self managed super: Issue 32 by Benchmark Media

QUARTER IV 2020 | ISSUE 032 | THE PREMIER SELF-MANAGED SUPER MAGAZINE

SMSF CHAMPIONS THE TOP PERFORMERS OF 2020

FEATURE

STRATEGY

ANALYSIS

COMPLIANCE

SMSF Awards Best service providers

Financial hardship How super can help

Budget and ATO data Predictions for sector

Select asset classes Additional obligations

SMSFPD 20 SHAPE YOUR d i g i t a l 20 CLIENT’S FUTURE Missed out? LUCKY WE RECORDED IT. On 27 October, SMSFPD Digital 2020 brought together all the current issues SMSF professionals need to be across. From technical updates, industry insights and strategies for clients, our presenters' expert commentary and use of case studies allowed a deep dive into topics. If you missed the live session, purchase your recording copy now!

PURCHASE NOW Topics: • SMSF legislative stocktake • New contributions strategies to beef up your super • Real Estate in SMSFs – what you need to know • Triple DDD - divorce/disability & death – how does your SMSF survive? • COVID-19 audit requirements • BONUS SESSION - Open mic with members of the SuperConcepts technical team and Thinktank Read more

FASEA 6.5 CPD hours Technical competence 6.5 hours

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COLUMNS Investing | 24 The current state of property.

Compliance | 28 LRBA considerations in the COVID-19 environment.

Investing | 32 Finding the next big-performing stocks.

Strategy | 36 Advantages of having a non-reversionary pension.

Compliance | 39 The additional obligations of certain asset classes.

Strategy | 42 Contributions opportunities arising from legal changes.

Strategy | 46 The range of financial hardship measures available.

Analysis | 50 What the latest ATO data and the budget reflect.

SMSF AWARDS 2020 CHAMPIONS CROWNED Cover story | 12

Strategy | 53 Mitigating member conflicts.

Management | 56 New insolvency measures.

Strategy | 59 Repair of the early release hole.

Compliance | 62

How downsizer contributions work.

Strategy | 65 Single-trustee SMSFs.

QUARTER IV 2020 1

FROM THE EDITOR DARIN TYSON-CHAN INAUGURAL SMSF ASSOCIATION TRADE MEDIA JOURNALIST OF THE YEAR

Untouched – for now at least This year’s federal budget was unique in a lot of ways. For a start, the accepted practices of the night were completely different. No lock-up for any of the recognised technical experts, nor sections of the media. Everyone involved knew it would be a different type of budget too, but still didn’t really know what to expect. In the end we got a budget with a heavy focus on repairing the economic damage the Australian economy has experienced as a result of COVID-19. There were a few superannuation announcements, being the YourSuper performance assessing requirement for MySuper funds and the change to allow employees to have one retirement savings fund ‘stapled’ to them throughout their working life. Neither was directly related to SMSFs. So, not much really to talk about when it comes to this sector or is there? As to be expected, analysis of the budget still had to be performed and this process has led to some interesting takes on what these minor announcements might mean for the sector. To this end, there has been speculation the new YourSuper benchmarking regime could actually benefit the appeal of SMSFs as they could end up representing the only retirement savings structure with the ability to truly deliver high returns as they will not be constrained by performance measures. But this is an uncommonly optimistic view of the situation. In the main, most of the industry’s take on the budget has been with an expectation of more pain or negative consequences. Evidence being the feeling that the YourSuper initiative could actually end up curtailing the instances where an adviser would be comfortable recommending a client establish an SMSF due to the best interest duty. The

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concern being whether they could guarantee running an SMSF would be in the client’s best interest should it not be able to outperform MySuper funds. Other respected sector experts have suggested performance benchmarking will begin with MySuper funds and will eventually be applied to SMSFs. And even before the budget was handed down there was speculation by more than one quarter that the pot of gold that is superannuation, and in particular SMSFs, will be used as a fiscal lever to repair the once-ina-lifetime deficit society will have to eventually address. Yes this is all guesswork at the moment, but if our politicians were smart, they would be monitoring all of these reactions. Why? Because it all lends itself to the worrying phenomenon of regulation and political risk being the most concerning factors in the country’s superannuation framework. Just about every reaction to the budget has been negative with respect to what might come next and that’s regarding a budget with no significant superannuation changes in it. But Canberra shouldn’t just take the word of practitioners working in the space. As reported by selfmanagedsuper in September, 51 per cent of respondents to an Investment Trends survey of SMSF trustees said changes to the rules and regulations governing superannuation is the main source of their concerns. This all points to a mood that there is too much legislative change to the retirement savings system and it is time our politicians sat up and took notice. Every SMSF stakeholder is pleased the sector was left alone in this year’s budget, but they are all wary about what’s around the corner that might be coming their way.

Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au Senior journalist Jason Spits Journalist Tharshini Ashokan Sub-editor Taras Misko Head of sales and marketing David Robertson sales@bmarkmedia.com.au Publisher Benchmark Media info@bmarkmedia.com.au Design and production RedCloud Digital

WHAT’S ON

Self-managed Independent Superannuation Funds Association Inquiries: jane@sisfa.com.au

To have an upcoming event featured on the What’s On page, please contact darin.tyson-chan@bmarkmedia.com.au.

DBA Lawyers Inquiries: dba@dbanetwork.com.au

SMSF Auditor Independence

2020 SISFA SMSF Virtual Forum

12 November 2020 Webinar 12.00pm-2.00pm AEDT

10 November 2020 Zoom webinar 12.00pm AEDT

SMSF Succession Planning

12 November 2020 Zoom webinar 12.00pm AEDT 17 November 2020 Zoom webinar 12.00pm AEDT 19 November 2020 Zoom webinar 12.00pm AEDT 24 November 2020 Zoom webinar 12.00pm AEDT 26 November 2020 Zoom webinar 12.00pm AEDT

Smarter SMSF Inquiries: www.smartersmsf.com/event/

18 November 2020 Webinar 12.00pm-2.00pm AEDT

Chartered Accountants Australia and New Zealand National SMSF Conference Online 2020 9 November 2020 11.00am-4.00pm AEDT 10 November 2020 11.00am-4.00pm AEDT 16 November 2020 11.00am – 4.00pm AEDT 17 November 2020 11.00am-2.45pm AEDT

Institute of Public Accountants

12 November 2020 9.00am-5.00pm AEDT

Inquiries: Liz Vella (07) 3034 0903 or email qlddivn@ publicaccountants.org.au

Changing Face of SMSF

SMSF Advanced Audit

SMSF Virtual Day 2020

10 December 2020 Webinar 12.00pm-1.00pm AEDT

Cooper Grace Ward Virtual SMSF Intensive Day 19 November 2020 10am-3.30pm AEST

SA 10 November 2020 Institute of Public Accountants Level 13, 431 King William Street, Adelaide

SMSF Law & the Regulator 12 November 2020 Zoom webinar 2.00pm-4.00pm AEDT

SMSF Live Audit WA 2 December 2020 Institute of Public Accountants Level 4, 1001 Hay Street, Perth

SMSF Accounting, Tax and Reporting in 2020 SA 3 December 2020 Institute of Public Accountants Level 13, 431 King William Street, Adelaide

SuperConcepts SMSF Specialist Course 24-26 November 2020 Virtual workshop

Quarterly Technical Webinar 3 December 2020 Webinar Accountant-focused session 11.30am-12.30pm AEDT Adviser-focused session 1.30pm-3.00pm AEDT

SuperGuardian Inquiries: education@superguardian. com.au or visit www.superguardian.com.au

Traversing the contributions landscape

1-3 December 2020 Virtual workshop

24 November 2020 Webinar 12.30pm-1.30pm AEDT

Accurium

SMSF expenses – just an arm’s-length away

Inquiries: 1800 203 123 or email enquiries@accurium.com.au

SMSF Auditor Independence 3 December 2020 GoTo webinar 2.00pm-3.00pm AEDT

Heffron SMSF Clinic 10 November 2020 Webinar 1.30pm-2.30pm AEDT 8 December 2020 Webinar 1.30pm-2.30pm AEDT 9 February 2021 Webinar 1.30pm-2.30pm AEDT

15 December 2020 Webinar 12.30pm-1.30pm AEDT

Alternate trustees & event-based trusteeship 19 January 2021 Webinar 12.30pm-1.30pm AEDT

Investment strategies destroy the red tape reduction strategy 23 February 2021 Webinar 12.30pm-1.30pm AEDT

SMSF Association National Conference 2021 16 February 2021 Virtual platform 8.30am-4.40pm AEDT 18 February 2021 Virtual platform 8.45am-4.50pm AEDT

QUARTER IV 2020 3

NEWS

ATO puts SAN misuse onus on trustees By Darin Tyson-Chan

The ATO has stipulated SMSF trustees have a responsibility to ensure their fund has not been victim to the misuse of SMSF auditor numbers (SAN) being perpetrated by some service providers in the sector. “An important message I have for SMSF trustees is remember it’s your responsibility to make sure your SMSF has had its independent audit completed prior to the lodgement of your SMSF annual return,” ATO SMSF segment acting assistant commissioner Stephen Keating said during the 2020 SMSF Trustee Empowerment Day hosted by selfmanagedsuper sister publication smstrusteenews.

“You must validate with your tax agent that the details they are reporting on your behalf are true and accurate, so make sure you ask for a copy of the auditor’s report before you lodge.” If the tax agent fails to produce a copy of the auditor’s report, Keating advised trustees to refrain from lodging the return in question. “My advice to them is they need to talk to the auditor who has been reported on their return and actually sight the report themselves,” he said. According to Keating, the ATO will welcome trustee assistance in eradicating the issue of SAN misuse. “If the tax agent has falsely reported that the audit has been done, then we would certainly welcome any referral from that trustee about that tax agent’s

Trustees have SAN misuse responsibility. behaviour and then we’ll take it from there,” he revealed. The ATO’s mail-out of the 2018 annual returns to registered SMSF auditors resulted in 107 confirming their SANs were misused on 832 occasions involving 230 tax agents. When the same exercise was performed using the 2017

annual returns, 420 auditors confirmed their details had been misused on 1445 occasions with 626 tax agents discovered to have been perpetrating this breach of the law. To date, the Tax Practitioners Board has terminated the registration of four tax agents stemming from SAN misuse.

YourSuper has SMSF advice implications By Darin Tyson-Chan

The YourSuper performance measure for MySuper funds announced in this year’s federal budget could have significant implications for advisers recommending clients establish an SMSF, a technical manager has said. “There is a potential knock-on effect of this, there is no question. Remember, as an adviser, one of the things that came out of the FOFA (Future of Financial Advice) changes was the idea of a best interest duty. And so if you’re going to be setting up an SMSF, in effect what you’ve got to be partly saying, certainly [if the client is in] accumulation [phase], is that this fund is going to do better than those APRA (Australian Prudential Regulation Authority)-regulated funds,”

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SuperConcepts SMSF technical and strategies solutions executive manager Phil La Greca said at the recent SMSF Professionals Day Digital 2020 jointly hosted by selfmanagedsuper and SuperConcepts. “So the question is going to be ‘can you say that’ and I guess a lot of that will depend on how the investment strategy for the proposed SMSF is structured.” According to La Greca, advisers cannot make the performance assessment of an SMSF at establishment with a view to the immediate term only. “The bigger problem is probably ongoing because certainly ASIC (Australian Securities and Investments Commission), in some of its documentation, has made it very clear that the best interest duty is not a oneoff issue. It is an ongoing obligation,” he said. As such, the adviser has to take into

account whether or not a recommendation to wind up the fund should be made if the SMSF is being outperformed by the MySuper funds, he warned. On a slightly more optimistic note, he suggested advisers need not be too concerned if the performance of an SMSF they recommended to be set up underperformed the said APRA-regulated funds in the first few years of its existence due to having a small asset pool. “The thing you would probably argue is the APRA performance numbers are [based on] eight-year rolling averages. So you’ve got a little bit of leeway,” he said. On 6 October, the government announced MySuper funds will have their performance assessed under the YourSuper initiative from 1 July 2021 with repercussions for underperformance.

NEWS IN BRIEF

Independence criteria set high The ATO has set very rigorous criteria for SMSF professionals and trustees who are looking to prove the administration and financial reporting work for a fund is of a routine and mechanical nature, thereby allowing an incumbent practitioner to continue to perform the annual audit. ATO SMSF auditor portfolio director Kellie Grant said: “To meet this requirement we will be reviewing auditors’ files and we’ll expect to see that the auditor can show evidence in the file that the trustee took on full responsibility for the preparation and fair presentation of [the] financial statements. “This goes beyond the trustee just signing the trustee declaration in the financial statements or saying in their trustee representation letter, that they provide their auditor with, that they’ve prepared those financial statements. “It really does mean the trustees being able to show they created all the fund transactions, basically provided a trial balance to their fund administrator to then upload it into their system, and [that] any financial statements produced will be based on those trial balance figures prepared by the trustees.” Grant stipulated only evidence of this detail will be able to prove to the regulator the accountant or accounting firm clearly made no judgment as to how a certain item should be classified in the SMSF’s accounts.

More SAN misuse punishment The Tax Practitioners Board (TPB) has terminated the registration of a fourth tax agent as part of its review of tax practitioners believed to have

provided false information to the ATO. In an update on its website, the ATO revealed the tax agent was deregistered by the TPB for falsely indicating audits had been conducted for various SMSFs, bringing the total of tax agents to have their registrations terminated by the board for SMSF auditor number (SAN) misuse to four. “The agent’s behaviour was uncovered after an auditor reviewed their client lists from multiple years and noticed funds listed that they had not audited. This auditor then got in contact with us and we were able to take appropriate action,” it said. “The agent will not be able to apply for registration for two years. Penalties will apply if they continue to provide tax agent services.” In addition to the four terminations of registration, the TPB has also suspended the registration of three tax practitioners since March when the ATO referred nearly 90 tax agents to the board following its investigation into nearly 500 instances of SAN misuse reported by auditors.

ASIC to review limited advice Financial advisers will be able to tell the Australian Securities and Investments Commission (ASIC) what regulatory barriers they believe the regulator has put in place to prevent the provision of limited advice as part of a new consultation paper to be released in November. ASIC financial advisers senior executive leader Kate Metz said despite the regulator providing guidance on this issue in the past, some segments of the advice industry still found it hard to provide limited advice. “Access to advice is something we have been actively thinking about for a long time and we are putting out a consultation paper in November which specifically looks at what impediments there are for industry to provide affordable and limited advice,” Metz said

at the Association of Financial Advisers’ national conference, Vision 2020. “We are really keen to hear what it is in ASIC’s control that we can change to help the industry and also asking industry to think about what it is within their control that can be changed.”

Cap indexation likely in 2021 The effect of the coronavirus pandemic on the level of employment across the country could trigger an indexation adjustment to the concessional contributions cap effective from 1 July 2021, a technical expert has said. SuperGuardian education manager Tim Miller made the prediction based on the components of the indexation formula imbedded in the retirement savings framework. Whether the indexation process is applied to the concessional contributions cap is determined by dividing the average weekly ordinary time earnings (AWOTE) from the December quarter immediately prior to the relevant financial year by the base AWOTE figure for the quarter immediately prior to these rules coming into effect on 1 July 2017 – in this case December 2016. Further, if this formula produces a result of 1.100, the concessional contributions cap will be indexed accordingly, resulting in an amended yearly cap of $27,500, being $25,000 multiplied by 1.100. “What we’re looking at is a base factor of 1533.40 and what we need to target to be able to get an indexation of the concessional contributions cap is 1686.00,” Miller noted. “What is significant here from an indexation point of view is that the June 2020 AWOTE figure was 1713.90. [This means] we’re well and truly above the 1686.00 and the concessional cap on those sorts of numbers is going to be indexed from next year.”

QUARTER IV 2020 5

SMSFA

SMSF budget implications still present

JOHN MARONEY is chief executive of the SMSF Association.

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The federal budget was all about jobs, providing an additional $98 billion under the COVID-19 response package and the JobMaker plan. So, with the budget focus on supporting small business and tax cuts, SMSFs were left alone – with audible sighs of relief from the sector being heard from Perth to Cairns. But super did not escape scrutiny, with structural reforms focusing on large super fund performance and costs being announced. The big question now is what impact, if any, will these structural changes to super, the personal income tax cuts and the small business support measures have on SMSFs, now and in the future. First, the key measures: • from 1 July, existing super accounts will be ‘stapled’ to a member to avoid creating a new account when a person changes employment, • the ATO will develop systems enabling new employees to select a super product from a table of MySuper products through the YourSuper portal, • there will be benchmarking tests on the net investment performance of MySuper products, with products underperforming facing stringent requirements, • by 1 July 2021, trustees of large superannuation funds will be required to comply with a new duty to act in the best financial interests of members, • the government will lower taxes for individuals by bringing forward its stage-two tax cuts that were due to start in July 2022, and • the government will offer ‘temporary full expensing’ to businesses to encourage them to invest. It’s also broadening access to small business tax concessions, introducing a new JobMaker subsidy for hiring younger people and a loss carry back for firms now unprofitable. Although the super changes focus exclusively on Australian Prudential Regulation Authority (APRA)regulated funds, it does not mean they won’t have any impact on SMSFs, especially in the long term. A focus on ensuring new super participants can choose a fund that is performing well and costeffectively is good for all sectors. A more robust system means bigger balances, more competition and a healthier retirement. Considering almost all SMSF members begin as, and may still be, members of an APRA-regulated fund, these changes are relevant.

The SMSF sector will benefit from younger individuals switching to an SMSF with larger balances. The new default system where funds are stapled to a member shouldn’t affect SMSF members. More relevant to SMSFs is the recently legislated Your Super, Your Choice Bill, which allows trustees to continue to choose an SMSF for their super guarantee payments, an avenue that may have been restricted by an enterprise bargaining agreement. In the future, underperformance will be the super hot topic. Although reforms are solely focused on public offer funds benchmarking and tests to see if they are delivering appropriately to their members, more comparisons with SMSFs are likely to occur. Hopefully, with greater transparency and understanding of the net investment performance of their APRA-regulated fund, it will be easier for members of these funds to properly compare the advantages and disadvantages of switching to an SMSF. It should also make it easier for SMSF trustees to identify underperformance in their own fund. On the issue of tax cuts, about 50 per cent of SMSF trustees own a small business or have owned one in the past, so many SMSF members stand to benefit indirectly from the small business support measures. With the personal income tax cuts being brought forward, the tax advantages associated with making salary sacrifice contributions to superannuation may be reduced. However, and depending on your circumstances, making salary sacrifice contributions to super may still provide a useful tax benefit, so it is important to seek professional advice before making any changes to contribution arrangements. Similarly, individuals with access to their retirement savings may feel it is no longer beneficial to retain their balance in a super fund because any tax savings associated with super are being offset by the accompanying costs. However, it is important to consider capital gains tax (CGT) as certain assets invested outside of super can be subject to CGT when sold. Typically, no CGT is payable if the asset sold is held inside a super fund and was supporting the payment of pensions. The budget was SMSF-free, but broad changes to super invariably catch up with SMSFs and we don’t expect it to be any different this time around. It just might take longer to become apparent.

CPA

Planning for the end at the start

RICHARD WEBB is financial planning and superannuation policy adviser at CPA Australia.

It may sound counter-intuitive, but planning an SMSF’s exit strategy should be part of its set up. Given many SMSFs are eventually wound up, developing an exit plan can simplify this process and provide peace of mind. Planning is a key part of establishing an SMSF. Trustees think deeply about how they will structure and manage an SMSF. They consider costs, investment returns, asset allocation and insurance, among other factors. Having decided an SMSF is the most appropriate investment vehicle for members’ retirement savings, it may seem counter-intuitive to contemplate leaving from the start. However, when establishing an SMSF, trustees should also consider what to do if the ongoing operation of a fund is no longer in its members’ best interests. As a fiduciary, the duties of a trustee continue throughout the life cycle of the fund. That’s why planning for the end of an SMSF should take place at the very beginning. There are a range of circumstances that could precipitate the winding up of an SMSF. These could be personal, such as temporary incapacity, death, bankruptcy or divorce, or operational, such as low asset balances, trustee disqualification or retirement. Although major events may be contemplated as part of the fund’s investment strategy, other events often do not receive adequate consideration. Yet, the possibility these events could occur should form part of the initial planning discussion between trustees. An exit strategy can assist trustees to manage major upheavals that affect the ongoing viability of a fund. Of course, not every circumstance can be anticipated, but planning can help the trustee avoid situations that may be difficult to extricate the fund from should it be necessary to wind it up. Trust deeds commonly contain winding-up procedures, but these usually cover what to do after the decision to close the SMSF has been made. In addition to these provisions, the trustee may wish to include specific clauses that specify actions to take in

certain circumstances. Some matters, although not all, may require the trust deed to be amended. Others may require additional administrative documents to be completed or signed by members, such as binding death benefit nominations. Difficulty accessing documentation is an issue that should be anticipated and managed. It may be prudent to store documents, such as enduring powers of attorney, outside the fund to ensure trustees have full representation in the event they are incapacitated and unable to undertake their fiduciary duties. Access requirements for each trustee may vary and could cover the fund’s internal bookkeeping records, online banking, stockbroking or share registry details. The costs of winding up an SMSF must also be considered. One of the most common events that can lead to an SMSF being wound up is a low investment balance in the fund. Trustees may be personally liable in the event that the costs of winding up the fund are larger than the fund assets themselves. To protect themselves from this risk, trustees should regularly review their estimate of winding-up costs and make adjustments as appropriate. Finally, trustees should consider the balance of the fund and how this will be dispersed. Funds may need to be cashed out or rolled over, and dependant income streams may need to be commuted. Assets must be disposed of in a way that is consistent with members’ best interests and does not breach laws such as the arm’s-length rules. If all of this sounds complicated, that’s because it is. This is where seeking professional advice can make a big difference. A trustee who is starting an SMSF may be unaware of the potential circumstances under which the fund may need to be wound up. A professional adviser can assist the trustee to develop an exit strategy that identifies potential issues and solutions for the fund. This will give the trustees comfort that they are prepared should the unexpected happen.

QUARTER IV 2020 7

SISFA

Never waste a crisis

MIKE GOODALL is a board member of the Self-managed Independent Superannuation Funds Association.

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There is an old saying that you should “never waste a crisis” and the recent federal budget was an opportunity in these economically traumatic times to undertake a number of measures that could be introduced to reduce red tape and help stimulate economic activity. The Self-managed Independent Superannuation Funds Association (SISFA) also believes there are a number of bigger picture issues in the superannuation system needing review, but let’s consider some other areas of simplification first. The superannuation system currently has a significant number of different thresholds for various measures, including the: • general transfer balance cap ($1.6 million), • total superannuation balance (TSB), which varies depending on the measure, • disregarded small fund assets (for individuals with a TSB greater than $1.6 million), • unused concessional cap carry forward (for individuals with a TSB less than $500,000), • bring-forward rule for non-concessional contributions (up to $300,000 for members with a TSB less than $1.4 million), and • extension of the work test exemption (for individuals with a TSB less than $300,000). SISFA believes many of these thresholds should be consolidated to a single threshold of $1.6 million (indexed). There is also inconsistency in the superannuation system in how various thresholds are indexed, including: • proportional indexation for the personal transfer balance cap, • indexation of the general transfer balance cap to $1.7 million on 1 July 2021, depending on the consumer price index, and • general concessional contributions cap of $25,000 indexed in line with average weekly ordinary time earnings (AWOTE). What makes a lot more sense is many of these thresholds should be indexed under the same formula tied to AWOTE. In particular, the proportionate indexation of the transfer balance cap should be replaced with flat indexation. The work test currently discriminates against older members in society from making contributions. Given our ageing society and longer lifespans, this unfairly affects this cohort. This is especially so given the caps on contributions (in particular preventing members with a TSB

of $1.6 million from making non-concessional contributions), which prevent excessive amounts being transferred into super for non-retirement reasons. The work test should be abolished. Super funds have been unable to commence market-linked pensions since 2007. Market-linked pensions commenced prior to that time have been grandfathered, cannot be commuted and must continue until the member dies. Market-linked pensions are now legacy products that create additional complexity and inflexibility for those members and super funds that continue to hold them. SISFA believes members in receipt of marketlinked income streams should have the option to convert them into account-based pensions. The non-arm’s-length income (NALI) rules have been present in the superannuation system for many years. The consequences of triggering NALI are one the most serious in the tax system (that is, an automatic tax at 45 per cent on income categorised as NALI) and even a larger penalty than applies to Part IVA of the Income Tax Assessment Act 1936. Because of the serious consequences of their application, the administration of those laws has been on the basis that they were effectively treated as anti-avoidance provisions and only used for the most serious of cases. It’s the experience of SISFA’s members that the administration of the NALI rules has been broadened in recent years. This has been brought into particular focus with the introduction of the non-arm’s-length expenditure rules and the ATO’s release of Law Companion Ruling 2019/D3. Rather than NALI applying in a blanket manner to all income tainted by non-arm’s-length dealings, SISFA believes NALI should apply proportionately. Examples of that application include: • if via non-arm’s-length dealings a super fund acquires an asset for 10 per cent below market value, then NALI should apply to 10 per cent of the income and gains from that asset rather than 100 per cent, • if a related party of a super fund fails to charge an arm’s-length fee of $10,000 for managing a super fund asset, then NALI should apply to the $10,000 and not all of the income and gains derived from that asset. These measures can give added incentive for more SMSF members to continue contributing to our economy, simplifying the ability to work, invest and save for the future.

IPA

Self-funded retirees always the bridesmaids

TONY GRECO is policy and public affairs general manager at the Institute of Public Accountants.

Arguably the introduction of the $1.6 million cap on a retirement balance and the lifting of the taper rate for the pension assets test from $1.50 to $3 restored some equity to an otherwise highly concessional tax treatment of superannuation. Advisers are now anxiously awaiting the findings of the Retirement Income Review for clues to the next round of possible tweaks to our superannuation system. The Retirement Income Review was completed in July and the report was handed to the Treasurer. We now wait for the government to release the reviewâ&#x20AC;&#x2122;s findings. More holistic changes are anticipated once the fact-based review has been tabled, highlighting possible areas for improvement to the superannuation system. It was no surprise there were minimal changes to superannuation in the federal budget given Canberra has more immediate priorities to deal with. The most important of these is to reboot an economy savaged by the financial impacts of COVID-19. Its priority is to grow the economy. The core focus is to reduce the unemployment figure to below 6 per cent before it changes its fiscal strategy to budget repair. According to government estimates, the earliest we can expect this to happen is 2023/24 and therefore this is when we can expect to see fiscal repair (higher taxes) start to kick in. Some are speculating superannuation is one area that represents an irresistible honey pot for a government trying to claw back lost revenue when it changes tack to fiscal repair. Caps on the refunding of imputation credits in a superannuation fund might make a comeback, albeit with some changes so that it only impacts relatively high-balance super accounts. This very unpopular proposed policy change could get over the line if it is tweaked to only apply to a smaller cohort of funds. Constant tinkering with our superannuation rules is the norm, so no news of changes impacting on SMSFs was warmly welcomed on budget night. The only changes included were around improving transparency and governance issues. The idea that once you open a superannuation account it follows you with changes in employment makes logical sense and will reduce the number of duplicate accounts. Making trustees more accountable and the creation of a tool to compare funds are similarly

improvements in the right direction. And lastly, not allowing underperforming MySuper products to receive new members until performance improves will force such funds to lift their game. One group that often gets ignored though is self-funded retirees whose incomes have been cut by record low interest rates, share market volatility and distressed rental markets. Some companies have reduced or cancelled dividends and another interest rate cut has now occurred to make matters worse. Some superannuants are resorting to riskier investments to make up for income shortfalls. During the global financial crisis, retirees had the option of leaving or moving their money to term deposits, which at the time were earning at least 5 per cent annually. Most term deposits from the major banks are now hovering well under 1 per cent. Without new investment options, retirees are having to redirect their savings to the share market in a period of high volatility and by doing so are moving up the risk curve. Retirees do not have the safety net of the indexed age pension and are reliant on their own resources to generate the income they need to live on. With falling interest rates, many self-funded retirees with assets well above the age pension threshold are now receiving less income than the full age pension and do not qualify for the Commonwealth Seniors Health Card. To put things into perspective, based on the most recent Reserve Bank of Australia rate cut, a capital sum of over $6 million is required to fund a single aged pension amount of $24,544, assuming you are able to lock your money away at an interest rate of 0.04 per cent. In addition, age pensioners and Commonwealth Seniors Health Card holders received two $750 economic support payments as assistance during the pandemic and are to be paid an additional two payments of $250 in the next year thanks to the budget. There are 2 million people who fully or partly selffund their retirement. There have been no specific measures of support for them other than lowering the drawdown rate, which only assists those who can afford to do that. Some argue self-funded retirees will just need to eat into their capital to sustain their lifestyle. A significant increase in reverse mortgage inquiries since the pandemic suggests some selffunded retirees may not like this option.

QUARTER IV 2020 9

CAANZ

The new world of audit

TONY NEGLINE is superannuation leader at Chartered Accountants Australia and New Zealand.

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SMSF audits and the professionals who complete them will be an area of great interest for the next 12 to 24 months. It is important to understand some of the background as to why this will be the case and then to discuss a practical way forward. In November 2018, the Accounting Professional & Ethical Standards Board (APESB), the standard setter for the three main accounting bodies, adopted a revised APES 110 – Code of Ethics for Professional Accountants (including Independence Standards), which was based on International Federation of Accountants codes issued earlier in 2018. This new standard applies to all accountants, not just SMSF auditors. The APESB set down January 2020 as the expected compliance date for these regulations. In May 2020, the APESB signed-off on a revised independence guide. It is commonly thought the revised APES 110 has raised the bar on whether or not the same accounting practice can provide a wide range of services to all entities, including, where relevant, auditing the entity. For example, the previous independence guide issued in early 2013 talked about the ability for firms to put up Chinese walls, but it also went on to say: “Smaller firms with two or three partners would find it difficult to put appropriate safeguards in place.” The revised APES 110 standard and independence guide make it clear accountants need to look at the totality of their client relationship and examine and address all real and potential independence threats. Where a threat cannot be adequately mitigated, then audit engagements will need to be declined. The current standard contains a potential exemption, that is, if a firm merely provides a ‘routine and mechanical’ accounting function, then potentially an audit could be conceivably completed by the same firm. Routine and mechanical means the client has accepted all management responsibility for the operation of an entity up to finalising its trial balance. At a practical level this exemption is quite narrow. Most SMSF clients need or request assistance to run their fund in a compliant fashion and produce accurate financial accounts. In many cases professionals providing assistance, guidance or

advice will stray into entity management functions. It is common for two or more accounting practices to be involved in the running of an SMSF. For example, Firm A has the direct relationship with SMSF trustees and is their tax agent, while Firm B provides all SMSF administration, account preparation and audit services. Under this structure, Firm B might say it merely prepares the accounts under the direction of the client via Firm A’s instructions and has a clear separation of duties internally to ensure those preparing the fund’s accounts cannot perform any related audit services. The key to acceptability of this arrangement under the revised APES 110 all comes down to any management functions Firm B completes for an SMSF. For example, does it solely post all transactions to a fund’s general ledger by following Firm A’s instructions? That is, it never provides any assistance or guidance to Firm A when it finds something that is incorrect or might provide a better result for the client. Firm B would also have to make sure it had a foolproof continual separation of duties internally and would not have other threats to independence, such as intimidation from Firm A.

When must you comply with these requirements? As mentioned, the APESB established 1 January this year as its commencement. Some SMSF auditors may have a professional indemnity insurance policy that requires all relevant standards are being followed. Under the Superannuation Industry (Supervision) Act and its regulations, SMSF auditors are required to comply with various requirements, including APES 110. The ATO, which supervises SMSF auditor compliance, has said it will give these practitioners until 1 July 2021 to comply with the new standard. Some have said this change will pose a threat to SMSF audit quality. We know from Australian Securities and Investments Commission data there are currently around 5500 SMSF auditors. Based on the 2017/18 ATO SMSF annual statistics, there are about 800 SMSF auditors who audit fewer than five funds each or about 2500 SMSFs in total. Those statistics also show that close to 2500 auditors check about 80,000 SMSFs. That is, more than half of all registered SMSF auditors work with less than 15 per cent of all SMSFs.

REGULATION ROUND-UP LRBA interest rate The safe harbour interest rates for related-party limited recourse borrowing arrangements fell by 0.84 per cent yearly on 1 July 2020. The current rates are 5.1 per cent for real property and 7.1 per cent for listed shares or units. This is the first reduction since the 2017 financial year.

COVID-19 rental income deferrals SPR 2020/D2

Louise Biti Director, Aged Care Steps Aged Care Steps (AFSL 486723) specialises in the development of advice strategies to support financial planners, accountants and other service providers in relation to aged care and estate planning. For further information refer to agedcaresteps.com.au

Rental relief provided by SMSF trustees to a related-party tenant due to COVID-19 are considered loans, creating an in-house asset investment. The ATO plans to make a determination by way of a legislative instrument (LI) to exclude the asset from being an in-house asset where the rental deferral was offered on arm’s-length terms during the 2020 and 2021 financial years as a result of the impact of COVID-19. Consultation on the draft LI closed on 31 August.

Audit independence APESB Independence Guide (Fifth Edition, May 2020)

This new guide clarifies hurdles that auditing firms need to overcome to meet independence requirements of the APES110 Code of Ethics for Professional Accountants, if performing in-house audits of SMSFs. The guide makes it clear an auditor will not be able to audit an SMSF that is a client of the same firm that has assumed management responsibilities for the trustee. If the trustee retains management responsibilities, the firm needs to clearly document and evidence the fact. This evidence requires more than the trustee just signing the financial statements declaration, but will require evidence that the trustee has coded fund transactions or approved trial balance entries, as well as undertaken other accounting administration actions, such as selecting accounting policies and managing compliance of the fund. Outsourcing functions does not create a way around these rules as the accountant or auditor still retains responsibility. The ATO has stated it will provide support and guidance to auditors on how to comply with the new code, but all audits completed from 1 July 2021 will need to comply with the amended standard. Breaches may be referred to the Australian Securities and Investments Commission for further action.

Your Future, Your Super Federal budget 2020

The main changes to superannuation in this

year’s federal budget were: • a proposal to have superannuation follow employees when they change jobs as an attempt to avoid unintended multiple funds, • a proposal for the ATO to develop and maintain a YourSuper comparison tool to help members compare and select funds, • requiring MySuper funds to meet an annual objective performance test. If failed, the fund would need to inform members and may be prevented from taking on new members if the benchmark is consistently failed, and • strengthening of trustee obligations to act in the best financial interests of members.

SMSF statistics SMSF quarterly statistical report – June 2020

The total number of SMSFs increased to 593,375 by 30 June 2020, with a total of 1,107,268 SMSF members. The 2020 financial year showed the largest number of net establishments since 2015/16, with 18,540 new funds set up during the most recent fiscal year. This compared to only 4694 new funds in 2018/19. In a separate report, the ATO also revealed that as at 12 August 2020, around 35,000 applications had been approved for COVID-19 early release of funds from SMSFs. This saw almost $341 million withdrawn from SMSFs. Of concern were the 1200 members identified as withdrawing and then recontributing the money as a personal deductible contribution. The ATO has contacted these members to raise the potential for Part IVA avoidance provisions to apply.

Transfer balance caps and market-linked pensions CRT Alert 042/202

Retrospective legislation passed in June provided a new way to calculate the transfer balance account debit for a commuted market-linked income stream. Funds have expressed concern over the difficultly with this reporting, so updated guidance has been published by the ATO. Further guidance will be provided in November in relation to the timeline for completing the reporting.

Choice of super Treasury Laws Amendment (Your Superannuation, Your Choice) Bill 2019

This bill has passed through parliament to allow employees under workplace determinations or enterprise agreements the right to choose their superannuation fund. The choice rules apply to new workplace determinations and enterprise agreements made on or after 1 July 2020.

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SMSF CHAMPIONS In a year like no other, the SMSF sector has continued to support the retirement plans of more than 1 million Australians, ably assisted by a range of service providers with the best recognised in the eighth annual selfmanagedsuper CoreData SMSF Service Provider Awards. Tharshini Ashokan and Jason Spits take a look at why advisers favoured these firms. Continued on next page

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In a year that will be best remembered for the coronavirus and the ensuing global slowdown that forced many to work from home, the task of providing products and services to the SMSF sector took on a new dimension. It could be argued that, fundamentally, COVID-19 has not changed the SMSF space. The rules around how funds operate have remained the same and the belated 2020/21 federal budget, for the first time in some years, added no further conditions to those rules. Yet at the same time change has arrived. Few investment managers would have predicted a sudden and sharp market downturn in the last quarter of the previous financial year, nor the government stimulus packages that helped reverse it. Predicting which markets will recover in the long and short term is an ongoing discussion investment teams are having internally and with their investor clients. Service providers – such as administrators, document providers and technical experts – also had to reconsider how they could continue to provide their offerings when they could not physically meet or contact clients, and their staff were forced to operate from home offices almost at the drop of a hat. Technology has always played a role in empowering SMSF service providers and advisers to support and assist clients, but the events of this year have some claiming it has pushed forward the adoption of remote working and online client servicing by about five years. The following pages cover how the firms named as the leading service providers for SMSF advisers for 2020 have handled COVID-19 for their staff and their clients, and a common theme is more communication matched to the circumstances at hand. Another common feature is longevity and quality of service offering – but this is not unique to the awards this year. Eight years ago selfmanagedsuper first started to recognise excellence among service providers, teaming up with research house CoreData to present the annual SMSF Service Provider Awards. Over that time the names chosen by advisers as leading service providers are

those organisations which have routinely delivered at a high level and have built brands that have come to speak for themselves. For example, Accurium, Heffron and Topdocs are repeat winners this year in their respective categories, as are investment firms CommSec, Charter Hall, Vanguard and Magellan in their respective categories. Other names returned to the top of the list, including PIMCO, Argo Investments and BGL, while ASF Audits and Zurich were firsttime winners. CoreData managing director Jason Andriessen, who was involved in collecting and analysing the adviser feedback, identifies a number of characteristics, including price and the level of technical support provided, that were critical to advisers favouring the finalists in each category over other service providers. “Generally speaking, pricing is always important. From an adviser perspective, technical expertise and strong customer service support are key. Transparency and simplicity are always highly valued as well,” Andriessen says. He points out the awards are necessary to SMSF service providers in helping them understand where their service is benchmarked against their competitors. “From the perspective of their customers and the end client, [the awards are] enormously important. It provides an evidence base to make decisions, rather than gut feeling,” he says.

Time in the market makes a difference Argo Investments: Listed investment company winner By Jason Spits Longevity and low cost are the factors Argo Investments managing director Jason Beddow believes

“We have not done a lot in the past year that is different from other years because we know what we do is well trusted in a volatile environment.” Jason Beddow, Argo Investments

attract investors to the firm’s listed investments. Having been set up in Adelaide in 1946, where its head office is still based, Argo Investments will celebrate 75 years of operation in 2021 with a market capitalisation of more than $5.4 billion and more than 90,000 shareholders invested through the firm. Currently, 93,000 investors count themselves as shareholders, of which one-third of the total number are SMSFs, according to the organisation’s most recent analysis of its clients. In a year of market volatility, the firm has seen an increase of 6000 shareholders, Continued on next page

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which Beddow says was not the result of any major changes in its offering or approach to investing. “We have not done a lot in the past year that is different from other years because we know what we do is well trusted in a volatile environment,” he notes. “We are also low cost at only 15 basis points and may not be a rocket ship compared to other firms, but we have been here for the long term.” For the 2020 financial year, Argo had a net tangible asset per share of $7.27, earnings per share of 27.8 cents and full-year and fully franked dividends of 30 cents, which have remained relatively stable for close to a decade. This performance is due to a diversified exposure to 85 stocks on the Australian Securities Exchange (ASX), of which the majority have been chosen for their returns and ability to pay fully franked dividends. Being a listed investment company, Argo Investments can also offer dividend smoothing to create a regular distribution to shareholders looking for consistency in their investment income. “One thing we try to achieve is fully franked dividends for our shareholders, and as interest rates fall and cash goes flat, dividends will play an important role in meeting income requirements,” Beddow explains. He adds having a broad exposure, including the top 20 well-known stocks on the ASX, has provided that income and allows the investment company to retain its mandate to be fully invested with minimal cash positions. This was a hard position to hold during the March and April market downturn as other investment managers moved to higher cash weightings, but it did allow Argo Investments to benefit from capital raisings in companies where it already held a stake, he says. “There was an increase in capital raisings and they were coming off a low base as markets rallied, so they played out well for us and we have participated in 13 to date, and given our fully invested position, we were also able to participate in the upside as well,” he says.

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The firm is confident it will continue to attract more interest going into its 75th year with its low barrier to entry of a $500 minimum investment, access via an online trading account and its history in the market. “Anecdotally we know our long track record, Australian-based and trusted brand is attractive and those considerations are being elevated for investors at the present time,” Beddow says.

A focus on continual improvement Accurium: Actuarial certificate provider winner By Tharshini Ashokan A combination of innovative software, client support and education, all focused on providing the highest possible level of service, is what ensures SMSF actuarial services provider Accurium continues to stand apart from its competitors. “We think we’ve got the most intuitive software, which makes the process of ordering actuarial certificates quick and easy,” Accurium general manager Doug McBirnie says. “We’ve got an excellent team of actuaries and SMSF experts in-house and on hand to provide technical support. Clients know that if they’ve got a question or they’ve got a problem, they can reach out to us and we’ll do everything we can and help solve it for them. “As well as SMSF technical support, our clients also benefit from our extensive SMSF education offering. The Accurium TechHub is an online SMSF education portal that provides access to hundreds of hours of accredited CPD (continuing professional development) and best of all, for actuarial certificate clients, it’s completely free. “I think it’s that combined package that keeps us as the market-leading actuarial

“With the pandemic disrupting traditional face-to-face conferences and seminars, our online learning and CPD has become even more important.” Doug McBirnie, Accurium

certificate provider.” Accurium has built on these strengths, taking advantage of fewer changes to actuarial certificate requirements over the past year to focus on broadening its SMSF education offering via the Accurium TechHub. “We’ve had the time to provide more content across a wider range of topics and through different media,” McBirnie notes. “With the pandemic disrupting traditional face-to-face conferences and seminars, our online learning and CPD has become even more important. “In the last 12 months, we’ve provided around 20,000 hours of accredited CPD to clients via our popular webinars.” Accurium’s recent partnership with the SMSF Association as an accredited educator, announced in February, aims to further its shared commitment with the industry body

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to provide quality education to the sector and in particular its practitioners. “That partnership allows us to provide more opportunities for our clients to obtain accredited CPD and build on the knowledge they need to service their clients,” McBirnie explains. Another priority for the actuarial firm during the past 12 months has been to survey clients in order to focus on possible areas of improvement for Accurium’s software. “Continuous improvement has been our mantra over the last year. We sought feedback from clients and worked hard to make our systems as easy to use as possible,” McBirnie adds. “Behind the scenes, we’ve also added further layers of protection to our already robust security system. “We regularly survey our clients on our system and service levels and we’re delighted to say that our client satisfaction levels are the highest they have ever been right now.”

Enabling ease of use ASF Audits: Audit winner

By Tharshini Ashokan Providing clients with a smooth audit process through the use of automated systems facilitating ease of use is of

paramount importance for ASF Audits. “Having seamless SMSF audits is key and one way in which we deliver that is through our One-Click Audit technology. What we’re able to do is to provide advisers with a streamlined on-boarding process which provides them literally with a one-click facility to provide us with that information from either BGL 360, Class or SuperMate,” ASF Audits head of education Shelley Banton says. “We have a client dashboard which provides them information in real time in the form of reports, queries and graphs, and they can track the progress of their audits along the way. It tells them to actually identify issues quickly and prioritise what they need to do a lot sooner.” From an internal training point of view, it also means advisers can see what query areas they need to work on by being able to track the type of questions tending to arise repeatedly throughout the year. By highlighting those issues for advisers and their teams as areas that require more attention and improvement, audit queries can be reduced in the long term, Banton explains. Further, she points out it is ASF Audits’ ability to combine its one-click, seamless approach to audits with the “human touch” of its service support for advisers that sets it apart from its competitors, especially during recent months with most people working from home due to the COVID-19 pandemic. “The more we look at developing our technology doesn’t mean that it’s a onesided game for our clients because we still want to provide quality service where we put them first at all times. Technology doesn’t have to replace that aspect of our customer service,” Banton says.

“Making sure that we maintain those client relationships is something that is important to us as a firm, especially during this time when people are feeling a little bit more isolated than usual.” In addition to prioritising a high level of client service and support, the firm strives to share the benefit of its SMSF compliance knowledge and insights with clients and the wider SMSF community, she says. “We’re trying to help people in terms of improving their education and training in SMSF compliance, because that’s what [our team wants to] give back to our advisers at the end of the day,” she says. “Being able to provide our clients and the industry with more insight and trying to respond to what the industry needs overall is really important, especially in terms of helping everyone work through the challenges of this pandemic.”

Scale and focus deliver stability Charter Hall: Commercial property winner By Jason Spits Reﬂecting on 2020, Charter Hall head of direct property Steve Bennett believes financial advisers had Continued on next page

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reasons to be nervous before the coronavirus rewrote expectations for the year to come, but says his firm was ready for those circumstances. “Advisers had to be nervous when considering cash and interest rates, and then more nervous as equities fell in March and April. They have bounced back, but there would have been worrying nights for some of them,” Bennett says. He was more upbeat about the performance of his funds through the market downturn, stating the underlying valuations were stable and the funds remained resilient. “The reason for this is that our property investments are underscored by the key thematics of long-term leases, high occupancy rates and institutional-grade investments for investors such as SMSFs,” he says. “This has meant very low volatility in the property we focus on, which are typically unlisted Australian assets.” He says the pandemic has demonstrated to Charter Hall’s investors the advantage of using a specialist property investment firm with sufficient scope to manage a portfolio, even when it is difficult to travel. “Despite the travel restrictions, we had enough people on the ground to maintain good interaction with landlords, to consider re-leasing and the provision of relief, and we did much of that face-toface, which allowed us to secure the best outcomes,” he explains. While this personal approach was more difficult to take with tenants and investors,

Charter Hall ramped up its communications with them and provided more detail. “We did not make many changes to the business, but instead focused on greater levels of reassurance, including more frequent valuations of underlying assets,” Bennett says. “For SMSF clients, we focused on educating people on why they had us in their portfolio and pointed to the low correlation to other asset classes and the low volatility we offer, and that has been well received. “We have also focused on the income generated and in a time of lower interest rates and term deposits being close to zero, 5 to 7 per cent returns in the hand from our funds have been super attractive to investors.” He reveals while there was a general move to cash by investors in the early months of the year, inflows to Charter Hall and its Direct PFA property fund have remained steady, boosted by quieter activity from its market competitors. “Some of our competitors stopped participating in the property sector during the COVID-19 downturn, which unlocked deals we would not have had access to previously or that allowed us to get a better result for the fund because we had the ability to keep transacting throughout the year,” he says. He also sees plenty of opportunity ahead driven by the conditions and new situations caused by the shift to working from home and a greater reliance on e-commerce. “We are looking to gain a greater understanding of the tailwinds supporting

the logistics and industrial sectors as more SMSF clients are seeking exposure to those,” he points out. “People will only invest in what they understand and they invest in retail property because everyone shops, but with e-commerce there is a growing awareness of its value and purpose.”

Experience the key CommSec: Australian shares winner By Tharshini Ashokan Australian equities remain one of the favoured asset classes for SMSFs. Further, their preference to access domestic shares directly makes the choice of trading platform very important. In this year’s SMSF Service Provider Awards, CommSec won the Australian shares service provider category and in assessing its success, the Commonwealth Bank of Australia business arm has nominated two key characteristics. Experience spanning two decades is one of these elements and its ability to provide up-to-date analysis for investors across the breadth of its product range is the other. “CommSec has over 20 years of industry-leading service and experience, offering online and mobile trading solutions for customers whether they are just starting

“For SMSF clients, we focused on educating people on why they had us in their portfolio and pointed to the low correlation to other asset classes and the low volatility we offer, and that has been well received.” Steve Bennett, Charter Hall

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out or are an experienced investor,” the online stockbroking firm explains. “Our customers are able to invest in Australian and international shares, including exchange-traded options, exchange-traded funds, hybrids and interest rate securities, and warrants, all with our unique range of benefits, including research, up-to-date analysis from CommSec experts and support.” The firm also identifies the ability to provide access to investment offerings beyond its own direct services as a key driver to being so highly rated among SMSF advisers. “Along with the benefits of our main platform, CommSec, as part of the Commonwealth Bank, provides SMSFs the ability to access a wide range of investment offerings within the banking group, keep across the latest market news, track SMSF portfolio performance and all with specialist support available at every step,” it notes. Additional benefits, such as access to exclusive events for investors and first-look opportunities relating to upcoming initial public offerings (IPO) for equities and market research all help CommSec stand out from its competitors, it points out. “Through CommSec, SMSFs may gain access to exclusive benefits, including invitations to investment events and webinars, early access to upcoming IPOs, complimentary access to premium research and alerts and direct access to our dedicated CommSec One service team for support,” it says.

Strength through technical support Heﬀron: Administration winner

By Tharshini Ashokan Heffron managing director Meg Heffron believes it is the technical support the

“We’ve made sure that not only are we industry leading, but that advisers have complete visibility over where things are up to and are actively engaged in the prioritisation of their funds.” Meg Heffron, Heffron

organisation provides that sets it apart from other SMSF service providers. “It just gives advisers confidence that they can handle anything their SMSF clients throw at them,” Heffron says. During the past 12 months in particular, the company has focused heavily on helping advisers meet lodgement deadlines enforced by the ATO and other regulators – an essential requirement many in the industry have struggled with. “We’ve made sure that not only are we industry leading, but that advisers have complete visibility over where things are up to and are actively engaged in

the prioritisation of their funds. By midOctober nearly 40 per cent of our funds were either with our external auditor, with the client for signing or complete. In other words, neither the adviser nor Heffron had anything further to do,” Heffron explains. “Our focus on meeting lodgement deadlines removes pressure on advisers. Because they’re at the pointy end, they’re the ones who deal with dissatisfied clients, get held up on their planning work because they don’t have the most up-todate figures or have to waste their time chasing work that should just get done.” During the past year, the SMSF service provider has placed even greater importance on supporting advisers in an effort to help them meet their clients’ needs and their own education requirements in the midst of the COVID-19 pandemic. “We’ve seen that the drain on advisers in terms of compliance work, helping their clients through COVID-19 and additional study means they are more time poor than ever,” Heffron notes. “We’ve responded by making it easy to access our support in a multitude of ways. Over the last 12 months we’ve rolled out new SMSF Clinic discussion forums, online tools, including the Heffron Super Companion, and free webinars dedicated to major events impacting SMSFs, such as the COVID-19 superannuation measures and the federal budget. “Our focus on education helps our clients earn valuable continued professional development hours and also provides ideas, strategies and practical updates from people who are recognised industry leaders when it comes to SMSFs. Our virtual events provide access to everyone, regardless of where they are based.” Highlighting a growing interest in the SMSF sector, she says the future looks bright for advisers who are passionate about giving their clients insightful, strategic advice. “We are seeing more and more inquiries from people considering Continued on next page

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setting up an SMSF. These people are distrustful of institutions, concerned about independence and want the flexibility to decide exactly who has their hands on their super. We’re also seeing advisers concerned about recommending super thanks to misdirected scrutiny from ASIC (Australian Securities and Investments Commission) and licensees,” she adds. “We see a huge opportunity for advisers who genuinely want to give their clients great strategic advice in becoming SMSF experts, partnering with an administrator that understands their needs as well as everything sector related, to capitalise on this groundswell of interest from potential clients.”

A distinct value proposition La Trobe Financial: Innovator winner

By Tharshini Ashokan The ability to deliver products that match investor demand for income has been severely tested during these times of COVID-19-induced market turbulence, but non-bank lender and credit specialist fund manager La Trobe Financial has managed to deliver on its promises. “Throughout the last 12 months of incredible market volatility due to COVID-19, La Trobe Financial’s portfolio products have each paid their advertised distribution rate on time and in full, and all maturity redemptions were also met in full. The stability of return over such a long period of time, including those periods of high market volatility over the past year, has strongly resonated with advisers,” La Trobe Financial executive general manager Michael Watson says. The strength of the long-established

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“Throughout the last 12 months of incredible market volatility due to COVID-19, La Trobe Financial’s portfolio products have each paid their advertised distribution rate on time and in full, and all maturity redemptions were also met in full.” Michael Watson, La Trobe Financial

La Trobe Australian Credit Fund, with $5 billion in assets under management, has helped the fund manager meet the needs of financial advisers looking for the best possible investment outcomes for their clients at even the worst of times, Watson notes. “Thanks to the extraordinary resilience of this asset class, our disciplined asset selection approach and our dedication to creating diversified portfolios of highly

granular, highly liquid assets, each portfolio product has operated with flawless liquidity and no investor losses,” he reveals. “SMSF investors have a pronounced need for low volatility and repeatable income products. There has been no time in modern history when this has been more difficult to achieve. Accordingly, financial advisers have an imperative to find solutions that meet these needs. Products that offer a distinct value proposition, while delivering transparency and simplicity of structure are increasingly important to advisers and investors.” In addition to a strong product offering, the fund manager also prides itself on the ability to provide advisers with a consistently high level of portfolio disclosure. “Transparency and disclosures are crucial for financial advisers to fully understand an investment strategy and relay the strategy to their clients while making informed investment decisions,” Watson points out. “In 2020 La Trobe Financial further enhanced its monthly market reporting to what we believe is the highest level of whole-of-fund disclosure in the funds management industry. “The increased level of transparency has resonated with advisers, particularly as it coincided with a period of almost unprecedented market volatility. Great confidence can be taken from La Trobe Financial’s standard disclosures alone, which are updated monthly and available for the world at large to view on its website.” He believes the importance La Trobe Financial places on disclosures will serve the fund manager well, as fund performance alone will not be enough for advisers in the long term. “The future of funds management will focus on more than just fund performance. Fund managers must commit to providing full disclosures around their investment strategies, asset selection and portfolio allocations. Such disclosures allow financial advisers to fully understand and engage with a strategy before including it in investor portfolios as part of an overall portfolio construction strategy,” he explains.

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Structured for the long term Magellan Financial Group: Infrastructure winner By Jason Spits Investing in the intangible generated by the physical is how Magellan Asset Management head of infrastructure Gerald Stack views infrastructure investing. The Magellan Infrastructure Fund invests in regulated utilities and infrastructure that delivers goods, people and data, that is, the capital equipment providing intangible but necessary services across the country. “The definition of infrastructure is important because different managers have different views,” Stack says. “The magic for us is the nature of our investments, which have reliable earnings, low risk and good cash flow. They are not get-rich-quick investments, but are a longterm play which resonates with investors and advisers.” According to Stack, the fund, which is available via platforms and as an active exchange-traded fund on the Australian Securities Exchange, absorbed the impact of this year’s market downturn without much difficulty, despite investments in physical infrastructure taking a hit due to the COVID19-related slump. “Our utilities investments were mainly unaffected and communications infrastructure, such as mobile and

broadband telephony, remains a strong fundamental story,” he reveals. “Transport investments were down because of the pandemic and lockdown, but have since recovered and we have moved away from airports and toll roads to higher levels of cash and utilities, but will return to airports because people will want to travel again.” He sees the impact of COVID-19 as a one-off event and says as a manager working through the current period, it is still looking three to five years ahead. “Infrastructure will continue to deliver reliable and predictable returns, probably inflation plus 5 per cent is a good expectation, split equally between yield and capital growth. There is no real reason that should change as these are assets that provide essential services,” he says. “Under our definition we strip out anything with unreliable earnings or too much risk, such as a high exposure to China, commodity price sensitivity or things which face competition, which is not a great thing for infrastructure. “We are looking for monopolies in regulated markets that are providing essential services. “We are happy with regulation. It is a friend and not an enemy because it gives confidence in the nature of returns over time. “We see no reason to believe the underlying rationale for investment in infrastructure will change and if we look at it in a few years’ time, we should see the returns over the three to five-year period we expect.” He recognises SMSF investors investing in infrastructure are continuing to look for low volatility and reliable income streams, as well as a yield in the current low interest rate environment.

“In that regard, they are not too different from other investors and they are common themes. Infrastructure is delivering a regular yield of 3.5 per cent and it is reliable, so they can be confident of growing their wealth by investing in it,” he says. “We have continued demand for our fund offerings and have grown the funds under management over the past one, three and five-year periods, and we have seen an increase of inflows during COVID-19, so it would appear people are continuing to allocate funds to infrastructure and underlying demand remains strong.”

Close to clients PIMCO: Fixed income winner

By Jason Spits Assisting advisers in having conversations about fixed income investments with clients, particularly during the COVID-19-induced market downturn, has played a large part in PIMCO’s win in the fixed income category in this year’s SMSF Service Provider Awards. PIMCO head of distribution for global wealth management Brendon Rodda sees the ability to leverage a global brand, combined with a local presence, has allowed the investment manager to get close to its adviser and investor clients. “Helping advisers to have an informed Continued on next page

“Helping advisers to have an informed discussion with their clients around fixed income has resonated with them, and in the last six months that has become even more important.” Brendon Rodda, PIMCO

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discussion with their clients around fixed income has resonated with them, and in the last six months that has become even more important,” Rodda says. “Like other managers, we pivoted to more digital offerings in our communications and events during COVID-19, which allowed us to actually increase the level of interaction with advisers. We expect this will remain a part of our engagement model even after this period.” According to Rodda, PIMCO has been able to get close to clients and help them identify what gaps they have in their portfolio when it comes to fixed income investments. “For the past 12 months we have been looking at market dynamics and recognising the need for income is growing. Our role is to offer strategies that meet those needs.” He says it was this need for a wider range of income solutions that encouraged the firm to launch a local version of its flagship PIMCO Income Fund into Australia in late 2015, eight years after it started operation in the United States. Since that time, the fund – which is available as a wholesale offering and via the Australian Securities Exchange’s mFund service – has returned 4.76 per cent net of fees and continues to pay steady monthly distributions. Given the current low rates of return for cash and reduction in dividend payments, Rodda sees the future of SMSF investing as including more diversification, including a greater focus on bonds and increased interest in income-returning investments. “Diversification will be a driver of change in a portfolio, but it is important for investors to understand the role bonds play and where they sit on the spectrum of incomeproducing investments,” he explains. “In addition to traditional funds, we are seeing interest in active listed income from listed investment trusts and exchangetraded funds. “We are also starting to see more interest in using credit in portfolios, although we would always caution investors to keep in mind the associated volatility, and the importance of focusing on quality in this space. “This comes back to one of our key

20 selfmanagedsuper

roles: helping people understand the asset class and how to use it, as well as what the risks are. “That’s why we remain focused on working with advisers to help them have conversations with their clients and to align their needs with our offerings. It might not sound exciting, but at end of day we are here to help our clients help their clients.”

Three drivers of success Topdocs: Trust deed provider winner By Tharshini Ashokan For the Topdocs team, the ability to recognise and deliver three key factors driving advisers’ decisionmaking when it comes to choosing a trust deed provider – namely, quality of documentation, automation and support – is the key to its success. Producing high-quality documentation allowing advisers to meet necessary regulatory and legislative requirements as they continue to evolve, while ensuring they can rely on technical and legal assistance when required, is essential in the SMSF space, Topdocs director Michael Spakman says. “The other big driver we see is automation and the ability for advisers to push and pull client information from their software applications and service providers to streamline their administrative process,” Spakman says. “Our integrations with software vendors such as BGL, Class, SuperMate and XPM ensure our advisers can pull data from their software into our order forms, and our integrations can then push new entity data back into the advisers’ software, greatly reducing admin time.” In addition to meeting these adviser needs, the firm has also placed a priority on providing new products and solutions to support clients grappling with the effects of

“With more firms needing to outsource the audit function from their firm, having consistent and upto-date documentation as provided by this service will assist those firms to make the audit process a lot smoother and likely cost-effective.” Michael Spakman, Topdocs

the COVID-19 pandemic. “Among the new offerings we have put in place during this period were free access to a range of COVID-19 relief documentation for SMSFs to advisers Australia wide to help them support their clients in a cost-effective way, and to provide a range of new document delivery options for our clients to support their working-from-home arrangements,” Spakman says. “These new offerings were received very well by our customers, who I think could see our desire to provide extra support for them during this time.” He highlights the company’s flexibility during the pandemic as an important aspect of its ability to continue meeting clients’

FEATURE

needs during this particularly turbulent time. “Ensuring our turnaround times have never wavered, that our delivery options have been expanded and that our support team is always available during the COVID pandemic has, we believe, meant our clients have felt supported during their work-from-home arrangements in particular and has assisted them to get on with their work effectively,” he notes. With the recent launch of its SMSF Compliance Suite, a service intended to give advisers unlimited access to best practice legal documents, Topdocs intends to continue providing the highest possible standard of support for advisers as the level of scrutiny of SMSF documentation by the ATO and auditors continues to increase. “We see this service not only providing advisers with a cost-effective way to ensure their SMSF documentation is up to date and compliant, but to assist them to streamline their audit function, particularly with the upcoming changes due to the auditor independence standard changes,” Spakman says. “With more firms needing to outsource the audit function from their firm, having consistent and up-to-date documentation as provided by this service will assist those firms to make the audit process a lot smoother and likely cost-effective.”

Assisting portfolio diversification Vanguard Australia: International shares products and ETFs winner By Tharshini Ashokan Financial advisers looking for broad diversification at a low cost know they can rely on Vanguard Australia’s range of international shares products and exchange-traded funds (ETF) to build up their SMSF clients’ portfolios. “All of our offerings can be used to

provide more diversification at a really low cost for the core of investment portfolios and then advisers can actually leverage satellite holdings to complement the core,” Vanguard Australia head of intermediary Rebecca Pope explains. Pope points out this is particularly true of how advisers use Vanguard’s range of ETFs and international share funds as a way to reduce the home-country bias evident in so many portfolios, helping to improve portfolio construction outcomes for investors and advisers who prefer to outsource their international exposure. “We’ve always positioned Vanguard each year as core building blocks for portfolios and that continues to resonate really well with advisers. Our trusted

“The importance of time in the market as opposed to not timing the market really continues to help advisers make the right choices when it comes to choosing the most appropriate ET Fs to help meet their clients’ needs.” Rebecca Pope, Vanguard Australia

reputation, our low tracking error and the well-diversified and cost-effective ETF lineup has really supported this,” she notes. “The importance of time in the market as opposed to not timing the market really continues to help advisers make the right choices when it comes to choosing the most appropriate ETFs to help meet their clients’ needs.” The company also places great importance on assisting advisers in their effort to provide clients with the latest investment knowledge and insights. “We’re constantly looking at ways we can continue to support advisers and meet their needs, and help advocate for the value of advice,” Pope explains. “Each year we partner with Investment Trends to produce probably one of the most comprehensive reviews of the Australian SMSF trustee and adviser market, and this enables us to provide some really great insights back to the adviser market with a view to supporting the growth of their own SMSF client base.” According to Pope, the report’s coverage of product preference and trends and the demand for advice from SMSF investors, as well as key themes resonating with the industry and factors affecting the SMSF market, has proven to be invaluable for advisers. Advisers also value Vanguard’s broad range of market and economic commentary, and its research into portfolio construction and asset classes for helping them educate their own clients. “We’re in the process of building out an adviser offer team, which will give our advisers access to specialist expertise, such as practice development management, education and investment specialist support, as well as implementation support,” Pope reveals. “That’s a new function that we’re building out that we hope really adds incredible value to our advisers and also their clients in future. “We’re always looking at different ways to advocate for advice and making sure that we do have all of those core building blocks in place for advisers. We continue Continued on next page

QUARTER IV 2020 21

FEATURE SMSF AWARDS 2020

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to focus on our team to upskill them so they can continue to support advisers as well and their clients.”

A long record of certainty Zurich: Insurance winner

By Jason Spits Surety is the central idea that runs through life insurance and Zurich Life head of sales Nathan Taggart sees the backing of a global organisation and a strong claims record as key parts of that offering in an Australian market in a state of ﬂux. “We seem to be heavily considered because of those factors, but once an adviser has made a choice to use Zurich, they are also looking for good services and the ease of doing business for them and their clients,” Taggart says. “We know there is more demand for these things and we have created adviser portals with a focus on efficiency and speed of completion that allows advisers to selfservice and navigate through our channels as an insurer.” According to Taggart, ongoing development and expansion of its client and adviser portals will benefit a range of advisers and their clients, including those in the SMSF space. “We have made a heavy investment

in those portals and so continue to make enhancements so that advisers can monitor and maintain their client books and the progress of underwriting and claims,” he reveals. “We have also aimed to make looking after existing clients as easy as it is to onboard new clients and have invested heavily to improve our ongoing service provision. “This has included how we handle claims, which is still the biggest promise we make to customers.” He predicts Zurich is well positioned to handle underwriting and claims arising from the uptick in life insurance inquiries ever since the majority of people began working from home due to the coronavirus shutdown. “Given the strength of our brand, we actually saw strong interest in life insurance and Zurich and with that awareness people were asking themselves where they could turn,” he says. “They were looking for known brands, and that assisted us because they knew we are in this for the long haul and we remain one of the longest-serving branded insurers in Australia.” Under its life insurance business, Zurich Financial Services Australia runs two brands, being Zurich Life and OnePath, the latter purchased from ANZ in mid-2019, and Taggart says the two brands both have strong appeal and recognition in the market. “SMSF trustees respect them and the reason they resonate is the products are appealing and have longevity in the market, which creates a lot of goodwill,” he explains. Much of this goodwill has also been generated by the organisation’s efforts to promote the value of life insurance and financial advice, despite not having a related financial advice business as some of

its market peers have. “We have gone big in the advice advocacy space and released a number of white papers and research papers detailing the need for advice and insurance and the benefits of those,” Taggart says. “We have backed those up by working on issues around the cost to serve for advisers and also built an adviser education offering, offering 80 hours of continuing professional development. “The education is offered online and on demand and is mapped to the standards, code of ethics and exam set out by the Financial Adviser Standards and Ethics Authority. “The education portal does offer life insurance content, but also offers wider financial advice content for all advisers.

Other winners Macquarie: Cash and term deposits winner Macquarie Wrap: Investment platform winner Macquarie: Residential property loans winner BGL Corporate Solutions: SMSF accounting/ administration software winner For a full list of the winners click here.

“We have created adviser portals with a focus on efficiency and speed of completion that allows advisers to self-service and navigate through our channels as an insurer.” Nathan Taggart, Zurich Life

22 selfmanagedsuper

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INVESTING

Expect the unexpected with property

Property will continue to be a major part of the equation as SMSF trustees brush off their investment strategies. But Per Amundsen warns care will be needed because the world has changed.

PER AMUNDSEN is head of research at Thinktank.

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With Victoria out of lockdown and some green shoots of recovery beginning to appear in other states, now seems an opportune time for SMSF trustees to revisit their investment portfolios. Although 2020 has been a year many would wish to forget – and not just on the investment front – overseeing an SMSF’s investment portfolio is a race that never ends. In this investment critique, property will be front and centre of the thinking of many trustees. On the latest ATO statistics, it comprises more than $110 billion (15 per cent) of total SMSF assets, with commercial property accounting for $73.5 billion

and residential $50.2 billion. Only cash/term deposits and listed Australian equities, at 21 per cent and 26 per cent respectively, have bigger slices of the SMSF asset pie. That trustees are attracted to property is unsurprising. Leaving aside the fact most have experience in this market via the family home, for a sizeable number investing in business real property can neatly dovetail their business goals with their retirement income strategies. The introduction of limited recourse borrowing arrangements (LRBA) in 2007 has helped facilitate this type of investment. But past knowledge of the property market,

It will be no easy task for SMSF trustees to pick the wheat from the chaff when they contemplate property investment, whether it be commercial or residential.

whether it be commercial or residential, does not automatically translate into getting future investment decisions right. And certainly not in the current climate. Thinktank’s quarterly property update for October to December 2020 recognised SMSF trustees are in a brave new world, to borrow the title of English author Aldous Huxley’s 1932 dystopian social science fiction novel. This economic reality was brought home in the latest International Monetary Fund (IMF) “World Economic Outlook”, which estimates global gross domestic product will shrink by 4.4 per cent (previously forecast to be -5.2 per cent) this year followed by an above trend recovery of 5.2 per cent in 2021 (previously forecast to be 5.2 per cent). In its outlook, the IMF said: “The global economy is climbing out from the depths to which it had plummeted during the Great Lockdown in April. But with the COVID-19 pandemic continuing to spread, many countries have slowed reopening and some are reinstating partial lockdowns to protect susceptible populations. “Improved forecasts for the United States economy now call for negative growth of 5.8 per cent in 2020 (up by 2.3 per cent) and rebounding to 4.5 per cent in 2021.

China is now forecast to grow slightly better at 1.9 per cent in 2020 (up 0.9 per cent) and surge 8.2 per cent in 2021, while India is now worse and forecast for a negative 10.3 per cent for 2020 (down 5.8 per cent) but to pick up strongly to 8.8 per cent in 2021 (up 2.8 per cent).” In Australia, the second quarter national accounts released by the Australian Bureau of Statistics (ABS) on 2 September told a similar story. The second quarter (April to June) had negative growth of 7.0 per cent (negative 6.3 per cent annual) compared with a 6.3 per cent contraction in the first quarter of 2020. On the federal government’s figures, it is forecasting a 3.75 per cent contraction in economic activity for 2020 before rising to 2.5 per cent in 2021. It’s worth stating all these numbers are predictions. As several European countries descend into a heavy second lockdown (and this has occurred post the IMF report) and in the US the spread of COVID-19 remains unchecked (its death toll is approaching 250,000, the highest in the world), no one can predict what economic damage this pernicious virus will continue to exact or over what time frame. The world economy might rebound strongly in 2021, and then again, it might not. So, what does this mean for property markets? What should investors be alert to? On the residential front, markets continued to fall during the third quarter of 2020 as prices for housing softened nationally, more so in Sydney and Melbourne. The long-term impact of COVID-19 on property prices is still not known, but Thinktank has moved from a “softening trend” across the board as further declines are less dire, but retained it for Sydney units and both houses and units in Melbourne – a graphic illustration of the impact of the coronavirus lockdown on the southern capital’s property market. Houses in Sydney were down 1.7 per cent for the past three months and 3.7 per cent in Melbourne. For the nation, the fall was less at 1 per cent. Only one of eight capital cities’ houses were down for the year (Perth fell by 0.9 per cent). Notably Adelaide was up 3.5 per cent, while Brisbane was up

4.5 per cent for the year. Regional prices were up 4.5 per cent. Perhaps rumours of more Australians looking to live and work in the regions have some truth to them. Unit prices are down by less than houses in Sydney and Melbourne in the previous quarter (July-September), according to Core Logic, at 1.5 per cent and 2.3 per cent, respectively. Adelaide was up 1.3 per cent and the combined capitals were down 1.5 per cent. With the evidence showing residential prices for houses and units in all capital cities either starting to decline or just peaking, we remain wary of this market, especially as we are still uncertain how the economic impact of COVID-19 will play out. Longer term, the issue of population growth and migration, so critical to the supply and demand equation of housing, is another wild card, with the numbers set to remain lower than what has been the historical norm for some time. And even with a strong V-shaped recovery, which is looking much less likely, growth will be diminished. Notwithstanding all of this, consumer sentiment has shifted regarding property with more feeling now is a good time to buy. To this we would say, caveat emptor. Commercial property, too, has not been immune to COVID-19. In July, the Property Council of Australia’s “Office Market Report” showed office vacancies rising in all capital cities, with Sydney and Melbourne heading the list. Fast forward to a more recent survey by JLL Australia and the vacancy numbers are up in all capital cities, with a flow-on effect on incentives and net effective rents. “The vacancy rate in Sydney has been inching upwards for several quarters before jumping from 5.8 per cent to 7.5 per cent. The situation in Melbourne is more dramatic yet, where the vacancy rate has more than doubled from 3.4 per cent to 7.7 per cent. In Brisbane, Perth and Adelaide, vacancy has also increased, but more moderately,” the study said. HTW’s most recent “Month in Review” describes Sydney as facing rental Continued on next page

QUARTER IV 2020 25

INVESTING

Continued from previous page

oversupply with contracting economic conditions, while Melbourne has large oversupply and faces severe economic contraction. Their markets are both described as starting to decline while the other capital cities are further into the cycle. Yields are now softening slightly in most locations, but ultra-low interest rates, which are expected to last for years, are offsetting lower returns. For SMSF trustees, there are some critical questions to be asked about investment in office space. The coronavirus has forced many people to work from home. Is this a long-term trend or a one-off response to the pandemic? We noted above the solid rise in regional residential prices. Does this herald a shift from the cities to the regions with a flow-on effect on central business district (CBD) office space? Blue-chip property companies such as Charter Hall saw their share prices savaged in the stock market sell-off earlier this year, only to recover much lost ground over the past eight months. Does this mean investors believe CBD office space remains a viable investment option? Whether listed or unlisted, in a record low interest rate environment, commercial property has provided SMSF trustees with much-needed yield as well as capital gain. Whether that continues to be the case remains to be seen. Recently released ABS figures for retail sales in August, in current price terms, fell by 4 per cent in what was described as a second-wave setback, following a rise of 3.2 per cent in July. Victoria was down steeply by 12.6 per cent following its second lockdown. Despite being up 7.1 per cent for the year, weak private sector business surveys suggest conditions will remain difficult. By state, Victoria predictably lagged the others, down a massive 12.8 per cent, with New South Wales down 2.0 per cent. Western Australia was only down 0.4 per cent, South Australia 0.9 per cent and Queensland 1.1 per cent. In this economic environment, store closures are being announced almost every

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With the evidence showing residential prices for houses and units in all capital cities either starting to decline or just peaking, we remain wary of this market.

day. To quote JLL: “We remain cautious about the outlook for discretionary retail as stimulus measures roll off later in the year, which is likely to contribute to an upward trend in vacancy rates. The events throughout the past few months have led to many discretionary retailers planning to shrink their store network that will likely polarise the retail sector even more.” Even before COVID-19, online shopping was exacting a toll on the retail sector, and the pandemic has magnified this. But to what degree remains uncertain. CBRE reported yields have fallen by 35 basis points in the retail sector since the end of last year, with rents also falling by up to 10 per cent year-on-year. But this is not uniform, with neighbourhood shopping centres bucking the trend. Thinktank has kept all its retail ratings and trends at Weak and Deteriorating on the basis that eventually we would expect declining earnings must lead to a further softening of yields and we will see lower capital values in general. Industrial remains the standout performer. In the ACCI-Westpac Survey of Industrial Trends for the September quarter, it rose strongly from 24.0 in June to 42.4, recovering from the most negative reading since the series began. This is consistent with the Westpac-MI Leading Index, which also recovered to minus 0.48 from minus

2.56 in August and minus 4.42 in July. Unsurprisingly, Victorian manufacturers continue to report the weakest results among Australia’s large manufacturing states. Manufacturers in NSW and Queensland also reported a decline in activity, while in South Australia, the index rose further into expansion. CBRE reported it was the story of the commercial property market in a pandemic: industrial is surging as investment in office property slowed to a trickle amid uncertainties over longer-term workplace occupancy. Likewise, lockdowns have put a brake on retail investment. According to CBRE, industrial yields are tightening in all locations and for both prime and secondary properties. Rents for prime properties will show little change, while secondary properties would initially see yields tighten by 50 basis points and face rents would stay the same, but with incentives rising slightly to 16.6 per cent. In its most recent monthly review of the Industrial sector, HTW sees Perth remaining in oversupply and is rated as Weak and at the bottom of the market. We have kept our ratings for Sydney at Good and Stable, as well as Adelaide, with a similar trend for Brisbane, but rated Fair. Melbourne, understandably, has been cut to Starting to Decline, but we have kept it at Good, expecting a short-term recovery once restrictions are lifted. To complicate matters more for SMSF trustees, the domestic situation is overlaid by overseas factors. The certainty is that international growth has plummeted, with high unemployment and underemployment with interest rates to stay low for some years to come. Much of the world is still grappling to contain COVID-19 and until that happens or a vaccine is found, it’s hard to see a sustained economic recovery. It will be no easy task for SMSF trustees to pick the wheat from the chaff when they contemplate property investment, whether it be commercial or residential. Getting professional financial advice would seem a good starting point because if the past nine months has taught us anything, it’s expect the unexpected and plan for it.

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COMPLIANCE

State of play with LRBAs

The financial hardship relief measures introduced due to the COVID-19 pandemic have had direct implications for SMSFs with limited recourse borrowing arrangements in place. Jeff Song analyses the issues trustees need to consider when looking to use this type of gearing in their fund in the current economic environment. JEFF SONG is superannuation associate division leader at Townsends Business and Corporate Lawyers.

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Borrowing by a super fund to invest was once a revolutionary concept, but since their introduction, limited recourse borrowing arrangements (LRBA) have steadily increased in number and become a common mechanism for SMSFs when investing in properties. The latest ATO statistical overview indicated about one in 10 SMSFs held an LRBA in the 2018 financial year.

LRBAs have been the subject of constant criticism by certain sectors of the industry and their political running mates, however, their popularity has continued. This article will cover emerging compliance issues in relation to LRBAs in light of the volatile market and regulatory circumstances. The pandemic has put some downward pressure on the value of property in general.

According to the latest Australian Bureau of Statistics figures, the residential property price index weighted average for Australia’s eight capital cities fell by 1.8 per cent in the June quarter and the total value of residential dwellings in Australia fell by $98.2 billion in the same period. On the other hand, this quarterly fall is not quite as dramatic as some economists predicted during the early stages of the pandemic and if we look at the annual figure, the price index rose by 6.2 per cent from June 2019 to June 2020. The record low cash rate of 0.25 per cent is making loan repayments more affordable than before and trustees are showing continued interest in using LRBAs either to acquire a new asset or to refinance an existing borrowing arrangement.

Is an LRBA still useful in this volatile market? In a nutshell, an LRBA is the only option if you want to leverage your SMSF investment. SMSFs are generally prohibited from borrowing, with an exception provided for LRBAs either to acquire a single acquirable asset or to refinance an existing gearing arrangement. So if SMSF trustees wish to acquire property for renting or development, or wish to save on loan repayments by refinancing at a lower interest rate with another lender, LRBAs offer the leveraging mechanism to gain or maintain that sought-after exposure to the property market.

Acquisitions under an LRBA and the liquidity issue Leveraged investing must be done in accordance with the current investment strategy of the SMSF. It is important to ensure the strategy is up to date, noting that the major market correction and volatilities we have seen recently during the pandemic constitute a significant event requiring trustees to review their investment strategy. The strategy should consider the liquidity issue. Early super release as a

COVID-19 support measure or other compassionate-ground releases are more likely to be undertaken in the current environment and when it comes to selling to raise liquidity to pay those early benefits, property, being an illiquid asset, could take weeks or months to offload. Any future lockdown of cities and limited potential buyers due to restrictions on travel could exacerbate this issue. Remember LRBA assets cannot be sold in parts, even if they are a collection of assets that might seem divisible, such as units in a unit trust. The gearing law requires the asset be a ‘single acquirable asset’ and also entails it be a ‘single disposable asset’ while the LRBA is in place. Considering an example of a collection of units in a unit trust subject to an LRBA, a parcel or group of identical shares or units (that is, of the same type, value or class) is deemed to be a ‘single acquirable asset’ for LRBA purposes. Once the units are acquired with the loan, they will have to be held as a single undivided parcel until the full repayment of the loan, as section 67B of the Superannuation Industry (Supervision) (SIS) Act operates to effectively prohibit any trading of a portion of the acquired collection of units. From an LRBA compliance perspective, the only options to sell the units are either: • sell all of the units, or • discharge the loan in full before selling any portion of the units.

Refinancing an existing LRBA In the current low interest rate environment, there has been increased interest in refinancing an existing LRBA with a related-party lender. For this financial year, the minimum yearly interest rate under the ATO’s safe harbour guidelines is 5.10 per cent. which in most cases would be lower than what would have been available to the trustees when they originally acquired the property using an LRBA. While the refinancing option could mean significant savings in monthly repayments for SMSFs, trustees should

LRBAs have been the subject of constant criticism by certain sectors of the industry and their political running mates, however, their popularity has continued.

carefully consider the SIS Act compliance requirements in refinancing an LRBA with a related-party loan, which could be more onerous to comply with than maintaining the LRBA with a bank. When refinancing an LRBA, the law requires the borrowed money from the new lender to be applied to refinance an existing borrowing in relation to the same single acquirable asset. In practice, this means the loan documentation should be drafted accordingly and formally establish a sufficient link between the loan and the property as the only security for the new loan. The money borrowed from the new lender must also be applied solely for the purpose of replacing the financing arrangement from the earlier arrangement with the outgoing bank. The amount of the new loan therefore must not exceed the amount required to pay out the bank in respect of the original LRBA. Other than the above, trustees must ensure the usual LRBA conditions are maintained in the new arrangement, such as the requirement to have a property held in a holding trust and limiting the recourse of the lender or any other person in the event of default to only the commercial property. In circumstances where the outgoing bank originally nominated its Continued on next page

QUARTER IV 2020

COMPLIANCE

Checklist when entering into or refinancing an LRBA Item

Tips and traps

Review the investment strategy in consideration of a proposed structure of the property investment

• • • •

Sole purpose

• • •

Ensure the strategy has been reviewed in light of the major market correction and volatilities during the pandemic (a significant event). If the property investment will result in lack of diversification, consider and have a documented response to the risk. Consider liquidity issues associated with investing in a lumpy asset. A single acquirable asset (including a collection of shares/units) acquired under an LRBA cannot be sold in parts until the loan is fully repaid. Consider and allow suﬃcient buffer for costs such as insurance, professional fees and other government charges and taxes (like stamp duty, land tax and rates) associated with property ownership in the relevant state. Any investment must also be for the sole purpose of providing retirement benefits for fund members as required under section 62 of the SIS Act. This is not always simple, but at the very least means members (or anyone related to them) cannot make personal use of the property or obtain current-day benefits from the investment. If refinancing an LRBA with a related-party lender, engagement should be on documented arm’s-length terms. An example of a possible contravention is where the SMSF trustees decide to refinance with a related party on materially similar (or inferior) terms in order to provide an additional income source to a struggling related party.

If using an LRBA, consider potential TSB implications in future years

•

TSB will affect relevant members’ ability to make various types of contributions in future years.

Check authority of the trustees to enter into the transaction

•

Amendment of trust deed may be required if current deed is missing any required authority.

If acquiring a property from • a related party, ensure the property is ‘business real • property’ as defined

Keep evidence relied on to determine the property is ‘business real property’ (for example, legal advice). Be mindful of arm’s-length requirement.

If borrowing from a related party, ensure the transaction would comply with both arm’s-length and LRBA provisions in the SIS Act

• • • • • •

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Formally document the holding trust and the loan. If refinancing, the new loan must be suﬃciently linked to only the same acquirable asset and the amount of loan must be less than or equal to the balance of the original loan being discharged. Stay within ATO safe harbour guidelines when determining loan terms. Any repayment relief should be on equivalent conditions to those offered by a commercial bank. Refinancing with a related-party lender is not recommended while the SMSF is on or in need of repayment relief in relation to the LRBA due to potential breach of section 109 of the SIS Act and NALI risks. If the lender is a related private company of which a member of the fund is a shareholder, consider ITAA Division 7A implications and structure the loan to satisfy both the ATO safe harbour guidelines and prescribed terms for a complying Division 7A loan. Also monitor Division 7A reform developments for the need to amend any future loan terms.

In the current low interest rate environment, there has been increased interest in refinancing an existing LRBA with a related-party lender.

associated entity as the holding trustee, conveyancing may be required to transfer the property from that entity to a new holding trustee. A concession or exemption on the transfer duty would be available upon application to the duties office in the relevant jurisdiction. The new holding trustee is typically a non-trading or new company of which the members are the only directors or shareholders.

Refinancing with a related party If the new lender is a related party of the fund, the trustees should be particularly cautious about the purpose of refinancing and be able to demonstrate the refinancing is for the sole purpose of retirement benefits for the members. At the very least this means the related-party lender should not unreasonably benefit from the refinancing arrangement and all engagement should be on documented arm’s-length terms. An example of a possible contravention is where the SMSF trustees decide to refinance with a related party on materially similar (or inferior) terms in order to provide an additional income source to a struggling related party. SMSF trustees are required to deal with parties on arm’s-length terms and compliance with this requirement continues to be critical as it can be a criminal offence to be in breach of it. In addition, a breach may result in the

income arising from the transaction being treated as non-arm’s-length income (NALI) and taxed at the top marginal rate of income tax. The ATO announced earlier this year that repayment relief from a related-party lender in relation to LRBAs would not give rise to NALI if similar relief could have been provided by a commercial bank. If any trustee is considering arranging temporary repayment relief with a related-party lender after refinancing, they must be extremely cautious, noting the commercial bank’s stage one COVID -19 support of six months’ repayment relief is at its end. According to the Australian Banking Association’s website, a further deferral of up to four months is only reserved for very limited circumstances in stage two. It is strongly advisable the new relatedparty LRBA mirrors the safe harbour terms contained in the ATO’s Practical Compliance Guideline 2016/5 and has no repayment relief arrangement. From a superannuation compliance perspective, a conservative approach would be for SMSFs that still require this relief to not refinance with a related-party lender due to a potential breach of section 109 of the SIS Act and the NALI risks.

both sets of requirements. However, this position might change with the proposed Division 7A amendments announced in the 2016/17 budget, which are yet to be implemented. While there is no longer a set starting date for these proposed changes, with the government recently revising the start date from 1 July 2020 to income years commencing on or after the date of royal assent of the enabling legislation, private company (or trust) lenders would need to monitor the development to determine if any need arises to amend the terms of the existing LRBAs in future once the proposed legislation is passed.

Outstanding loan balance and total super balance Total superannuation balance (TSB) implications of an LRBA should also be considered because switching to a relatedparty lender would mean the outstanding loan balance each year will need to be apportioned among the participating members and included against their respective TSBs. Once their TSB reaches $1.6 million, the member will be unable to make further non-concessional contributions.

Division 7A considerations

In summary

If the lender is a related private company of which a member of the SMSF is a shareholder, Division 7A of the Income Tax Assessment Act 1936 (ITAA) may potentially apply to treat the amount advanced as payment of dividends. In order to avoid this, the new loan must also be structured as a Division 7A complying loan and satisfy the prescribed minimum interest charge and maximum term requirements for a secured Division 7A loan. Currently, the LRBA safe harbour guidelines are more restrictive, imposing a higher interest rate, lower maximum loan-to-value ratio and shorter maximum term than the prescribed conditions of a complying Division 7A loan, meaning the trustees could simply implement the LRBA safe harbour terms to satisfy

The property market seems resilient so far against the challenges during the pandemic, despite some downward pressure on the overall value we have seen in the past few months. For SMSFs looking to gain and maintain their exposure to this market, an LRBA remains a popular option allowing the use of gearing to acquire fund assets, which is more affordable than ever before with the record low cash rate. When considering these transactions though, it’s important to ensure the strategy is implemented in compliance with the current regulatory requirements. Compliance issues considered in this article are not exhaustive and not suited for all circumstances. Trustees should obtain formal advice before committing to any property investment in their SMSFs.

QUARTER IV 2020 31

INVESTING

Finding the next big thing

The coronavirus pandemic has seen certain stocks soar. Michael Wayne identifies some shares with the potential to be the next stellar market performers.

MICHAEL WAYNE is managing director of Medallion Financial Group.

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The Australian Securities Exchange (ASX) has been a consistent underperformer in recent years. Looking overseas to the United States and the exact opposite has been true. The larger, FAANGM stocks (Facebook, Apple, Amazon, Netflix, Google and Microsoft) as they have been termed, have all continued to deliver stellar growth, driving the US indices higher in the process. It just so happens the larger businesses in Australia tend to be more mature older-style

operations, while in the US it is the contrary.

US market concentration growing Looking at the US, these mega-cap technology names have played such a key part in driving markets higher that many investors have become increasingly concerned about their dominance in major indices such as the S&P 500, where FAANGM stocks represent 25 per cent of the indexâ&#x20AC;&#x2122;s market capitalisation.

As a word of caution, we would not necessarily go out and buy each of these names today. Nevertheless, it is our view that should the good news flow continue and management keep the businesses on the right path, there is a high chance of meaningful success. The two technology stocks that might do an Afterpay, perhaps not necessarily in terms of percentage returns but in respect of taking advantage of a large and growing addressable market, are as follows.

Stock 1: PointsBet (ASX: PBH) PointsBet is a cloud-based sports and racing bookmaker. The company does have operations in Australia, but with the market very much mature and saturated, the true potential for PointsBet and the part of the business we see as having the Continued on next page

Largest stock

Largest 5 stocks

Largest 10 stocks

30 20 10

2019

2017

2007

1997

1987

1977

1967

0 1957

In a world of disinflation, as well as a low, volatile and unpredictable growth outlook, quality businesses able to generate sustainable growth have

Two technology stocks that might do an Afterpay

1947

Growth at any price?

to be careful not to get caught up in momentum at the expense of earnings, and ensure they continue to look for growth at a reasonable price.

Graph 1: Weight of largest stocks by capitalisation in US stock market

1937

In years gone past, equity indices were largely driven by old economy sectors. Macquarie outlines that during the period from 2001 to 2010, 95 per cent of average yearly returns were delivered by what we would describe as ‘old economy’ or ‘old world’ businesses and sectors. Looking at the past decade, however, and the picture is somewhat different. Old economy sectors have accounted for less than 40 per cent of index returns, whereas new economy sectors, such as software and healthcare, have been responsible for over 60 per cent of index returns. According to statistics provided by the Macquarie research team, the average index weight of ‘new economy’ from 2001 to 2010 was less than 5 per cent in China and 37 per cent in the US. Today the figures are closer to 50 per cent in China and 60 per cent in the US. One particular Organisation for Economic Co-operation and Development study highlighted the productivity of the top 5 per cent of firms in any industry is now growing at four to five times faster than the productivity achieved by some of the laggards. These days the share of the top 1 per cent continues to steadily climb over the past two decades, with around 40 per cent to 45 per cent of earnings before interest, tax, depreciation and amortisation delivered by the top 1 per cent of profit generators. In essence, an increasing proportion of the ‘winnings’ are going to a decreasing proportion of companies within industries.

1927

Shifting sands: old world v new age

become increasingly more valuable. Nowhere is this theme more obvious than on the ASX with the WAAAX (Wisetech, Altium, Afterpay, Appen and Xero) stocks, whose performance over the past five years has dwarfed even that of the FAANGM stocks as growth-starved local investors herd into a limited number of high-growth names. Just because a company is large and well-known today, doesn’t necessarily mean it’ll remain that way into the future. Equity investors need to overcome familiarity bias and focus on the future; what is to come rather than what has happened in the past. There is no doubt Afterpay and any like companies are valued at multiples that are hard to justify based on traditional valuation metrics. In many respects, current prices have extrapolated recent success and embedded a world domination price. As such, we caution investors about chasing the next Afterpay and blindly following momentum as there are never any shortcuts when investing in equity markets. Nothing can or ever will substitute for time spent analysing and deeply understanding a business. Investors need

% Market cap weight

Although much has been made of this increasing market concentration, looking back at history, the dominance of such a few names appears less pronounced now (see Graph 1).

Source: Investor Amnesia.

QUARTER IV 2020

INVESTING

In a world of disinflation, as well as a low, volatile and unpredictable growth outlook, quality businesses able to generate sustainable growth have become increasingly more valuable.

Continued from previous page

biggest opportunity is the large and rapidly growing US market.

Explained: patented ‘pointsbetting markets’ At first glance, PointsBet appears like any other sports betting service and it does provide the typical offerings as any other standard platform, however, it differentiates itself with its patented ‘pointsbetting markets’, which adds a new level of strategy and excitement to betting. Basically, the game-changing concept is to pick an outcome with an amount to wager per point – the more correct you are, the larger the payout. For instance, if a bet was for a team to win by one point above the line (the score offered by PointsBet), customers would receive $1. If it was to win by 20 points, customers would win $20.

US sports betting market offers opportunity With the amount of sports betting in Australia, it is hard to imagine a sportscentric country like the US had a nationwide

34 selfmanagedsuper

ban on sports betting right up until 2018. At that time, a Supreme Court ruling passed the ability to legalise sports betting over to individual states. Logically, the revenues involved make this a very enticing prospect for states and for this reason we have seen and expect to continue seeing an explosion in the number of states legalising. PointsBet is positioning itself as one of the first movers in the US. With a unique offering, quality technology and large marketing budget, it is continuing its aggressive growth strategy to lock in an early piece of a market with unbelievable growth potential as additional states begin to open for business. In a matter of months, PointsBet has seen its US market opportunity expand as each new state comes to legalise sports betting. With only a minority of US states accessible so far, the runway for growth is still extremely large and as the market grows, even a small market share for PointsBet will prove lucrative.

The acquisition complemented PushPay’s custom community app and donation solution, such that online churches could manage administrative affairs and ensure church announcements, sermon streaming and mobile giving were maintained throughout the quarantine period. We argue PushPay’s integrated system for churches has a powerful competitive advantage that differentiates it from other payment process services such as PayPal and Stripe. We are also very encouraged by PushPay’s total processing volume growth rate as a key component of its revenue is the processing fee of 1.8 per cent. In the 2020 financial year, total processing volume increased by 39 per cent, amounting to US$5 billion, which is expected to grow more as PushPay states and most churches see a 76 per cent growth in recurring givers in their first six months without losing current givers.

Stock 2: PushPay (ASX: PPH)

Social distancing creates tailwind

PushPay Holdings Limited is a cloud-based online payment solution that provides a donor management system, including donor tools, finance tools and custom community app, to religious organisations, non-profit organisations and education providers in the US, Canada, Australia and New Zealand. Founded in 2011, PushPay operates under a SaaS (software as a service) model with a heavy emphasis on churches. As of 31 March 2020, PushPay maintained a customer base of 10,896 churches and an annual revenue retention rate of 100 per cent. While PushPay is listed on both the ASX and New Zealand Stock Exchange, 98 per cent of its customers are in North America (US and Canada).

With social distancing restrictions expected to continue, Medallion is encouraged by PushPay’s prospects as revenues and gross operating margin jump, all while total operating expenses improve. At Medallion there is a strong emphasis on the founder and management team’s involvement as we believe it increases the likelihood of management’s interests aligning with shareholder interests. Hence, we find co-founder Chris Heaslip and the directors’ equity stake amounting to 49.7 per cent encouraging as it suggests there is a vested interest for management to grow the company. Looking to the future, we view it as a great opportunity to take a position in a business that is rapidly growing its customer base, revenue and margins, both organically and through targeted acquisitions. While PushPay’s customers are predominantly North American, it is important to consider the prospects of global expansion given the world Christian population is 2.3 billion.

Acquisition consolidates competitive advantage PushPay’s acquisition of Church Community Builder, a US-based leading provider of church management systems in December 2019, proved to be God’s gift.

The 202O SMSF FOR has gone virtual Hear from leading SMSF industry professionals!

The forum is loaded with great content and top presenters - and at $90 member rates for all 6 sessionsit's great value

12pm AEDT 10 Nov- 26 November www.sisfa.com.au/event-list

STRATEGY

The case for nonreversionary pensions

Making a pension reversionary is a popular estate planning strategy for many SMSF members. However, having a non-reversionary pension can be beneficial as well, Meg Heffron writes.

MEG HEFFRON is managing director of Heffron.

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Back in the day when reasonable benefit limits still existed, I was an advocate of reversionary pensions. The decision had a huge impact on the tax treatment of any ongoing pension for the recipient and in some cases made the difference between leaving money inherited from a spouse in superannuation as opposed to withdrawing it. All that changed when superannuation was simplified in 2007 and making a pension reversionary suddenly became less critical. Changes to the income test for the Commonwealth Seniors Health Card (CSHC) in 2015 and the next major round of superannuation tax changes in 2017 swung the pendulum back the other way, but even today there are some

circumstances where making a pension nonreversionary can be very beneficial.

Why are we even asking the question? There are well-known benefits to making a pension reversionary when it comes to transfer balance caps. Critically, when a person dies and their pension reverts to someone else, let’s assume their spouse as is usually the case, the spouse gets two important benefits: • even though they start receiving the reversionary pension immediately, nothing counts towards their transfer balance cap until 12 months later, and • the amount that counts is the value of the pension account on death, not 12 months later.

(We are assuming a standard accountbased pension here rather than a capped defined benefit pension). On the latter point, there are actually two benefits – one is the certainty of the amount upfront and the second is the fact it won’t reflect any growth in the pension account after death. So in many cases this is good news.

What is the counterview? However, there are some good reasons a client might still choose a non-reversionary pension. The top five I would nominate are as follows. The fixed time frame

A 12-month delay sounds great until it’s not quite enough. Put another way, when a pension is reversionary, the one thing that is happening for sure is the value of the pension at death will be added to the reversionary beneficiary’s transfer balance account 12 months later. That’s fine if they are well prepared and have taken steps such as rolling back their own pension. If they haven’t done so, it can be a problem. Remember in particular that sometimes the surviving spouse doesn’t have a pension big enough to roll back the amount they need to clear transfer balance cap space for the reversionary pension. Take this situation as an example. Jill has an account-based pension. It started on 1 July 2017 at $1.6 million, but over the years she’s taken a little more than the minimum, markets have dropped and it’s now worth $1.5 million. Her husband, Tony, also has an account-based pension that he started more recently than Jill. Its value when set up on 1 July 2019 was $1.6 million, but it is now worth $1.7 million. Tony dies and his pension automatically reverts to Jill. Even if Jill rolls back her entire pension of $1.5 million, her transfer balance account will only reduce to $100,000. In 12 months’ time, $1.7 million will be added to her transfer balance account from Tony’s pension. Between now and then, she will need to make sure she has taken a commutation of at least $200,000

from the reversionary pension. This is a hard deadline and it requires a physical transaction – she can’t just put paperwork in place to roll it back to accumulation phase. It rules out a payment to the estate

Sometimes, even when the spouse is receiving the superannuation, making it payable as a pension, there are benefits in having superannuation money paid to the estate. Perhaps the superannuation was predominantly tax-free and the family wanted the freedom to distribute the money via a testamentary trust. Perhaps, like Jill above, not all of the money can remain in superannuation anyway. If the pension is reversionary, any commutation ‘belongs’ to the member who owns the pension at the time. In the example above, Jill would have to take the $200,000 directly; she couldn’t put that amount into Tony’s estate. By contrast, if the pension was nonreversionary and the trustee could pay some of the death benefit to the estate, in other words there was no binding death benefit nomination saying it all had to be paid to Jill, the trustee could choose to pay $200,000 to the estate and only put the remaining $1.5 million into a new death benefit pension for Jill. It’s not important for exempt current pension income

There was a time when making a pension reversionary was beneficial for maximising exempt current pension income. This is because the tax exemption ceased when a pension ended on death. These days the exemption continues until the death benefit has been dealt with. In Jill’s case, for example, even if Tony’s pension was non-reversionary, it would continue to contribute to the fund’s actuarial percentage until the entire balance was either converted to a pension, paid out as a lump sum or a combination of the two. Of course, the same applies if the pension is reversionary, but the key is this doesn’t have to be the case to continue the tax exemption.

Sometimes the surviving spouse doesn’t have a pension big enough to roll back the amount they need to clear transfer balance cap space for the reversionary pension.

It is included in the reversionary beneficiary’s TSB immediately

Remember that the total superannuation balance (TSB) is relevant for many things – a number of which revolve around contributions. In the Jill example above, her current balance is $1.5 million. That means it’s conceivable her account could be slightly less than this amount at 30 June 2021. If she’s still young enough to contribute to superannuation and use the bringforward rules, that gives her scope to make up to $200,000 in non-concessional contributions in 2021/22 (assuming no change to the general transfer balance cap or concessional contribution cap amounts). If, however, Tony’s pension is reversionary to her, the value of his pension account will be included in her TSB immediately. That won’t impact on her ability to make contributions in 2020/21, as this is based on her TSB at 30 June 2020, but it will definitely rule her out of further non-concessional contributions in 2021/22. Not everyone cares about this. Jill might not be concerned if she’s too old to make non-concessional contributions or if she’s young enough but had no plans to do so. If it’s the latter, though, don’t forget she’s going to have to take some of Tony’s Continued on next page

QUARTER IV 2020 37

STRATEGY

Continued from previous page

superannuation out of her fund. This might be exactly the time when being able to put large amounts back in could become useful. The pension payments don’t need to continue

When a pension is reversionary, the usual minimum payment is required in the year of death. In Jill and Tony’s case above, the fund would need to make the normal minimum payments for both Jill and Tony’s pensions in 2020/21 if Tony died but the pension reverted automatically to Jill. On the other hand, if the pension was not reversionary, there is no minimum pension required from Tony’s pension in 2020/21. This is even true if he dies in June 2021 and hasn’t drawn any pensions at all during the year. Of course, Jill may actually need the money and want her pension payments to continue. If so, she has a few options: • keep the payments running, but treat them as coming from her own pension – it will mean she meets her minimum earlier, but buys her time to decide what to do with Tony’s superannuation, or • quickly start a pension with some or all of Tony’s super – there’s nothing to prevent the trustee from doing this very quickly, or • take a lump sum payment from Tony’s super balance. It’s worth remembering, though, that a maximum of two superannuation lump sums can be taken from Tony’s pension account. But there are things to watch out for when pensions are not reversionary. SIS Act requires death benefits to be dealt with

A neat side benefit of a reversionary pension is that the trustee automatically meets the Superannuation Industry (Supervision) (SIS) Act requirement to cash a death benefit if it is paid as a reversionary pension. Normally this is something that needs

38 selfmanagedsuper

There are some good reasons a client might still choose a nonreversionary pension.

to be done as soon as practicable after the member dies. If the deceased had a nonreversionary pension or an accumulation account, the trustee must take specific action to demonstrate the death benefit has been dealt with, either by starting a new pension, or paying a lump sum in cash, or by transferring assets. Even though the benefit won’t be added to the beneficiary’s transfer balance account for another 12 months, and they may in fact commute part or all of the pension, making a pension reversionary means the trustee will have at least ticked one task off the to-do list and met the SIS Act requirement to cash the death benefit. Watch the CSHC implications

Remember that account-based pensions started before 1 January 2015 have some handy grandfathering for the purposes of the CSHC. Basically the pension is completely ignored for the income test that applies to this card. If the pension is reversionary, this grandfathering will continue to the beneficiary when they inherit it. Sometimes this is really important and can be reason enough to tip the balance in favour of making the pension reversionary. However, it might not be. Take, for example, cases where: • the couple had other income and have already lost the CSHC. The special grandfathering is lost forever if they ever lose the card, and • the widow/widower will have income from other sources and will fail the

income test in any case once the income from a combined portfolio is assessed for this card. One final point – legacy pensions should be handled with care

In an SMSF it’s too late for the pensioner to change their mind about whether a lifetime or life expectancy pension should be reversionary. The terms were set at the outset and changing them now is something that might require them to profoundly change the pension, for example, convert it to a market-linked pension. At the very least it is something to handle with a great deal of care. However, some market-linked pensions can be changed from reversionary to nonreversionary or vice versa. If the term of the market-linked pension was set based only on the original pensioner’s particulars, such as age and sex, the pensioner can choose whether or not the income stream is reversionary. And they can even change their mind now if they want, as long as their governing rules allow it. The opposite applies if Tony had a market-linked pension for which he had deliberately made Jill the reversionary beneficiary because it allowed him to choose a longer term. In this case, Tony has no choice and the pension must be reversionary to Jill. So would it be better if the marketlinked pension was reversionary? Maybe – it depends. Making it reversionary would mean it can keep running after the original pensioner dies, assuming the pension hasn’t reached the end of its term yet. It will also keep its status as a ‘capped defined benefit’, which allows people to have more than $1.6 million in a superannuation income stream without being forced to reduce it. But that could be a blessing or a curse, depending on a great many factors. This is exactly where the services of an accountant or financial adviser become crucial in making the call.

COMPLIANCE

SMSF asset compliance considerations

Investing in certain asset classes or implementing particular structures to do so can result in additional compliance issues for SMSFs. Mark Ellem identifies areas where trustees will need to pay extra attention.

MARK ELLEM is head of education at Accurium.

When an SMSF considers acquiring an asset or making a new investment, there are several compliance rules and issues that need to be considered at the time of acquisition. For example: • whether the asset can be acquired from a related party, • does it fit within the fund’s investment strategy, • will the investment be regarded as an in-house asset, • does the acquisition meet the sole purpose test, and • is the acquisition or investment permitted

under the trust deed. In addition to these considerations at the time of acquisition, the ongoing and potential future compliance and audit requirements should also be factored in when the trustees are weighing up whether a particular investment is one the SMSF should be making. SMSFs can have additional layers of compliance when compared to using other non-super structures when acquiring and holding an asset. These ongoing compliance Continued on next page

QUARTER IV 2020 39

COMPLIANCE

Continued from previous page

requirements, potential costs and hurdles should be understood by SMSF trustees prior to purchase. Let’s consider what these issues are for various types of commonly held SMSF assets.

Real estate One of the most popular asset types held by an SMSF is real estate, which presents several ongoing compliance issues that SMSF trustees need to be aware of. A few of these are discussed below. • Year-end market value – The market value of real estate held by an SMSF must be considered by the trustee(s) each and every 30 June. SMSF trustees need to be aware of the potential ongoing costs associated with determining and substantiating market value for real estate. Potential costs include the expense of obtaining an independent valuation or other forms of market-value evidence and additional administration and audit costs for an SMSF owning real estate. The ATO has recently released guidance on the evidence trustees need to provide their auditor to substantiate the market value used in the fund’s financial statements (search QC 64053 on the ATO’s website). • Leasing real estate to a related party – Where the property is leased to a related party, trustees must ensure it continues to meet the definition of business real property (BRP). There should be an examination of the lease agreement to ensure the terms are being adhered to, including any review of the market of rents and that the rental agreement has not expired. In addition to the initial costs to draft and execute a lease, there would be ongoing costs to extend, renew and vary it. This may include the cost of obtaining an independent assessment of market rental value. Variation to a lease may also be caused by unexpected market conditions, for example, the COVID-19

40 selfmanagedsuper

rent relief measures. • Residential property – Where the property is residential, the SMSF auditor may require evidence it has not been used by a fund member, relative or related party. This could be brought into question where the property is situated in a popular holiday destination and is rented out as holiday rental accommodation. An SMSF auditor may require the trustee(s) to provide evidence the property has not been used by a related party and that this is provided at each annual audit. • Charges over the property – The SMSF auditor may wish to conduct a search each audit year to ensure the property has not been used to secure any borrowings, unless permitted. This may incur additional costs for the SMSF. • Investment strategy – It is not uncommon for an SMSF holding real estate to have no other assets, apart from its bank account. The ATO and SMSF auditors have a focus on funds with single-asset investment strategies to ensure compliance with the requirements under the Superannuation Industry (Supervision) (SIS) Act 1993. SMSF trustees need to be prepared to dedicate time to ensure the investment strategy will stand up to audit scrutiny. • LRBAs – Real estate held via a limited recourse borrowing arrangement (LRBA) is subject to certain SIS requirements. For example, the property cannot be developed. SMSF trustees need to be mindful of the limitations and restrictions of property purchased using an LRBA.

Units in a non-related unit trust A common scenario is where two or more unrelated SMSFs hold units in a unit trust and that unit trust acquires an asset, typically real estate. In these cases, each SMSF must not hold more than 50 per cent of the issued units in the unit trust. This, together with other requirements, ensures the SMSF’s investment is not treated as an in-house asset. • Ongoing assessment of relationships

SMSFs can have additional layers of compliance when compared to using other non-super structures when acquiring and holding an asset.

– In addition to an initial assessment to ensure a unit trust is not a related trust of each of the SMSF unitholders, there will be a requirement for an ongoing annual assessment to ensure this remains the case. This would include determining whether there has been any change in circumstances that makes members from different SMSFs related parties. For example, a member from each fund jointly acquiring a rental property together or children of members from each SMSF getting married to each other may mean they become related parties. The trustee should not be surprised if their auditor reviews the structure each and every year. • Exit plan – It is important when this type of structure is entered into that the SMSF trustees are aware of the potential issues when one of the SMSF unitholders wants to dispose of their units in the unit trust. The assessment of whether the investment is caught by the in-house asset rules is examined from the perspective of each SMSF unitholder. A unit trust may be a related trust to one of the SMSF unitholders, but not another SMSF unitholder. For example, a unit trust is set up with three unrelated SMSF unitholders, SMSF A, SMSF B and SMSF C, each holding one-third of the issued units. SMSF C unitholder wants out and

SMSF A offers to buy the units at market value. From a practical perspective, this achieves the desired outcome. However, there is now a significant compliance issue for SMSF A as it now holds two-thirds of the units in the unit trust. As SMSF A now holds more than 50 per cent of the issued units, the unit trust is a related trust of SMSF A and caught by the in-house asset rules. From SMSF B’s perspective, it still holds units that represent less than 50 per cent of the issued units and so the unit trust is not a related trust of SMSF B. Assuming SMSF A’s unitholding value represents more than 5 per cent of the total value of its assets, it will be required to dispose of the excess in-house asset amount by the following 30 June. This may cause issues, particularly where the asset held by the unit trust is the business premises of the business operated by members from one or more of the SMSFs. SMSF trustees in this type of non-related unit trust structure need to have an exit plan prior to executing the acquisition to deal with unitholders wanting to dispose of their interest, either voluntarily or involuntarily, such as when a member passes away. • Market value – As with real estate, SMSF trustees who hold units in a unit trust, or any other unlisted entity, will be required to determine and substantiate the market value each and every 30 June.

Division 13.3A unit trusts Another common scenario is where an SMSF acquires an asset via an interposed unit trust that complies with SIS regulation 13.22C in Division 13.3A, commonly referred to as a non-geared unit trust. This type of structure can be used where the SMSF is the sole unitholder or where the fund and a related party are the unitholders. While the unit trust is prima facie a related trust of the SMSF, the SIS provisions exempt the units from being treated as an in-house asset, provided it complies with the requirements of SIS regulation 13.22C.

One of the most popular asset types held by an SMSF is real estate, which presents several ongoing compliance issues that SMSF trustees need to be aware of.

• Checklist of prohibited events – SMSF trustees need to be aware of the consequences where certain events occur after the structure has been established. These events are commonly referred to as 13.22D events and will cause the unit trust to be forever tainted as an in-house asset. A 13.22D event can occur simply through the SMSF buying listed shares with surplus cash. Rectification can be a challenge, as well as costly. The fund auditor will need to assess, during each annual audit, that there have been no 13.22D events.

Overseas assets Two issues that arise where SMSFs acquire assets overseas, particularly direct assets such as real estate, are ownership and market value. Often local laws prohibit the asset being held by the SMSF and an interposed entity is required to hold the asset as a custodian or nominee, resulting in additional costs. Without relevant documentation, substantiating asset ownership can be a challenge. Market value is also a challenge and may require engaging a local valuer to provide a market-value report. Again, this may be more expensive than arranging a valuation of a property situated in Australia. • Language used – Where documents

are not in English, translation costs may be incurred so that the accountant and auditor can understand them. • Foreign currency translation – Where a transaction in relation to the overseas asset is in a foreign currency, there may be additional accounting and compliance costs associated with converting the amounts into Australian dollars and dealing with the related income tax consequences. Further, the SMSF may have an obligation to lodge local foreign jurisdiction returns and pay taxes. Generally, the administration and compliance costs associated with an SMSF owning an overseas asset, such as real estate, will be higher than where the asset is situated in Australia.

Collectables and personal-use assets The rules for an SMSF owning these types of assets are very prescriptive and are generally seen as a back-door prohibition on SMSFs holding such assets. Commonly, when SMSF trustees are made aware of the ongoing compliance requirements of these types of assets, they decide to acquire the asset outside of their fund.

Forewarned is forearmed Advice at the time an SMSF acquires an asset, or makes an investment, is important to ensure the superannuation rules are followed, but such advice should not end there. Where SMSF trustees have the knowledge and understanding of the ongoing compliance requirements for different types of asset classes, preparation of the annual financial statements and performance of the annual independent audit can run a lot smoother. It also prompts forward planning to deal with potential future events. In fact, it may even lead to the SMSF trustees deciding not to acquire the asset or make the investment. Educating trustees on these and other asset-type issues can reduce the risk of compliance matters or simply lessen the level of annual audit angst for trustees, their accountants and even the auditor.

QUARTER IV 2020

STRATEGY

Legislative impact on contributions

Anthony Cullen details some of the recent legislative changes and the impact they have had on contribution opportunities for SMSF members.

ANTHONY CULLEN is SMSF technical specialist at SuperConcepts.

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A raft of legislative changes made in the past two years have had an impact on SMSF funds, how and when we can contribute to our funds and when we can access our funds in retirement. SuperConcepts and selfmanagedsuper combined for the fourth annual SMSF Professionals Day on 27 October – the first digital edition of the forum – where these issues were discussed and we offered advice to professionals enabling them to assist their clients. The legislative changes discussed included: • the ability for people aged 65 and over to make a downsizer contribution of up to $300,000 to their super fund from the proceeds of selling their home, • the ability to make catch-up concessional super contributions if you have a total superannuation balance (TSB) of less than $500,000,

• work test exemptions for Australians aged between 65 and 74 with a superannuation balance below $300,000, and • the increase in the work test age from 65 to 67. Many of these amendments can be confusing, especially as they can collide with each other, making it challenging to know how, when and how much trustees can contribute to their SMSF fund in their senior years. Here are the basics on what these changes mean and some advice on how you can help clients make the most out of their SMSF by leveraging the current legislative landscape.

Downsizer contributions for people over 65 It is quite common for people to sell the family home when they reach retirement age so they can

purchase a smaller property because the kids are all grown up and have moved out of the house. This not only means singles and couples can have a more appropriately sized property in a location that suits them, it also means they can free up funds that can be used for their retirement savings. The federal budget made allowances for this and from July 2018, anyone over the age of 65 could make a $300,000 downsizer contribution using the proceeds of selling the family home. But to be able to do this, the ATO has outlined strict eligibility requirements, including: • the house must have been owned by the member or their spouse for 10 years or more before the sale (calculated from the settlement of purchase through to the settlement of sale), • the home is located in Australia and is a fixed address, not a caravan, houseboat or other mobile homes, • the proceeds must be, at least partially, exempt from capital gains tax (CGT) under the main residence exemption or entitled to this exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset, • the downsizer contribution is made within 90 days of receiving the proceeds of sale, and • the member has not previously made any other downsizer contributions. Downsizer contributions are tax-free and exempt from concessional and nonconcessional contributions caps and aren’t subject to the $1.6 million TSB restriction, making it a perfect way for people downsizing their home to boost their superannuation after the age of 65. And one of the best parts of the downsizer contribution scheme is that proof of purchasing a new property is not needed, nor is the need to actually downsize. If members want to spend their retirement on the road in a mobile home, on the water in a houseboat or any other nomadic form of lifestyle, they can do so while still being able to contribute up to $300,000 to their super fund.

New retirees aged between 65 and 74 can now make voluntary contributions to their super account without having to undergo a work test, under certain conditions.

So, what happens if the client settles on the sale of your property when they are 64, but turn 65 during the 90-day period given to make the contribution? That is fine because the individual can wait until their 65th birthday and make the contribution (which still falls in the allowed 90-day period) without any fear of penalty. Another thing to consider is the timing of the settlement and whether the property was sold towards the end of the financial year. If the 90-day period has the end of the financial year in the middle of it, the client may want to consider waiting until after July 1 before making the contribution. That way it won’t impact the person’s TSB and potential to make other contributions until the following financial year.

The changes to bring-forward and catch-up super rules Changes were made to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 to allow people to carry forward their unused concessional contributions (CC) cap from the previous financial year into a later year and this was enacted from 1 July 2018. This only applies if the member’s TSB was less than $500,000 in the previous financial year, but it allows members the chance to make up $150,000 of

CC in just one financial year by carrying forward the unused cap from the previous five financial years. It should be noted though, especially during COVID-19 times, if there are changes to the market and a person’s TSB falls below $500,000 in a future financial year, they become eligible to take advantage of their carry-forward balance, even from a period where this threshold may have been exceeded. Bring-forward non-concessional contributions work in reverse, allowing a superannuant to make early contributions using the non-concessional contributions (NCC) cap from future years. Right now, this only applies up until the age of 65, but there is a bill before parliament that will extend this up to age 67. The Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 entered parliament in May, but has been stuck in the Senate since late August. With just 12 sitting days left in the Senate for 2020, it appears likely this may be further delayed until 2021. If passed, it means retirees aged up to 67 will be able to use the bring-forward rule without being subject to a work test and without it being considered an excess NCC. Unfortunately, it means SMSF clients who are turning 65 this year are in a holding pattern and face a tough decision – exercise the bring-forward rule now or hope the legislation passes the Senate and wait until they are 67. There are a number of amendments put forward by Pauline Hanson’s One Nation party that have delayed the bill from receiving royal ascent and we will all have to adopt a wait-and-see approach as to when this might happen and in what form. The propsed changes include: • the potential to recontribute money released from super via the Temporary Early Access to Super COVID-19 measures, under specific circumstances, up to 30 June 2030, • having an increased CC cap determined Continued on next page

QUARTER IV 2020 43

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by age if a person is 67 or older at the beginning of the financial year, and • the avoidance of excess CC should an employer contribute in accordance with certain workplace superannuation schemes that result in an individual exceeding the cap. Whether Senator Hanson and One Nation are successful remains to be seen. There appears little doubt the bill will ultimately pass though as it has garnered wide support throughout the Senate. But the advent of COVID-19 and reduced parliamentary sitting days have caused delays in it passing through the upper house. So what happens to people turning 67? There is no legislation right now. They have to decide as an individual whether they are willing to run the gauntlet and make a contribution triggering the bring-forward provision. We cannot advise you on this until there is an outcome in the Senate and for everyone’s sake let’s hope it comes soon.

Work test exemptions for Australians aged 65 to 74 New retirees aged between 65 and 74 can now make voluntary contributions to their super account without having to undergo a work test, under certain conditions. For people over a certain age, the ATO will require work tests to be met in some cases before they can make any further contributions to their super account. To meet the criteria of this work test, members must have worked at least 40 hours in a 30day period during the financial year in which they want to make a contribution. But now the ATO has put exemptions in place to allow retirees the opportunity to top up their super without having worked the required hours in that financial year. To be eligible, these taxpayers must: • have a TSB of less than $300,000, • make the contribution within 12 months after the financial year in which they last met the work test, and • adhere to the existing contribution caps.

44 selfmanagedsuper

This legislation became effective from July 2019 and was put in place for retirees and pre-retirees who have not had a lifetime of super contributions from their employer. The superannuation guarantee was only enacted in 1992 and was only 3 per cent to 5 per cent of wages at the time before slowly increasing to the current rate of 9.5 per cent. It is legislated to rise to 12 per cent from 1 July 2025. It means many retirees missed out on a significant portion of super contributions the generations after them enjoyed, resulting in this measure being put in place to allow them to top up their retirement savings for a more comfortable retirement. It is important to note, though, if a person retires early, they may not be eligible for these exemptions. If an individual stopped working when they were 60, for example, this doesn’t mean they can suddenly contribute now when they are 67. In scenarios such as this a work test would still have to be satisfied.

The increase in the work test age from 65 to 67 As well as the work test exemption, the age when these work test requirements kick in has been extended to 67, a change that came into effect on 1 July 2020. It means workers approaching retirement age or new retirees also have an opportunity to make contributions under the CC cap of $25,000 and the NCC cap of $100,000 without having to meet the work test

The AT O has put exemptions in place to allow retirees the opportunity to top up their super without having worked the required hours in that financial year.

eligibility requirements. It effectively affords retirees, or people approaching retirement, a larger window to make voluntary contributions and also gives them a window to access the bring-forward non-concessional super contributions – providing this bill passes the Senate shortly. As a result, people in this 65 to 67 age bracket now have a unique opportunity to have their cake and eat it too. By reaching the age of 65, these individuals will have automatically triggered a condition of release, enabling them to access their preserved funds. Therefore, they can draw down on their super to start retirement, but also make further contributions to ensure it lasts you longer.

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STRATEGY

Superannuation salvation

The government has allowed early access to super as a response to the financial hardship caused by the coronavirus. However, there are other opportunities and strategies to consider in order to maximise the role an individualâ&#x20AC;&#x2122;s retirement savings can play to alleviate the adverse effects of the pandemic, Tim Miller writes.

TIM MILLER is education manager at SuperGuardian.

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There is much to contemplate when it comes to the early release of superannuation proceeds, whether under financial hardship or other provisions. When early access is due to financial hardship or compassionate grounds, some are totally for it and some are totally against it; many are largely indifferent. As it stands, the law provides for it in limited circumstances and the federal government has, for the past three years, pondered changes to the rules surrounding it. COVID-19 relief measures brought early release front and centre, but the longer-term financial effects of nationwide shutdowns mean financial hardship is not going away in a hurry and many individuals may find themselves in a position where the first two tranches of the pandemic measures wonâ&#x20AC;&#x2122;t get them through these times. The reality is the financial hardship associated

with COVID-19 comes with collateral damage. Collateral damage in this sense is colloquial because the damage people are experiencing is all encompassing, be it financial, physical and/ or mental. So, what is the link between these potential long-term impacts and the early release of superannuation?

JobSeeker Excluding the politics behind the decision to allow people to access their retirement savings prematurely, the early release of super due to the financial impact of COVID-19 provided, for many, an element of comfort that while they were experiencing employment hardship, they had a financial buffer that would at least help them through some initial tough times. However, for many, and we

are talking in the hundreds of thousands, those tough times mean extended periods on initiatives like JobSeeker. With JobSeeker being government-based income support, it is significant to those who applied at the outset of the original state-based shutdowns in March/April 2020. Many of these individuals are approaching or have passed their 26-week eligibility criteria to access superannuation under the longestablished condition of release – severe financial hardship.

Severe financial hardship For those under preservation age, currently 58, severe financial hardship requires the receipt of income support for a continuous 26-week period and requires an inability to meet immediate living expenses. However, unlike COVID -19 early release, which was a new ‘compassionate grounds’ measure administered and controlled by the ATO, severe financial hardship is a trusteecontrolled condition of release. This in itself is one of the review items the government has been looking at for the past three years. Subject to providing satisfactory evidence identifying the continuous receipt of government income support, an individual can be paid an amount between $1000 and $10,000. Unlike COVID-19 early release, the amount is taxable at 20 per cent plus Medicare on the taxable component. Individuals can, however, only apply once in a 12-month period, but that is exclusive of applying under other conditions. That means, as it stands, some individuals may be eligible to apply for up to $30,000 for the period March 2020 to June 2021 at an upfront cost of $2200.

But wait there’s more For those over preservation age, currently 58, if they have been in receipt of government income support for a cumulative period of 39 weeks after attaining preservation age, then the $10,000 maximum limit is removed, that is, there is no restriction on how much they can draw down. It is this cohort of individuals that requires

Table 1: Date of birth and preservation age Date of birth

Preservation age

Before 1 July 1960

1 July 1960 – 30 June 1961

1 July 1961 – 30 June 1962

1 July 1962 – 30 June 1963

1 July 1963 – 30 June 1964

From 1 July 1964

further analysis and consideration. It also requires a complete understanding of how having a tiered preservation age can create complexities. Table 1 shows preservation age based on date of birth.

Preservation example Let’s consider Louise and Frank. Louise was born on 20 June 1962, so turned 58 in 2020. Frank was born on 20 October 1962, so also turned 58 in the same year. By virtue of Louise being born prior to 30 June 1962, her preservation age is 57, whereas Frank, being born after 1 July 1962, has a preservation age of 58. As a result of COVID-19, both Louise and Frank lost their jobs and both applied for and received JobSeeker from 1 April 2020. We assume neither has been on JobSeeker previously. Based on the severe financial hardship condition of release, Louise will satisfy the requirement of 39 cumulative weeks post attaining preservation age towards the end of December, let’s just say 1 January 2021 for the purposes of the example. Frank on the other hand did not reach preservation age until 20 October and so his 39-week period does not commence until that date, meaning the six months of JobSeeker already received is irrelevant. For Frank, he will not be able to access super under the extended definition until the end

of July 2021. The point of this example is primarily to highlight preservation age in itself can add complexity to superannuation questions. One of those questions is once someone has reached preservation age and they satisfy the severe financial hardship condition, what should they do in their best interest? Clearly the answer is subjective, but there are ultimately three options or a combination of three options an individual could contemplate if faced with the prospect of long-term unemployment post preservation age. An individual in this situation could: • commence a transition-to-retirement income stream, • access superannuation under the severe financial hardship condition of release, and • permanently retire and commence an account-based pension. An individual’s intent and their age will be the determining factors between a transitionto-retirement income stream in accumulation phase and an account-based pension in retirement phase. If they are under the age of 60 and can demonstrate they are no longer gainfully employed and have no intention of ever again being gainfully employed, then they could move straight to an accountbased pension. Similarly, if they are 60 Continued on next page

QUARTER IV 2020 47

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or over, the very fact they cease a gainful employment arrangement after turning 60 is enough without future intent being a consideration. That doesn’t apply to Louise and Frank.

The relevance of JobSeeker Arguably this issue comes down to an individual’s capacity and/or desire to maintain government income support. On the presumption that an individual declares retirement pre-age-pension age, then they will lose their entitlement to JobSeeker given they have a mutual obligation to be seeking work. Again, slightly different retirement definitions pre and post age 60 will have different outcomes. But for those under the age of 60, as is the case for Louise and Frank, the relevance may also be the different pay-as-you-go treatment for transition-to-retirement versus lump sum withdrawals and Centrelink assessment of the income received. Oneoff lump sums do not count towards the income test for JobSeeker purposes. The same can’t be said for income streams. Of course, what an individual does with the lump sum may impact on other assets and income-tested assets. More importantly, income stream payments prior to age 60 from a taxable component are taxed at marginal tax rates less a 15 per cent rebate. Lump sum withdrawals are taxed at 0 per cent up to the superannuation low-cap threshold, currently $215,000 in the 2021 financial year. Lump sums are not accessible via a transition-toretirement income stream. The reality is that in the midst of a recession, long-term unemployment could result in more people accessing their superannuation beyond the 31 December 2020 cut-off for early release on COVID-19 compassionate grounds.

Compassionate grounds By mentioning compassionate grounds, it would be remiss to ignore that there are also many Australians currently struggling to pay

48 selfmanagedsuper

Given there is currently no COVID-19 vaccine, there is one other aspect that has not really been contemplated as much as financial hardship and that is the physical and mental health impact.

their mortgages. The existing compassionate grounds early release measures do provide for access to superannuation in the event that foreclosure is imminent due to unpaid mortgages. If we expand out the relief measures provided by the Australian Banking Association, they provided an initial six months plus a further four months upon application for loan deferrals. What does this look like for super fund members come January 2021? Will we see a further call on super to help out with repayments? Unlike severe financial hardship, members will need to provide supporting material to the ATO.

Short and long-term health Given there is currently no COVID-19 vaccine, there is one other aspect that has not really been contemplated as much as financial hardship and that is the physical and mental health impact. There is the virus itself and the varying effects it has on those who contract it. Shortterm illness may very well lead to temporary incapacity and SMSF trustees need to understand what benefits can be paid in the event of this affliction. Beyond those who actually catch the virus, there is the short and potential long-term impact of mental

health issues, particularly those linked to community lockdown. How long until we really understand the full impact of this? Overall, 2020 has thrown up a number of challenges that not only the SMSF but broader superannuation industry face and many of the challenges can be linked to future claims on superannuation.

Final consideration Now, as we know, the objective of super, or the presumed objective of super given there is still no legislated objective, is to substitute or supplement the age pension. Also we accept the sole purpose is to summarily provide for retirement benefits, but that doesn’t take away from the reality that superannuation is a real consideration for financial relief not just until 31 December, but potentially well into the next financial year. For those needing help and those helping those needing it, the question becomes “What is the damage done now by not accessing super?” versus “What is the damage done later by accessing super?” In its reviews into financial hardship and compassionate grounds, held between 2017 and 2018, the government stipulated rules relating to super should operate under four guiding principles: • Preservation – which meets the objective above, • Hardship – that circumstances exceed the benefits of preservation (that is, when does compassion outweigh policy objectives), • Last resort – super should only be used as a last resort where other financial support is exhausted, although it’s arguable this was a consideration given the speed with which the COVID-19 release was introduced, and • Fair and effective – the rules are clear and consistent. These reviews seem to have ground to a halt post the last federal election, but the above principles do have some merit not only for early release and other superannuation measures, but also when highlighting the rules to existing and potential clients.

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ANALYSIS

The future looks bright for SMSFs Bryan Ashenden analyses the latest ATO statistics and the 2020 federal budget to determine what they mean for the future of the sector.

BRYAN ASHENDEN is head of financial literacy and advocacy at BT Financial Group.

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Reflecting on the federal budget in October and the recent release of the ATO’s latest SMSF statistics, there are many signs that are pointing to a bright future for the SMSF industry. Let’s start with the latest SMSF statistics for some proof points first. These figures, relating to the June quarter 2020, paint an interesting picture for the sector, particularly as we were right in the middle of the first wave of the COVID-19 pandemic. Historically, the June quarter has shown a significant number of SMSFs actually being wound up. And this is unsurprising as it is the last quarter before the end of the tax year, and by having the SMSF wound up then, it means lodging an income tax return for the fund in that year, but not having to do another one as would be required if the SMSF was still in existence into July. In fact, in each of the June quarters for 2015 to 2019, an average of close to 10,000 SMSFs were wound up and there was a net decline in the overall numbers in those quarters. The year 2020 has proven a very different story. There were only 204 funds wound up in the quarter, the lowest in at least the past five years, and over 4000 were established. For the year ended 30 June 2020, there was a net increase in the total number of SMSFs of close to 18,000 – the biggest year since the year ended 30 June 2016. Why the June quarter of 2020 has proven so interesting is that it was, as mentioned earlier, in the middle of the COVID-19 pandemic in Australia. In other words, it was during a period when equity markets were proving extremely volatile, super balances were being affected and people were withdrawing up to $10,000 from their super under the early release stimulus measures introduced by the government. It is likely this resulted in more Australians starting to take an active interest in their super. As part of this, many Australians, possibly for the first time,

really considered whether they were happy with their existing superannuation arrangements. And certainly for existing members of SMSF, the results show a resounding sense of confidence in their current arrangements. Fewer people were exiting their SMSF. Perhaps the control and choice an SMSF provides really came to the fore during these times. This may not have been about the ability to change investments to suit the circumstances, but perhaps also the ability to sit tight, to stay on course with their current investments and not change tack. Given there can be a reasonable lead time in setting up an SMSF, from the original recommendation, sourcing an appropriate deed, executing that deed, registering the fund and rolling money over, no doubt a lot of the work for these new establishments occurred prior to the onset of COVID-19. However, it could have been very easy to hit the pause button during the June quarter and reassess the state of play on the other side. But clearly this hasn’t happened. So where is this growth in SMSFs coming from? Not surprisingly, the establishment data follows population data, with about two-thirds of all SMSFs being established in New South Wales and Victoria, followed by another 18 per cent being set up in Queensland. It will be interesting to see if there is any difference in the statistics when they are released for the September quarter, particularly for Victoria and whether the impact of COVID-19 has

flowed through to the SMSF sector. But the fact we havenâ&#x20AC;&#x2122;t seen it yet could also point to trustees, and SMSF professionals, becoming more tech savvy in their approach to running a fund with regard to legislated requirements and obligations. What is more interesting than the locations of where SMSFs are being established, are the age and gender profiles of new members and hence new trustees. Continuing the trend from recent quarters, a substantial growth in new members is coming from those aged under 45, with just under 45 per cent coming from this cohort. This is a positive for the sector, as decisions to establish an SMSF cannot be taken lightly and should be formed with a view to them existing for the longer term. With those under 45 likely to have at least 20 years of

their working life ahead of them, it really shows the longevity the SMSF industry has ahead of it. There are also more women in this age bracket joining SMSFs than men, while males outpace females in later stages of life. However, for all SMSFs as at 30 June 2020, not just those established in the quarter, there was a higher proportion of female membership across all age brackets until you reach age 70. From age 70 onwards, there was a noticeable reversion to SMSFs with members that are male. The question then must be asked: what conclusions can be drawn from these statistics? As mentioned, there is the longevity from the current establishment data, with a concentration on younger workers setting up SMSFs and a higher concentration on females, who

It could have been very easy to hit the pause button during the June quarter and reassess the state of play on the other side. But clearly this hasnâ&#x20AC;&#x2122;t happened.

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QUARTER IV 2020

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statistically will live longer and therefore will need their retirement savings to last longer. However, we do also have a concern with what appears to be a large tail at the other end of the spectrum, with older males still in SMSFs. For those advising these sectors, there will clearly be a need to provide assistance, support and education to help younger generations come to understand their SMSF responsibilities. However, assistance will also be required for those who are well into retirement with appropriate succession or wind-up strategies for their SMSFs. These statistics clearly paint one story, but the 2020 federal budget also has ramifications for the future of the SMSF industry. It doesn’t take a lot of analysis to note there really weren’t any measures in the budget for SMSFs this year – which in reality is a positive. No changes to the contribution rules. No changes to the taxation of benefits in accumulation or retirement, and just some reconfirmation of delays to the start date of some other previously announced measures, such as increasing the maximum number of permissible members in an SMSF to six. But an analysis kept to this level fails to see the significance of the reforms to MySuper products and what they could potentially mean for SMSFs. An important announcement in the budget was the proposal to ‘staple’ default account arrangements to a member form 1 July 2021. This will have the effect of an individual taking their existing fund with them when they move from one employment arrangement to another. The immediate and clear benefit of this move is to reduce the future instances of lost super, simply on the basis that there will be fewer accounts being opened. More importantly though, as noted in the “Your Future, Your Super” document released by the government on budget night, the Productivity Commission has previously found the incidence of multiple

52 selfmanagedsuper

accounts is leading to Australians losing around $2.8 billion a year in excess fees and lost returns. Imagine if that wasn’t the case? Clearly addressing this issue should lead to a boost in the retirement savings of many Australians. When you consider one of the most important factors in deciding to establish an SMSF is the level of current and projected super savings, measures that should return benefits to a member’s account can only assist in SMSFs becoming a desirable option for more Australians in the future. Add to this the proposed benchmarking approach for MySuper products from 1 July 2021, which is then to be extended to non-MySuper trustee-directed products a year later. Under the proposals, if a super product is deemed to be underperforming its benchmark, the trustees must inform the fund’s members. If a member is told their investment is underperforming, they may take a greater interest in what is actually happening with their super savings. A greater level of interest leads to a greater level of engagement. And SMSF trustees need to be engaged members. Again, this may lead more superannuants to consider if their super needs may be better met

With those under 45 likely to have at least 20 years of their working life ahead of them, it really shows the longevity the SMSF industry has ahead of it.

through the SMSF environment. Of course, increased interest, and possibly demand, for SMSFs from Australians in the future doesn’t mean these types of funds are the right solution for all. SMSF practitioners will still need to use their professional judgment to determine who they believe are the right candidates to run their own super fund, and advise accordingly and appropriately. But there can be no doubt the future for SMSFs is looking bright.

STRATEGY

Heading off member conﬂict

The interaction between SMSF members can sometimes result in conﬂict. Rob Lavery examines this issue and courses of action that can be taken to avoid these situations.

ROB LAVERY is senior technical manager with knowIt Group.

The rules governing the membership of an SMSF are fairly straightforward – all members must be trustees or directors of the trustee company if the fund has a corporate trustee. The rules are slightly different for single-members. It is the simplicity of an SMSF’s governance structure that leaves it uniquely exposed to the very human issue of conflict. With the prospect of six-member SMSFs once again on the legislative agenda, the likelihood of conflict between trustees is only increasing. So why is conflict likely to arise between SMSF members and how can members and their advisers set up SMSFs to minimise the risks?

Conﬂict often arises from issues outside the SMSF It is common for conflict that arises in an SMSF to originate from issues between the trustees outside the fund. From this standpoint, an SMSF created as an extension of an existing relationship, such as one based around a jointly held business, is often more prone to conflict between the fund’s trustees.

Dunstone v Irving In the Victorian Supreme Court case of Dunstone v Irving, a dispute between the fund’s trustees had Continued on next page

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its origins in a business owned by those trustees. As noted in the ruling: “The dispute arose as a result of the plaintiff’s (Dunstone) departure at the end of the 1997 calendar year from a construction and development business that the plaintiff and defendant (Irving) jointly operated. The plaintiff wished to roll over his entitlements into another superannuation fund. At the time the fund contained approximately $2.1 million. The plaintiff claimed he was entitled to about $1.3 million, an amount derived in essence from his annual member’s statements. The defendant claimed that the fund should be divided equally. He later also claimed that allowance should be made for certain tax liabilities.” The defendant, Irving, claimed he and Dunstone had agreed to equalise the benefits drawn from their jointly held business. Superannuation contributions formed part of these benefits to be equalised. Irving extended this unwritten agreement to mean that the benefits payable from their SMSF could be amended to ensure this equalisation. Ultimately, the judge did not agree with Irving and Dunstone remained entitled to his larger portion of the SMSF’s assets. It also emerged the fund was actually a trading arm of a property development group – in substance the fund was nothing more than a serial property developer and the assets were held mostly in cash to enable the fund to carry out such developments. All in all, it was clearly not in the interests of the members for this matter to be publicly litigated and hence drawn to the attention of the ATO.

The lessons from Dunstone v Irving Section 17A of the Superannuation Industry (Supervision) (SIS) Act only requires that no member may be an employee of another fund member, unless they are relatives. It does, however, mean business partners, friends and in-laws can join or form an

54 selfmanagedsuper

SMSF as long as the maximum fund membership is not exceeded. While an SMSF can contain business partners and friends, Dunstone v Irving demonstrates it may be a better strategy to confine membership to the immediate family to prevent, or at least limit, the possibility of problems in the future should business relationships turn sour. One lesson the case clearly outlines is that an SMSF should not form part of a business agreement, particularly where the agreement is potentially in conflict with superannuation and trust law. Dunstone and Irving would have been better off forming their own separate SMSFs and creating a separate nonsuperannuation-funded mechanism for ensuring the benefits each claimed from their business were equal.

When relationships break down As mentioned above, when relationships between trustees break down, difficult situations can be limited by keeping membership of an SMSF within the immediate family. That said, keeping the fund in the family is not a cure-all for avoiding conflict as was demonstrated in another court case.

Notaras v Notaras In the New South Wales Supreme Court case Notaras v Notaras, the plaintiff, Basil Notaras, and the defendant, Brinos Notaras, were brothers and the only two members and trustees of an SMSF called the Saraton Superannuation Fund. Basil sought to remove Brinos as trustee of the fund on the following grounds: • Brinos sold the fund’s shares and withdrew the proceeds from two bank accounts without consulting his cotrustee (Basil), • the total amount Brinos had withdrawn was more than he was entitled to as a member of the fund, • failure to take part in the management of the fund and refusal to sign documents (tax returns and member statements) had placed the trustees in

It is common for conflict that arises in an SMSF to originate from issues between the trustees outside the fund.

breach of the SIS Act, and • since the withdrawal, Brinos had a nominal interest in the fund. As a result of the breaches, the Supreme Court concluded Brinos could be removed as trustee and replaced as trustee under section 70 of the Trustee Act 1925 (NSW). The replacement trustee was a company, Bazport Pty Ltd, controlled by Basil. The presiding judge, Justice Nigel Rein, commented that to appoint a corporate trustee with such a close connection to Basil would not be appropriate, but under the circumstances, where only Basil had a financial interest as a member of the fund, it was not inappropriate, because Brinos’s interest as a member was nominal only.

Lessons to be learned from Notaras v Notaras The Notaras v Notaras case highlights several issues for consideration by both SMSF trustees and their advisers. An initial source of friction between the

brothers was a disagreement over a familyowned property in Maroubra, Sydney – once again, the origin of the conflict was not directly related to the fund itself. Shared business or investment interests within a family are not always a good reason for establishing an SMSF and should be evaluated against a broader range of considerations, such as fund purpose, skills, time and expertise of the participants, as well as having sufficient assets. In the event of a relationship breakdown between trustees, the trust deed should be a source of guidance as to how decisions can be made in an alternative manner, as well removing and appointing a trustee. This is easier said than done in cases where funds have more than one member as the requirement that all members be trustees cannot be ignored just because one trustee has fallen out of favour. The ability to weight voting rights via the trust deed, or the use of a corporate trustee, may help avoid situations reaching the boiling point seen in Notaras v Notaras. Justice Rein also commented that attempts had been made to have tax returns and member statements finalised in 2011, but none had been completed since 2008. Thereafter, “no further steps were taken in relation to the finalisation of tax returns and member statements, with a consequence that the trustees of the fund had put themselves in breach of the (SIS) Act”. The lack of understanding by the trustees as to their duties demonstrates the need for SMSF trustees to have capable professionals, such as financial advisers and accountants, on whose advice they can rely.

Blended families invite even greater risk The failure of jointly owned investments or business ventures are not the only sources of conflict in an SMSF. Situations where there are blended families or multiple children by multiple former or current spouses can be just as prone to conflict.

Marsella v Wareham (No 2) In the Victorian Supreme Court case

If thought and effort are not put in ahead of time to prevent conflict, issues can fester and the likely result is a trip to court for the warring trustees.

Marsella v Wareham (No 2), the children from an SMSF member’s first marriage had to be removed as trustees of the fund. The SMSF, the Swanston Superannuation Fund, had only one member, Helen Marsella. The fund’s second trustee was the member’s daughter by her first marriage, Caroline Wareham. Upon the death of Marsella, Wareham appointed her brother as the second trustee of the SMSF and paid out the entirety of her mother’s death benefit to herself. Marsella had no valid death benefit nomination in her SMSF. She had made a nomination more than a decade before her death, however, it nominated her grandchildren as beneficiaries and they were not permissible dependants under superannuation law. When she died, Marsella had a number of potential dependants, including her second husband, her children from her first marriage and her estate. The fund’s trust deed considered the fund’s “beneficiaries” to include dependants with “a mere expectancy to receive payment of a benefit entitlement”. Her will provided specific bequests to her second husband, her children from her first marriage, largely assets acquired from the estate of their father, and cash bequests to her grandchildren. The court ultimately ruled Wareham and her brother be removed as trustees of the Swanston Superannuation Fund as they

had not given genuine consideration to all the beneficiaries of the fund.

Lessons to be learned from Wareham v Marsella (No 2) Marsella’s SMSF failed to prevent conflict in two major areas: 1. There were no clear instructions relating to payment of her death benefit, and 2. A trustee with a conflict of interest was appointed. Had the fund’s only member provided clear and binding instructions on the payment of their death benefit, the surviving trustee would not have had any ability to exercise their discretion. A clear, valid death benefit nomination and well-considered trust deed wording are essential in preventing the most common superannuation conflict, that relating to death benefits. The other issue relates to the member’s choice of a second trustee in a singlemember SMSF. While it is hard to know whether there was evidence of conflict between Marsella’s second husband and the children from her first marriage before her death, it should not be surprising that the death of a loved one can heighten any discord between such parties. The fund’s member would have been well advised to engage a second trustee who was not a potential beneficiary upon her death, or using a corporate trustee with provisions in place for unbiased decision-making after her death.

Choose fund members and trustees carefully Most conflicts between trustees are preventable. By carefully choosing the SMSF’s members and trustees, choosing a deliberately worded and frequently reviewed trust deed and engaging capable professionals, SMSF members can head off conflict before it overwhelms the fund. If thought and effort are not put in ahead of time to prevent conflict, issues can fester and the likely result is a trip to court for the warring trustees. It is much easier to head off potential conflict ahead of time than it is to stop it once the fights commence.

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Rescuing small businesses The coronavirus has resulted in amendments to the country’s insolvency laws. Vicky Stylianou suggests how the reforms should work if they are to prevent struggling small businesses from ceasing to trade.

VICKI STYLIANOU is advocacy and policy group executive with the Institute of Public Accountants.

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The insolvency laws in Australia have been the subject of debate for a considerable period of time. Reforms have been piecemeal and have tackled some issues, while leaving others for another time, which never seems to come. Until now. COVID-19 has forced the government to address many outstanding reform issues, but not all, and the time has now arrived for insolvency to be put under the spotlight. We have already seen some of the COVID-19related measures, including the relaxation of the insolvent trading laws. The federal government has previously announced the removal of the risk of a director having personal liability for the debt incurred in the “ordinary course of the company’s business”. The question of what is in the ordinary course of a company’s business was not expressly defined, but it is a term the courts have often considered in various contexts. The director will bear the “evidential burden” of showing the exemption applies to them if challenged. The amendments do not reduce the general legal obligations upon directors to act in the best interests of the company and its stakeholders. Directors still have legal obligations to the company and to their creditors. The intention is that relaxing the insolvent trading laws, together with the safe harbour regime, will provide directors with the opportunity to work through their current difficulties and essentially keep a business going. The relaxation of the insolvent trading laws has been extended to 31 December 2020 after Treasurer Josh Frydenberg announced: “The extension of the temporary changes to the insolvency and bankruptcy laws will continue to

provide businesses with a regulatory shield to help them get to the other side of this crisis.” However, some are still planning for the anticipated wave of small business insolvencies. ANZ chief executive Shayne Elliott was reported as saying the bank was building up teams to deal with the pain next year. “We do believe there will be a pick-up in insolvencies next year and we are making sure we are resourced appropriately to deal with that,” Elliott told a parliamentary committee. “We are making sure we are preparing from a resources point of view – so adding people – and a cultural point of view – so how to deal with [company failures].” In preparation for the withdrawal of more government stimulus and to give businesses a fighting chance of survival, the government is making more changes with the introduction of laws and regulations relating to reconstruction and turnaround, that is, pre-insolvency. This has been an area of debate for many years and it is unfortunate that now, because of COVID-19, these long-awaited reforms are being rushed through so they can start on 1 January 2021. The exposure draft of the legislation has been released for consultation and the Institute of Public Accountants (IPA) has made its submission to Treasury. However, it should be noted the devil will be in the detail, that is, in the regulations and these have not yet been released for consultation. At the time of writing, Treasury was still working on them. The IPA was extensively involved in the insolvency inquiry undertaken by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), which released its report in July 2020. Our submission reinforced the recommendations made in the ASBFEO’s report and added a few

more. The main points being: 1. A small business viability review should be introduced as the first stage in the process. 2. Small business restructuring practitioners (SBRP) should be appropriately qualified and regulated. 3. Government should commit to an early review of the reforms to ensure they are working as intended.

Small business viability review Adding to our support for the ASBFEOâ&#x20AC;&#x2122;s proposal for a small business viability review, we have found widespread member support for this as a first stage in the process, prior to the commencement of any formal restructuring process. We also support the complementary proposal put forward by the ASBFEO and others that this viability review could be undertaken with government funding through a targeted grant specifically tied to obtaining professional advice from a suitably qualified practitioner. It has been widely documented that all too often small business owners will not seek help until it is too late or almost too late. In order to prevent small business insolvency, whether as a result of COVID-19 or generally, we believe it is critical to address some of the underlying issues. If small business owners can be encouraged to seek assistance before it becomes too late, then the policy objective of preventing small business insolvencies, or saving small businesses so they can grow into the future, can be further supported and, in fact, strengthened. We have been advised many small businesses will not want to be associated with the stigma of insolvency and may stay away from a formal pre-insolvency process. This is another reason to support a business viability review that takes a different, nonthreatening and supportive perspective and may be more appealing to small

business owners. Likewise, putting a restructuring plan to creditors may be off-putting for small business owners. On the other hand, a business viability review by a qualified accountant may have a higher probability of achieving the desired policy outcome of preventing small business insolvency.

SBRPs The draft legislation is seeking to establish a new category of registered liquidator, SBRPs. According to the Treasury fact sheet and our discussions, these would not have to be, but could be, existing registered liquidators. Treasury is using the existing rules to establish the new sub-category. The requirements to become an SBRP will be contained in the regulations, which as mentioned have not yet been released. The objective is to deal with the anticipated wave of small businesses facing solvency problems when pandemic recovery protections are removed by broadening the category of professionals that could readily qualify as an SBRP. We believe this should include experienced and appropriately qualified

COVID-19 has forced the government to address many outstanding reform issues, but not all, and the time has now arrived for insolvency to be put under the spotlight.

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practitioners who can diligently and expeditiously undertake an initial viability assessment in the first instance, followed by the preparation of a reconstruction plan if required. To ensure continuity and to expedite the process, this could be the same person, but not necessarily. We support the recommendations of the ASBFEO in respect of the attributes required to qualify as an SBRP professional: • be a member of an appropriate professional association, with a code of ethics (that is enforceable against members), • hold a public practice certificate and hold appropriate professional indemnity, • (and any other required) insurance, • be appropriately skilled and competent to perform the task, and • meet the ‘fit and proper person’ test on an ongoing basis. To pre-empt the regulations, the IPA submitted the educational requirements needed to meet the level of knowledge and skills to undertake an SBRP role, which means eligible practitioners could complete, as a minimum, two intensive continuing professional development programs, such as those being considered by the IPA’s education partner, Deakin University. It is fairly certain some level of specialised knowledge will be needed. For this reason, we believe it will be critical to the success of the reforms to closely align the role and functions of the SBRP to the position’s qualification requirements. If the optimal balance between a suitably qualified SBRP and having an effective and efficient process is not reached, then the reforms may be undermined. For instance, the turnaround process is more than debt restructuring and cashflow reports, which appears to be the focus of the exposure draft. For SBRPs who do not have lengthy experience in insolvency, it may be that appropriate

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A business viability review by a qualified accountant may have a higher probability of achieving the desired policy outcome of preventing small business insolvency.

training is required, though how much of the process can be ‘templated’ or reduced to a reliable checklist approach is arguable. Further, experienced insolvency practitioners have referred to requirements such as dealing with creditors, some of whom may be disgruntled. More specifically, the draft legislation strongly leans on the voluntary administration process and part X debt agreements – it may be fair to say only registered liquidators and/or registered trustees have the necessary familiarity and working knowledge of these to ensure the correct administration of the new simplified process. Further, the interactions of these new insolvency regimes with the existing laws concerning the Personal Property Securities Act 2009 and secured creditor appointments (via a receivership) also need to be considered. Given all of the above, it will be critical to strike the balance between achieving a workable, simplified process and suitably qualified practitioners. The regulations will play an important part in the success of the reforms. How the existing market responds will also depend on whether any restrictions are placed on the commercial viability of this work through prescribed fee structures. We consider it is important

not to create a race-to-the-bottom environment where fees can be undercut. This has happened in the market for SMSF auditors where over a number of years the average fees have gradually and significantly reduced to the point where the ATO has imposed greater scrutiny on the quality of SMSF audits that are being undertaken. Another issue is that the regulator needs to be adequately funded to carry out this activity. We are concerned the Australian Securities and Investments Commission is inadequately funded to perform its current functions, a point we have made repeatedly over many years, and that it may be underfunded to adequately regulate this new class of practitioner.

Commitment to review Given the importance of the reforms, the potential for unintended consequences and the fact they have been rushed into legislation and regulation, we strongly believe the government should commit to a full review of the operation of the reforms shortly after 12 months from commencement. It is critical to the survival of many small businesses these reforms operate as intended. We also believe the current environment needs to be considered in that the government has recently announced changes to the Credit Act and a relaxation of the responsible lending laws, which reverse the responsibility from ‘lender beware’ to ‘borrower beware’. We understand second and third-tier lenders may occupy the market of lending to distressed small businesses on suboptimal terms. The likely increase in lending and debt could lead vulnerable businesses into insolvency. This further supports the need to ensure small business owners can access competent and trustworthy advice at an early enough juncture. It is also necessary to ensure the pre-insolvency market operates as intended and that it does not attract unscrupulous practices. It needs to be and remain fit for purpose.

STRATEGY

The delicate balancing act of early release super

The design and rollout of the federal government’s early release superannuation scheme has been the subject of much conjecture in recent months. Andrew Yee argues how people who have accessed the scheme are going to adequately restore balances in time for retirement is of great concern.

ANDREW YEE is director of superannuation at HLB Mann Judd Sydney

The early release superannuation (ERS) scheme has unquestionably been a lifeline for many Australian workers financially affected by COVID-19, whether it be through redundancy or reduced working hours. Being able to access money they wouldn’t normally be able to has meant the difference between surviving and not being able to pay rent or provide for a family. Accessing a portion of their entire super savings now, however, will adversely impact on a person’s ability to retire comfortably later in life; the short-term gain could have negative longer-term consequences. The government’s data indicates a vast number of presumably lower to middle-income earners have benefited from the ERS scheme. An estimated 3 million people have taken advantage of the scheme

in some form ($10,000 up to 30 June this year and a further $10,000 from 1 July to 31 December), with around $42 billion exiting super balances to date. It’s a drop in the ocean compared to the total superannuation pool of around $1.5 trillion, but it’s a significant amount nonetheless. It is also enough to impair the government’s ability to support some of these people in the long term and will undoubtedly dent federal revenues for many years to come. To be eligible, those applying need to satisfy certain criteria, including having to be unemployed, to have recently lost a job, to be receiving government support payments, to have lost 20 per cent or more of their working hours, or to have lost Continued on next page

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20 per cent or more of their turnover as a sole trader.

Financially vulnerable affected Many who have accessed the scheme are purported to be in lower to middle-income brackets, working in sectors most affected by the economic shutdown, such as hospitality, which attract a higher proportion of casual and part-time workers. Depending on their life stage, some may not be in a position to plan for retirement or have excess funds available to top up their super. Whether or not the introduction of the ERS has diminished the integrity of the superannuation system is debatable, but it has been one of the untouchable assets since the modernisation of the super system in the early 1990s. It wasn’t designed to accommodate short-term financial liabilities but, then again, a once-in-a-lifetime, unprecedented event such as a global pandemic wasn’t envisaged either. From the government’s perspective, the scheme has been more than justified, and it has made accessing required funds straightforward, which greatly assisted those who needed it most. As alternatives to the ERS scheme, however, some people could look to other means of funding, such as debt, social security benefits and other government incentives, such as JobSeeker or JobKeeper.

Road to financial recovery Fortunately, however, for those Australians faced with rebuilding their super balances, no matter what the remaining balance, there are a number of practical strategies they can consider when looking to maximise contributions. These include: 1. Make a concessional contribution: Up to $25,000 can be contributed each year from employer contributions as well as salary sacrifice and member concessional contributions. • This strategy is maximising taxdeductible contributions and should

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If you invest in cash or cash-type products, it will take a long time to rebuild and in some cases be too late if nearing retirement. be considered by all taxpayers, irrespective of their financial position. It will work especially well for those who have accessed the ERS scheme, as for those on lower to middle incomes, they will gradually move up the ladder and can increase their concessional contributions along the way. As with all strategies, however, it comes down to planning, getting the right advice, and for those who can’t access advice, having the discipline to execute their own plan effectively. It’s hard starting from ground zero, but it’s very achievable for people to recover from a poor financial position. One method would be to include maximising contributions as part of year-end tax planning; that way it’s not too onerous a task for people arranging their own finances. 2. Use unused concessional contributions cap over five years (assuming the super balance is under $500,000): Since 1 July 2018, people could start accruing their unused concessional contributions cap and carry it forward to future years. This means if people don’t use the full amount of their contributions cap in a particular year, they can carry forward the unused cap amount and take advantage of it for up to five years later. • This measure provides more flexibility to the traditional annual concessional contributions cap; if for whatever reason you’re not able to utilise your cap for one year, you can carry

it forward to the next year with whatever cap you have available, for up to five years. It’s a new and recent measure, with financial advisers needing to keep track of how much of the cap clients have or haven’t used. Previously, it was use it or lose it, but now individuals fortunately have the ability to carry it forward. The strategy helps if a person has a windfall or sold an asset, as they will be able to top up their super and make up for those lost years. It is a powerful strategy for people to consider in rebuilding their super for whatever reason, including having accessed the ERS scheme. 3. Make a non-concessional contribution: Up to $100,000 a year or $300,000 brought forward over three years can be contributed on a non-concessional basis. The cap will be indexed in line with the concessional contribution caps. • Realistically, this strategy will be slightly out of reach for those without very healthy super balances, but is one to consider once they’re in a better financial position. Typically, later in life, when mortgages have been paid off and once dependants have been educated, the extra savings available can be used towards this measure. If a person is in that position, they can build a super balance back up fairly quickly, but again it comes down to discipline in setting the money aside and not putting it towards discretionary items, such as new cars and holidays. 4. Contribution splitting: A person can split up to 85 per cent of their concessional contributions from a prior year to their spouse as long as they’re under their preservation age or under 65 and still working. If the spouse is eligible to use any unused concessional contributions caps carried forward, then up to 85 per cent of these contributions could be split and allocated to their spouse as well. • This strategy would be suitable for

couples where one spouse enters the relationship with a higher super balance, or is able to accumulate their superannuation more rapidly than their partner, which then allows them to split and allocate their concessional contributions to their spouse with the lower super balance. This strategy could be in addition to the spouse super contribution, where voluntary contributions made on behalf of a spouse, depending on their spouse’s income, would be eligible for a tax offset of up to $540. 5. Take advantage of the government super co-contribution: Low or middleincome earners who make a personal after-tax contribution to their super fund can also access the government cocontribution up to a maximum amount of $500. • This strategy should be easily obtainable for most who have taken, or plan to take, money out via the ERS. An extra $500 contribution from the government, every year, certainly adds up over time.

Reading the fine print Further to these strategies, people rebuilding their super balance should try to ensure their super is invested in longerterm growth-style assets, rather than conservative, cash-style liquid assets. Compounding interest over time will more quickly rebuild the super balance lost and take it forward. If you invest in cash or cash-type products, it will take a long time to rebuild and in some cases be too late if nearing retirement. Fortunately, a large proportion of those who have accessed the ERS have time on their side and will have a higher risk appetite in terms of super investments. Importantly, for people who don’t have a financial adviser and have accessed the ERS, discipline is key to restoring their balance. Information will be harder to get and keep track of, but it’s not an insurmountable task, and while the road back to financial security is long, it’s never

too late to implement a financial plan. In its recent budget announcement, the government also committed to clamping down on poor-performing super funds and strengthening regulations that compel funds to act in the best interest of the member. One measure announced was the development of a new online tool called YourSuper to help people choose an appropriate fund. Super savings can also be rebuilt quicker by simply switching to a low-cost fund or one that incorporates low administration and investment fees. When choosing an investment strategy, super fund members need to consider factors such as their age, appetite for investment risk and how long it will be before they reach retirement age. Everyone, especially those who have accessed the ERS scheme, should move to consolidate any unused super accounts if they haven’t done so already. This measure does not apply to SMSFs, but nevertheless could provide a valuable performance benchmark for trustees. All of these measures in isolation are relatively small, but when used in conjunction with one another, will add

While the road back to financial security is long, it’s never too late to implement a financial plan.

up and potentially make a difference to someone’s capacity to rebuild the balance, and years of compounding interest, lost through the ERS scheme.

REBUILDING SUPER: AT A GLANCE • Consolidate superannuation balances as having multiple accounts isn’t effective. Often when moving jobs, people start a new superannuation account and the balances of old super accounts could be eaten up by fees when contributions are no longer being deposited. • Don’t pay too much in fees. Weigh up the fees charged by the current superannuation fund and compare them to those charged by similar funds. • Make sure insurance cover is appropriate for your needs as the premiums are paid out of your contributions. • Plan for career breaks, such as sabbaticals or parental leave. Consider spouse contributions and contribution splitting during career breaks and salary sacrifice later in your career to make up for missed contributions. The government’s five-year catch-up concessional contributions for those with super balances under $500,000 should be considered. • Retirement can seem a long way off, but even though balances have been eroded as a result of the ERS scheme, it’s never too late to start taking action – the younger, the better!

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The basics of downsizer contributions

The ability to make downsizer contributions can be significant for individuals over age 65. Daniel Butler details how the rules currently work and the elements requiring special attention.

DANIEL BUTLER is director at DBA Lawyers.

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Downsizer contributions for the right person or couple can be very strategic. Yet, not many are aware of the key rules that can unlock the potential that the downsizer strategy offers. Broadly, downsizer contributions allow those aged 65 or over to sell or dispose of an ownership interest in their main residence and make up to a $300,000 contribution to superannuation. This results in a contribution of up to $600,000 for a couple, provided the relevant criteria are satisfied. Moreover, these contributions can be made even if the member has a total super balance of more than $1.6 million and can be made at any age over 65, even at 100. This article examines questions about how downsizer contributions work and provides the key tips and traps associated with them.

How downsizer contributions work There are three broad steps that need to be followed before you make a downsizer contribution. The downsizer contribution criteria are largely contained in section 292-102 of the Income Tax Assessment Act (ITAA) 1997. Step 1: Eligibility

The first step is to confirm the amount will constitute an eligible downsizer contribution. Broadly, an eligible downsizer contribution is where: • the contribution is made to a complying super fund, including an SMSF, by a member aged 65 years or over, • the amount is equal to all or part of the ‘capital proceeds’ received from the disposal of an ownership interest in a dwelling that qualifies as a main residence in Australia, subject to a maximum amount of $300,000 for each member of a couple, • the member or the member’s spouse had an interest in the main residence during the period of at least 10 years prior to its disposal, and

• the member has not previously made downsizer contributions in relation to an earlier disposal of a main residence. An ownership interest includes a legal or equitable interest and in certain cases a right or licence to occupy a dwelling may qualify, provided the interest has been held for at least 10 years prior to being disposed of. Note, a caravan, houseboat or other mobile home does not qualify as a main residence for these purposes. This may be unfortunate for ‘grey nomads’ who wish to travel around Australia in their motor homes, caravans, houseboats or yachts. They would need to first dispose of their home after turning 65 to make a downsizer contribution. Special rules apply where a member has separated from their former spouse or where their spouse has died (and an interest in the dwelling is held by the trustee of the deceased spouse’s estate). These special rules may allow, for instance, a member who has obtained an interest in their home from their former partner as a result of a family law property settlement to count the ownership period of their former spouse to determine whether they satisfy the 10-year test. For example, a female spouse who has held the home for the past six years can add the prior eight years that her former spouse held the asset prior to the property settlement that resulted in the title being transferred to her. Step 2: Contributions

The contribution rules must be satisfied. These can be summarised as follows: • A member can make up to a maximum of a $300,000 downsizer contribution. Note the maximum downsizer contribution, however, must not exceed the total capital proceeds the individual, their spouse or they both receive from disposing of their ownership interests in the dwelling. • There is no age limit or gainful employment test that needs to be satisfied, however, many SMSF deeds may still preclude such contributions

and a deed update may be required. • Downsizer contributions are not counted towards: − the relevant member’s contributions caps (for example, the usual $25,000 a year concessional and $100,000 annual non-concessional contribution caps, − the total superannuation balance (TSB) at the start of the financial year a downsizer contribution is made, and − the $1.6 million (indexed) TSB limit (that determines an individual’s eligibility for non-concessional contributions) does not apply in respect of downsizer contributions in the financial year that contribution is made. Thus, a member could have over $1.6 million in superannuation and still make a downsizer contribution. However, a member is precluded from making nonconcessional contributions if their TSB exceeds $1.6 million at the start of that financial year. Once the member sells their main residence, they are required to make downsizer contributions to their super fund within 90 days after the day the ownership changed (typically 90 days from settlement unless they have been granted an extension from the ATO). While multiple downsizer contributions in respect of the sale of the same residence can be made, as noted above, you cannot make a downsizer contribution in respect of a second or subsequent dwelling. Some members may, for instance, contribute some of the deposit moneys they receive and then make a subsequent contribution following settlement of their dwelling. As noted above, an eligible couple could contribute up to a maximum of $600,000, being two times $300,000, by way of a downsizer contribution that: • is not counted towards their usual contributions caps, • can still be made even if they both have a TSBs over $1.6 million, and • will not affect their TSBs, which may

Downsizer contributions allow those aged 65 or over to sell or dispose of an ownership interest in their main residence and make up to a $300,000 contribution to superannuation.

impact on their ability to make nonconcessional contributions and the like until the end of the financial year after the downsizer contributions are made. For example, if Jane and Finn are both 85 years old and each has $2 million in super, they can both still make a downsizer contribution of up to $300,000 each. Step 3: Reporting and verification

An approved form should be completed by the contributing member(s) and given to the trustee of the super fund detailing the amount that is to be attributed to downsizer contributions. The ATO then runs verification checks on the amount and may contact the member for further information. If the contribution does not qualify, the ATO notifies the superannuation provider. The amount will then either be allocated as a non-concessional contribution if permitted by superannuation law, which may result in the member exceeding their cap, or refunded to the member in due course. Expert advice should be obtained if the contribution fails to satisfy the downsizer criteria as there are special rules for dealing with excess contributions. Continued on next page

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Some key tips and traps Full or part disposal of an ownership interest

The explanatory memorandum introducing the downsizer provisions, contained in Treasury Laws Amendment (Reducing Pressure On Housing Affordability Measures No 1) Bill 2017, confirmed a part disposal is applicable for downsizer contributions. However, until 21 August 2020, there was no express recognition by the ATO that a part disposal in a dwelling would satisfy the downsizer provisions. The ATO updated its web page on 21 August 2020 to state: “You can only access the downsizer scheme once. This means you can only make downsizing contributions for the sale or disposal of one home, including the sale of a part interest in a home.” Prior to this ATO confirmation it was generally considered a person had to sell or dispose of the entire interest in their home to be eligible to make a downsizer contribution. However, the ATO confirmation on a part disposal now means SMSF retirees can sell a part interest in their home and make a downsizer contribution, therefore also allowing them to stay in their home. While a residential property cannot be sold to an SMSF, a part interest in a home can be sold to provide cash to the member that can be contributed to an SMSF or public offer superannuation fund. DomaCom Australia, for example, obtained an Administrative Binding Advice on its Seniors Equity Release product confirming a person could dispose of a part interest in their home. This Seniors Equity Release allows a person to receive cash to make a downsizer contribution while remaining in their home. Some elderly people fear disposing of their home, but may not have enough cash available to test the facilities in retirement villages, making this ATO ruling significant for them. Given a part disposal is possible, there may be some couples who may wish to consider transferring a part interest to their spouse or another family member. Expert

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Members should note that disposing of their main residence and contributing downsizer contributions to their super fund may adversely impact their access to Centrelink entitlements.

advice should first be obtained before implementing such a strategy to ensure it satisfies the relevant criteria and does not fall foul of any anti-avoidance rules.

entitlements. Accordingly, an appropriate assessment of any such adverse impact should be undertaken. The main residence exemption

An understanding of how the capital gains tax (CGT) main residence exemption operates is fundamental for advisers to provide strategic advice on downsizer contributions. In particular, a dwelling must have been at least the main residence of a person for part of the time during that person’s ownership period. For example, a dwelling could have been the person’s home for one year and rented for more than nine years. It should also be noted that section 292102 of the ITAA also provides a downsizer contribution can also be made if the dwelling was a pre-CGT asset (that is, it was acquired prior to 7.30pm on 19 September 1985 as confirmed by the ATO in Law Companion Ruling 2018/9) and would have satisfied at least part of the main residence exemption if it had been acquired after CGT was introduced.

Age pension

Members should note that disposing of their main residence and contributing downsizer contributions to their super fund may adversely impact their access to Centrelink entitlements. This is because the age pension is assessed against, among other things, an assets and incomes test and those who exceed the applicable thresholds will be denied an old age pension in whole or in part. A person’s family home is generally not included in that person’s assets test, however, superannuation savings are included once a member reaches pension age. This means that if a member disposes of their main residence and makes a downsizer contribution, the member may either have: • a reduced age pension, or • no entitlement to any age pension. This aspect can significantly reduce the attractiveness of the downsizer provisions for those who would be worse off as a result of a negative impact on their age pension

Proceeds and borrowings

It is important to note the downsizer contributions cap is the lesser of $300,000 or the sum of the capital proceeds. Any debt outstanding on a mortgage over the relevant property is not considered for the purpose of determining the capital proceeds. For example, Peter bought his main residence 14 years ago for $1 million. He then sells it for $1.25 million when his outstanding borrowings are $1 million. Peter received capital proceeds of $1.25 million. Thus, he can make downsizer contributions of up to $300,000. Members should also be aware downsizer contributions are not deductible. SMSF deed provisions

As the downsizer contribution is a relatively new type of contribution, SMSF deeds should have express wording that covers them, especially as prior legislation had not contemplated the flexibility these contributions require.

STRATEGY

A radical SMSF approach – part one The scrutiny and accountability applied to SMSF trustees may make the requirement for all members to fulfil this role impracticable. In part one of this two-part series, Grant Abbott examines the case for a single-trustee structure for SMSFs.

GRANT ABBOTT is a director of I Love SMSF.

It is commonly accepted every member of an SMSF also must be a trustee of the fund, but given the ever-increasing scrutiny and accountability being levelled at trustees, this structure may no longer be practicable. In this article, over two parts, my goal is to completely change your thinking on the way an SMSF should be run and managed. I know people generally hate change, but if there is a better way, one that advantages your client, simplifies SMSF administration and improves compliance, wouldn’t you want to know about it? And as SMSF advisers we need to be able to change and change quickly. COVID-19 has certainly taught me that change can

quickly wash over us, so it is better to be adaptable when change hits. Now I want to ask you one simple question. If being a trustee of an SMSF was optional for fund members, what percentage of your SMSF clients, understanding the high expectations and responsibilities of acting as an SMSF trustee, would stick to membership only and abandon trusteeship?

The dangers of SMSF trusteeship There are more than 3000 pages of laws, regulations and commissioner’s guidelines when it comes to SMSFs, so there are very real dangers for any member to act as an SMSF trustee in 2020. We are no longer in the early cowboy days of SMSFs of the 1990s or the Simpler Super days of the 2000s. It is 2020 and things have changed. I talk with accountants and planners all day long about SMSFs and one thing they all tell me is over the past five years things have gotten tougher and tougher for advisers, licensees and trustees in the SMSF space. Take for example the current investment strategy requirements for SMSF trustees contained in section 52B(2)(f) of the Superannuation Industry (Supervision) (SIS) Act 1993. Since 1994, creating one-page investment strategies with 1 to 100 per cent asset allocations has been the norm. Having worked in the funds management industry and been part of writing prospectuses for balanced retail super funds, having real benchmarks for each asset class was my norm, but it is hard to change an industry and my detailed SMSF investment strategy musings often fell on deaf ears. But I always remind myself of a quote from Frank Abagnale: “The law sometimes sleeps; it never dies.” So it was no surprise to me when the Continued on next page

QUARTER IV 2020 65

STRATEGY

Continued from previous page

commissioner of taxation began writing directly to trustees and their fund auditors in September 2019 telling them if their SMSF’s investment strategy was not adequately diversified, each trustee of the fund may be liable for a $4900 fine. Now that letter shook things up because it bypassed advisers and went straight to fund trustees. And what a furore it caused, but it did not stop there. In February 2020, the commissioner released on the ATO website a brand new set of investment strategy guidelines stating, in part, the following: i. An investment strategy must be in writing and cover each member’s age, employment status, super benefit details and their specific retirement objectives, as well as any fund insurances on their behalf. ii. Ensure the investment strategy is a forward-looking document which is to be prepared at the beginning of an income year, not post year end. iii. That benchmark asset allocation, for example, domestic equities 20 to 40 per cent, is to be used across all asset classes and must include the time frame for holding that asset class plus the asset class characteristics. iv. The commissioner notes a 0 to 100 per cent asset allocation is not an investment strategy leaving the SMSF’s adviser and auditor exposed to legal action from members for any investment losses on fund investments. v. The requirement for a new investment strategy where a pension is commenced, the market for the asset class falls or a new member comes into the fund. This suddenly rendered a lot of 2019 investment strategies in breach of the rules and we can expect to see some heavy audit contravention reports for the 2020 income year as SMSF auditors realise their exposure. Importantly, it shows the taxation commissioner has turned from the education of trustees to compliance. There is no hiding behind advisers and accountants anymore. And despite our

66 selfmanagedsuper

protestations, it was bound to happen with the SMSF industry hitting $750 billion in assets, complaints from industry super funds, the royal commission and the Australian Securities and Investments Commission (ASIC) toeing a heavy compliance line and virtually warning prospective SMSF members away from these funds. Things are getting tougher for trustees.

COVID-19 has certainly taught me that change can quickly wash over us, so it is better to be adaptable when change hits.

The commissioner’s expectations of SMSF trustees – would you want to be one? First off, acting as trustee of an SMSF or a director of a corporate trustee is no walk in the park and the commissioner of taxation is forthright about that. To this end he has stated the following on the ATO website:

What it means to be an SMSF trustee or director Whether you’re a trustee or director of a corporate trustee, you’re responsible for running the fund and making decisions that affect the retirement interests of each fund member, including yourself. As a trustee or director, you must: • act honestly in all matters concerning the fund, • act in the best interests of all fund members when you make decisions, • manage the fund separately from your own superannuation affairs, • know, understand and meet your responsibilities and obligations, and • ensure that the SMSF complies with the laws that apply to it. All trustees and directors are equally responsible for managing the fund and making decisions – you’re responsible for decisions made by other trustees even if you’re not actively involved in making the decision. You can appoint other people to help you or provide services to your fund (for example, an accountant, administrator, tax agent or financial planner). However, the ultimate responsibility and accountability for the SMSF’s actions lie with you, as trustee or director.

As an individual trustee or director of a corporate trustee, you may be personally liable to pay an administrative penalty if certain laws relating to SMSFs are not followed. Other members of the fund can take action against you if you don’t follow the terms of the trust deed. Any fund member who suffers loss or damage because of a breach of any trustee duties may sue any person involved in the breach. Let’s unpack some of the commissioner’s points. Firstly, being a compliant trustee are pretty big shoes to fill. Consider these three points: 1. the trustee of an SMSF must know, understand and meet their responsibilities and obligations, and 2. the trustee must ensure the SMSF complies with all the applicable laws, and 3. as an individual trustee you are personally liable for any administrative penalty. Now the above three statements are daunting even for the most qualified SMSF specialist adviser or lawyer, let alone an untrained SMSF trustee. Hence the commissioner’s recommendation that the trustee may need to seek help to run the fund.

The new hard-line administrative penalty regime – section 166 of the SIS Act At our Accountants Strategy Summit in July

2020, I had the opportunity of sitting down with ATO SMSF segment acting assistant commissioner Steve Keating to discuss all things SMSF. One of the more important questions I asked Keating was about how the ATO penalty regime works and how often had it been applied. In reply, he noted that in the past the ATO had remitted far too many administrative penalties and that was about to change. During the interview he also forecast a guideline on the regulator’s approach to SMSF administrative penalties. So it was no surprise when the ATO released a practice statement (PS) for auditors, advisers, trustees and ATO staff on 15 October 2020, PS Law Administration 2020/3 – Self-managed superannuation funds – administrative penalties imposed under subsection 166(1) of the Superannuation Industry (Supervision) Act 1993. Here is an example of a breach of the SIS Act and how the penalty regime applies:

Example – personal liability, individual trustees Larry and Adam are members and trustees of the Redrock SMSF. In the 2020 financial year, an auditor contravention report found the trustees of the SMSF had contravened subsection 84(1) by providing a loan to a related party, who is not a member, in excess of the in-house asset limits. Each trustee of the Redrock SMSF is individually liable for the full administrative penalty. The administrative penalty for this contravention is 60 penalty units. Larry and Adam are each issued a separate penalty notice for 60 penalty units. • 60 penalty units for the 2021 income year is equal to $13,320. There are nine examples in the PS, with the final one three pages long and important reading for any adviser with SMSF clients and definitely auditors. Some of my key takeaways from the PS are: a. For any administrative penalty, individual trustees are personally liable. b. For any administrative penalty where

The taxation commissioner has turned from the education of trustees to compliance. There is no hiding behind advisers and accountants anymore.

there is a corporate trustee, directors of a corporate trustee are jointly and severally liable. c. Monies from the SMSF cannot be used to pay the penalty as they are personal fines. d. The penalties are prima facie payable, but the commissioner may remit these penalties taking into account: i. the decision to remit must be fair and reasonable, ii. the reasonable person trustee test is to be applied, not whether the trustee was doing the right thing, iii. a transaction may involve multiple breaches – such as breaches of section 62, section 66, section 84 and section 52B(2)(f) in relation to a transfer of an asset from a related party to the trustee of an SMSF. Given the ATO will be more forceful in administering the penalty provisions on trustees and directors of corporate trustees, plus the extensive responsibilities and legal knowledge required by a trustee of an SMSF, it ought to be considered whether every member of the fund should be a trustee.

Should all members be trustees? You may not have known it, but I was there at the very, very start of the SIS Act \

and in fact made submissions on the SIS Bill in 1992. One of the key features of the SIS Act was section 18A, which provided for a small excluded super fund, the forerunner to today’s SMSF. In essence, it was a four-member small super fund that was excluded from the prospectus provisions for a public offer super fund. It also had various enabling provisions not available to public offer super funds, such as acquiring business real property from a member or related party provided it did not exceed 40 per cent of the fund’s assets. To be an excluded super fund, the following conditions had to be met: 1. The fund was a regulated super fund pursuant to section 19 of the SIS Act. This meant it had to have a trustee and if individual trustees, it could only pay pensions and not lump sums. 2. The superannuation fund had less than five members. 3. Each member was a trustee of the fund or director of the corporate trustee unless the member was a relative of the trustee or an associate of the trustee as that term was defined under the Corporations Act. In practice, this meant an excluded superannuation fund that had four members – John Smith (father), Sally Smith (mother) and two adult children, Max and Mary – could have John Smith as the sole trustee or director of the fund’s corporate trustee because he was a relative of the members. Having one person acting as trustee, one person dealing with advisers, one person interacting with the auditor and the commissioner of taxation certainly simplifies the operation of the fund. In the next part of this article, I will look at the five reasons to have a single trustee or director of the corporate trustee of the fund as well as the commissioner’s guidelines on how an SMSF can be run by an external party to fund members and still not be in breach of the SMSF rules. This is way beyond the original excluded super fund requirements above.

QUARTER IV 2020 67

LAST WORD

JULIE DOLAN HIGHLIGHTS WHY THE SMSF INVESTMENT STRATEGY IS SUCH A CRITICAL DOCUMENT. The importance of an SMSF’s investment strategy cannot be underestimated, especially in the current economic climate due to the ripple effect of COVID-19. This article will explore a few of the main reasons why the fund’s investment strategy is such a crucial document. It is more than the traditional view of being a standard document the auditor requires at year end.

So why is this document so important? JULIE DOLAN is enterprise director at KPMG.

68 selfmanagedsuper

• The requirement for the trustees of the fund to “formulate, regularly review and give effect to an investment strategy for the whole of the fund” is a trustee covenant under sections 52B and 52C of the Superannuation Industry (Supervision) (SIS) Act 1993. The covenants codify how trustees are to behave in carrying out their responsibilities. They are “deemed” to be included in the trust deed of the fund. A breach of any of the covenants can leave the trustee(s) being liable to an action of loss or damage by another member within a six-year time period from the day the cause of action arose. It is also a prescribed operating standard under regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994. A breach of a prescribed operating standard imposes an administrative fine of 100 penalty points. • The ATO trustee declaration, required to be signed by all new trustees and directors of corporate trustees of SMSFs since 30 June 2007, specifically states the trustee’s responsibilities around the investment strategy. The trustees are declaring they understand their obligations under law and accept the commissioner’s actions should noncompliance occur. • The ATO is providing greater focus on this document. It is requiring trustees to put “mind to matter” and tailor the strategy to the fund’s specific circumstances rather than a standard pro forma document. Trustees need to be able to demonstrate they have considered the minimum criteria listed under the relevant covenant. This tailored approach can be demonstrated as part of the investment strategy document, an addendum or a minute

of meeting. In relation to the regular review, best practice is at least annually or whenever the fund experiences a major event. • It is a great focal point of discussion. The overall investment objective and then the detailed strategy provide an invaluable tool for proactively providing direction and advice to your SMSF clients. Understanding the member profiles, investment objectives, liquidity requirements, risk tolerance and the like provides a robust framework in helping your clients achieve their objectives in a proactive manner. It allows you to then revisit it on a regular basis to see whether the objectives are on track and what needs to deviate, while truly formulating a tailored blueprint for your clients to work with. It becomes a moving invaluable document rather than a reactive, templated document needed for audit purposes. • Risk mitigation. The aim of the investment strategy and underlying covenants is to guide trustees in making considered decisions around what to invest in to protect member benefits and in turn reduce the risk of careless and ad hoc decision-making. It also requires trustees to ensure the fund’s proposed investments will not contravene the superannuation laws. Another important factor is that it brings to front of mind the insurance requirements of members and requires the action points to be disclosed. • The effects of the coronavirus have not changed the rules around the investment strategy, however, further consideration is required by trustees on the impact on such matters as asset valuations and liquidity from the effect of rent deferrals or waivers. This is part of the ‘giving effect’ to the strategy. Short-term deviations from the underlying asset allocations of the strategy are allowed, based on the supporting documentation being in place. Alternatively, if it is a permanent deviation, changing the strategy may be required. The above list is not exhaustive, but rather highlights the importance of treating this document with respect. It is also a great business development tool for being able to maximise the strategic opportunities for your SMSF clients.

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self managed super: Issue 32

Articles inside

Regulation Round - Up

The case for non-reversionary pensions

Heading off member conflict

The delicate balancing act of early release super

Legislative impact on contributions

Expect the unexpected with property

SMSF asset compliance considerations

A radical SMSF approach – part one

Untouched – for now at least

SMSF CHAMPIONS