF has an ownership structure around a couple, which is why SMSF’s are often called “mum and dad funds”. Frequently, the question arises if a child or children should join the fund as well? The numbers would indicate that in most cases, the answer is probably no.

There are a number of considerations that should be given due attention before allowing a child or children to join a fund. While the First Home Super Saver Scheme may seem like a great opportunity for children to join a fund, caution still needs to be exercised.

In an SMSF, the trustees of the fund all have control over the fund and this can include who is paid death benefits from the fund. If a child is a member of the fund, they may well end up controlling the payment of an individual’s death benefits and can exclude their siblings (who are not members) from receiving any benefits. We all like to think that our family wouldn’t do that but it does and has happened.

Where bringing children in, it may be advisable to bring them all in so they all have control but clearly for larger families, it may not be possible to bring all the children due to the restriction on the number of members in an SMSF limited to no more than four.

Further, superannuation can be one of the largest assets an individual or couple own after the family home. Bringing in a child as a member of the fund will give that child access to information regarding the quantum of those super holdings – this may not be desirable, particularly in blended families.

For some, the First Home Super Saver Scheme may well prove a great catalyst to bringing children into their SMSF but the key message here is to have properly considered the ramifications more generally of bringing in another member/trustee to the fund.

What are some of the technical traps to watch out for with some of the new changes coming into play from 1 July including transfer balance cap reporting, downsizer contributions and catch up contributions?

With most of the new measures being introduced, there are qualifying rules that must be adhered to in order to make the most of the opportunities. It will be crucial for advisers to understand the rules in full when talking to clients about their eligibility.

Tracking contributions will be important, knowing timing, thresholds and other criteria will be vital. The need for proactive engagement with clients on a regular basis to discuss their intentions and actions cannot be understated. It is no longer enough to engage with clients once a year at tax time. In many cases, it will simply be too late to take up opportunities or assess eligibility for some measures.

Are there any residual issues from the super reforms that you’d like to see fixed by the government?

There are still a number of people who hold market linked and complying lifetime income streams in their SMSFs. These types of income streams may no longer be appropriate for them but they have an inability to shut them down without significant consequences. In some cases, they have no option but to keep them operating due their non-commutable status which can further lock them into continuing an SMSF. The new superannuation reforms have compounded the complexity and rigidity of these arrangements and this is resulting in poor outcomes for some clients. Industry is working with the Australian Tax Office and the government to find an appropriate outcome for these people.

The rollover of a death benefit containing insurance proceeds from an SMSF to an APRA fund can result in a tax liability in the new fund, which would not arise if the proceeds were retained in the SMSF. Clearly, this is not consistent the new changes to allow the rollover of death benefits to a new fund (for immediate payment of a death benefit income stream). Particularly after the death of a spouse, an SMSF may no longer be appropriate for the surviving spouse but the imposition of a tax liability may cause them to keep the fund when they are better off rolling over to a large fund.

With any new legislation, there will be unintended consequences arising. These are generally identified as advisers work through the practical implementation of changes as they arise and will be worked through with the Government and the ATO.