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

June 1, 2012 By Leave a Comment

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.

Filed Under: Announcements, SMSF, SMSF Compliance, Trustee education Tagged With: , , , , , ,

Latest SMSF statistical report highlights growth but also the need to greater reform

April 15, 2012 By Leave a Comment

As we progress (albeit slowly) towards industry reforms with the superannuation sector, it is somewhat timely that the Australian Taxation Office has released their latest statistical overview of the SMSF industry, providing details of the 2009-10 financial year.  This statistical report now in its third year of data was first published as part of the Super System Review by Jeremy Cooper, which debunked many of the myths surrounding SMSFs and demonstrated that the industry as a whole was fairly robust and well-managed.

Download the ATO’s Self-managed superannuation funds: A statistical overview 2009-10.

Many of the statistics regarding the growth of the SMSF industry are now well-known as the sector appears to grow from strength to strength.  The more pertinent data when reading this review is the impact of Government policy, ongoing consumer confidence in financial markets (and Government), the important role of advice and specialisation within the sector.  Much of what I discuss below focus on these key themes.

The impact of Government Policy

SMSFs were arguably the biggest loser from the Labor Government’s decision to halve the concessional contribution cap in 2009-10.  Not only were contribution inflows impacted, but it most probably SMSF members who were hit the most in the significant rise of excess contributions tax assessments for the financial year as well (up 296% on the previous year).

The need for greater certainty with concessional contributions is important for the sector going forward.  With the transitional period for those 50 years of age and over ending at 30 June 2012, these individuals need clear direction from Government about planning contributions for 2012-13.

The demise of the corporate trustee

The continued growth in the use of individual trustees is a concern, with 90.13% of all new SMSFs established with individual trustees in 2009-10.  Unfortunately, this alarming trend has probably arisen from the highly competitive nature of the SMSF administration/accounting market.  With some administrators offering free SMSF establishments, this enticement to the market appears to be coming at a cost: the cost of advice!  Individuals appears to continue to setup SMSFs without knowing or understanding the differences/limitations in the different trustee structures.

It was acknowledged by the Cooper Review Panel that a corporate trustee was a far superior trustee structure, so it staggers me why individual trustees continue to grow.

Pension Phase

It is very apparent from the statistics that a growing proportion of SMSF members are moving to retirement phase.  55.7% of all SMSF members are now at an age (55 years and above) where they could draw an income stream from their SMSF, whether as an Account Based Pension (ABP) or Transition to Retirement Income Stream (TRIS).  The statistics show that 34% of SMSFs are paying a pension to at least one member; even more interesting is that this proportion of SMSFs actually represent 52% of all fund assets.  This would account for a significant amount of tax revenue (and growing) forfeited by Government due to policy in providing tax exemption within pension phase.  Add to this, tax-free pension payments from age 60, you must wonder about the longevity of the current policy with retirement incomes.

Whilst the statistics have traditionally had members being within the SMSF system for anywhere up to five years prior to drawing an income stream, this trend is shifting, with many new SMSF entrants commencing the payment of pensions in the first year of existence.

The growth in the payment of pensions is seeing the ATO take a greater interest in the area across several fronts including education and enforcement.  A new ATO publication on SMSF pensions (due out in July 2012), the finalisation of TR 2011/D3 (April 2012), and a focus on Exempt Current Pension Income (ECPI) with the 2011-12 compliance program, means we will expect more and more activity from the Regulator in this space.

Asset ranges & fees

They say that “size does matter”… although its not always the determining factor when it comes to SMSFs.  There is however a trend showing a reduction in lower account balances and growth in higher account balances.  It appears that education and the role of advice may be playing a role in people deciding to set up SMSFs.

The average expense ratio within SMSFs continues to decline, down to 0.54% in 2010 from 0.69% in 2008.  However, this is likely to be distorted by the growing number of SMSFs moving to pension phase where deductions are required to be proportionately reduced by the exempt income percentage applicable to the fund.  This issue has been recognised by the ATO, with changes expected to the SMSF Annual Return to capture both deductible and non-deductible expenses.

As the industry grows however and technology plays a greater role, we will continue to see the operating costs of SMSFs go down.  Due to the typically lower volumes of SMSFs per tax agent, the industry does appear to have a very slow uptake in technology advancements to become more efficient.  The statistics also show progressive decreases in SMSF auditor fees, a reflection of a growing number of specialist auditors starting to build streamlined and efficient businesses to handle high volumes of audits each year.

SMSF Assets

Interesting to note that the number of SMSFs with more than $1 million of assets has grown from 19% in 2006 to 26.7% in 2010.  The industry continues to see many new SMSF entrants coming from industry and retails funds with sizeable balances.  Even with volatile global financial markets during this time, SMSFs have continued to build their average and median total assets.

Investment Performance

The traditionally high proportion of cash and deposits held by SMSFs augured well during the GFC, however in a year where markets bounced back positively, the SMSF industry was generally outperformed by APRA regulated funds.  See comparison table below for 2008, 2009 and 2010 financial years between SMSFs & APRA regulated funds:

When looking at the Return on Assets (“ROA”) for the 2010 financial year where markets rebounded, the rate of return achieved on average per SMSF increased progressively across the asset-range bands, with 8.90% achieved on average for funds with greater than $2 million.  This compared with a -8.64% average ROA for balances under $50k.  This can be seen in the chart below:

In my view, the statistics reflect an an emerging industry, with some areas of compliance still a concern as with a greater need for competency across professional services including financial advice, accounting and the approved auditor functions.  With both the Future of Financial Advice (“FOFA”) and Stronger reforms intending to impact the quality of advice and competency requirements for these industries, I think it will be fair to say the landscape will look significantly different when reviewing the statistical summary in 5 and 10 year’s time.

For SMSF trustees, these statistics and the recent SPAA/Russell SMSF survey highlight a lack of confidence in current market conditions and also in the ever-changing nature of Government policy with superannuation.  In addition, a focus on mainstream media for advice (52% of respondents in SPAA/Russell survey), means many people may end up like a “deer in headlights” if issues arise through the lack of advice.

However, I do think it is an exciting time for the SMSF industry, and these statistics continue to prove it…

Filed Under: SMSF Tagged With: , , , , , , , , , , , , ,

Reflecting on SMSFs in 2011

December 30, 2011 By Leave a Comment

As the 2011 year comes to a close, it’s a time to ponder where the SMSF industry has come from in the last 12 months and also where it is heading…

This time last year, we had just seen the Government’s response to the Cooper Review, with many of these reforms now only 6 months away (although there does appear for some work still be done on FoFA and the Approved Auditor registration reforms).

In reflection, here’s some of the interesting things impacting SMSFs from 2011:

  • Total SMSFs grew by 7%*  to 450,498
  • Total assets grew by 3.4% to more than $397 billion; predominantly driven by an increase in cash held by SMSFs.  Property also grew in asset value for the year, however shares on the other hand, were the asset class hard hit due to the continued global financial problems.
  • Excess Contributions Tax continued to grow as a key industry issue, with an increased number of assessments by the ATO… and to think that the most recent published statistics showed that the ATO had only just started on the 2009-10 financial year, where the Labor Government halved the concessional contribution cap!!
  • We did however see some sort of olive branch by the Government, with a proposed ‘once-off’ refund of Excess Contributions Tax.  This was not retrospective though, taking effect for the 2011/12 financial years and onwards.
  • We continue to await details of the proposed concessional contribution cap extension for those 50 years of age and over with account balances of less the $500,000.  A budget commitment in 2010 and re-affirmed in 2011, we currently appear no closer to an outcome from Government to this administrative nightmare!!
  • The year also saw two important rulings issued, although the industry responses to these could not have been any further apart.  The views expressed by the Commissioner on key concepts of limited recourse borrowing arrangements were embraced by many who were pleased in the practical approach taken to the single acquirable asset definition and also the ability to make improvements to an asset using the SMSFs own resources.  The more controversial ruling issued in July 2011 was when a pension commenced and ceased.  Many of the views expressed by the Commissioner, whilst not necessarily having changed since a previous interpretation in 2004, were broadly criticised with their interpretation and also of the unintended consequences.  With all responses to the ruling also in the hands of Treasury to review, it is quite obvious that further action will be taken here ensure there is no ‘revenue leakage’ if the industry is found to be correct.
  • The year also saw the introduction of section 62A and SISR 13.18AA relating to collectables and personal use assets acquired from 1 July 2011.  These new rules implemented from the Stronger Super reforms intend to address the legitimacy of SMSFs acquiring these assets for investment purposes, rather than gaining a current day benefit (e.g. hanging a painting on your wall at home).
  • Streamlined TPD insurance tax deductions have also been introduced, distinguishing the level of deductibility based upon whether an insurance policy is classified as ‘any occupation’ or ‘own occupation’.
  • A range of ATO interpretive decisions impacting pension payments, death benefits with stepchildren, and assets acquired where a charge already exists.
* these figures were using Sept-10 to Sept-11 ATO statistics as these are the most recently published by the Regulator.
In my view, 2011 has been more talk than action…  I’m not suggesting that it’s necessarily been a bad thing; however it has been a year where the Future of Financial Advice and Stronger Super reforms have been heavily debated, with most of these reforms expected (but not yet assured) to take effect from 1 July 2012.  Add to these reforms, unresolved discussion papers on extended contribution caps, refund of excess contributions, amongst other things that reiterate my views on the year.
Many people in the financial services industry are already “reformed out” from 2011, however the real challenge lies ahead in 2012.

 

Filed Under: ATO, Contributions, Limited Recourse Borrowing Arrangements, Pensions, Professionals, SMSF, SMSF Compliance, Trustee education Tagged With: , , , , , , , , , , ,

New ATO Statistical Overview released… good for the industry, but more to be done

December 14, 2011 By Leave a Comment

The ATO Statistical Overview shows SMSFs growing from strength-to-strength, however more statistical information is required to better understand behaviour of trustees/members

As previously announced over a month ago on thedunnthing blog, the Australian Taxation Office has yesterday released an updated statistical overview into Self Managed Super Funds for the 2008-09 financial year. This report is an update to the Statistical Summary prepared on the request of Jeremy Cooper, Chair of the Super System Review.  He used this report as part of Phase Three to debunk many of the myths surrounding SMSFs and ultimately conclude that the SMSF sector was in fairly good shape.

A recommendation of the Stronger Super reforms is to improve the statistical information available of SMSFs to better understand the sector.  The ATO as Regulator is in the best position to provide this reporting through the information they gather each year in the SMSF Annual Return and fund establishment process.

This report provides us with a greater insight into SMSFs than the quarterly statistics issued on SMSFs, so the updated report is well overdue for the industry.  However in my view it needs to be expanded further to better understand all the elements within the SMSF life-cycle.  Unfortunately, with the need for greater statistics comes the need for trustees and SMSF service providers to collate and report this information.  The issue of cost in improving this statistical data is a potential impairment for the Government.

There has already been some positive talk from this statistical overview about the sector’s growth, both in the number of funds and also in total super assets.  SMSFs have moved from being a retirement vehicle for baby boomers to a retirement vehicle of choice for those individuals who wish to become ‘engaged’ in their superannuation savings.  As a result, we are seeing significant growth in the 35-54 age demographic setting up SMSFs.  This is in my view a collective of factors including greater engagement, coupled with improved financial literacy, greater investment choice (including the ability to leverage investments), along with the having an adaptable retirement savings vehicle that moves as individuals move employment.

Disappointingly from these statistics, we see no break down in the contributions, in particular member contributions that are provided as off-market or in-specie asset transfers?  This information is readily available within the SMSF Annual Return.  By not providing this information, I believe it has impacted the ability for the SMSF industry to put forward a valid argument on the Stronger Super reforms recommendation to remove listed shares from related parties exception (s.66, SISA) from 1 July 2012.  The reality is the Government has responded to a Cooper Review recommendation to ban off market transfer of listed shares on ‘hear-say’ stories of the industry (whether true or not).   In my view, I think it would be valuable to not only look at contributions to SMSFs at a macro-level, but also understand how these contributions got into the fund, e.g. as business real property or listed shares transfers.

The statistical report also shows the continued growth in SMSF net flows (total contributions and benefit payments).  The statistics support that not only did the Simpler Super reforms provide an incentive to get money into super, but the draw down benefits (in particular post-60) have meant we are seeing a growing percentage in the benefit payments taken each year.  The popularity of Transition to Retirement would also be attributing to the increase in benefit payments.  However, a macro-view is taken to benefit payments, rather than providing information on how these benefits are being withdrawn, either as lump sum or via income stream (such as account based pension).  I believe, providing greater information in this area will help the industry and Government better understand the direction retirement income stream policy needs to be taken in the future.  It would be good to be able to identify whether on average, members are ‘living beyond their means’ and how that will influence how long their money will last against average life expectancy, etc…  The issue of longevity risk would be the number one emerging issue in superannuation right now.

A few other areas of note from the statistical overview:

  • It staggers me than only one in every ten new SMSFs established are within a corporate trustee;
  • SMSFs whilst growing in the area post-retirement benefits, very few establish funds and commence income streams immediately (only 11%).  49% of funds commencing pensions within 2009, had been in existence for 5 or more years;
  • The concept of a ‘family fund’ doesn’t appear to be gaining traction… only 4% of funds have 3 or 4 members;
  • The entry point for SMSFs appears dropping in more recent times.  Growth has occurred in all ranges up to $500k.  This may be due to performance dissatisfaction as a result of financial markets – historically the number of new SMSFs have grown in poor financial markets.  Conversely, there has been an asset size decline in member balances >$500k.  This will have come about from a variety of reasons including the impact of GFC coupled with an increasing trend in benefit payments; and
  • SMSF Trustees appear to have taken an active response to their investment strategy as a result of the GFC, with a move to cash and term deposits.  Holding of real property has also grown which would incorporate the law changes to allow limited recourse borrowing from 24 September 2007;  It will be interesting to see in future data, when SMSF trustees look make that shift back into listed equities;
I will provide a detailed analysis on the impact of SMSF service providers in this report in the coming days… these statistics on tax agents, and auditors are quite interesting when looking at a fund’s overall operating expenses.  I’ll be providing my thoughts and views on this area, in particular the evolving role that technology (and greater competition) is appearing to play.

View the ATO Statistical Overview 2008-09.

Filed Under: ATO, Professionals, SMSF, SMSF Compliance, Statistics Tagged With: , , , , , ,

ATO about to release update to Cooper’s Statistical Summary into SMSFs

November 10, 2011 By Leave a Comment

The statistical summary into Self Managed Super Funds commissioned by Jeremy Cooper as part of Phase Three of the Super System Review in December 2009 has been widely recognised as one of the most valuable tools and insights into the SMSF sector ever produced.  This publication not only showed the industry to be in fairly good shape and robust, but it also dispelled many myths about SMSFs.  It became a valuable tool to enable to industry to better understand information about trustees and service providers, much of which now forms part of the Stronger Super reforms, which has focused on increasing competencies for these working within the SMSF industry.

The disappointing thing has been that the statistics within this report were based on the 2008 financial year.  We are now two years down the track since this valuable report was prepared and don’t have any statistical information available that compares to what was provided as part of the Super System Review…. well, that is until now.

I was pleased to hear that the ATO will be releasing in the next few weeks an updated version of this SMSF statistical summary which will include 2009 financial year information.  A further report will be provided in the first half of next year incorporating 2010 statistical information.

With the Government’s support of the majority of the Stronger Super reforms, the ATO has been charged to improve the collation of information on the SMSF sector.  It is expected this report to be released each year will become an important industry document, helping us to better understand the ongoing growth of the sector, key issues, and behaviors of trustees and service providers alike.

The SMSF Working Group established to assist the ATO with the implementation of the Stronger Super reforms will assist the ATO to continuously improve what data is important for the industry.  It is not unreasonable to expect changes within the SMSF Annual Return to capture additional information.

I like many people are very much looking forward to its release…

Filed Under: Announcements, ATO, Professionals, SMSF, SMSF Compliance, Trustee education Tagged With: , , , , , , ,
Next Page »
Follow

Get every new post delivered to your Inbox.

Join 1,161 other followers