Gadens partner Kathleen Conroy speaks to Katarina Taurian about some crucial issues surfacing in the SMSF sector, and the Financial System Inquiry's key focus areas for SMSFs.
What do you see as some of the main issues surfacing in the SMSF sector?
The next big wave is definitely litigation over death benefits.
The law around estate litigation is a lot more well developed and procedures [are] in place, whereas when it comes to death benefits, the law isn’t so well developed.
There hasn’t been the body of law that you get in relation to estates. Estate litigation in relation to family provision and the rest of it has been around for hundreds of years.
So it’s definitely, definitely the next big thing.
In the Financial System Inquiry’s interim report, released earlier this week, the panel sought feedback on the prohibition of borrowing in super. What are your general views on SMSFs borrowing to invest?
I think definitely it’s got to be looked at.
The whole idea is you’re not supposed to have a fund that has a lot of debt, and people are now buying multiple properties in their fund. It’s not really what [super] was designed for and again, as [the report] said… there’s so much growing money in the SMSF space, without being dramatic or overly pessimistic, if that system does break down, that’s a significant impact on the national economy.
So do I think it should go back to no borrowing? Maybe not necessarily, but definitely agree that we’ve got to have the conversation.
What would your thoughts be on a review of borrowing in super as per the Cooper Review’s recommendations four years ago?
I certainly think there should be a review. I think [borrowing is] happening a lot more than perhaps people thought it would. And I don’t see any harm in having a review. That’s a mature approach to test a system. There’s no point in having a review after it’s fallen apart.
What are your views on creating barriers to SMSF establishment, which was also raised in the FSI’s report?
It’s a hard one. I still think there should be compulsory trustee education before people go in, and I am inclined to think there should be a minimum amount. [Some] people say anywhere between $200,000 and $500, 000 before SMSF. I don’t think you should necessarily go up that high, but I don’t think it would be unreasonable to say, ‘okay, you’ve got to have $120,000 or $150,000’, because it stops the people that have got $20,000.
On the topic of education, what would you say the key arguments for mandatory trustee education are?
The self-managed super system is designed, as we know, to provide benefits for you in your retirement. And given that, if you mess it up, that can have a serious detrimental impact on your retirement lifestyle.
Proper management involves specialist knowledge in relation to both finances and the law. It doesn’t mean detailed knowledge, but it involves specialist knowledge.
So your everyday dealings with the fund require a fundamental knowledge of the law and financial planning because it operates in the environment of the law and it is designed to give you financial comfort in your old age, so it only makes sense that you should have some fundamental knowledge on those points before you walk in that space.
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