A brief history of the sector

Grant Abbott provides a history of the SMSF sector in anticipation of any changes that might be introduced by the new Labor government.

SMSFs started as ‘excluded superannuation funds’ on 1 July 1994. They were excluded from the prospectus requirements for a super fund and had some quirky laws. For instance, excluded superannuation funds were the only retirement savings vehicles that could accept business real property from a member provided it did not exceed 40 per cent of the market value of the assets of the fund. Weird, but a law is a law.

On 1 July 1994, 70,000 superannuation funds made the choice to become excluded funds. Then the race was on. Even before the beginning of the race submissions were being made to Treasury on the Superannuation Industry (Supervision) (SIS) Bill 1993.

The 1990s – the cowboy days

The rules in the early days of SMSFs were reasonably loose and the regulator, the Insurance and Superannuation Commission, which was superseded by the Australian Prudential Regulation Authority, was nowhere to be seen. In those first few years I saw some very interesting things, including:

• an SMSF trustee investing in bull semen,

• ostriches were all the rage, • racehorses were a popular investment,

• business licences, such as abalone, fishing and even brothel licences, were acquired by SMSF trustees, and

• investing in 100 per cent-owned unit trusts that could borrow.

But there were limitations. Only allocated pensions were available, there was no such thing as limited recourse borrowing arrangements and we had reasonable benefit limits.

A new sheriff in town

On 1 July 1999, the ATO took over as the regulator of SMSFs. I remember there was a big uproar with many SMSF commentators saying it was like a “sledgehammer smashing a walnut”. I was of a different view because the ATO had a long history of providing rulings, determinations and guidelines in the taxation space – something sorely needed for SMSFs. At the same time excluded super funds were binned and SMSFs were introduced into the SIS Act 1993 in section 17A. Although all members had to, prima facie, be trustees or directors of a corporate trustee of an SMSF, Treasury left open the option of a member not being a trustee or director if their enduring power of attorney (EPOA) stood in for them. Still to this day I am surprised where an SMSF has mum and dad members who hold each other’s EPOA why they are both trustees or directors.

In the first decade of running SMSFs the ATO took an education approach to SMSFs and they grew heartily. There were so many great rulings, determinations and guidelines allowing practitioners to apply exactly what the regulator dictated.

SMSFs grew quickly

Within a decade the number of SMSFs had grown more than 400 per cent while assets under management had grown 1500 per cent. They were great days for SMSFs, but in 2002 the world changed.

Licensing for SMSFs

The Financial Services Reform Act 2001 introduced Part 7 into the Corporations Act 2001. Part 7 was designed to provide consumer protection in respect of financial products. Any person recommending a financial product to a person was required to have an Australian financial services licence or act as an authorised representative of a licensee unless they were exempt.

Superannuation was specifically designated as a financial product. In that regard, section 764(1)(g) of the Corporations Act 2001 included a superannuation interest as a financial product. But the term superannuation interest was not defined under the Corporations Act 2001, but instead by reference to section 10(1) of the SIS Act, which refers to a beneficial interest in a superannuation fund. As this was a blanket provision with no carve-out, SMSF interests were included as financial products. This meant advising on the following required a licence, unless exempt:

• making a contribution to an SMSF,

• rolling over from a retail or industry super fund to an SMSF – this was two financial products, one dealing with a superannuation interest in a retail or industry super fund and one acquiring an interest in an SMSF,

• commencing a pension in an SMSF, and

• becoming a member of an SMSF.

Note all of these deal with a member’s superannuation interest in an SMSF and not the trustee’s. So, what SMSF trustee advice was caught then? Only specific investment advice and never an investment strategy. This was confirmed in 2018 by the Australian Securities and Investments Commission (ASIC), the regulator of the Corporations Act 2001, a guidance note for accountants seeking an exemption to allow them to provide SMSF advice.

Accountant, lawyer and tax agent exemptions

The ASIC advice summarises the original accountants’ exemption, the limited licensing regime and the current 2022 exemption, which are largely unknown: “One former exemption, which allowed recognised accountants (that is certain accountants who are members of CPA Australia, Chartered Accountants Australia and New Zealand or the Institute of Public Accountants) to give financial product advice about acquiring or disposing of an interest in an SMSF, was repealed on 1 July 2016.”

There is no doubt the meteoric rise of SMSFs was courtesy of the accountants’ exemption. From 1 July 2016 a restricted licensing regime was introduced for accountants, but was always going to fail. Particularly if you look at the generous licensing exemptions in section 766B of the Corporations Act, which states: (5) The following advice is not financial product advice:

a. advice given by a lawyer in his or her professional capacity, about matters of law, legal interpretation or the application of the law to any facts,

b. except as may be prescribed by the regulations – any other advice given by a lawyer in the ordinary course of activities as a lawyer, that is reasonably regarded as a necessary part of those activities,

c. except as may be prescribed by the regulations – advice given by a tax agent registered under Part VIIA of the Income Tax Assessment Act 1936, that is given in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities. So effectively a tax agent can provide the following advice.

Contributions into an SMSF

Under the exemption, a registered tax agent may provide advice on any tax implications of contributions into an SMSF, or other superannuation fund, such as a client’s eligibility to make concessional and non-concessional contributions and the tax treatment of those contributions. For instance, a tax agent can use a client’s total superannuation balance to advise the client on their eligibility for:

• the unused concessional contributions cap carry-forward,

• the non-concessional contributions cap and the two-year or three-year bringforward period.

However, they cannot recommend a client make a particular level of contributions, although they can advise on the maximum level of contributions a client can make. This is because the decision to make a particular level of contributions involves considerations other than tax.

I suggest all accountants read the ASIC info guide and the broad exemptions provided by ASIC to accountants and tax agents as it turns the game on its head. Moreover, it contradicts much of the advice provided by the accounting bodies to their members.

Never advise without meeting competency standards

If you advise on SMSFs and do not meet the relevant competency standards, you will be found out. The competency standards for the SMSF industry were formulated in 2004 and they still stand to this day. In a previous article (Issue 038: “Required competencies”) I reviewed these standards.

Simpler Super starts a new wave

The golden age of SMSFs began with then treasurer Peter Costello’s May 2006 budget where there was a radical makeover of superannuation from 1 July 2007. The changes were revolutionary at the time and included:

• tax-free super post age 60,

• an ability to contribute $1million of nonconcessional contributions by the start date of the Simpler Super reforms, which saw an increase in SMSF assets of $50 billion in 14 months,

• abolition of reasonable benefit limits,

• the introduction of a simplified accountbased pension,

• no mandatory conversion of super benefits to a pension at age 65. This meant an accumulation account could be maintained until death, which became popular with the introduction of the pension transfer limits in 2016, and

• limited recourse borrowing arrangements legislated, enabling an SMSF to borrow.

All of these changes saw a big spike in the number of SMSFs and assets in those funds. However, on the bad side contribution limits were introduced with heavy financial penalties for any member contributing in excess of their nonconcessional and concessional contribution limits. Prior to 30 June 2007 there was an age-based concessional contribution limit for members over the age of 50 in excess of $100,000.

But SMSFs grew in number and their balances grew even more rapidly post the global financial crisis. The world looked bright but then Treasurer Scott Morrison let the team down in his May 2016 budget where he decided to dip into the super coffers to increase super taxation by $2.9 billion over a four-year period. The worm had turned and the glory days of SMSFs were over.

In my next article I will be looking at the future of SMSFs under a Labor government financially supported by industry super funds and the unions, what may happen and more importantly how to prepare for any anticipated changes. If Morrison did not care about retrospectivity with the pension transfer balance cap, can we expect the current government to do any different?