Pension ruling: a small but important step

It was a welcomed reform. When the federal government moved recently to amend the law as it relates to the tax exemption status of pension earnings when a person dies, it was good news for the thousands of SMSFs in the pension phase with unrealised capital gains.

By Andrea Slattery, CEO, SMSF Professionals’ Association of Australia

The SMSF Professionals’ Association of Australia (SPAA) had lobbied hard and long with other sections of the industry to have the previous ruling amended, and the federal government’s decision to heed our request deserved – and got – due recognition across the industry.

But as I said at the time, there are still some issues that require clarification in the wake of the recent handing down of this draft Australian Taxation Office (ATO) ruling. For example, the ruling identified a number of other events that might result in a pension exemption stopping and for the pension to be re-started. It’s SPAA’s assumption that the ATO’s interpretation of the law in these instances will remain in place and, if this is the case, then there are still a number of related technical issues outstanding.

The timing of the implementation of this amendment also needs to be clarified. The official announcement has these changes applying from the 2012/2013 financial year, but that leaves unclear what happens before 2012/2013. Are we to assume the ATO’s view prevails? SPAA is aware of a number of SMSF administrators who started taxing death benefits in accordance with the ATO’s interpretation when it first became known a few years back. Presumably these funds will now be entitled to a tax refund.

No doubt these issues will be resolved. The government’s decision to leave superannuation relatively unscathed and resist any major changes to the tax treatment of and controls on superannuation as part of its budgetary strategy in its mid-year economic and fiscal outlook has given the industry an enormous fillip, and suggests the government is adopting a ‘steady as it goes’ approach to superannuation.

Minister Shorten, in his public speeches and addresses to parliament, is committed to superannuation for the funding of people’s retirement and the health of the overall economy. To have a bipartisan commitment from all sides of government to building and protecting this system is so very important to Australians and Australia’s future viability.

When introducing the bill to increase the levy from 9 per cent to 12 per cent, Shorten told the parliament, “The Superannuation Guarantee legislation has since proven fundamental to the sustainability of our private retirement income. Superannuation has proved to be a terrific idea, blessing Australia with a national institution that almost every developed economy in the rest of the world would give their eye teeth for.”

Later, in the same speech, he said, “In mid-2011, two decades after compulsory superannuation was introduced, superannuation stands as one of Australian Labor’s most enduring and far-sighted reforms. The mission of adequate retirement savings is not yet completed, but the journey here has been a great national direction. We will know that we have succeeded when all Australians recognise that superannuation is as vital a pillar for our quality of life as Medicare or the minimum wage.”

The Cooper review also committed to the superannuation system as underpinning Australians’ quality of life, and more than two years later, it is worth restating once again three of the 10 superannuation policy principles:

  • The superannuation system must be supported by high quality research and data, as well as by intermediaries with high professional standards;
  • Superannuation is a large and complex system with an increasingly important social and macroeconomic dimension.  It must be regulated and administered coherently and rule changes, including to taxation rules, should be made sparingly and in a way that engenders member confidence; and
  • The system must have sufficient flexibility to accommodate its inherent growth path and should strive for continual improvement, rather than abrupt changes.  Where possible, government and trustee decisions about superannuation should be taken with a long-term perspective.

From SPAA’s perspective, these three principles enunciated by Cooper help highlight what we espouse as an organisation. Our commitment to professionalism has never been in question. It was recognised by the government, for example, when it announced a new form of financial advice licence in June, adding that SPAA was likely to be given a greater role in the new licensing regime.

It was a strong endorsement of our work over the past 10 years to raise the standard of advice in the SMSF sector and to protect the interests of consumers.

But for the clients of our members to be able to extract the maximum benefit from their professionalism, it is imperative that they operate in a system – as Cooper stressed – in which rule changes are the exception, not the norm, thereby instilling confidence in the system.

The ATO ruling on the tax exemption status of pension earnings when a person dies was a small but important step in instilling this confidence.

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