SMSFs: Now for the big stick
By Scott Francis
December 17, 2010
PORTFOLIO POINT: The government’s ‘Stronger Super’ response to the Cooper review includes seven points that will make SMSF trustees take notice.
Given all the changes to superannuation rules over the past five years, the one thing an SMSF trustee will be aware of is that it’s a moveable feast. You simply must keep up to date with what is happening from a regulatory stand point or risk being left behind.
The government’s response to the Cooper review of superannuation has reinforced this notion but also made it clear that as the trustee of the fund you are responsible for what happens within the fund, and if you put a foot wrong then you will cop it.
Yesterday's 'Stronger Super' announcement had seven core items that self-managed super fund trustees should be aware of:
It should be noted that many of the recommendations required “consultation with stakeholders” before the exact details of how the recommendations would be implemented; so there remains a degree of uncertainty as to the final outcome of much of what was presented.
Top of mind for DIY funds should therefore be the announcement that 'Stronger Super' will provide for “administrative penalties” levied by the tax office where breaches occur. The scale of these penalties will come after further “consultation with stakeholders”. These penalties will be paid by the trustee, and not from the assets of the fund.
Further, where a trustee has made a breach of the SIS (Superannuation Industry Supervision) Act they can be required to undertake training, again at the cost of the trustee and not out of the assets of the SMSF.
These recommendations further cement the position the trustee of an SMSF as having the ultimate responsibility for the running of the fund. The imposition of penalties and educational costs directly on trustees reinforces this important point.
Auditors are also mentioned in the recommendations, including audit independence and the registration of auditors for SMSFs. The detail of what will actually happen will follow consultation with stakeholders, however it seems unlikely that this will be a huge change for most SMSF trustees who already have their fund audited. It may mean that they have to check the registration of the auditor they use, as well as ensuring that the auditor is appropriately independent from any other involvement in the SMSF.
CPA Australia’s head of business and investment policy, Paul Drum, suggests that the focus on auditors is unnecessary, and that the proposed regulation of SMSF auditors smacks of regulation for its own sake.
“Of SMSF auditors, 95% are members of one of the three professional accounting bodies,” he says. “and as such are already subject to a rigorous process of professional, ethical and auditing standards.”
The tax office’s current $150 SMSF levy will increase in this current year, in response to the cost of implementing the reforms, although there is no final figure on this amount. The $150 levy is not a huge amount, and a modest increase will probably not make a significant difference to the average SMSF, although some trustees (especially those who work hard to ensure they do the right thing) might feel somewhat dissatisfied about paying more to the tax office to be more closely scrutinised.
- Greater penalties for SMSF breaches.
- Compulsory education for trustees who breach SMSF rules.
- A greater focus on auditors.
- An increase in the $150 tax office levy for SMSFs.
- Upcoming reviews of borrowing in SMSFs and personal-use assets in SMSFs.
- Greater training on SMSFs for advisers.
- A requirement for trustees to consider life insurance as part of the investment strategy of SMSF.
There is a flagging of an upcoming review into borrowing in superannuation funds. While the nature of this review is not clear, it seems there is a bias against the use of borrowing in superannuation. The government response to this recommendation includes the statement that, “leverage poses a risk to superannuation fund assets … because it can magnify investment losses and reduce liquidity”.
The question is, how should an SMSF trustee react to this?
Consider a younger couple who want to set up an SMSF to borrow using a non-recourse loan and invest in property. If the review into borrowing to invest in superannuation is unfavourable, perhaps they need to act now (before the review) to set their plans in place. However, if they buy the property in an SMSF now and the review is unfavourable, do they risk having to sell the property quickly after incurring the buying and selling costs and with no guarantee of not making a significant loss on the investment?
There is also a statement that there will be a tightening of rules about the investments in personal-use assets and collectibles from July 1, 2011.
There will be the creation of a specialist training unit in financial services related to SMSFs. It is important to note that there is already a significant number of such programs, and by making it part of the training within the financial services industry it may mean that trustees are better supported in the advice that they receive.
Training standards are an issue through the financial services industry as this nine-day Diploma of Financial Services course shows, however a focus on specialist training related to SMSFs should help trustees in their role.
The last recommendation relates to insurance. Insurance will now need to be considered as part of the investment strategy of each SMSF. This is a reasonable option and for people close to or at retirement it is not likely to be a significant issue; they will more than likely note that it is not required because of their circumstances (significant assets, no dependents, no debts).
For people earlier in their working life, it will require them to address this issue in their role as trustees, and ensure that they have not forgotten about their life insurance, which is often an important part of retail, industry and corporate super funds.
If the “devil is in the detail” then the true nature of this devil won't be known for a while because the detail of most of the changes is yet to be worked out. That said, Stronger Super at least makes clear the areas of SMSFs the government is looking to reform. The reality is that trustees continue to take on the responsibility of managing their SMSFs and need to continue to stay on top of superannuation changes. The government, in the summary section of Stronger Super, acknowledged there was too much “tinkering” in the superannuation system. Moves to slow down that tinkering would be very welcome indeed.