Lawyer criticises heavy focus on cost with low balances
An industry lawyer has argued that the likely returns of an SMSF are more important than the associated costs when deciding whether setting up an SMSF will meet a client’s best interests.
Speaking at an event in Sydney, Townsends Business and Corporate Lawyers owner Peter Townsend said there has been insufficient consideration of return in the regulatory materials provided on minimum balances for SMSFs.
While ASIC did admit in Consultation paper 216 (CP 216) that cost was only one of the factors that should be considered when establishing an SMSF for a client, with responsibilities, time and risk also listed as important factors, there was no mention of return, said Mr Townsend.
“If there’s a particularly good investment and the SMSF can return 15 per cent compared to the APRA fund's five per cent, even with $75,000 then the SMSF is the clear way to go,” said Mr Townsend.
“If you can make a case that the investment that you're going to put into the SMSF is going to return substantially more than the APRA fund, then that covers off on the best interests rule.”
There may be other reasons for establishing an SMSF below the recommended $200,000 also, he said, with some of the research reports examining the viability of low balance SMSFs pointing to the issue of capital gains tax.
“There can be capital gains tax when you switch from an APRA regulated super fund to an SMSF,” he said.
“They’ve pointed out the fact that the longer you wait, the more CGT that might apply. So do you wait until you hit the $100,000 mark or the $200,000 mark or the $300,000 mark?”
The practitioner, he said, can also argue that the client wants a non-standard investment such as real estate and/or that they want to use gearing.
“The adviser could also make it clear that the fund is expected to reach the benchmark within a reasonable time,” he said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.