SMSFs: why always on the government radar?
The federal government review in 2009 of Australia’s superannuation system was relatively kind to the self-managed sector. Through direct and indirect attention, however, significant change is taking place within the self-managed superannuation system.
A time of changes
In the lead-up to the 2009 review, there were significant changes regarding the conduct of a self-managed superannuation fund (SMSF). For example, September 2007 saw the introduction of the requirement for fund trustees to appoint an approved auditor for their fund within a prescribed period, and the changes to the borrowing prohibition on fund trustees, now largely set out in sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (SIS Act).
Since the release of the 2009 review, there have been several changes made or forecast that are directed at the SMSF sector. These include, but are not limited to:
- the introduction of legislation with respect to collectables and personal use assets;
- the turning of the prohibition on mixing personal and fund assets from a covenant to a “prescribed standard” under superannuation law;
- the introduction at regulation 4.09(2) of the Superannuation Industry (Supervision) Regulations 1994 of the requirement for fund trustees to regularly review the fund’s investment strategy; and
- increases in the superannuation levy.
The collectable and personal use asset legislation became law in July 2011 and is designed to ensure fund members do not enjoy any present day benefit from fund assets. This is achieved through several prohibitions and obligations, including, for example, a prohibition on the storage of any of the relevant assets in the private residence of a related party of the fund, and the requirement to document decisions on storage.
The elevation of the prohibition on mixing assets from covenant to prescribed standards allows the Australian Taxation Office (ATO) to enforce compliance with respect to the separation of personal and fund assets. Among other things, the requirement to review the fund’s investment strategy forces a fund trustee to turn attention to the fund as a source of revenue in retirement, while increases in the superannuation levy clearly escalate the cost of maintaining a self-managed fund.
What does it all mean?
These changes illustrate two fundamental aspects of running an SMSF.
First, and at the most basic level, they demonstrate that while a member of a self-managed fund controls that fund:
- the control is in no way absolute; and
- the latitude to control superannuation savings is limited, existing within the greater superannuation picture of building and maintaining wealth to provide support to fund members in retirement (or support for dependents in other permitted circumstances)
The importance of this point in the mind of the government is also evident from the advertised current compliance activities of the ATO. In its 2012/2013 compliance program, the Taxation Commissioner, for example, advises us that as part of the program for the coming year the focus of the Commissioner’s attention will include:
- “SMSF compliance with income tax obligations, particularly in relation to exempt current pension income and non-arm’s length transactions”; and
- “SMSF compliance with regulatory obligations, particularly the behaviour of new trustees, illegal early release, and accuracy of contributions report”
It is important to remember here that fund trustees are individually and wholly liable for the conduct of the fund.
Second, the changes – and attention to self-managed superannuation per se –illustrate that while self-managed superannuation is an attractive product, it is not for everyone.
Running a fund takes time and understanding. A fund trustee is responsible for their fund and where there is little inclination to devote time to running a fund, or little real time for that devotion, the self-managed product may be both an inappropriate and a dangerous option.
At the same time, there are costs involved in maintaining a fund and where superannuation savings are reasonably low, a person should consider whether the cost of maintaining the fund outweighs the advantage of saving in a self- managed product. These are not only ‘one time’ considerations; they are issues that should be addressed over time, with various factors (including a member’s age) determining whether a person should move into or out of a self-managed fund.
The self-managed superannuation sector is here to stay. However, it continues to exist based on two premises. First, the sector will be heavily regulated and that regulation will be supported by greater capacity within the ATO to enforce compliance. Second, it will not receive special concession but, rather, it will be allowed to operate with only that level of flexibility that is consistent with the notion of saving for long-term future goals.
In short, current change directed at self-managed superannuation is designed to more tightly tether the self-managed superannuation product to its parent concept – saving for retirement as opposed to garnishing wealth for present day use or benefit – and to force compliance with that parent concept.
Kathleen Conroy is a partner at Gadens Lawyers