The government and regulators on their SMSF agenda
ASIC, the ATO and Treasury update delegates at the SMSF Professionals’ Association of Australia National Conference in Brisbane on the upcoming policy agenda and the current and projected state of the SMSF sector
We’re nearing one million SMSF members, or 8 per cent of the 11.6 million members of Australian super funds. SMSFs’ return on assets is on par with APRA-regulated funds. In general, this growth can be seen as a positive demonstration that increasing numbers of Australians are taking an active and controlling interest in their financial future.
Naturally, with more and more Australians choosing to ‘ride the SMSF wave’, comes increased media interest, scrutiny and sometimes criticism. As the regulator, it’s our role to ensure the health and security of this sector.
We do identify a number of funds – and indeed, professionals – doing the wrong thing, but these are in the minority.
The top contraventions reported to us on auditor contravention reports relate to loans, borrowings, a lack of separation of assets, in-house assets, not investing at arm’s length, making acquisitions from related parties and sole purpose breaches. This year, we will review every fund reported to us by approved SMSF auditors.
Some other issues that we think are, or could become, areas of concern include illegal early release – if you see any new activity or new promotion of this, we’d love to hear from you [and] on-time SMSF annual return lodgement is still not high enough. Late last year, we removed from Super Fund Lookup the details of funds with two or more years’ returns overdue.
We’re [also] working closely with ASIC and other agencies to identify and take action on fraud but it’s an issue all of us … should be on the lookout for.
Some funds don’t report non-arm’s length income, known as NALI, correctly and don’t pay the correct amount of tax – [and] limited recourse borrowing arrangements particularly, when used to purchase real property, have received a lot of attention recently. So I don’t think I need to say much about them other than to say: make sure you set up the arrangement correctly because there can be serious financial consequences if you don’t. And make sure it’s the right investment for the fund.
As you know, the government has announced that starting on July 1 administrative penalties will apply to breaches of the super laws (this is still proposed law at this stage). Trustees will be personally liable for these new penalties, so they can’t use the resources of the fund to pay the penalty.
While the start date is July 1, it should be appreciated that contraventions such as loans to members or relatives still existing on that date will come under the new penalty regime. The message for SMSF trustees is clear: rectify any contraventions as soon as possible or be liable for a penalty.
As I mentioned, SMSFs form the largest sector of the Australian super industry, and the numbers are growing fast, so it’s vital that the sector remains appropriately regulated and complying. We at the ATO have a role to play in this, and it is – in my perhaps biased view – an important one.
My co-regulators have shared the work they are doing that impacts on SMSFs, and ASIC likewise has been busy in this area.
Our role with respect to SMSFs is primarily geared towards regulating the gatekeepers, in particular financial advisers, SMSF auditors, issuers and distributors of financial products in which SMSFs invest, and to a lesser degree the SMSF trustees themselves.
In April 2013, ASIC released Report 337 SMSFs: Improving the quality of advice given to investors (REP 337). The report summarises our findings from the first major project undertaken by the SMSF taskforce. As part of this project, we conducted a review of over 100 investor files on the establishment of SMSFs – provided by financial planners and accountants. While most of the advice provided was considered adequate, there were pockets of poor advice.
As part of the SMSF taskforce’s second major project, in September 2013, ASIC released a consultation paper on proposed guidance to improve the quality of advice given to investors.
ASIC commissioned Rice Warner to examine the minimum cost-effective balance for SMSFs when compared with APRA-regulated superannuation funds. CP 216 includes Rice Warner’s report, Costs of Operating SMSFs. ASIC sought feedback on Rice Warner’s findings and the costs associated with setting up, running and winding up an SMSF.
As part of our consultation, we held two separate roundtable discussions in October 2013 – one for industry and one for consumer representatives. Overall, stakeholders supported the disclosure proposals in CP 216. What was great to hear was that a number of industry associations indicated that their members had already been discussing the issues covered by the proposals.
In general, industry stakeholders were more concerned with what they perceived as ASIC’s intention to prescribe a mandatory minimum balance. We are not, however, proposing a mandated minimum balance – we are looking to provide clearer guidance on this issue based on research and industry and investor views.
From a risk perspective, we are more likely to look at advice to set up a SMSF where the balance is outside a specific range. However, the balance is just one consideration and there are circumstances where advice for a small balance superannuation holder to set up an SMSF may still be in the best interests of the client – for example, where the investor has a concrete plan to transfer a large business asset into the fund within a specific timeframe.
A number of consumer associations suggested requiring clear, detailed disclosure of set-up, ongoing and exit costs, and a comparison of these costs with the cost of remaining in an APRA-regulated fund. We think this is a good idea and we are exploring it further.
The purpose of our SMSF taskforce is to examine high-risk SMSF issues. At the most recent SMSF taskforce meeting, held earlier this month, the taskforce decided to introduce two new areas of focus for 2014.
First, the taskforce will appoint a small project team to explore the trend of ‘one-stop shop’ operators offering a range of services to SMSFs. The project team will investigate the (often complex) business model structures of these operators and the risks to investors that this trend poses.
This area of focus comes in response to the recent collapse of Charterhill Group, which operated as a one-stop shop providing – among other services - advice to clients on establishing SMSFs, rollover of existing superannuation funds into an SMSF, and sourcing and purchase of investment properties. Second, the SMSF taskforce will expand its work on misleading advertising of SMSFs.
At the moment, we regularly identify advertising of SMSFs on websites, print and radio, which do not comply with Regulatory Guidance 234 Advertising financial products and advice services: Good practice guidance (RG 234). This work will be expanded to cover online advertising channels, such as Twitter, Facebook and Youtube.
We will also be looking at SMSF seminars for evidence of misleading and deceptive conduct, as well any unlicensed financial services conduct. Where we identify any breaches, regulatory action will be sought and we will look to issue an alert to industry and the public to be wary of shonky selling tactics at SMSF seminars.
Probably a lot of you [SMSF practitioners] have dealings with the ATO and ASIC – maybe more than you’d want to – [but] very few of you would have dealings with the Treasury. I just want to reflect on our role, particularly in [relation] to superannuation. I’ll make some observations on the growth of superannuation and SMSFs in particular. I’ll touch on the issues around the regulation of SMSFs. And then finally, just look at the policy landscape which may be of some relevance and interest.
It’s important to note that the Treasury is an adviser. We don’t actually regulate, we don’t actually, if you like, do anything apart from advising our minsters, and typically you never know what that advice is. Occasionally, there’s an exception where things might get put out under Freedom of Information, which is always tricky, but typically you never understand what it is we believe on things because we work for the government of the day, and our views have to change depending on the broad philosophy of the government.
Touching on some of the growth in superannuation, it’ll be obvious to all of you the enormous growth in superannuation. In 1996, Stan Wallis did the financial systems inquiry. Superannuation assets totalled $245bn, which then was [a bit over a third] of Australia’s GDP.
Today’s superannuation assets now stand at [about] $1.75 trillion … which is over 100 per cent of Australia’s GDP. So it’s huge. It’s an enormous amount of money under management. And of course, that growth is expected to continue, especially with compulsory super. There is only one way to go, and that is up.
Within that, the SMSF sector is increasing. SMSF assets [have increased] to $531bn today. Now that $531bn, assets under management by SMSFs, to put it in perspective, that’s roughly two and a half times the size of New Zealand’s total output. Or about 20 times the size of Tasmania. So if ever you have one of those really big SMSFs, you might be in a situation where you can purchase an island or two.
The Treasurer has said … the broad philosophy of people being in control of their own retirement incomes for their future is unambiguously a good thing. And I think that … will give you a lot of confidence about the future of the sector.
Just speaking now about the regulation of SMSFs ... we have the compulsion through the super guarantee, tax concessions for voluntary saving, all designed with a special role of supporting individuals in their retirement.
Apart from the owner-occupied house, super is the single biggest savings asset that we have as a nation. So then the question: why regulate? What’s the point of the regulation? You think about the APRA-regulated funds ... one of the key reasons of regulating is because first of all there is a stability risk for the financial sector, the other thing is that of course you might need to make sure that trustees are actually doing the right thing on behalf of the members, particularly with that potential level of disengagement.
Why do it for SMSFs? Because SMSFs are quite different. Trustees being members, of course, looking after money, they are going to look after their own interests, because it is in their own interests. And there is no systemic risk to the financial system from SMSFs. If an SMSF or even a group happen to lose a lot of money, tragic for the people involved, but there is not a systemic risk.
Given the government’s quite explicit intention to make sure the economy is regulated only to the level that it really needs to be to be a properly functioning, optimised economy … if there are views on [or] ideas of possible deregulation measures … we would really appreciate hearing that.