The Government has released an exposure draft for the introduction of a retirement income covenant within the SIS Act from 1 July 2022, with SMSFs a notable absentee.

This is a distinct change from the position paper that was subject to consultation over the past couple of months which was clear that the covenant would apply to “all trustees, including trustees of SMSFs”.  However, this decision to exclude the SMSF sector appears to be based upon the Government not wanting to burden trustees with unnecessary red tape.

Why exclude SMSF trustees?

It’s an interesting question… The most recent statistical overview of the SMSF sector by the Australian Taxation Office (ATO) in 2018-19 show approx. 40% of members were in retirement phase, with a median:

• Retirement balance with no accumulation balance of $555,223; and
• Retirement balance where the member also has an accumulation balance of $1,061,872

It should also be noted that the median benefit payments were $69,341, with:

• 31.4% taken as lump sums
• 65.4% taken as an income stream
• 3.2% taken as a transition to retirement income stream

Therefore, more than two-thirds of all benefits payments taken from more than 400,000 members were in the form of an income stream.  These statistics show a far more mature concept of ‘retirement’ within the SMSF sector to other parts of the industry.

The disconnect for SMSFs

From the position paper, there did appear to be some disconnect in a number of areas for SMSFs when compared to APRA-regulated funds.  Furthermore, there were a number of concerns raised by industry back to Treasury in respect to the impact of the retirement income covenant, including the:

• Potential overlap between retirement income covenant and investment strategy covenant on investment composition and risk – this may have caused confusion and/or duplication.
• Role of advice, in particular with a large cohort of unlicensed accountants seen as the primary ‘adviser’ to the majority of SMSF trustees. With a large amount of reform underway and continuing in 2022, it would pose a challenge for trustees to seek advice to obtain what is necessary and relevant at the appropriate time.
• Role of SMSF auditors and any extended scope of the audit to check compliance with the covenant, which increases the time of complexity of the audit.

But it could have been a positive…

Whilst the Government has listened to industry feedback regarding some of the inconsistencies and potential unintended consequences, the role of a retirement income strategy (as part of a covenant within section 52B, SISA) could assist in future decision making about the fund – for example:

• guidance material to help with member’s retirement planning,
• dealing with loss of capacity,
• the importance of valid enduring powers of attorney,
• getting trustees to contemplate appropriate exit strategies for fund members; and
• when it would be appropriate to wind up the fund.

You get the feeling that with the Government’s push towards a 1 July 2022 start date, this would be a timeframe too hard to achieve within the SMSF Investment Strategy sector – think about the need to allow sufficient time for trustee and professional education, preparation of regulatory guidance, clarity of issues such as the auditor role and ultimately time for trustees to seek appropriate advice.

Whilst a transitional period could have potentially worked, it seems the Government is content to leave SMSF trustees to their own devices, due to the highly engaged nature of these funds.