Announcements / SMSF / SMSF Compliance / Trustee education

Exposure draft released on consideration of Insurance, Separation of Assets and Valuation of Assets at Net Market Value for SMSFs

The Super System Review submitted to Government back on 30 June 2010 made several recommendations to improve the operation and regulation of the self managed super fund sector. Many of these recommendations were accepted by Government and formed part of the Stronger Super reforms to take effect from 1 July 2012.  We have now seen the issue in of the draft regulations in respect to some of the recommendations around consideration of:

  • insurance within an SMSF investment strategy;
  • the inclusion as an operating standard the requirement to have fund assets held separately from personal or employer assets; and
  • fund assets to be valued at net market value for reporting purposes

Trustee requirement to consider insurance for SMSF members as part of their investment strategy

The proposed regulations are to insert a new paragraph into sub-regulation 4.09 (2) to ensure that trustees consider whether they should hold a contract of insurance that provides insurance cover for one or more members of the fund.  With less than 13% of SMSF’s holding insurance for members, this recommendation aims to ensure that trustees appropriately consider the holding of insurance for fund members.

There will be a requirement for trustees to consider whether to hold insurance for their members such as life insurance when they formulate, regularly review and give effect to the fund’s investment strategy. It is expected that trustees will evidence this requirement by documenting decisions in the funds investment strategy or minutes of trustee meetings that are held during an income year.

In addition to the consideration of insurance within a fund’s investment strategy, this regulation would also amend subsection 4.09 (2) to require trustees to regularly review the funds investment strategy.  This will require trustees to evidence this review by documenting decisions in the minutes of trustee meetings are held during the income year.

The separation of fund assets from personal or employer assets

These regulations would insert into sub regulation 4.09A to require that a fund trustee keep money and other assets of the fund separate from money or assets held by the trustee personally or by a standard employer sponsor.  Currently this requirement forms part of a covenant (section 52(2)(d) of SIS Act) that is deemed to be incorporated into the governing rules of the fund (i.e. trust deed).  The ATO is currently unable to enforce compliance with covenants and relies on voluntary compliance by trustees.

It is not uncommon within SMSFs that breaches occur within this existing covenant where investments are incorrectly held by the fund.  This may include the fund bank account or other investments that maybe incorrectly recorded in a member’s own name rather than in the capacity as trustee of the SMSF.  Contraventions of this existing covenant are one of the most commonly reported contraventions sent by auditors to the ATO.

With this regulation becoming a prescribed standard applicable to the operation of a SMSF, the Regulator will have powers to enforce fines of up to $11,000 for a person who intentionally or recklessly contravenes the standard.

Valuing fund assets at net market value

A SMSF is required under section 35B of the SIS Act to prepare a Statement of Financial Position and Operating Statement each income year.  From the 2012/13 financial year, all SMSF’s will be required to value an asset at its net market value when preparing accounts and statements.

Sub-regulation 8.02A(2) will define net market value as the amount that could be expected to be received from the disposal of an asset, in an orderly market, after deducting costs expected to be incurred in realising the proceeds of such a disposal.  Currently, SMSFs are generally able to choose either historical cost or market valuation methods to determine the value of fund assets when preparing financial statements.  There are however requirements for a fund in pension phase (see TD 2009/29) or for in-house asset purposes (see s.82, SIS Act) that assets should be valued at market value each year.

The lack of consistency in valuation methodology has not only lead to an impact on a member to not be able to ascertain the current value of their super benefits, but it also affects the reliability and usefulness of superannuation data to make accurate comparisons across the entire superannuation sector (where APRA regulated funds are required as reporting entities to value their assets at net market value as required by Australian Accounting Standard, AAS 25).

The requirement to value assets to their net market value will ensure that members are provided with current and accurate information about the financial position of their fund and entitlements, along with an ability to better compare and understand the financial information across all sectors of the superannuation system.  Failure to comply with this reporting requirement will carry penalties of $11,000 and is also a strict liability offence and carries a penalty of $5,500.

My views

It will be interesting to watch over the coming years as to the influence of the inclusion within the fund’s investment strategy to consider insurance.  I would argue that many SMSF trustees (not all) lack a solid written investment strategy, with a large number of funds only having something in existence to ensure compliance with the auditor’s sign off under the compliance audit.  Far too often it is not actually used as a tool to set objectives consider risk, diversification, liquidity and from 1 July, insurance.  With a large proportion SMSF members at or nearing retirement, the need for insurance traditionally diminishes over time.  I do however believe this to be a positive step with the number of younger SMSF members entering the market, in particular where individuals are now undertaking borrowing within superannuation to acquire assets.

You can access information about these draft regulations and explanatory memorandum on the Stronger Super website.

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