The minimum balance debate seems to be ongoing. What are your thoughts – should they be imposed by the regulator?
I don’t think so. Obviously it might be okay but there are circumstances in which it might be appropriate to have an SMSF with a small balance because of wishing to do something that you can only do through an SMSF, and that strategy might be appropriate to the client, but it might be precluded if there are minimum balance restrictions. So I guess if I had to an express an opinion it would be in the negative.
So a minimum balance restriction could negatively impact someone, for example, who wanted to purchase business property but had a lower balance?
Yeah, that’s the classic example isn’t it? I just did one recently for a client and the settlement on the loan happens [soon], and their balance in super is not terribly high but they run their own business and they have the capacity to contribute to the maximum and also for the business to pay rent to the super fund – so it’s a very appropriate strategy for them. And if the balance requirements of an SMSF were set at say $200,000 or upwards of that, then they wouldn’t have been allowed to do it.
You’ve been in this industry for a while now, what are the main mistakes you’re seeing advisers make with their SMSF clients?
I’m not seeing it personally, but the evidence suggests that there are people being put into SMSFs unnecessarily. In other words, they are incurring the expenditure of having an SMSF but aren’t gaining any advantage out of it because if they sourced the equivalent retail superannuation vehicle, they could achieve what they are doing in the SMSF without the additional cost or obligations.
Do you think the industry and its practitioners need to do more to address this?
I honestly think so because the concern is that SMSFs underperform by virtue of inappropriate strategies and investment decisions being made, and then we run the risk on two fronts. We run the risk that the regulator gets involved and starts to limit the ability to utilise SMSFs, and there is also the danger that certain SMSF members end up in a worse position than they would have been if they had stayed in the retail superannuation or industry superannuation space, and we wouldn’t want that.
Do you think it’s a widespread problem, or is it just happening with a few advisers?
I don’t know if it’s driven by advisers as much as it is by accountants because my experience is that more accountants get involved in the set-up of SMSFs than do advisers, and there seems to be a bit of, well there are two problems: one is people being encouraged to set up an SMSF for the wrong reasons, and there also seems to be a little bit of ignorance with respect to whether or not there is any advantage to having an SMSF.
Could you say it’s predominantly an accounting industry issue?
I’m not saying mainly, I’m saying establishments are probably more driven from the accounting profession than from planning, I certainly know more accountants that assist their clients to set up SMSFs than I do financial advisers, but the concern is not who’s doing it, the concern is that people are in them and not gaining benefit from doing so.
Are there any other recurrent issues you’re seeing happen in the industry?
In the SMSF space, yeah there are issues and concerns in relation to LBRAs being done inappropriately, obviously we’ve had some concerns about interest-free loans and things of that nature, and the concern that the forgoing of interest might be deemed as a contribution and things of that nature. So what happens is that people try and stretch the rules or whatever and run the risk of undermining it for those who are playing down the middle, if that makes sense.
What do you think 2015 will hold for advisers in the SMSF space?
It will be an interesting year I think because there’s an increasing awareness of the capabilities of SMSFs, so there’s an increased interest amongst superannuation members to go down that path. There’s also been suggestions of LRBAs being limited or restricted or even disallowed hence forth. There might be some appetite to get into the sector while the opportunity still exists.
Do you think it could drive people into making a rushed decision about limited recourse borrowing?
Yes possibly, if they get the feeling that they need to act quickly rather than miss out, they might not do all their homework or might not make decisions for the appropriate reasons and that would be a concern. But equally so if you think an opportunity, a window of opportunity is closing, you’d obviously want to take advantage of it while it was still there to be taken advantage of, on the assumption of course that there’s no retrospectivity in any of the rules or rule changes that occur.