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.

 

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?

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?

 

Join me for the SMSF Quarterly Wrap webinar


Join me for the next SMSF Quarterly Wrap webinar, where in this one hour session I will be discussing at the latest technical and regulatory issues impacting self managed super funds.

The last quarter has been another busy one for SMSFs with changes announced from the Mid-Year Economic & Fiscal Outlook (MYEFO), in particular around the continuation of tax exemption after the death of a member.  In addition, there have been a range of ATO interpretative decisions, recent cases impacting SMSFs and details of the technical issues of the September 2012 ATO National Tax Liaison Group (NTLG) Super technical sub-group meeting “hot off the press”.

SPAA CPD points are available for members, with 1-2 CPD points typically available for these webinars.

Find out more and register here

 

(C) The SMSF Academy 2012
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