March TECE News

Welcome to this month’s technical roundup from the TECE team. This update helps keep you up to date with the latest industry news and technical developments in financial advice relating to insurance, superannuation, tax and estate planning.

Employers who have historically underpaid SG contributions can now make good on any outstanding SG liabilities to their employees without the penalties for late payment applying.  

The Bill enacting these changes, Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019, has now received royal assent.

This one-off SG amnesty encourages employers to self-correct historical SG non-compliance dating from 1 July 1992 to 24 May 2018.

Employers will have six months to pay outstanding SG amounts to their employees as the amnesty period starts from 24 May 2018 and will end six months after the day the Bill receives royal assent.

The changes will allow employers to claim tax deductions for payments of the SG charge or contributions made during the amnesty period to offset the SG charge. The SG charge generally includes all the SG amounts owing to an employee, plus interest and an administration fee, and is usually not tax-deductible to the employer.

Around 7,000 employers have since come forward to voluntarily disclose historical unpaid superannuation since the amnesty was first announced on 24 May 2018. Further, Treasury estimates an additional 7,000 employers will come forward during the six month amnesty period.

To use the amnesty, employers must pay all that is owing to their employees, including interest.

The legislation ensures that employers who do not take advantage of this one-off amnesty will face significantly higher penalties if they are subsequently caught. 

The ATO has released guidance stating an SMSF investment strategy that specifies asset ranges of zero to 100% per cent within an SMSF investment strategy document is “not a valid strategy”.

Their view is that the investment strategy must be tailored and specific to the relevant circumstances of the SMSF. The guidance is based on the outcomes of the letter recently sent by the ATO to nearly 18,000 SMSF trustees who have more than 90% of their fund’s assets in a single asset class – namely property.

While there are no restrictions under general law prohibiting SMSFs from investing in a single asset, there are measures in the Superannuation Industry (Supervision) (SIS) Act and Regulations that require SMSFs to formulate, regularly review, and give effect to an appropriate investment strategy, and rules as to what considerations the strategy must address.

There may be good reasons as to why SMSF trustees choose to invest a majority share of their retirement savings in one asset or asset class, such as property. For example, a member may have a public offer superannuation fund that is predominately invested in shares and/or cash/fixed interest, so overall the member’s superannuation portfolio may take on a more balanced approach.

The ATO’s views have sparked much debate about whether the ATO has the power to assess the validity of an SMSF investment strategy and the chosen investments in an SMSF.

Although the ATO is not responsible to determine whether an SMSF investment strategy is appropriate for SMSF members, the ATO can assess whether than SMSF has followed the investment strategy rules and determine whether the correct process has been followed.

Instead, it is the SMSF auditor’s responsibility to check that:

• An investment strategy was in place for the fund that considered the factors stated in SIS Regulation 4.09 (ie. investment and diversification risk, liquidity risk, whether trustees should hold insurance cover for one or more members of the fund, etc.)
• The fund’s investments during the year were in accordance with the strategy, and
• The strategy had been reviewed at some point during the year.

Where SMSF trustees do not comply with the investment strategy requirements, the SMSF auditor may need to notify the ATO about the breach by lodging an auditor contravention report.

Thus, all SMSF trustees, and particularly those whose funds where assets may appear to lack investment diversification and liquidity, should consider having a well-documented investment strategy that:

• Provides the decision making rationale behind the investment choice/s
• States trustees have considered the risks associated with a lack of diversification, and
• Includes details on how diversification and liquidity will be managed (eg. by including a cash flow plan and a risk assessment analysis, etc).

The ATO has updated its website with some FAQs around the SMSF investment strategy requirements. Click here for more information.  

Did you know that the annual industry-wide rate of return for APRA regulated superannuation funds for 2019 was 13.8%? (Source: APRA Quarterly superannuation performance statistics highlights, December 2019)

APRA’s data also revealed: 

• The five year average annualised rate of return to December 2019 was 7.1%, and 
• Total assets increased by 1.7% (or $36.2 billion) to $2.2 trillion.

In terms of asset allocation, the total investment amount of $1.9 trillion was invested in the following asset classes: 

• 51% equities (22% Australian listed equities, 25% international listed equities and 4% unlisted equities)
• 21% fixed income (12% in Australian fixed income and 9% international fixed income)
• 10% cash
• 9% property
• 6% infrastructure 
• 3% other.

APRA’s data revealed that industry funds had amongst the lowest allocations to fixed income and cash while retail funds had a higher exposure to equities.

Q: My client has life, TPD and income protection owned by his SMSF. Upon meeting an insured event, will the payout of the insurance proceeds be taxable to his SMSF?

A: No, the payment of the life insurance proceeds to the SMSF trustee/s will not be taxable to his SMSF (or to any complying superannuation fund). This is because exemptions apply to ensure that insurance proceeds for insurance cover held on a member's behalf through superannuation are not assessable income, nor an assessable capital gain of a superannuation fund trustee who receives them.

Life and TPD insurance held on a member's behalf through superannuation are all capital in nature and proceeds are therefore not ordinary assessable income. In addition, any capital gain that would apply where these proceeds are paid to a trustee is ignored.

Further, income protection insurance held on a member's behalf through superannuation is also not assessable income of the fund, and the fund trustee cannot claim a tax deduction for proceeds paid on to a member.

When proceeds are paid to a superannuation fund trustee, tax components are created which will drive the ultimate tax treatment in the hand of the member or dependant recipient. The tax components that the insurance proceeds take are determined by:

• The superannuation interest into which they are paid (ie. accumulation or retirement/pension phase), and
• The type of insurance held (ie. life, TPD, income protection).

Where life or TPD insurance premiums are debited from a fund member’s accumulation account, claim proceeds will be paid into the same accumulation account and the proceeds will generally be allocated to the taxable component (taxed element).

Income protection/salary continuance insurance proceeds do not generally form part of a member's balance and are not allocated to one or more tax components. When paid out to a member under the temporary incapacity condition of release, income protection proceeds are not considered a superannuation benefit and are generally taxed as ordinary income in the hands of the recipient.

If insurance premiums are debited from a member’s pension account, the tax components that the insurance proceeds take will depend on whether the pension is reversionary or non-reversionary.

This can be summarised in the table below:

Do you have a technical question about a financial advice strategy or need to find technical resource material? Don’t hesitate to email us at tece@aia.com

Kind regards,
The AIA Technical and Education Centre of Excellence (TECE) Team