Nick Bruining: This special five-year ‘get out of SMSF jail’ card lets you dodge tax and debt penalties

Thousands of older self-managed superannuation funds are likely to be closed down following a significant let-off on potential Centrelink debts and tax liabilities. In some cases, closing down an SMSF could have cost retirees tens of thousands of dollars. That roadblock has seen a large number of funds continue to operate, with members effectively “stuck” in an SMSF. A special five-year window to wind up “complying income streams” in SMSFs and public offer schemes is set to end on December 7, 2029. Affected members can effectively roll over their benefit to a conventional low-cost superannuation scheme without penalty. Complying income streams caught up in the change include lifetime pensions that are similar to an annuity paid from SMSFs and a special version of an account-based pension called a term-allocated pension (TAP). These can be paid from SMSFs and large public offer super funds. Colonial First State head of technical services Craig Day said the concessions were considerable. “While there are certainly still people out there with lifetime pensions in their SMSF, there are a lot of more people with TAPs who could take advantage of these changes,” Mr Day said. To meet the requirements for a complying income stream, the income stream needed to be payable for an agreed term. For lifetime pensions, this is throughout the life of the member. Alternatively, TAPs are payable for a fixed term that was set at commencement. For both pension types, the capital supporting the pension could not be accessed. For lifetime pensions, an annual actuarial certificate also needed to be prepared, adding to the operating costs. Independent financial planner Lewis Christie said while there were not many SMSFs left with these arrangements in place, many would take up the offer to exit the scheme without penalty. “These particular SMSF structures are very complicated to operate, and as people age some find it increasingly difficult to maintain,” Mr Christie said. “That usually means a greater reliance on expert help. “The account balances may have declined while the fixed costs charged by accountants and others has gone up. Once the SMSF has been would up, the total fees charged by an alternative low-cost public scheme can be less than half” On compliance costs alone, it is not unusual to rack up a $5000 annual bill before investment management and financial advice fees are taken into account. One of the more significant issues relates to a special Centrelink concession which is about to be enacted. People who established a complying income stream prior to September 20, 2007, would often qualify for a full or part Centrelink age pension due to these exemptions, which under the grandfathering provisions continue to apply. “Complying income streams commenced before September 2004 enjoyed 100 per cent exemption from the Centrelink asset test,” Mr Day said. “Between that date and September 20, 2007, you received a 50 per cent assets test exemption.” Before the concessions were announced, terminating a complying income stream meant that Centrelink income support recipients such as age pensioners, would need to repay up to five years worth of any over-payments received. While there is some uncertainty over the effective date, some additional changes mean this five-year claw-back rule will no longer apply. However, some will lose their assets test exemption going forward, so terminating their income stream could still impact their future Centrelink entitlements, depending on their circumstances. The changes in December last year also removed restrictions that limit a fund’s ability to allocate any assets held by the fund to support a lifetime income stream back to the member after the income stream is terminated. “Given that many members of these funds are now in their 80s, I suspect that quite a few will be looking to simplify their affairs as much as possible,” Mr Christie said. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association