The year in review: SMSFs in 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 

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.

Liar liar pants on fire…

Financial distress can cloud an individual’s judgement and recent AAT case has highlighted that telling “porky pies” isn’t going to win any favours with the Commissioner of Taxation.

The case of Sinclair and the Commissioner of Taxation was an appeal by the taxpayer as to the assessability of an illegal early release amount from BT rolled over to a SMSF.  The facts outline that the taxpayer was (eventually) found to have been in some financial distress and it through a “promoter” signed documentation at the pub (yes, the pub!) to rollover $40,000 from BT.  A promoter fee of $14,482 appears to have been paid after transferring $25,518 to a personal account for use.  Supposedly, the promoter fee included an amount of tax that was to be remitted to the ATO on the withdrawal.  Funnily enough, this didn’t occur…

In 2010, the ATO started the process of auditing the SMSF and requested a series of documents regarding the fund.  After the trustees failed to respond to any communication from the Regulator for 8 months, the ATO notified both trustees that they had been disqualified as trustees.  After a few more months passing, Mr Sinclair contacted the ATO and that’s where the porkie pies began.  After advising the ATO of his lack of knowledge around the entire fund and transaction that took place, the ATO request Mr Sinclair to provide evidence to support these claims – failure to do so would mean the $40,000 would be included within his assessable income for the 2009 financial year.

Just like Lance Armstrong, it appears the evidence against Mr Sinclair started to become too much and after a few months of deliberation, he finally admitted to the ATO that the money was used for personal reasons including to look after his family, and buy a new car.  He did believe however that the some of the $15k he did not receive was a tax payment.

The Commissioner ultimately issued an amended notice of assessment, including $40,000 within Mr Sinclair’s 2009 income tax return.  He was obviously not overjoyed with this decision and appealed to the AAT in regard to amended assessment by the Commissioner and the additional administrative penalty for making a false and misleading statement (25%).

The decision handed down by the Tribunal found that:

  • the Commissioner was correct in including the $40,000 as assessable income to Mr Sinclair;
  • there is no exercise in discretion to allow for the such an amount to not be included as assessable income (s.304-10(4) of ITAA 1997);
  • that the base penalty amount of 25% was correctly applied for the shortfall amount; and
  • the penalties should be remitted in full due to the taxpayer’s previous good record and the fact that out of the $40,000 withdrawal, he will end up with approximately $12,000 (not really worth it!)

This case is an important reminder that there is no place for illegal early access (IER) of benefits, in particular through the use of a SMSF.  Unfortunately for Mr Sinclair, he became a victim to a scam promoter to illegally access his super – fortunately though, the level of activity around IER schemes has been virtually non-existent according to the ATO.  Credit should go to the ATO as Regulator, and the industry to their input in the Stronger Super recommendations to continue to show that the SMSF system is robust and operating effectively.

View the AAT decision here.

Cost no barrier for SMSF auditors, but competency could be?

The announcement of the  replacement of the accountant’s exemption has grabbed much of this week’s headlines, but for SMSF approved auditors,  the release of the ASIC registration requirements provided some much-needed guidance around minimum levels of competency and the costs of registration.  For those auditing more than 20 funds, there was a reprieve from having to sit an exam, with this minimum number seen as the base competency level required continue to operate in sector.  This direct pathway into the ASIC framework for some must come as a huge relief!!  However, for those auditing less than 20 funds, the exam creates an interesting challenge for those who have previously ‘dabbled’ in the sector.

As you can see from the table below, published in the latest ATO SMSF Statistical Summary (2009-10), more than 50% of current approved auditors are going to need to sit a competency exam to continue to work as an approved auditor from 1 July 2013.

The issue here won’t be cost, with a $100 registration fee and a $50 ongoing fee when submitting their annual statement.  For those that have to sit the exam, a further $100 fee will apply.  Less than the cost of one audit (for most)!!  The challenge will be whether many practitioners currently auditing SMSFs have the necessary skills around audit and SIS compliance to continue to operate in the new regulatory environment.  Recent ATO research into SMSF auditors conducted by Colmar Brunton Social Research, showed a very high likelihood of the more than 11,000 auditors would move into the ASIC regime.

With registrations to start from 31 January 2013, many existing auditors (and aspiring approved auditors) need to think about getting themselves ready for the new framework from 1 July 2013.  For those becoming serious about forging a career in the SMSF sector, the exam may just be the start moving into a specialist SMSF role.

What are your thoughts on the auditor requirements? Should everybody have been required to sit an exam?  Is 20 funds too low? I’d love to hear your thoughts!!

Full details of the Minister’s announcement can be read here.

Greater enforcement to rectify contraventions a key part of the new SMSF landscape

The powers provided to the Australian Taxation Office (ATO) to deal with issues of non-compliance by SMSF trustees has been reasonably inadequate, something that was acknowledged by the Cooper Review Panel as part of the Super System Review.  The ATO in many respects had been known to have two options in dealing with trustee contraventions:

  • the “feather duster”approach – where limited penalties or undertakings could be applied against SMSF trustees ;or
  • the “nuclear”option – where fund’s were made non-complying for more serious breaches

A key outcome from the Stronger Super reforms to take effect from 1 July 2012 is the greater powers to be provided to the Regulator when dealing with contraventions by SMSF trustees.  Currently, where the fund trustees have contravened part of superannuation law, it is the trustee that may enter into an Enforceable Undertaking (EU) with the ATO to remedy the breach.  The Regulator may then accept or reject the enforceable undertaking from the trustee.

This however changes from next financial year, where new powers will allow the ATO to direct a SMSF trustee to rectify a contravention where it remains unrectified.  These powers will provide the ATO with greater capabilities to improve the timeliness and efficiency of remedying these issues.

These powers will range from providing penalties and sanctions on fund trustees, where SMSF Annual Returns may be outstanding or more serious breaches including loans to members, in-house asset issues or breaches of financial assistance.  Part of this rectification process may also require SMSF trustees to undertake mandatory education to continue to carry on their role as a trustee.

Since taking over as Regulator of SMSFs in 2000, the ATO has taken an educative approach to ensure trustees understand and comply with superannuation law and their ongoing statutory requirements.  Whilst the education process plays an important part in the overall ATO compliance program, we will expect to see a greater role in enforcement to protect the integrity of this burgeoning superannuation industry.

(C) The SMSF Academy 2012
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