New tax could result in loss of SMSF assets

By Darin Tyson-Chan

The chief investment officer of a funds management firm has relayed a scenario raised by a shareholder that demonstrates the severe impact the proposed 30 per cent tax to be levied on superannuation member balances above $3 million will have for individuals whose liquidity levels are low.

“I was talking to one of our shareholders a couple of weeks ago after [the measure] was announced. He’s a farmer who lives six kilometres from a regional centre that is growing very well. He fell on tough times and had to sell half the farm to an investor, with the remaining half being held in his self-managed super fund,” Wilson Asset Management chair and chief investment officer Geoff Wilson shared during a client webinar.

Stephen Jones

Wilson noted the farmer had benefited from the recent appreciation in property prices, which has resulted in his member balance exceeding $ 3 million.

This means he would be caught by the new charge – a situation he has already recognised he will struggle to manage due to the nature of his SMSF portfolio and is already worried about.

“He asked: ‘How am I going to pay the tax?’ He said: ‘I’ll have to sell my farm that I’ve owned all my life because that’s the only way I’ll be able to pay the tax,’” Wilson said.

He described this scenario as an illustration the government has not thought the proposed policy through properly.

Wilson Asset Management chief financial officer Jesse Hamilton concurred that the proposed $3 million soft cap seems to have been rushed into existence.

“As everyone is digesting the proposal, everyone is starting to look at who it is going to impact and finding these unique circumstances,” Hamilton said.

“The Assistant Treasurer [Stephen Jones] and Treasurer [Jim Chalmers] have said [the measure] will only impact a few [people], but that just demonstrates it has not been thought out because I think it’s going to impact a lot of people in these situations.”

No wording from ATO

The ATO has confirmed it will not be providing specific wording for an SMSF investment strategy even though there has been high demand among trustees for it to do so.

“We’re often asked about specific wording that should be included in an investment strategy. For example, should it have percentages in terms of asset classes and should it specify certain objectives such as setting specific rates of return,” ATO superannuation and employer obligations director Paul Delahunty said.

“Our view on this is ultimately the specific wording and detail in an investment strategy will be up to the trustees and will depend on their personal circumstances.”

However, he indicated the regulator’s reluctance to provide specific wording for an investment strategy did not mean it is unwilling to give SMSF trustees assistance in complying with their legal obligation in this area regarding both what to do and what to avoid doing.

The rise of singlemember funds

An assessment of current superannuation data performed by SuperConcepts has shown a noticeable preference that has emerged among SMSF establishments to have the fund service a smaller number of members.

“We haven’t seen much uptake or interest in six-member funds. So [the records show] four or more members [only account for] 3 per cent of our client base. The vast majority are two-member funds,” SuperConcepts SMSF support executive manager Nicholas Ali said.

“But a trend that we are seeing is [a rise in the number of] single-member funds.”

“A lot of people who are setting up selfmanaged superannuation funds are single members.”

He pointed out, situations where one member of a two-member fund passes away leaving the SMSF to continue as a single-member fund is contributing to the shift, but not in a significant manner.

“What we see generally is [where] there is one surviving spouse [from a twomember SMSF] they tend to rotate into an industry fund rather than maintain their self-managed super fund,” he noted.

Pathway for aspiring auditors

The SMSF Auditors Association of Australia (SMSFAAA) has announced it is offering a new tier of membership in response to feedback from its members.

“I’m really excited to announce today that we will be offering an associate membership and that will include allowing your staff, who aren’t registered auditors, to take part in our education programs with 20 hours of CPD (continuing professional development) included,” SMSFAAA president Lina De Marco said.

“So we really encourage you to help us educate your staff and prepare upcoming auditors for after we all retire because it’s really important to leave a legacy and improve the education of the younger people coming through the system.”

The new membership level will cost $330 annually and has been made available based on a member survey where 72 per cent of respondents suggested an initiative of this kind would be a positive development.

Launch of investment strategy tool

A specialist financial services firm offering assistance to advisers has partnered with a portfolio management company to assist SMSFs that have not meet the ATO’s investment strategy requirements by providing compliant fund-specific documentation.

The Investment Strategist service is a collaboration between Iconic Investors and Clearwater Capital and will produce investment strategy documents, including insurance, in line with the specific retirement goals and investment objectives of the members of an SMSF and that comply with the ATO guidelines.

Iconic Investors director Tony Zulli revealed as part of the development of the service, the two firms created a set of diagnostics that measure the diversification, liquidity, cash flow, volatility and risk/return within a portfolio, which are then used as inputs into the investment strategy document.

“We ask trustees and their service providers to supply us with the actual portfolio data as a starting point. We use this data to incorporate the key components of the new ATO guidelines, including asset concentration, liquidity, risk, cash flows and insurance,” Zulli said.

“We also help trustees to look ahead at any significant events over the next 12-month period (for example, a fund member leaving) and adjust their strategy accordingly.”

The service also covers the annual review of a strategy and capital market assumptions are used for each asset class to assist trustees in evaluating the future returns and volatility of the portfolio.