What lies ahead for SMSFs in 2013?


2013

A Happy New Year to all my readers…

With the SMSF industry growing strongly, 2013 is likely to provide one of the most challenging and competitive (yet rewarding) periods for SMSF professionals. The year ahead will require practitioners to ‘step-up to the plate’ and be ready for many of the reforms that will reshape the advice and compliance landscape – many that I see as ‘game-changing’ – not only for SMSFs, but for superannuation and financial services in general.

This year will see the culmination of Government reforms, with the introduction of many of the changes related to Future of Financial Advice (FoFA) and Stronger Super. These will have a wide-ranging impact on financial advisers, accountants and auditors, who will all be required to demonstrate increased competency as service providers within the SMSF industry.

So what else will we see in 2013?

There will be no shortage of news and changes when it comes to superannuation… here are just a few that I expect will make some noise this year:

  • With the Mid-Year Economic & Fiscal Outlook (MYEFO) announcing that the Government will amend legislation to extend the tax exemption after death when paying pensions, it is likely that we will see the finalisation of draft ruling, TR 2011/D3. This final ruling is expected to provide much-needed clarity to a range of issues related to when a pension commences and ceases.
  • Outcomes from the Inspector General of Taxation’s (IGT) review of excess contributions – the ATO’s approach to excess contributions has come under significant attack from individuals and practitioners, which has led the IGT to launch a review. This review is designed to address concerns around:
    • ECT administration, such as the timeliness, clarity and comprehensiveness of ATO advice (including where discretion is to be applied),
    • the quality of communication; and
    • the adverse impacts of the ATO’s administration on taxpayers and tax practitioners.
  • There has been a lot of recent discussion and activity around limited recourse borrowing arrangements (LRBAs), with both the ATO and ASIC having issued warnings about the correct structuring of arrangements and promoters schemes with property investing in super.  This year we are likely to see some action on bringing sections 67A & 67B into the financial consumer protection framework by making any LRBA acquisition a financial product. It is not a unanimously agreed decision within industry, but unless some action is taken, the next likely step might be to remove the ability to borrow using limited recourse arrangements altogether.

Election “super” promises or dealing with a changing landscape?

With the Labor Government having recently withdrawn from their commitment to delivering a budget surplus, this year’s Federal Budget could see the delivery of a few superannuation ‘sweeteners’ – in particular, an increase to the concessional contribution cap for those over 50. Subject to being re-elected, the Labor Government still appears committed to their concessional contribution cap extension for those 50 and over with super account balances of less than $500,000. But will there be something more to grab votes?

The opposing view to vote-grabbing was highlighted last year in a speech titled “Future Challenges: Australia’s Super System” given by Dr Martin Parkinson, Secretary to the Treasury, at ASFA’s conference (28 November 2012). Dr Parkinson shared some valuable insights about the challenges that face Australia’s superannuation system. He mentioned that the future direction of the retirement income system must be characterised by Australian’s having adequate income in their retirement, through a system that has integrity and is sustainable over the long-term.

But what does this mean for the year ahead?

The issue of adequacy will evolve in 2013, with the commencement of increases to compulsory superannuation from 9% to 12% by 2020. From 1 July 2013, a further 0.25% in compulsory superannuation (SGC) will be required to be paid on behalf of employees. With changes to compulsory super levels expected to provide up to 90% replacement income for an individual who is currently 30 years old, much of the attention now needs to focus on the management of various retirement phases and risks such as longevity. This issue has been at the forefront of discussions with the Government’s Superannuation Roundtable and will continue throughout 2013 and beyond.

Sustainability appears to be one of the Government’s greatest challenges, due to global uncertainty and an ageing population. A key question is whether the current framework for our superannuation system will be sustainable into the future. Continued budgetary pressures may put a further ‘squeeze’ on superannuation policy, rather than affording to offer some incentives in an election year. Dr Parkinson noted in his speech that “…scrutiny will be even more important to the extent that existing concessions are seen to favour some at the expense of the majority”.  Do you remember some of those recommendations in the Tax Review by Dr Ken Henry?  I don’t think we’ll see any courageous decisions in retirement policy an election year!

The growth of SMSFs certainly wasn’t lost on Dr Parkinson and will continue to be closely scrutinised by Treasury as an emerging issue of integrity for the superannuation system. It is clear that Government wish to see greater transparency on the implications of operating an SMSF, along with increased accountability requirements for SMSF trustees. The ‘stepped’ administrative penalty system to be introduced as part of the Stronger Super reforms from 1 July 2013 will certainly offer a greater level of accountability to fund trustees, as it provides the ATO with additional powers including potential mandatory training subject to the severity of the breach.

What does it all mean for SMSF professionals?

An exciting opportunity lies ahead for those who are prepared to embrace change and look to further develop their SMSF business model to attract new and existing trustees. More than ever, you will need to think about effective ways to deliver your services, content and education as many self-directed trustees continue to build knowledge through the web and social media.

I look forward to exploring these issues with you in the year ahead…

Regards,

Aaron

PS. We will also see the one millionth member of a self-managed super fund in 2013. I suspect this will happen in either the September or December quarter this year. An amazing milestone that shows the sector is flourishing!

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 

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.

Alarms bells ringing with ATO around property investing in SMSFs


After only just discussing the regulatory focus by ASIC on SMSFs and property investments, we have seen further regulatory “alarm bells” ringing through the ATO’s release of taxpayer alert, TA 2012/7.  A Taxpayer Alert is an “early warning” of significant new and emerging higher risk tax and superannuation planning issues or arrangements that the ATO has under risk assessment, or where there are recurrences of arrangements that have previously been risk assessed.  With the growing amount of ‘hype’ in the use of these type of strategies, the alert is a timely reminder to ensure such arrangements comply with the strict nature of superannuation law.

It is often lost in the conversation, that borrowing is ordinarily prohibited in superannuation.  Limited exceptions apply, with the ability to enter into a limited recourse borrowing arrangement for prescribed purposes.  The specific purpose of the borrowing must be for the acquisition of a ‘single acquirable asset’.  To say ‘near enough is good enough’ simply won’t cut it when it comes to compliance with these requirements.  Failure to comply with sections 67A & 67B of the SIS Act, will mean that any maintenance of the loan will be in breach of the borrowing provisions.  With an inability to sell a brick-at-a-time, the unwinding of these arrangements can be difficult, and potentially expose the fund to a significant loss on a forced sale.

What problems are the ATO seeing with property investments using LRBAs?

  • The borrowing and title of the property is held in the individual’s name and not in the name of the trustee of the holding trust.  The SMSF has paid the deposit and ongoing repayments;
  • The title of the property is held by the trustees of the SMSF, not the trustee of the holding trust;
  • 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 signed;
  • The SMSF acquires residential property from a member;
  • The acquisition comprises two or more titles and there is no physical or legal impediment to the two titles being dealt with, assigned or transferred separately; or
  • The asset is a vacant block of land, with the intention to construct a house on the land.  The land is transferred to the holding trust prior to the house being built.

These problems throw up a whole range of compliance concerns, including:

  • potential breach of the sole purpose test in section 62 of SISA;
  • failure to comply with section 67 which prohibits a SMSF from borrowing money or maintaining a borrowing;
  • the acquired asset not meeting the single acquirable asset definition under section 67A(2) as it comprises two or more proprietary rights;
  • the acquirable asset is subject to a charge which would prohibit the fund from borrowing money or maintaining a borrowing of money under section 67A(1)(f); and
  • where the title is incorrectly held in the name of the individual and not the trustee of the holding trust, the deposit and/or loan repayments may breach the payment standards, effectively drawing on preserved benefits prior to meeting a cashing condition.

As highlighted by the Commissioner, there is a lot of talk about the benefits of limited recourse borrowing in super, but not a lot about the risks.  It is important to remember, responsibility ultimately rests with the trustees to comply with superannuation law.  Ensuring that the fund’s governing rules allow for borrowing (and assets to be held in a custodian arrangement), and that the decision is consistent with the fund’s investment strategy are all critical elements to ensure compliance.  Failure to do so, can render the fund non-complying, effectively meaning the fund is subject to a 45% tax rate which is applied to its income and market value of fund assets (other than undeducted contributions).  Furthermore, civil and criminal penalties could also apply.

Related trust arrangements

The taxpayer alert also highlights a range of concerns around the use of related unit trust structures to acquire property.  Once the ‘darling’ of the SMSF sector, the use of unit trusts has somewhat diminished with the inability to typically leverage inside these trusts, nor put a charge over the assets of the trust.  These strict requirements are outlined within SIS Regulation 13.22C.

The ATO concerns with these arrangements appear to stem from investments that are failing to adhere to the requirements of SISR 13.22C and subsequently become in-house assets under section 71 of SISA, thereby counting towards the allowable 5% limit.

It is not to say these strategies don’t provide some fantastic outcomes for individuals, but the decision process to establish a SMSF and consider acquiring property is not something to be taken lightly.  These alerts and investigations by the Regulators highlight the need for “buyer-beware” when it comes to property in SMSFs.

 

Have SMSFs become the target of property spruikers?


I read with great interest recently in the Australian newspaper, an article titled “Setting up an SMSF to buy property a risky strategy” (13 November 2012) regarding ASIC commissioners Peter Kell and Greg Tanzer focusing a taskforce on aggressive marketing of speculative property developments with SMSF limited recourse borrowing arrangements.

Whilst there appears to be a lot of ‘hype’ around SMSF borrowing arrangements, it has highlighted the lack of a Government response to introducing these arrangements into the financial services licensing regime.  It was June 2010 when Treasury released its first consultative paper around licensing and bringing these arrangements under the financial consumer protection framework.  A further consultation occurred in February 2012 and now nearly two and a half years later the industry is still waiting.   The consensus from submissions generally supported bringing these rules into the licensing framework to avoid the situations highlighted in the newspaper article.

So to the Regulators, I commend you in targeting those looking to make a quick buck from consumers with borrowing in super, but let’s get a regulatory framework in place to ensure we have the right licensing framework and regulatory protections.  I just hope this doesn’t put a nail in the coffin for the use of SMSF limited recourse borrowing arrangements…  I kind of believe the framework around the legislative definitions and operation of such arrangements was heading down the right track!

Do you think SMSF borrowing will be hear to stay?

 

(C) The SMSF Academy 2012
%d bloggers like this: