Required competencies

SMSF practitioners are required to adhere to five competency standards. Grant Abbott details what this compulsory obligation involves.

To provide advice on SMSFs, there are five competency standards laid out in the financial services training package that can be found at www.training.gov.au, a joint initiative of the commonwealth and state governments. These are base competency standards and apply to all SMSF professionals.

There is no moving away from these standards and they exist to support the industry and provide confidence and respect from clients and other financial services professionals that an SMSF professional is of the highest standard.

But I continue to be surprised at issues and errors that come across my desk at Abbott & Mourly. We are not talking about administration mistakes, but failure to understand the law, regulations and even know the fundamentals of the trust deed. The fund’s trust deed is actually part of the superannuation laws and not knowing it means potential litigation.

There are no ifs or buts: all SMSF professionals need to know these to a level of being “consciously competent”. If you don’t, you can be sued for any losses or damages the fund experiences. Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110 is a good example where an auditor was sued for losses on an underlying investment in an SMSF. Unless you can show conscious competence under cross-examination, then it is time to rethink your commitment to SMSFs.

Warning to SMSF professionals

If you have been following my articles in selfmanagedsuper, you will know:

a. The commissioner of taxation states that a trustee of an SMSF must produce an investment strategy and regularly review it.

b. The Australian Securities and Investments Commission (ASIC) has stated in ASIC INFO 216 that accountants can prepare and advise the trustee on an investment strategy. They are exempt from the licensing rules in the Corporations Act 2001 when it comes to investment strategies, but importantly cannot advise a trustee on specific investments.

c. The commissioner of taxation has published the following for SMSF trustees: “Broad investment ranges between 0 to 100 per cent in a broad range of assets do not reflect proper consideration in satisfying the investment strategy requirements. Your strategy must articulate how you plan to invest your super in order to meet your retirement goals.”

d. SMSF administrators and accountants who have prepared an investment strategy for their client with 0 to 100 per cent broad ranges for classes of assets have breached section 52B(2)(f) of the Superannuation Industry (Supervision) (SIS) Act 1993. This is considered a personal breach as was demonstrated in Australian Prudential Regulation Authority v Holloway [2000] FCA 579 where the regulator at the time took action against the accountant personally rather than his corporate entity.

e. Now here is the warning. If there is no investment strategy for the fund, the trustee can recover against the administrator, accountant and the auditor of the fund for any losses on investments pursuant to section 218 of the SIS Act.

f. With the current equity market outlook moving to the downside, expect some actions by trustees against administrators.

g. And don’t expect to use the defence of contributory negligence as this is a statutory claim under the SIS Act backed by the Commonwealth Crimes Act.

SMSF advice standards

So how you can show your competence? As I noted above, there are five detailed competency standards – which you may or may not have read. Read these carefully and assess objectively how many of these you display in your SMSF knowledge, evidence and advice.

And this is not the full standard, just one page out of five-plus pages. There are four more pages that determine your competency.

Questions to test your SMSF competency

Let me ask you a couple of questions and provide your answer:

1. Can an accountant act as the director of a client’s SMSF corporate trustee provided they have a director identification number?

2. Can a tax-effective testamentary trust be directly created by the trustee of an SMSF on the death of a member rather than going through the will?

Answers

1 . Accountant director of an SMSF

From a practical point of view, it’s probably not a great idea for an accountant, lawyer or financial planner to act as the corporate trustee director of an SMSF. They can, however, act as a director of a client or friend’s SMSF. However, there are caveats. First and foremost, the constitution of the SMSF corporate trustee must allow it. Secondly, the accountant must hold the member’s enduring power of attorney – see section 17A(3)(b)(ii) of the SIS Act. And for confirmation, the commissioner of taxation stated in SMSFR 2010/2:

Example 1

20. Andrew works for a large international group of companies. He and his wife, Jane, are trustees and members of their SMSF. From 1 February 2009, Andrew is transferred to an overseas company for an indefinite period of time. In accordance with the relevant state legislation, Andrew and his wife each execute an enduring power of attorney in favour of their friend and retired accountant, Trevor. In addition, Andrew and Jane both resign as trustees of their SMSF and appoint Trevor as the trustee. The appointment of Trevor as trustee is in accordance with the terms of the trust deed. Other than the fact that Andrew and Jane are not trustees of the SMSF, the superannuation fund satisfies the other requirements of the definition of an SMSF in subsection 17A(1).

21. Trevor is a legal personal representative of both of the members, Andrew and Jane, by virtue of holding an enduring power of attorney in respect of each of them. In addition, Trevor is now the trustee of the SMSF in place of both Andrew and Jane. Once appointed as trustee, Trevor is subject to civil and criminal penalties in the event that he breaches his duties. Provided that the enduring power of attorney remains valid during the period Trevor is the trustee and given that the other requirements of subparagraph 17A(3) (b)(ii) are satisfied, the superannuation fund continues to satisfy the definition of an SMSF in subsection 17A(1), notwithstanding that Andrew and Jane are no longer trustees.

2. SMSF testamentary trust

The next question is an important one, but so many estate planning lawyers get it wrong. Can a testamentary trust be directly created by the trustee of an SMSF on the death of a member rather than going through the will?

I remember writing on this some time ago and had a number of lawyers saying this was absolutely impossible as testamentary trusts can only be established under a will.

But a testamentary trust is not limited to a will. A testamentary trust is a trust established on the death of a person, including a member of an SMSF, insured or employee as well as a testator. From a legal perspective, section 102AG(2)(c)(v) of the Income Tax Assessment Act 1936 provides that a minor beneficiary of a trust created from the superannuation benefits of a member of a super fund is to be taxed under ordinary marginal tax rates and not penalty tax rates.

In order to do so, the super benefit must be paid to a dependant, such as a spouse, adult or minor child, a person who has an interdependency relationship with the member or is a financial dependant of the member. This allows the trustee to pay the benefit to the dependant pursuant to section 62 of the SIS Act – the sole purpose test. This can be optional for the dependant or mandated through an SMSF will. I have yet to see a binding death benefit nomination (BDBN) that caters for this strategic option.The importance of this testamentary trust is that it is not subject to a family provisions claim or contested will compared to a testamentary trust in a will – except perhaps in New South Wales, the only state with the concept of ‘notional estate’. So here is a great question: If a lawyer directs super via a BDBN into the deceased member’s estate and there is a family provisions claim, can any losses from what would have been paid to the dependant or dependants be recovered from the lawyer personally and/or their legal firm?

Conclusion

In the next issue I will cover other SMSF competency questions and will show you how to make a claim against a lawyer or adviser who has recommended super to be transferred to an estate that ends up being contested.

Table 1: FNSSMS603 – Apply legislative and operational requirements to advising in self-managed superannuation funds

Element Performance criteria

Elements describe the essential Performance criteria describe the outcomes performance needed to demonstrate achievement of the element

1. Establish knowledge of client 1.1 Advise client on features, regarding SMSFs structures and operations of an SMSF

1.2 Inform client of roles played by trustee, specialist advisers and regulators

1.3 Inform client of process to appoint trustees and explain trustee duties, responsibilities and liabilities

1.4 Advise client of key issues and associated risks to be considered when evaluating SMSF applications

1.5 Advise client of steps required to establish an SMSF

1.6 Explain to client process of winding up an SMSF

2. Advise client on relevant 2.1 Identify sources of legislative legislative requirements information appropriate to an SMSF

2.2 Advise client on legislative requirements that apply to an SMSF

2.3 Advise client of role of principal regulator in managing an SMSF

2.4 Inform client of ongoing legislative requirements to maintain a compliant SMSF

2.5 Inform client of consequences of an SMSF becoming non-compliant

3. Advise client on relevant 3.1 Identify sources of operational operational requirements information appropriate to SMSFs

3.2 Advise on operational requirements that apply to client

3.3 Inform client regarding operation of trust deeds and ongoing deed amendment

3.4 Advise client of requirements for establishing investment strategy, considering investment restrictions for an SMSF

3.5 Advise client of application of Superannuation Industry (Supervision) Act preservation rules on fund monies

4. Identify and explain 4.1 Advise client on regulations implications for contributions regarding eligibility to contribute to client to an SMSF

4.2 Advise client on contribution rules, including in specie contributions of business real property

4.3 Advise client on allocation of contributions to individual member accounts

4.4 Advise client to seek advice for higher level, specialist and/or comprehensive advice if required

5. Identify and explain 5.1 Explain requirements for implications for benefits accessing assets in SMSFs for payments to client of benefits to client

5.2 Explain key features, characteristics and risks of different types of SMSF income streams to client

5.3 Explain process of setting up income stream from an SMSF to client

5.4 Explain calculation and operation of member accounts in both accumulation and pension phases to client

5.5 Inform client of treatment of death benefits, including lump sum and pension issues