The year in review: SMSFs in 2012


2012

It’s been a fascinating year… an Olympic year, with golden memories from London, a diamond jubilee, a Korean named Psy had a billion visits on YouTube in just five months, and the world still lingers on the precipice of further economic turmoil.  It is this global uncertainty that has arguably continued to have the biggest impact on superannuation and self-managed super funds as decreasing consumer confidence in financial markets and reducing interest rates have many trustees wondering where they should be investing their retirement savings.

So what were the things that impacted SMSFs in 2012?

There’s been a few…

The Future of Financial Advice (FoFA) and Stronger Super reforms made a big splash in 2012; however a range of these matters were delayed for further industry consultation.  Only now, at the tail end of the year, are we seeing regulatory statements being issued by ASIC around the best interests duty and scaled advice, along with the long-awaited draft regulations regarding the replacement for the accountant’s exemption.

For SMSF auditors, the licensing regime is about to formally commence, with registrations opening from 31 January 2013,  requiring approved auditors to be registered to conduct audits from 1 July 2013.  For those who have conducted 20 or more audits, a streamlined pathway to registration is available; for those auditing less than 20 funds, a competency exam awaits.

The year also saw the Government announce a deferral in the banning of off-market share transfers on listed shares until 1 July 2013.  New regulations around consideration of a contract of insurance for members; regularly reviewing the fund investment strategy; and valuing all fund assets to market value took effect from 1 July 2012.

For most of the year, the industry awaited a response from the Commissioner to his draft ruling, TR 2011/D3, as to when a pension commences and ceases.  With the industry not sitting comfortably with the Commissioner’s views, in particular with the cessation of a pension at death, intense lobbying finally saw an announcement in the Mid Year Economic & Fiscal Outlook (MYEFO) that the Government will amend the legislation to continue a fund’s tax exemption until after the payment of a death benefit to a beneficiary or beneficiaries.  Added to the MYEFO announcements were changes to the timing of the SMSF Supervisory Levy with an increase to $259 over the next couple of years.

The focus on delivering a surplus in the Federal Budget (May 2012), saw the re-introduction of a “surcharge” for high-income earners (those with income >$300k), along with a deferral until 1 July 2014 of an increased concessional contribution cap for over 50′s with less than $500,000 in superannuation savings.  This deferral effectively meant that every individual regardless of age is subject to a $25,000 concessional contribution limit for the current financial year.  As part of the Government’s intent to re-balance the fairness and equity of tax concessions with super contributions, a new Low-Income Super Contribution (LISC) was also introduced to effectively ensure that no contributions tax is paid by individuals earning less than $37,000 p.a.

The ATO released its final ruling on the application of key concepts using limited recourse borrowing arrangements, SMSFR 2012/1.  Widely applauded for taking a practical approach to issues such as the single acquirable asset definition and repairs, and maintaining and improving an asset, the year has seen a growing interest in borrowing within SMSFs.  This growth however has been a concern to both the ATO and ASIC who have  issued warnings about the correct structuring and use of property within SMSFs and reassurances that surveillance activity is occurring to ensure consumers are not getting caught by opportunistic ‘property spruikers’.

Statistics on excess contributions for the 2009-10 financial year were published in 2012, which showed a 316% increase in people caught with excess concessional contributions, predominantly as a result of the halving of the cap by the Labor Government in that financial year.  This has led to many cases through the Administrative Appeals Tribunal (AAT) throughout 2012, with the taxpayer having some victories in amounts being disregarded or reallocated (re: Bornstein and Longcake decisions).  2012 for the first time, saw refunds and personal assessments for super fund members who breached their concessional contribution cap by less than $10,000.

Some interpretative decisions impacting SMSFs were also significant…  the timing of contribution allocations to members flagged a large amount of interest in ‘reserving’ strategies with contributions through ATOID 2012/16, however discussion followed shortly via the NTLG that alerted practitioners to some key issues with fund-capped amounts and some practical issues in effectively implementing the strategy.  The Commissioner also appears to have put the “acid” on the use of reserves with his views expressed with allocations from self-insurance reserves and through the commutation of defined benefit pensions.

Statistically, SMSFs continued to grow, with the latest numbers now showing more than 490,000 in existence and more than $458 billion in total assets.  A growing number of individuals under the age of 45 are becoming attracted to SMSFs as they wish to take a greater level of control and interest in building their retirement savings.

So, that was 2012… a lot of activity, with a lot more to come in 2013.  A common complaint amongst practitioners has been that they are feeling “FoFA’ed” out, however the year ahead poses just as many, if not more challenges to SMSF professionals.  In my view, it is these challenges that some people and businesses will see as opportunities that will drive success in the year ahead.

* Next post “2013 – the road ahead for SMSFs” to follow 

What to take from the latest ATO SMSF statistics


Last week saw the release the ATO’s SMSF quarterly statistics (September 2012) which again showed strong growth in fund establishments.  A further 8,183 new funds were setup in the first quarter of 2012-13 financial year, taking the number of SMSFs to 488,576.  Total assets grew to more than $458 billion, which now shows the average SMSF assets at $938,341.

Whilst the continued growth in numbers and dollars of SMSFs continues to be the main story, there were a couple of things I found in my analysis that I thought were interesting and worth highlighting:

Member numbers per fund

Average members per SMSF

Commonly referred to as “Mum and Dad” funds, we know that SMSFs typically operate with an average of just under two members (two member funds represent about 70% of all SMSFs).  With less than 4% of all SMSFs having three or four members, it is interesting to note that there were 2.27 members per fund established for the September 2012 quarter, well above the industry average (1.91 member per fund).  This higher than average number for September does not appear to be a ‘one-off’, as you can see from the above chart – on four occasions since 2008, the September quarter has had establishments where (on average) more than 2 members per fund exist.

Why is it the case?  Good question!!  What do you think?

Are SMSF trustees really switching to property?

Asset allocation percentages

There’s been a lot of talk about the growing interest in property within SMSFs… enough to raise the eyebrows of both ASIC and the ATO, ensuring that trustees are considering all the risks of property investment and the broader issues of the fund’s investment strategy.

The September 2012 quarterly statistics showed growth in property with:

  • Business Real Property (commercial) growing to more than $53 billion (9.45% increase over last 12 months); and
  • Residential property growing to $16.25 billion (9.45%  increase also over last 12 months)

Whilst showing signs of growth, these statistics do not appear to be showing any dramatic shift of trustees moving heavily into property.  In contrast the last 12 months has seen the total assets in listed shares grow by 19.6%, and is again the largest asset held within SMSFs by asset allocation ($141.5 billion).

The acquisition of property using limited recourse borrowing arrangements (LRBAs) also remains quite low statistically as the ‘derivatives and instalment warrants’ label represent only 0.34% of September 2012.  This would also include other forms of derivatives including options, warrants and similar instruments (NB.  ATO requires SMSF trustees to report LRBAs under the ‘derivatives’ label, now LRBA label for reporting purposes within the SMSF Annual Return).  Whether the reporting is done correctly or not, it must be questioned whether much of the property talk in SMSFs is just that… talk!

I’d be interested to hear your views about the latest SMSF statistics – where numbers are heading, what about asset allocations?

You can find out more about the ATO’s SMSF quarterly statistics here.

 

GUEST POST: Understand the state jurisdictions when establishing LRBAs


the-law

The ATO’s recent release of Taxpayer Alert – TA 2012/7, provide trustees and professionals with a timely reminder about acquisition of property using a Limited Recourse Borrowing Arrangement (LRBA) and also through related unit trusts.

Some of the examples of concern raised by the Commissioner in TA 2012/7 surrounding LRBAs suggest individuals are either:

  • oblivious to the appropriate legislative provisions; or
  • not seeking the appropriate advice prior to entering into the property acquisition.

Of most interest from the features that concern the Commissioner, was the following statement:

“The trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed” [Arrangement 1, item (c)]

Whilst this may be a true statement for some state jurisdictions, this is not necessarily the case across all States and Territories of Australia.  For example, Victoria’s conveyancing and stamp duty laws do not prohibit nor penalise parties when they incorporate and establish a Trust in contemplation of being the nominated party for a property transaction that is already on foot.  It is commonplace in Victoria for parties to be nominated to complete a property acquisition to which they were not the original party. Usually, the initial Contract of Sale provides a nomination provision. If this is not the case, there is a statutory provision that enables a nomination of the purchaser of a property in Victoria within 14 days of the date of settlement.  Any nomination is subject to the nominated party completing the transaction. If this not be the case the original purchaser is still liable to settle.

Additionally there is no stamp duty penalty if there is a nomination of a substituted purchaser that does not equate to a second sale.

The fact that the Custodial Trustee and the Bare Trust has not been established prior to the execution of the Contract for the property that is eventually acquired by the SMSF as law would be irrelevant in Victoria.

With a LRBA via nomination adhering to all of the provisions of section 67A & 67B of the SIS Act, it is difficult to determine what offends SIS or the ATO in respect of such arrangements?

The prohibition described by the ATO where the Custodial Trustee and the Bare/Holding Trust has not been established prior to the execution of the contract may in fact offend some State stamp duty provisions that would lead to double Stamp Duty.

The “lore” described by the ATO where the Custodial Trustee and the Bare Trust has not been established prior to the execution of the Contract may not be found offensive in Victoria.  I would submit that the Victorian courts would question the ATO’s motives by making such a statement.

Only time will tell, but invariably frightened parties will shy away from when a good real estate investment opportunity presents itself to a SMSF.

Written by Ian Glenister, Solicitor

Legal Officer & Co-founder, The SMSF Academy

Prevailing market conditions can pose problems in acquiring shares using LRBAs


investors

Whilst most of the attention with limited recourse borrowing arrangements (LRBAs) has centred around property transactions, there has been a need to clarify a range of issues on other acquirable assets, in particular assets allowable as a collection of identical assets under the definition of a single acquirable asset (SAA).

It’s not uncommon when placing an order of shares that there may be insufficient volume at a particular price to acquire shares or units.  This is particularly common where the shares are to be acquired at the prevailing market price.  This results in the single order being ‘filled’ over multiple share prices or even different dates.   This however poses a problem for those undertaking any share acquisitions using a limited recourse borrowing arrangement, because of the strict interpretation of a collection of assets” within the single acquirable asset as defined within s67A(3) of the SIS Act.

The question was asked of the ATO recently (via National Tax Liaison Group (NTLG) Superannuation Technical sub-group, September 2012) as to whether a single order of shares filled over multiple prices or dates will still meet the definition of a single acquirable asset.

To understand the issue, let’s consider the following example:

ABC Super Fund enters in a LRBA to acquire #42,500 shares in NewCo Limited at the prevailing market price. This single order is undertaken by the trustees through their CommSec account.  Due to the share volumes available at the time of the order and movement in the prevailing market price, the purchase of the shares were completed in three tranches:

  • 01/10/2012 – #30,000 @ $4.70
  • 01/10/2012 – #10,000 @ $4.72
  • 02/10/2012 – #2,500 @ $4.67

Have we got a problem?

It is important to note that the policy intent around the changes introduced on 7 July 2010 were to prevent borrowing arrangements over multiple assets in which may permit the lender to choose which assets are sold in the event of default.   Whilst a strict interpretation of s67A would mean this transaction would fail as a single acquirable asset, the ATO has stated that in circumstances such as these, they are prepared to ignore short delays in fulfilling a single on-market order to purchase shares or a single on-market order at the prevailing market price which might result in some shares being acquired at different prices.

For the trustees of the ABC Super Fund, the ATO would allow these this single order to be filled over multiple transactions, given the short timeframe to fulfil the order (based on the prevailing market conditions).

Whilst providing a logical outcome for fund trustees, the Regulator has also made it abundantly clear that it will not allow trustees to embark on a course of action to accumulate or sell down shares as an acquisition of a ‘single acquirable asset’.

Do you see much activity with LRBAs to acquire assets other the property?

The ASIC game-changer for SMSF auditors


The next few months starts a transformation for more than 12,000 SMSF auditors, with ASIC registration to open to become an Approved SMSF Auditor.  This registration is mandatory for all SMSF auditors to continue to conduct self managed super fund audits post 1 July 2013.

With about 50% of the SMSF auditors currently auditing 10 SMSFs or less each year, the months ahead will provide some current auditors with “food for thought” about whether they should continue to operate within the sector.  It is anticipated that a significant proportion of the existing auditors will no longer be a part of the industry from 1 July 2013.

The concerns around low-level auditors having the sufficient skills and competency to conduct an appropriate SMSF audit has been discussed and debated for some time… however, the acid-test moving forward begins from 31 January 2013, when registrations commence for the new approved auditor regime.

For those individuals auditing less than 20 funds, this will require the completion of an exam, which will pit their knowledge and judgement against key areas of undertaking an SMSF.  For those auditing 20 funds or more, a streamlined pathway is provided for registration, recognising that a minimum level of competency has been reached to conduct an SMSF audit.  Many in the industry will argue that this level is probably too low…

Regulation of SMSF auditors will see ASIC and the ATO play a dual role in managing SMSF approved auditor sector.  The ATO will continue to “police” regulation of the sector, with ASIC to maintain and enforce:

  • the independence principles of APES 110: Code of Ethics for Professional Accountants;
  • the applicable auditing and assurance standards; and
  • competency standards

ASIC has recently launched an SMSF auditors page, which provides further valuable information for fund auditors and trustees who may wish to search the register for approved SMSF auditors from 31 January 2013.

(C) The SMSF Academy 2012
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