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 

Mid Year outlook outlines an increase to the SMSF Supervisory levy

The Mid-Year Economic & Fiscal Outlook (MYEFO) released today has seen the Government announce a further increase to the SMSF Supervisory levy to $259 for the 2013-14 financial year.  Having seen progressive increases in the supervisory levy since the introduction of the Simpler Super reforms from 1 July 2007, this jump represents the largest increase since that time. In more recent times these increases have formed part of the cost of Government reviews in superannuation, but the Government report released is suggesting that the current levy is not providing full cost recovery on the regulation of the growing SMSF sector.

In addition to seeing an increase in the levy from 1 July 2013, the Government has also announced changes to the timeliness of collection of the SMSF Supervisory levy.  Currently, the levy is collect in arrears through the SMSF Annual Return.  The Government, to help with the ‘cash-flow problems’ will align the collection of the levy with APRA regulated funds which pay in the year of operation.  This change in timing of collection will be phased in over 2 years meaning an additional $259 in levies will be collected from existing SMSFs during the 2013-14 and 2014-15 years.  This represents an additional $319 million in revenue savings based on forward estimates period of 2013-14 to 2015-16.  A nice little earner from self-funded retirees!!

Importantly, it would appear that the SMSF Annual Return will still act as the collection vehicle for the supervisory levy.

I have included below a diagram of the change to the SMSF Supervisory levy over the past 10 years.

What are your thoughts about the increase of the SMSF supervisory levy?

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Budget delivers a fix for now but problems for the future

A band-aid approach to superannuation is hurting retirement savings strategies and confidence in the sector.

It was a budget that certainly delivered on news that the Government was tightening its belt to deliver a budget surplus for 2012-13 and superannuation was certainly not immune from this pain.  Unfortunately though, as a result of the announced changes in tonight’s budget, we are likely to see confidence in the superannuation sector erode as the Government takes a narrow view to retirement savings policy for the sake of short-term popularity to endeavour to re-build public credibility of the Labor Party.

The measures about the additional contributions tax for individuals earning more than $300,000 made public a week ago started the bandwagon of criticism about a Government again using superannuation as a political football to kick a few financial goals.  Unfortunately, the news delivered within the budget extended beyond this measure, sending a clear message about discouraging Australians to save for retirement.

So, here’s delivering the news:

30% contributions tax rate for individuals with income of more than $300,000

From 1 July 2012, individuals with income greater than $300,000 have a 30% tax rate apply on concessional contributions, rather than the 15% flat tax rate currently available.

The definition of “income” will be quite broad providing a greater catchment area of individuals subject to the higher contributions tax rate.  This will include taxable income, concessional superannuation contributions (e.g. superannuation guarantee contributions and salary sacrificed contributions), adjusted fringe benefits, total net investment loss, target foreign income and tax-free government pensions and benefits, less child support.

There was some concern that an effective tax rate of 108% could apply where an individual breached the concessional and non-concessional contribution cap (calculated as 30% contributions tax + 31.5% ECT concessional contributions + 46.5% ECT non-concessional contributions).  However, the Government has announced that the 30% tax rate will not apply to contributions that exceed the concessional cap.  This effectively means that the highest marginal tax rate (46.5%) will still apply to excessive contributions.

It is unclear how the ATO will collect this additional contributions tax and what additional reporting will be required by super funds, in particular with tax-free benefit payments.  If the super surcharge system was anything to go by, this could amount to another administrative disaster.  Measures could apply to allow the ATO to collect this additional tax under the compulsory release authority that applies for non-concessional contributions.

Join us for a webinar about the impact of the Federal Budget and what it means for SMSFs

Deferral on proposed extension of concessional contribution cap for over 50’s to 1 July 2014

With the transitional period for concessional contributions for those over 50 finishing at 30 June 2012, the Government back in May 2010 announced as part of their ‘fairer super’ package an extension of the concessional contribution cap where an individual’s super balance was less than $500,000.  A deferral of the start date to 1 July 2014, is effectively an acknowledgement by Government that this policy decision is administratively difficult and that currently inadequate systems and reporting exists to appropriately manage the extension to the cap.

As a result of this deferral, all taxpayers, regardless of age, will be subject to a concessional contributions cap of $25,000 for the 2012-13 and 2013-14 income years (remembering that the Government in the Mid Year Economic & Fiscal Outlook; MYEFO) announced a freezing of indexation in 2013-14).  When these measures are finally expected to commence in 2014-15, indexation of the concessional cap should occur to $30,000, meaning eligible individuals will be able to make concessional contributions up to $55,000 where 50 years of age an over.

Accordingly to Minister Shorten, deferring the start date to 1 July 2014 will allow implementation to occur in conjunction with changes to super fund reporting and systems that will be occurring under the SuperStream reforms.  With the ATO developing an online reporting facility to manage member super balance, this deferral will allow for sufficient time to provide access to for member to comprehensive account balance information.

This changes are going to have a significant impact on individuals salary sacrificing into superannuation, in particular those with transition to retirement strategies.

SMSF Auditor Registration

The SMSF Approved Auditor role has been subject to significant reform as a result of recommendations from the Cooper Review to address issues of competency in the sector.  Final details of the auditor registration along with the replacement rule for the accountant’s exemption are long overdue and have become a key source of frustration for the accounting industry.

The Government announced that it will provide $10.7m over 4 years to ASIC to develop and maintain an on-line registration system for auditors of self managed superannuation funds (SMSFs).  As part of the registration process, ASIC will develop a competency exam for SMSF auditors. ASIC will also be responsible for the de-registration of non-compliant auditors.  It is unclear whether the competency exam will apply to all approved auditors, or only to those who don’t meet minimum criteria such as number of funds audited each year?

Auditors may begin to register with ASIC from 31 January 2013.

In addition, a further $10.6m over 5 years (including $1.5m in capital funding in 2011-12) will be provided to the Tax Office to police registered auditors, check their compliance with competency standards set by ASIC and refer auditors to ASIC for enforcement action. The cost of this measure will be offset by increases in the SMSF levy and fees charged by ASIC for sitting the competency exam.

Still no word from Minister Shorten on the accountant’s exemption replacement.  

We do need to overlay these budget announcements with some of the More Super measures to increase SGC from 9% to 12%, introducing a $500 credit for low-income workers and abolishing the age limit for SGC payments, which were applauded by the industry.  However, many people looking to self-fund their retirement have been dealt a blow, and will challenge advisers as to the worth of individual’s building superannuation savings at the risk of the Government moving the goal posts again and again in the future.

Join us for a webinar about the impact of the Federal Budget and what it means for SMSFs

Cooper Super now Stronger Super – the impact for SMSFs

Santa, or should I say Minister Bill Shorten has delivered a Christmas gift a little early this year with the Government’s response to the Super System Review (Cooper Review).

The government’s response, known as “Stronger Super” has provided support, or in-principle support for 139 out of 177 of the Review’s recommendations.

Much of the mainstream media focus is on MySuper and to a lesser extent, SuperStream.  Self-Managed Super Funds as we know were a significant part of Phase Three of the Super System Review, and in today’s release address the 29 recommendations impacting SMSF trustees and the profession.

I have tabled below the Super System Review recommendations into those that are supported and note supported:

8.1 No change to the current membership limit of 4 members
8.2 Introduction of sliding scale penalty system for ATO as Regulator
8.3 Greater powers for the ATO to issue directions regarding specified contraventions
8.4 Mandatory education for trustees who have contravened SIS legislation
8.6 Development specialist SMSF component to RG146 to increase knowledge and competency of licensed advisers
8.8 Approved Auditors to be required to be registered by ASIC, including initial and ongoing assessment of competency
8.9 ASIC to develop approved auditor independence standards (in conjunction with industry)
8.10 Review of the ability to borrow within superannuation in 2 years’ time
8.15 Mandate for ATO to collect and produce SMSF statistics
8.16 SMSFs to value all assets at their net market value
8.17 ATO to assist in publishing valuation guidelines for consistency and standardisation of practices within the industry
8.19 Removal of additional administrative burdens that are unnecessary
8.20 Greater identification measures for people joining SMSF, whether setting up or joining an existing fund
8.21 Capture of provider information regarding advice in setting up SMSF
8.22 Introduction of some naming protocols for SMSFs
8.23 Improved processes to allow more efficient rollovers into SMSFs from APRA regulated funds
8.24 Introduction of criminal and civil sanctions around illegal early release scheme promoters
8.25 Non-complying tax rate to apply to illegal early access amounts
8.26 Rollovers into SMSFs to be captured by AML/CTF Act
8.27 Amend SIS Act to allow for automatic deeming with SMSF trust deeds (no need to upgrade)
8.28 Create a SIS operating standard to require separation of fund assets
8.29 Amend investment strategy operating standard to consider life & TPD insurance
Support in Principle
8.13 Removal of exception to transfer listed shares off-market / where underlying market exists, must sell personally and then purchase within fund.  Property to require independent valuer report to be prepared.
Not Supported
8.5 No introduction of binding ruling system for SMSFs
8.11 Credit providers will not collect and provide information about levels of finance in SMSFs.  Will be captured by ATO in their data collection process.
8.12 No change to the current In-house asset requirements
8.14 No change to SMSFs being able to hold artwork and other collectibles
8.18 No change to the member reporting requirements for an SMSF
8.7 Removal of Accountants’ Exemption and requiring an adviser to hold an AFSL to establish a fund.  This issue is being considered under Future of Financial Advice, and potentially includes a restricted licensing framework.

This appears to be a great result for the SMSF industry and in particular for fund trustees.  SMSFs will continue to be set apart from alternative superannuation structures by their diversification in investment choices, which will continue to include in-house assets, and collectibles (even though they make up a very small overall percentage of SMSF total assets).

These changes are going to involve some costs to the ATO and ASIC.  As a result, these costs will be offset through an increase in the annual SMSF supervisory levy (currently $150), with effect from this financial year (2010-11).

Where to from here?

The government will now look to establish an SMSF sub-group from the overarching consultative group in early 2011 to progress the implementation of these SMSF reforms.  Initial consultation will focus on detailed design and implementation issues, with subsequent consultation on exposure draft legislation.

Most measures are intended to take effective from 1 July 2012.  Tighter legislative standards for investments in collectibles and personal use assets will apply to new investments from 1 July 2011, with all holdings of these asset types to comply by 1 July 2016.  AML/CTF changes will take effect from 1 July 2013 and amendments to the registration process will commence on 1 July 2014.

Join us for a special webinar on the impact of these reforms

Given the importance of these changes, I have decided to run a special webinar event next Tuesday, 21 December 2010 at 4pm ESDT.

Click here to read further details on this event.

Space is limited.
Reserve your Webinar seat now at:

Self Managed Super Solutions – Final Report of Cooper Review released

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As promised, the government has been quick to release the final report of the Super System Review (“Cooper Review”).  It is a comprehensive report (overview & recommendations are 70 pages alone) covering the review into governance, efficiency, structure and operation of the superannuation industry.

At this stage, it is unclear what the government may adopt from these recommendations.  It is quite clear that the report is now in the public domain for ongoing consultation to develop standards with industry alongside the ‘Future of Financial Advice’ reforms and ‘Future Tax Review‘.

Many of the final recommendations appear in line with the preliminary report issued by the Review Panel on 29 April 2010.  I have outlined below the key recommendations issued in the Final Report (contained within section 8).  I have highlighted in RED, some of the key issues from the review impacting SMSFs:

No. Recommendation
8.1 No change to the current SMSF limit  of 4 members
8.2 Sliding scale penalty regime based of seriousness of breach.  To applied to trustees/directors, not to be paid from SMSF
8.3 Greater ATO powers to enforce rectification of specified contraventions within specified timeframe
8.4 Mandatory education for trustees that have contravened SIS requirements.  Training to be paid for by Trustees, not the SMSF
8.5 ATO to be given powers to issue binding rulings
8.6 Development of SMSF specialist knowledge component of RG146 for licensed advisers
8.7 No replacement of Accountant’s Exemption. Government should legislate to require advisers to hold an AFSL to establish an SMSF
8.8 Approved Auditor registration with ASIC, to be governed by ATO as Regulator
8.9 Complete audit independence. Approved auditor independence standards for auditors to meet as part of ongoing registration requirements
8.10 Borrowing provisions to stay… review in 2 years time subject to impact of recent consumer protection changes announced
8.11 Credit providers to collect and provide information based on level of finance being provided to super funds
8.12 Abolish 5% in-house asset limit. Five year transition period to dispose of IHA or convert to a Small APRA Fund (SAF).
8.13 Prohibition on in-specie share transfers – where underlying market exists, must be conducted through that market.  Sworn valuations required for Business Real Property transfers
8.14 Prohibition on collectables and personal use assets in SMSFs. Five year transition period to dispose or convert to SAF
8.15 Better collection of statistics relating to SMSFs to understand the sector and its performance
8.16 All SMSF assets to be valued each year at market value
8.17 ATO and industry to publish valuation guidelines for consistency
8.18 Amend Corporations law to ensure SMSF trustees provide all members with certain key information on an annual basis
8.19 Amend legislation to remove unnecessary trustee administrative burdens (i.e. trustee minutes)
8.20 Proof of identity checks for all people joining SMSFs, whether establishing a new fund or joining an existing fund
8.21 SMSF registration to capture details of person providing advice in establishing SMSF and relevant service providers (for ASIC & ATO risk assessment processes)
8.22 Limitations of naming rules
8.23 Improved system to provide SMSF information to APRA regulated funds to allow for immediate processing of rollover requests
8.24 Criminal and civil penalties to discourage illegal early release
8.25 Greater penalty rates (non-complying super fund tax rate) for illegal early access
8.26 SMSF rollovers to be captured as designated service under AML/CTF Act
8.27 No need for trust deed updates; automatically deem anything permitted by SIS or Tax Act to be permitted by Fund’s governing rules.
8.28 Covenant set out in section 52(2)(d) of SIS, separation of fund assets to be replicated in a SIS operating standard
8.29 Amendment to investment strategy operating standard so that SMSF trustees are required to consider life and TPD insurance for SMSF members as part of their investment strategy

It appears that the Review Panel has not had to reconsider many issues from its Preliminary Report.  Some of the issues that they appear to have reconsidered include:

  • Providing Small APRA Funds (SAFs) as an alternative retirement vehicle, in particular for those who want to invest in collectables or have in-house assets (subject to 5% limit);
  • Change of view relating to use of Super Complaints Tribunal (SCT) for SMSFs (no longer appropriate)
  • No longer pursing ‘gatekeeper’ mechanism for establishment of SMSFs. Removal of accountant’s exemption provides opportunity to improve overall advice framework for setting up a fund.
  • Slight softening in audit independence requirements, however ASIC to develop approved auditor independence standards for SMSF auditor to meet  as part of ongoing registration.  It will be interesting to see how vigorous the accounting bodies are in pursuing a softening of this complete independence stance of the Review Panel.
  • Bringing the issue of ‘under insurance’ into the SMSF spotlight by having trustees consider as part of the fund’s investment strategy.

It was pleasing to see that there is no place for compulsory education (unless a serious breach has occurred), nor any requirement for particular academic, professional requirements to operate a SMSF.  It will however now be up to the respective professions (SMSF service providers) to provide trustees with the relevant advice, guidance and tools to deliver the retirement objectives that they would like to achieve.

Whilst the Final Report has now been released, it is just the beginning of a range of changes about to impact SMSFs and the industry.

(C) The SMSF Academy 2012
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