SPAA by Executive Media

SPAA

10 year anniversary journal

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Message from the Prime Minister

PRIME MINISTER CANBERRA

MESSAGE FROM PRIME MINISTER JULIA GILLARD SELF-MANAGED SUPER FUND PROFESSIONALS' ASSOCIATION OF AUSTRALIA NATIONAL CONFERENCE AND GALA DINNER On this occasion of your tenth anniversary, it’s important to take a moment and acknowledge the work SPAA has undertaken, under the excellent leadership of Andrea Slattery, to represent the interests of self-managed super funds and ensure this diverse group has a strong voice. The Government has benefitted from your advocacy and representation on committees including the Stronger Super Peak Consultative Group and the Superannuation Advisory Committee. The Government is pleased to recognise SPAA’s continued focus on increasing education and raising standards in the superannuation sector. The recognition of SPAA’s auditor accreditation program as an approved audit qualification will assist so many auditors as they work toward admission to the ASIC register as an approved SMSF auditor. Congratulations to all gathered there this evening on ten years of outstanding contribution to this vital section of the superannuation industry. I wish you great success in the future.

The Honourable Julia Gillard MP Prime Minister of Australia

SPAA . 2013 . 1

Contents

CONTENTS

MESSAGE FROM THE PRIME MINISTER 1

Message from Prime Minister Julia Gillard

FOREWORD 4

The Hon. Sir Anthony Mason, AC, KBE

THE WORD FROM CANBERRA 5 6

Minister Bill Shorten Senator Mathias Cormann

CEO MESSAGE 8

Leading from the front | by Andrea Slattery

HISTORY OF SPAA 10

From boiled lollies to chocolates | by James Dunn

SIR ANTHONY MASON 16

The security of superannuation

EDUCATION 20

An enlightening decade for SMSF advice | by Liz Ward

HISTORY OF SMSFs 24

It’s been a long and winding road | by Michael Laurence

FUTURE OF SMSFs 27

How the industry will adapt to the future | by John Kavanagh

SPAA TIMELINE 30

10 years of SPAA

TECHNICAL 34

A stronger SMSF sector | by Peter Burgess

WOMEN IN SMSFs 46

Women a great untapped market for SMSF by Tony Featherstone

SPAA NATIONAL CONFERENCE 2013 50

The National Conference in photos

LEGISLATION 54

Playing by the rules | by James Dunn

PROFILE 56

The best and the brightest | by John Kavanagh

OVERSEAS SHARES 63

Published by:

The missing asset class – international equities by Marcus Tuck

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SMSF Professionals’ Association of Australia Ltd (SPAA) SPAA House, Level 1, 366 King William Street, Adelaide SA 5000

2 . SPAA . 2013

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Foreword

Foreword BY THE HON. SIR ANTHONY MASON, AC, KBE

It is my pleasure as patron of SPAA to congratulate the organisation on its 10th birthday.

s the stories in this magazine celebrating this milestone attest, it has been a rewarding journey for SPAA‘s members and, perhaps more importantly, for all the trustees of SMSFs to whom they give their professional advice. As the Cooper Review so comprehensively demonstrated, the SMSF sector is proving to be a dynamic, secure, and fulfilling way for people to both plan for and live out their retirement years. When SPAA was first founded in early 2003, there was a degree of uncertainty pervading this sector of the superannuation industry. Questions were being asked inside and outside the industry about the capacity of trustees to handle their superannuation competently, whether that be meeting their tax obligations or making investment decisions. Pivotal to these questions were doubts about the advice that trustees received; did advisers have the professional skill set that trustees both wanted and needed? So it‘s testimony to the SPAA founders that they both recognised the need for an organisation to ensure that people advising in this complex area had the professionalism to do so, and then had the dedication, perseverance, and enthusiasm to establish a body that would underpin an SMSF profession by setting the highest professional standards. SPAA has never wavered from this goal; its commitment to professional excellence – from the board to the executives, through to the members – has become its raison d‘être.

4 . SPAA . 2013

That this has happened is hardly surprising. From its founding members – Peter Fry, Peter Nicholson, Nick Aston, Brian Williams and today‘s Chief Executive Officer, Andrea Slattery – to the five chairs of the organisation – one of the founders, Peter, as well as Peter Hogan, Graeme Colley and Sharyn Long, and the incumbent Andrew Hamilton – SPAA has always been well served by people of vision and commitment.

SPAA HAS NEVER WAVERED FROM THIS GOAL; ITS COMMITMENT TO PROFESSIONAL EXCELLENCE, FROM THE BOARD TO THE EXECUTIVE THROUGH TO THE MEMBERS While many have faithfully served SPAA over the past decade, one person in particular has come to symbolise SPAA: Andrea Slattery. Andrea became a Founding Director in 2003, and remained so until September 2005, when she was appointed CEO. Recently, she has been reappointed to the board. The success of SPAA – and it has been a phenomenal success – has

been very largely due to Andrea‘s tireless efforts and indefatigable energy. Without any question, at a time that has been difficult for the superannuation industry, confronted as it has been by the prospect of radical changes, Andrea has gained an admirable reputation for herself in representing the industry, in particular the SMSF sector, in negotiations and discussions with government and other stakeholders in the industry. Her integrity, industry knowledge and persistence have all contributed to that result. To slightly misquote that famous expression, “behind every great organisation there is a great woman”. Andrea exemplifies what SPAA stands for: an unwavering commitment to professionalism that is recognised by government and the industry alike. I have no doubt that SPAA will remain the voice of the SMSF sector, perfectly poised to build on an already impressive list of achievements as it enters its second decade.

Minister Bill Shorten

Minister Bill Shorten MINISTER FOR EMPLOYMENT AND WORKPLACE RELATIONS, FINANCIAL SERVICES AND SUPERANNUATION

SPAA was established in 2003, and things have changed considerably since that time – it is fair to say that SMSFs and SPAA have gone from strength to strength since 2003.

en years ago, superannuation assets were valued at $547 billion – around 66 per cent of the value of GDP. Of those assets, SMSFs held $106 billion, or 19 per cent of the total. Nearly 10 years later, superannuation assets are valued at $1.5 trillion – more than the total value of Australia’s GDP. SMSFs have grown to hold $474 billion of these assets, or 31 per cent of the total. SMSFs are now an integral part of the superannuation system and the Australian economy.

SMSFS CANNOT OPERATE IN ISOLATION. THEY RELY UPON THE KNOWLEDGE AND ADVICE OF PROFESSIONALS, INCLUDING ACCOUNTANTS, FINANCIAL PLANNERS, AUDITORS AND LAWYERS. Australians, irrespective of their funds, want to enjoy a comfortable and dignified retirement. SMSF trustees and their advisers have a

key role to play by ensuring that savings are well invested and provide adequate retirement incomes. The government understands the needs of the SMSF sector, and has been working with SPAA to improve governance so that members and their advisers can be confident that the system works. This includes implementing a number of changes to ensure that integrity and confidence in the sector are retained. We want to depoliticise superannuation and enshrine the core principles of adequacy and sustainability in an agreed charter of superannuation to ensure all future policy settings are consistent and provide certainty. The government will establish a Council of Superannuation Custodians to ensure any future changes are consistent with the charter. In addition, the government is making it easier to contribute to superannuation. The government will abolish the maximum age limit of super guarantee contributions and make all individuals aged 60 and over eligible for a temporary higher concessional contributions cap of $35,000. The higher cap will be extended to individuals aged 50 and over from 1 July 2014. SMSFs cannot operate in isolation. They rely upon the knowledge and advice of professionals, including accountants, financial planners, auditors and lawyers. In this regard, I wish to thank SPAA, which has been working closely with government in the development of important

reform measures, such as the Future of Financial Advice reforms and the replacement of the accountants’ licensing exemption. These measures help to ensure that SMSF trustees receive the best advice available, so the right decisions can be made for people’s retirement. I also wish to thank Andrea Slattery and her executive personally for the significant contributions that she has made to the sector and broader superannuation policy debates through her participation in a number of key government forums. SPAA has been well served by Andrea’s leadership and professional experience. I wish SPAA, its members and Andrea every success for the next 10 years.

SPAA . 2013 . 5

Senator Mathias Cormann

Senator Mathias Cormann SHADOW ASSISTANT TREASURER AND SHADOW MINISTER FOR FINANCIAL SERVICES AND SUPERANNUATION

Self-managed super funds are the fastest-growing segment in superannuation, and for good reason.

or Australians actively engaged with their retirement planning, SMSFs offer more choice, more control and better opportunities to tailor retirement planning to personal circumstances. There are currently around half a million SMSFs representing over one million Australians. The Coalition is very supportive of Australians looking after their own needs in retirement through selfmanaged superannuation. In fact, promoting self-reliance in retirement is a cornerstone of Coalition policy. In government, the Coalition will provide certainty and stability in superannuation by not making any

WE WANT TO ENCOURAGE AS MANY AUSTRALIANS AS POSSIBLE TO PLAN AND SAVE FOR THEIR RETIREMENT, AND TO TAKE FULL ADVANTAGE OF THE BENEFITS THAT THE SUPERANNUATION SYSTEM OFFERS.

6 . SPAA . 2013

IN MY DEALINGS WITH SPAA, I HAVE ALWAYS FOUND ANDREA SLATTERY AND HER TEAM TO BE A SOURCE OF INTELLIGENT, PRACTICAL, AND HIGH-QUALITY ADVICE. unexpected detrimental changes, so people saving for their retirement can plan their future with confidence. The Coalition strongly supports Australia’s three-pillar retirement system, comprising an aged pension as a safety net, a compulsory system of retirement saving through superannuation, and incentives for additional voluntary saving. We want to encourage as many Australians as possible to plan and save for their retirement, and to take full advantage of the benefits that the superannuation system offers. A Coalition government will work with the industry to achieve greater consumer engagement on retirement planning. For 10 years, SPAA has been doing this by working to ensure the highest professional standards for all advisers in the SMSF sector, including accountants, financial planners, auditors, and lawyers.

Since becoming the Shadow Minister for Financial Services and Superannuation, I have had a close, very positive and productive working relationship with SPAA. In my dealings with SPAA, I have always found Andrea Slattery and her team to be a source of intelligent, practical, and high-quality advice. Congratulations to SPAA on its first 10 years. I look forward to working with you for many years to come – hopefully soon in government.

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CEO message

Leading from the front

SPAA CEO Andrea Slattery

he recent announcement by the Minister for Financial Services and Superannuation, Bill Shorten, and the Treasurer, Wayne Swan, of more significant changes to superannuation saw SPAA playing a critical role in negotiating the final outcome. With SPAA celebrating its 10th anniversary this year, these negotiations with government serve as a pertinent reminder of how pivotal SPAA is in finding a practical outcome. They also show just how far the association has come over the past decade – and the respect in which it is held – since being established on 7 January 2003. As one of the founders of SPAA, I can put my hand on my heart and say the past 10 years have been an exciting, fulfilling journey. Today, the number of funds is poised to exceed half a million, the number of trustees is approaching one million, and assets under management total about $474

8 . SPAA . 2013

billion – about one-third of the total superannuation pool of savings. It‘s not just the raw numbers, exciting as they are. In 2010, the Cooper Review gave our sector a largely clean bill of health. To quote Cooper: “The vast majority of submissions supported the view that the SMSF sector, with a few exceptions, generally works well. This view is shared by the Panel. The review process has generally confirmed that the SMSF sector is largely a successful and well functioning part of (the) system.” Back in late 2002, the outlook was anything but bright. Assets under management were just topping $100 billion. There was a perception that the SMSF sector was nearly 90 per cent non-compliant. Many in the industry were questioning its survival; some even hoped it wouldn‘t survive. When Peter Fry, Peter Nicholson, Nick Aston, Brian Williams and I met in Adelaide in early 2003, this was the perceived state of affairs for SMSFs.

We were not deterred. We had a vision to build a genuine SMSF profession through standards and education, to be the voice of SMSFs, and to help all stakeholders understand the sector and its importance. A decade later, it‘s evident what has been achieved. Our sector has not only survived – as the figures mentioned and the Cooper Review attest – it has flourished. SPAA‘s role in working to build a flourishing SMSF sector has been critical. It is testimony to all those involved in the organisation to see what‘s been achieved. Aside from the determination and commitment of my four co-founders, SPAA has been well served by its five board chairs – the incumbent Andrew Hamilton, and his four predecessors: Peter Fry, Peter Hogan, Graeme Colley and Sharyn Long. All have played significant and vital roles in building this association. It wasn‘t just SPAA insiders. From the beginning, people such as Mark Jackson, the then ATO Commissioner

CEO message

THE PERCEPTION OF SMSFS OF A DECADE AGO IS LIGHT YEARS AWAY FROM HOW OUR SECTOR – AND SPAA – IS SEEN TODAY, BY OUR PEERS, GOVERNMENT, AND, MOST IMPORTANTLY, SMSF TRUSTEES. for Superannuation, and Tony Kier, were supportive, as was Louise Du Pre Alba from ASIC. With people of this calibre either at the helm or actively supporting from the sidelines, it‘s little wonder the milestones soon started coming. By January 2004, we had formulated the first undergraduate equivalent SMSF Specialist program. By June 2006, we had introduced the first SMSF Auditor accreditation program set at Masters equivalent level. By 2007, with assistance from Richard Misfud, CEO of AUASB, we were significantly involved in developing the AUASB SMSF Auditing Guidelines – a first for Australian auditors. In 2007, Senator Nick Sherry, as Minister for Superannuation, invited SPAA to the Superannuation Consultative Committee to represent the SMSF sector for the first time in Canberra. His successors, Minister Chris Bowen and Minister Bill Shorten, have continued to include SPAA on their peak consultancy committees. Minister Shorten has also recently acknowledged SPAA Specialist Auditors. The Opposition has invited SPAA

to their peak consultative forums; the first being Chris Pearce, and this continues with Senator Mathias Cormann. In 2012, we were invited to be a partner of the United Nations Convention of Independent Financial Advisors, as the leading professional association in Australia in financial services. This list, which is far from exhaustive, is testimony to what SPAA has achieved over the past decade. But much remains to be done. This year will see unprecedented change for accountants, auditors, and financial planners, and SPAA is committed to ensuring that all our members are professionally well equipped to handle this transformation. At an industry level, it has been disappointing to see the superannuation debate shift from being about its primary role as the savings vehicle of choice for Australians‘ retirement, to focusing on tax concessions as a replacement for equity measures.

SPAA has been unequivocal about its position in this debate. What is required is a bipartisan commitment to the original objective of superannuation – self-sufficiency in retirement. To this end, we support the recent initiative to establish a Council of Superannuation Custodians to provide certainty and bipartisan commitment, in the process removing superannuation from the day-to-day political cycle. The perception of SMSFs of a decade ago is light years away from how our sector – and SPAA – is seen today, by our peers, government, and, most importantly, SMSF trustees. We have earned their trust and respect. And I am convinced that if we continue to act with integrity, to acknowledge educated and enquiring minds, and to act with the courage of our convictions, we will retain their trust and respect, and, in the process, ensure both our future and the future of the SMSF sector.

Peter Fry, Nick Aston, Andrea Slattery, Peter Nicholson and Brian Williams.

SPAA . 2013 . 9

History of SPAA

From boiled lollies to chocolates BY JAMES DUNN

How SPAA has changed the SMSF industry

he SMSF Professionals‘ Association of Australia (SPAA) does not have a history that goes back as far as self-managed superannuation funds – let alone as far as the history of superannuation in Australia – but its rate of growth in recent years has been just as impressive. From its birth at a meeting in Adelaide in 2002 to discuss the formation of a peak body for selfmanaged super funds (SMSFs) – a meeting that attracted 28 people – SPAA has grown to become the first Australian financial services organisation appointed a partner of the United Nations‘ Convention of Independent Financial Advisors (CIFA), which manages the UN‘s “Charter of the Protection of Investor Rights” worldwide.

It has been a heady ride in just over a decade of existence; a trajectory matching the consistent growth in the numbers of self-managed super funds in Australia. From cottage industry – ridiculed as “mum-and-dad” funds and “do-ityourself” super funds – to the single largest chunk of superannuation

money in the space of a decade is an extraordinary track record of growth. It has both driven and required the growth in a peak body determined to build a genuine SMSF profession through standards and education, to be the advocacy voice of the SMSF sector, and to help all stakeholders understand the sector and its

SPAA HAS GROWN TO BECOME THE FIRST AUSTRALIAN FINANCIAL SERVICES ORGANISATION APPOINTED A PARTNER OF THE UNITED NATIONS‘ CONVENTION OF INDEPENDENT FINANCIAL ADVISORS (CIFA), WHICH MANAGES THE UN‘S “CHARTER OF THE PROTECTION OF INVESTOR RIGHTS” WORLDWIDE. continued on page 12

10 . SPAA . 2013

w 10 c e 0 om a c d o % m c n in i s e p ’ t d e si t p e on nd s . en t.

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History of SPAA

continued from page 10

SLATTERY AND HER CO-FOUNDERS, HOWEVER, COULD SEE THAT SMSFS WERE ALREADY THE MAIN REVENUE SOURCE FOR A LOT OF ADVISORY AND PROFESSIONAL SERVICES BUSINESSES, AND WERE CONVINCED THAT THIS BUSINESS WAS ONLY GOING TO GROW. importance. At the time of SPAA‘s genesis, says Andrea Slattery, Chief Executive Officer of SPAA, the Australian Taxation Office (ATO), which had been given the regulatory power over SMSFs in the late 1990s, was concerned about whether the existing funds were compliant. “The ATO wanted to get a handle on it. The ATO was not alone in holding that preconception about SMSFs: there was a very real assumption coming from the government and other sectors of the financial services industry – including other forms of superannuation – that most SMSFs were not compliant, and that they really ought to be removed.” Coming from a background of tax and accounting advice to clients who had SMSFs – ranging from elite athletes and self-employed people to high-net-worth individuals – Slattery knew that, in the main, SMSFs were compliant. But what really sparked her interest in forming SPAA was the realisation of the level of demand

from SMSFs for information and professional advice and services. “When we called that first meeting, our initial thought was to ask the established accounting and financial services industry associations to take this new sector under their wing,” says Slattery. “But it soon became apparent that none of these groups understood the sector, or why we were so excited about its untapped potential. Those doors were all politely closed.” If the existing accounting and financial services professional associations were aware of the SMSF sector at all, says Slattery, they thought of it as a niche market. “None of them thought that it would be a robust area to be involved in. Most of them seemed to think that their membership did not actually advise SMSFs or provide services to them, nor would they ever come into contact with them. They were wrong.” Slattery and her co-founders, however, could see that SMSFs were already the main revenue source for a lot of advisory and professional services businesses, and were convinced that this business was only going to grow. “It was funny, because at the time there was this feeling that SMSFs were going to wither on the vine – and should be helped to do precisely that – but a group of us who provided services to these funds were coming at it from the complete opposite direction: the need for high-level professional advice and service. “But we knew that there was absolutely huge demand for professional services from these funds, from clients – SMSF operators – who were far more engaged than the average financial services client. We believed quite firmly that offering services to the SMSF sector was going to be a career pathway in itself, and that it needed a clear professional framework established around it,” she says. From the beginning, says Slattery,

education and professional standards was a crucial focus of the new group. After SPAA was officially launched in April 2003, it took just seven months for it to formulate the first undergraduate equivalent SMSF Specialist Advisor program. By June 2006, SPAA added to that base with the introduction of the first SMSF Specialist Auditor accreditation program, set at Masters equivalent level. SPAA now has educational opportunities ranging from diplomas and certificate courses, and links to undergraduate, Masters and PhD programs. Slattery says SPAA‘s specialist accreditation programs define excellence in the SMSF profession, advance practitioners‘ knowledge

WE FELT WE HAD DONE AN ENORMOUS AMOUNT OF WORK HELPING POLICYMAKERS AND THE GOVERNMENT UNDERSTAND THAT THE SMSF SECTOR WAS A VERY IMPORTANT PART OF SUPERANNUATION AND THAT IT NEEDED TO BE REPRESENTED, BUT THAT WAS THE FIRST TIME WE ACTUALLY HAD A SEAT AT THE POLICY AND ADVISORY TABLE IN CANBERRA. continued on page 14

12 . SPAA . 2013

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History of SPAA

continued from page 12

WE HAD A LOT OF INPUT INTO BOTH THE COOPER REVIEW AND THE HENRY REVIEW INTO THE TAX SYSTEM, WHICH RAN AT THE SAME TIME, BUT THE COOPER REVIEW WAS A MAJOR TASK FOR US. with continued leading professional development and networking, and promote the profession of SMSF specialists by recognising accredited SMSF professionals. Pressed to nominate a turning point that meant SPAA had “made it” as a professional financial services organisation, Slattery names three such events. “I think the first was in 2007, when Senator Nick Sherry, then the Minister for Superannuation, invited SPAA to the Superannuation Consultative Committee to represent the SMSF sector. We felt we had done an enormous amount of work helping policymakers and the government understand that the SMSF sector was a very important part of superannuation and that it needed to be represented, but that was the first time we actually had a seat at the policy and advisory table in Canberra. Opposition financial services, superannuation and corporate law spokesman Chris Pearce did the same.”

14 . SPAA . 2013

The second was the “Super System Review” – more commonly known as the Cooper Review, after its chairman, Jeremy Cooper, the former deputy chairman of the Australian Securities and Investments Commission (ASIC) – established by the federal government in 2009, and which reported in 2010. “We had a lot of input into both the Cooper Review and the Henry Review into the tax system, which ran at the same time, but the Cooper Review was a major task for us. The Cooper Review had the mandate to look at the efficiencies of superannuation – we were able to provide research and data to the Review to show that the SMSF sector was very efficient and effective,” says Slattery. The Cooper Review was déjà vu for Slattery and SPAA: it felt like 2002 all over again. “I think there was a general feeling at the time that the Cooper Review would show that the SMSF sector really was not viable, and would need serious change,” says Slattery. “We were able to demonstrate to the Cooper Review that the SMSF sector was well and truly outpacing the performance of any of the APRAregulated superannuation sectors over the last 10 or so years – through the tough times as well – that it was the most engaged sector, that it was the most transparent, and that it had the lowest fees; in fact, it was the only sector where the fees were falling,” says Slattery. The result was that the SMSF area was the only super sector that got a positive report in the Cooper Review, indicating that only a few smaller changes were required. And with the government‘s response to the Cooper Review coming in the form of the Stronger Super law reforms in

2012, the SMSF sector was confirmed as a viable, well-managed and wellfunctioning superannuation sector. Slattery says the future looks “pretty strong” for SPAA. “I think that people can see that being involved in this sector adds genuine value. The clients – the trustees – see the valueadd; the people who provide the services and the products add the value and can see that value, and the result is a sector that really underpins the Australian investment market,” she says.

I THINK THAT PEOPLE CAN SEE THAT BEING INVOLVED IN THIS SECTOR ADDS GENUINE VALUE. THE CLIENTS – THE TRUSTEES – SEE THE VALUEADD; THE PEOPLE WHO PROVIDE THE SERVICES AND THE PRODUCTS ADD THE VALUE AND CAN SEE THAT VALUE, AND THE RESULT IS A SECTOR THAT REALLY UNDERPINS THE AUSTRALIAN INVESTMENT MARKET

Sir Anthony Mason

The security of superannuation The following address was given by the former Chief Justice of the High Court, and patron of SPAA, Sir Anthony Mason, AC, KBE, to the organisation‘s national conference in February. Its central premise – that superannuation should be as “sacrosanct as the family home” – struck a deep chord with the audience. What follows is an edited version of that address.

y talk on the security of superannuation reflects on the point made by [SPAA CEO] Andrea Slattery in an interview reported in The Australian, when she said that “both sides of politics should make super as sacrosanct as the family home”. The ownership of a home is the ambition of most Australians. It is an ambition that is encouraged by governments in many ways, and, in many cases, it is an ambition that is realised. Home ownership is, of course, subject to local government rates, but otherwise – with some exceptions – it is not subject to taxes. As it is with house ownership, so it ought to be with superannuation. Very many Australians aim to have sufficient superannuation to adequately fund life in retirement. They are not only encouraged, but in

16 . SPAA . 2013

many cases they are also required by governments, to make contributions to superannuation that will bring this about. This encouragement takes various forms, including tax advantages. It is on the basis of these advantages that Australians voluntarily invest in superannuation and decide how much they will invest and what form that investment will take. In doing so, they and their advisers make projections on the basis of the laws as they stand, including tax advantages and liabilities, and on the assumption that the relevant laws will not be changed to the detriment of those who invest in superannuation. In the absence of such a settled framework, it is not possible to make realistic projections and provisions for the superannuation that is adequate to meet an individual‘s future needs. Even with that settled framework,

ANOTHER ELEMENT OF UNPREDICTABILITY IS THE VOLATILITY OF INVESTMENT RETURNS AT A TIME WHEN THE WORLD ECONOMY, IN PARTICULAR THAT OF THE UNITED STATES AND EUROPE, HAS EXPERIENCED AND IS EXPERIENCING FUNDAMENTAL DIFFICULTIES.

Sir Anthony Mason

the making of accurate projections is a tricky business. The Institute of Australian Actuaries pointed out last year that national life expectancies “are rising much faster than commonly expected”. It is predicted that the life expectancy of males after retirement in 2010, at 65, could rise by 50 per cent, and females by 26 per cent. Despite an increased involvement by Australians in superannuation in the last financial year, it is likely that many retirees will find that their existing provision will fall short of supporting the lifestyle in retirement for which they have planned. Another element of unpredictability is the volatility of investment returns at a time when the world economy, in particular that of the United States and Europe, has experienced and is experiencing fundamental difficulties. These difficulties led to lower than expected investment returns in the GFC, with an adverse impact on superannuation balances. At the present time, it has led to much lower interest rates in most developed economies, with lower investment in bonds, term deposits and fixed interest securities, accompanied by investment in riskier securities, such as “junk bonds”, and high-yielding equities and hybrids. Encouraged by optimistic financial advisers and fund managers, investors have invested in high-yielding securities in order to overcome perceived inadequacy in their superannuation provisions. In the United States, this development has excited concern because there is a risk of deterioration in the economic outlook, and it is possible – perhaps likely – that low interest rates will continue for quite some time. Some of the concern in the United States relates to the high level of investment in corporate bonds: an element that is not mirrored to the same extent in Australia. The Australian economy seems to be in rather better shape

than the American economy, though there can be no certainty about the continuation of this situation, as there are some signs of a downturn here; for example, rising unemployment. Another very important element in

PROGRAMS ARE SOMETIMES ADOPTED BECAUSE THEY ARE THOUGHT TO HAVE ELECTORAL APPEAL, WITHOUT CAREFUL THOUGHT BEING GIVEN TO HOW THEY WILL BE FUNDED the background that I have sketched is the raft of recent reforms and proposals for reform – sometimes floated, only to be later abandoned – affecting the financial services and superannuation industries. These reforms and proposals have been the subject of much debate, and have generated their own uncertainties. These uncertainties following past amendments affecting superannuation, some of them substantial, could lead to lack of confidence in the benefits of superannuation. We should never forget that by making an investment in superannuation, people lock away assets that could be used for other purposes. Uncertainty about the benefits may lead people to conclude that the sacrifice is not worth making. In that event, they may elect to spend more on consumption and rely on the old age pension or invest in other ways – for example, in insurance bonds or negative gearing – thereby

exposing government to other revenue losses. It has been suggested that these possibilities, giving rise to financial consequences that are notoriously difficult to quantify from a budget perspective, may indicate that the real cost to government of superannuation concessions may have been overstated by Treasury. As it is, one commentator has suggested that Australians are already investing less in superannuation than they have been previously. Unfortunately, the high level of investment in superannuation and the cost to revenue of the tax advantages present a strong temptation to governments looking for sources of additional revenue and cost savings to fund new programs. Programs are sometimes adopted because they are thought to have electoral appeal, without careful thought being given to how they will be funded. History tells us that governments do not have a track record of resisting temptations of this kind. Politicians will say, by way of justification, that current taxation arrangements are always subject to change, depending upon circumstances and governmentdetermined priorities. They will also say that they are entitled, as indeed they are, to eliminate inequities in the taxation regime. But there comes a point when the so-called elimination of inequities becomes a contestable issue, and may itself amount to an “inequity”. Be this as it may, once politicians start to eliminate superannuation concessions to bolster government revenue, it is only natural that people may think that governments will go further down that path, with detrimental consequences for public confidence in the system. There are powerful reasons for saying that there is a very strong case for not disturbing the basic framework and the principal assumptions on which superannuation projections

SPAA . 2013 . 17

Sir Anthony Mason

are based. Superannuation is, as I have said, no less important to the individual Australian and the Australian family than the family home, not least because investment in superannuation has been promoted and encouraged by Australian governments. Indeed, Australian workers have at times been urged and persuaded to moderate wage claims in consideration of receiving increased superannuation entitlements.

WE SHOULD RECOGNISE THAT A GROWING PROPORTION OF OUR COMMUNITY IS BECOMING ECONOMICALLY LITERATE AND WOULD PREFER TO MANAGE THEIR OWN AFFAIRS WITHOUT BEING SMOTHERED BY HEAVY-HANDED, AND IN SOME CASES POINTLESS, REGULATION.

Conscientious politicians recognise that public confidence in the political process – and it is not at a high point at this time – rests upon the integrity of the political process in its relationship with the people. Broken promises, public misstatements and over-reliance on public relations (“spin”) inevitably damage trust in the

18 . SPAA . 2013

Sir Anthony Mason

political process. Nothing, however, is more damaging to public trust in the political process than the making of decisions that disappoint the justified financial expectations of workers and retirees. That is certainly the case when the expectations relate to superannuation and the benefits it will bring in retirement. The expectations relating to the security of superannuation benefits are as strong as expectations concerning the security of one‘s home. Another matter of concern is the array of never-ending regulations that affect the operation of SMSFs. It has been suggested that proposed rules to asset transfers and disposals could make the establishment of new SMSFs unattractive. This might curb the expansion of the sector, which controls $420 billion

in assets – a development that, it is suggested, would not be unwelcome to government. Be this as it may, everincreasing complexity in regulations affecting the SMSF sector make it more difficult for everyone and are detrimental to efficiency, leading to an increased need to obtain legal, financial and accounting advice and consequential costs. We should recognise that a growing proportion of our community is becoming economically literate, and would prefer to manage their own affairs without being smothered by heavy-handed, and in some cases pointless, regulation. The Australian provision for superannuation is the envy of the world. Why expose it to jeopardy by expedient proposals that could disappoint the well-founded expectation of so many Australians?

Education

An enlightening decade for SMSF advice BY LIZ WARD, HEAD OF EDUCATION SERVICES, SPAA

It‘s an understatement to say that times have changed in the SMSF education marketplace over the last decade.

n internet search for SMSF education today results in over 340,000 hits; it is amazing to consider that just 10 years ago, the number may have been in the tens – a lot can happen in a decade, including the birth and rapid growth of a new financial services education sector.

WITH THE SPOTLIGHT TURNING TOWARDS THE IMPORTANCE OF SMSF EDUCATION, THE INDUSTRY WAS GATHERING PACE, WITH MANY TRAINING PROVIDERS – BOTH FORMAL PROVIDERS AND INDUSTRY EXPERTS – BEGINNING TO OFFER QUALIFICATIONS, SEMINARS AND ACTIVITIES

For those practitioners who identified early on that SMSFs were an appropriate retirement vehicle for many of their clients, and became advocates of the products and services that enable Australians to take a vested interest and control of their superannuation, there was little guidance on what constituted quality and comprehensive SMSF education. For that equally pioneering group of educators who recognised the need for education, it was left to their discretion to determine what needed to be covered in a course, and what professionals might require in order to provide quality advice to their clients, be it from a financial planning, accounting, auditing or legal perspective. As a lone voice, SPAA rose to the challenge and, with generous input from members, set about identifying the education standards for SMSF professionals. The first set of standards comprised two modules: one focusing on the legal elements, the other on the provision of advice. These underpinned the higher-level learning through SPAA SMSF specialisation programs for its members. These two modules, or sets of standards, were also adopted, adjusted and lowered as the underpinning Units of Competence for the Financial Services Training Package, and incorporated into the various diploma qualifications available to the financial services industry. Subsequent to this, the importance of – and what differentiates – SMSF

Liz Ward

advice was also recognised by ASIC, as it was introduced into the Regulatory Guide 146 as a specific subset of superannuation advice. Again, the two SPAA education standards were reflected in ASIC‘s identification of RG146 requirements for the provision of financial advice in SMSF, albeit at a lower educational level. Race forward to 2013, and the SPAA education standards and accompanying curriculum have now been expanded from those two modules to eight modules, which include every aspect from taxation and administration through to investment strategies and insurance – this in itself is a reflection of the sector‘s growth, change and, frankly, demand from professionals seeking to provide advice in SMSFs. With the spotlight turning towards the importance of SMSF education, the industry was gathering pace, with many training providers – both formal providers and industry experts – continued on page 22

20 . SPAA . 2013

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Education

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beginning to offer qualifications, seminars and activities solely focused on increasing the competence of the SMSF professional. With the range of education opportunities starting to grow, and myriad options providing a difficult maze for professionals to navigate in order to determine the best fit for their need, SPAA commenced providing an assessment of the education programs, and providing CPD points to enable members to determine best fit and value for their CPD dollar. The SPAA CPD Accreditation program was an industry leader, focusing on quality education: content, delivery, assessment and industry connection. Many other industry associations have taken the example set by SPAA and have developed their CPD accreditation programs to focus not just on the content, but on the educational experience and outcomes. SPAA has been assessing and allocating CPD points to SMSF-focused programs and

WE HAVE SEEN THE REMOVAL OF THE ACCOUNTANTS‘ EXEMPTION, WHICH HAS ENABLED ACCOUNTANTS TO PERFORM LIMITED SERVICES FOR THEIR CLIENTS RELATED TO SMSF SINCE THE INCEPTION OF FINANCIAL SERVICE REFORM IN THE EARLY 2000s. 22 . SPAA . 2013

activities now for over nine years. With this understanding and exposure to the programs available, SPAA will be launching a new education facility that will enable practitioners to better understand which program is best suited to their SMSF education needs. The education requirement baseline was therefore established by ASIC, the industry expectation was set by SPAA, and professionals were left seeking to differentiate themselves and to provide consumers with a form of independently assessed validation of their SMSF knowledge and skills. SPAA again provided the answer, with SPAA SMSF Specialist Accreditation. For over seven years, the SPAA SMSF Specialist Advisor (SSA) designation has been the pre-eminent recognition of specialisation in the SMSF professionals‘ community. With over 1300 SPAA SMSF SSAs currently around Australia, increasingly, trustees are seeking out SPAA members who have attained this designation. The SPAA SMSF Specialist Auditor (SSAud) designation was similarly established to identify those SMSF auditors who have had their SMSF knowledge independently validated, and provides evidence of their expertise not just in the auditing standards, but also in the SIS legislation. In fact, the SSAud was recently recognised in the SIS Act to support the introduction of the new SMSF auditor registration regime, in which it is recognised, in conjunction with other tertiary qualifications, as meeting the educational requirements for the registration process and providing some streamlining benefits for our members. This brings us up to 2013, the year of unprecedented change for many SMSF professionals. With SMSF auditor registration well and truly underway, it will be the ultimate identification of those professionals who have been approved to provide SMSF audit services. We have seen the removal of the

THE NEXT COUPLE OF YEARS WILL SEE A RESHAPING OF THE SMSF INDUSTRY AS MANY DECIDE TO REMOVE THEMSELVES FROM THE ADDITIONAL REGULATORY SUPERVISION. accountants‘ exemption, which has enabled accountants to perform limited services for their clients related to SMSF since the inception of Financial Service Reform in the early 2000s. We will see the removal of the exemption in 2016, and the introduction of the limited licence will require accountants to decide the extent of SMSF advice they wish to provide to clients, meet educational and experience requirements, and change their business model accordingly. The proposed tax on financial product advice status will enable financial planners who hold an additional form of registration to provide tax advice within the context of providing financial advice. The range and depth of advice will depend on the education/ competencies that are required. The proposed changes will mean that many individuals will reflect on their businesses and clients, and will need to determine their response to the requirements and whether they intend to step up to the additional regulatory requirements. Some may elect that SMSF advice is no longer for them and their business, and may rely on a referral approach to best service those clients seeking SMSF guidance. Others will decide that SMSF advice is their professional future and jump in, boots and all.

Education

A recent SPAA survey of SMSF auditors conducted via LinkedIn indicated that the majority would be taking the step of registration and maintaining compliance in the new regime. Similarly, many accountants have suggested that, while still under development, they will be responding to new requirements and pursuing SMSF advice as a client service offering in their business. SPAA has always encouraged the increased competence of all professionals operating in the SMSF advice industry, and welcomes the governance provided by these new regimes to assist in providing trustees with increased confidence and transparency in the SMSF advice they receive. The next couple of years will see a reshaping of the SMSF industry as many decide to remove themselves

SMSF EDUCATION WILL CONTINUE TO DEVELOP, EXPAND AND ENCOMPASS NEW DIRECTIONS.

from the additional regulatory supervision. However, the need for improvement in knowledge, skills and expertise will continue in order to assist those sticking around to keep pace with the growing level of consumer expectations and knowledge, with the ongoing

regulatory changes, and with those like-minded practitioners seeking to position themselves as specialists in this complex environment. SMSF education will continue to develop, expand and encompass new directions. The regulatory spotlight on the SMSF sector will ratchet up the need for professionals and trustees to not just dabble in SMSFs, but also to take it by the horns and make sure their knowledge and behaviour provides protection of the future of the SMSF industry. SPAA welcomes all those professionals â&#x20AC;&#x201C; those with both feet firmly planted in the SMSF space, as well as those who are considering it as an opportunity for their clients and their businesses â&#x20AC;&#x201C; to join us in our quest to raise the standard of advice and behaviour in this dynamic and vibrant environment.

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SPAA . 2013 . 23

History of SMSFs

It’s been a long and winding road BY MICHAEL LAURENCE*

The earliest possible predecessors of today‘s self-managed super funds (SMSFs) can be traced back almost a century to when a few astute small business owners may have taken steps to become eligible for the Commonwealth‘s first tax concessions for super.

uper funds “established for the benefit of employees in any business” were made exempt from tax under the 22-page Income Tax Assessment Act 1915. By formally becoming employees of their own enterprises, small business owners could set up their own tax-exempt funds. Although the Income Tax Assessment Act 1936, passed 21 years later, continued to provide tax exemptions to employer super funds, no provision was made for the self-employed.

THE BIGGEST DEVELOPMENT TO DATE IN THE EVOLUTION OF THE MODERN SMSF OCCURRED IN JULY 1994, WHEN THE SUPERANNUATION INDUSTRY (SUPERVISION) ACT (SIS) CAME INTO EFFECT.

24 . SPAA . 2013

However, the 1936 Act was amended within a few years to mark what some believe is the true beginning of self-managed super in Australia. The tax exemption was extended to super funds established by groups of no fewer than 20 selfemployed individuals. It is hardly surprising that very few of the self-employed would have rushed to take advantage of this rather cumbersome opportunity to set up a super fund. And by the 1940s, super fund membership was still basically made up of what a Treasury paper refers to as a “select group of salaried employees”. Nevertheless, the number of small funds with less than a handful of members – typically established by owners of small family businesses and professionals – had grown to about 70,000 by the early 1990s. Again, it was a matter of informed individuals making sure of their eligibility for concessional tax treatment for their own funds.

Recognition of small super funds

The biggest development to date in the evolution of the modern SMSF occurred in July 1994, when the Superannuation Industry (Supervision) Act (SIS) came into effect. Under the new legislation, funds with fewer than five members were named “excluded” funds – excluding them from the demanding prudential

BY JUNE 1999, AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY (APRA) STATISTICS SHOW THAT THERE WERE 193,000 “EXCLUDED” FUNDS HOLDING $60 BILLION IN ASSETS – UP FROM 100,000 FUNDS WITH $28 BILLION IN ASSETS JUST THREE YEARS EARLIER. requirements imposed on large employer, industry-based and commercial super funds. This legal recognition of what were later to become known as selfmanaged super funds would have given professional advisers more confidence in recommending them to their clients. In turn, this led to a rapid increase in fund numbers.

History of SMSFs

FROM JULY 2004, SUPER FUND MEMBERS WERE EMPOWERED TO INSTRUCT SUPER FUNDS TO TRANSFER THEIR BALANCES TO ANOTHER FUND. IN OTHER WORDS, THEIR SUPER SAVINGS HAD BECOME PORTABLE.

Australian Prudential Regulation Authority (APRA) statistics show that, by June 1999, there were 193,000 “excluded” funds holding $60 billion in assets – up from 100,000 funds with $28 billion in assets just three years earlier. In October of that year, amendments to the SIS Act introduced a new category of small superannuation funds, called self-managed superannuation funds, under the regulation of the tax office rather than APRA (successor to the Insurance and

325541A_BGL | 1886.indd 1

Superannuation Commission). The SIS amendments also required all members of an SMSF to be individual trustees of their fund, or directors of a corporate trustee. As with their excludedfund predecessors, membership was limited to a maximum of four members. In short, the form of today‘s SMSF had arrived. Two key legislative changes then helped to further break down the barriers to SMSF membership. From July 2004, super fund members were empowered to instruct super funds to transfer their balances to another fund. In other words, their super savings had become portable. From July of the following year, choice of fund legislation came into force, allowing employees to nominate which complying super fund would receive their superannuation guarantee contributions. Fund choice, together with fund portability, enabled most employees to specify that both their compulsory contributions and accumulated super savings be paid into an SMSF if desired.

New SMSF boom

The outlook for SMSFs significantly changed once more on Budget night 2006, when the then Treasurer, Peter Costello, announced the government‘s plan to simplify the super system.

The simplification measures to begin from July of the following year included the removal of tax on lump sum and pension benefits paid from the age of 60, and the elimination of reasonable benefit limits for concessionally taxed benefits. These imminent changes were well received by existing SMSFs and those considering establishing an SMSF. In 2006-07, a record 45,666 SMSFs were established – up 86 per cent on the previous financial year. This record is yet to be broken.

THE OUTLOOK FOR SMSFS SIGNIFICANTLY CHANGED ONCE MORE ON BUDGET NIGHT 2006, WHEN THE THEN TREASURER, PETER COSTELLO, ANNOUNCED THE GOVERNMENT‘S PLAN TO SIMPLIFY THE SUPER SYSTEM.

3/8/13 8:46 AM

SPAA . 2013 . 25

History of SMSFs

The review panel recognised the significant role performed by SMSFs in Australia‘s superannuation system, and acknowledged that SMSF members had “effectively assumed sole responsibility” for their super savings. Further, the review gave its vision for the SMSF sector as one “where trustees act diligently to build their retirement savings and are supported by highly competent and skilled service providers”. The review also emphasised the need for advisers to have specialist SMSF knowledge before giving advice in relation to SMSFs, reflecting SPAA‘s determination to keep raising the professional standards and ethics of SMSF advisers. As at December 2012, Australia‘s 496,000 SMSFs held $474 billion in assets – or almost a third of the money in superannuation. Much has changed since the early days of super, when just a few enterprising business owners thought it might be a good idea to have their own super funds.

Another key measure in force from July 2007 allowed the self-employed to claim tax deductions for 100 per cent of their eligible personal super contributions, instead of the previous 75 per cent. Until that point, full tax deductions could only be claimed by employers making contributions on behalf of their employees. In 2009, SMSFs overtook retail super funds to become superannuation‘s biggest sector, with $332 billion in assets – up from $132 billion five years earlier. By September of that year, the number of SMSFs had far exceeded 400,000.

26 . SPAA . 2013

Cooper Review milestone

In June 2010, the final report of the “Review into the Governance, Efficiency, Structure and Operation of Australia‘s Superannuation System” – known as the Cooper Review – was handed to the government, marking another milestone in the history of SMSFs. After the most thorough examination of self-managed super to date, the review described the sector as “largely successful and well-functioning”. Its recommended changes for SMSFs were much lighter than for the rest of the superannuation industry.

* Michael Laurence is a freelance journalist and media consultant, specialising in superannuation and personal investment. Sources include: The Australian Superannuation Handbook 201213, Thomson Reuters; “A statistical summary of self-managed superannuation funds”, Cooper Review, December 2009; “Chronology of superannuation and retirement income in Australia” by Leslie Neilson, Parliamentary Library, June 2010; “The rise and rise of self-managed superannuation in Australia” by Josephine Castillo; “The Australian Taxation Office‘s approach to regulating and registering selfmanaged superannuation funds”, Australian National Audit Office, June 2007; “A recent history of superannuation in Australia”, APRA, 2007.

Future of SMSFs

How the industry will adapt to the future BY JOHN KAVANAGH

When Jeremy Cooper started work as the head of the Australian Government‘s Super System Review in 2009, one of the things he heard a lot was how bad the self-managed sector was.

n a 2010 speech, Cooper said, “Stories about investor losses, dangerous investment products, non-compliance, bad advice and general mayhem were often bandied about as truths about self-managed super funds; yet, there was very little hard evidence to go on.” What Cooper found was quite different. SMSFs were achieving investment returns that “appear to be as good, if not better, than the returns

THE DIRECTOR OF EDUCATION AND PROFESSIONAL STANDARDS AT THE SMSF PROFESSIONALS‘ ASSOCIATION OF AUSTRALIA, GRAEME COLLEY, SAYS CHANGES IN SUPERANNUATION MIRROR CHANGES IN OTHER PARTS OF THE ECONOMY.

of other sectors”, and that the sector was a cost-effective way to administer superannuation accounts. Cooper said, “On the whole, SMSF members appear to be doing well in taking on a higher level of responsibility for their retirement savings and achieving satisfactory net investment returns.” To the surprise of many in other parts of the superannuation industry, the Cooper Review gave the SMSF sector a legitimacy it had never had before. Before Cooper, it was normal to hear industry commentators disparage the sector, but not since. Now, self-managed super is held up as one of the models for what super should be. The director of education and professional standards at the SMSF Professionals‘ Association of Australia, Graeme Colley, says changes in superannuation mirror changes in other parts of the economy. “What we see in the retail sector is consumers using the internet and social media to cut off the middleman. “Self-managed fund trustees are doing the same thing. They are taking control of their funds and going direct for investments and services. This is where we are headed.” Colley says one of the positive developments of the past few years has been that service providers have turned their mind to how they can service the SMSF sector better. “With almost 500,000 funds, it is a very disparate group, and it can be hard

ONE OF THE VERY PROMISING THINGS ABOUT THE FUTURE OF THE SMSF SECTOR IS THAT WE WILL HAVE SERVICE PROVIDERS CATERING A LOT BETTER TO TRUSTEES‘ NEEDS to identify marketing opportunities. Many service providers just put the sector in the too-hard basket, but not any more. One of the very promising things about the future of the SMSF sector is that we will have service providers catering a lot better to trustees’ needs.” Other likely changes to SMSFs will flow from broader discussions about how to improve the broad super system. In the latest “Melbourne Mercer Global Pension Index”, published last October, the Australian system received a rating of B+, which means that it is “a system that has a sound structure with many good features, but has some areas for improvement”. Of the 18 countries

SPAA . 2013 . 27

Future of SMSFs

THE MERCER REPORT SAYS THE AUSTRALIAN SYSTEM COULD BE IMPROVED BY INTRODUCING A REQUIREMENT THAT PART OF THE RETIREMENT BENEFIT MUST BE TAKEN AS AN INCOME STREAM. IT ALSO RECOMMENDS INCREASING THE LABOUR FORCE PARTICIPATION RATE AMONGST OLDER PEOPLE. surveyed, only Denmark received an A rating, and the Netherlands was the only other country to receive a B+ rating. The index looks at issues such as adequacy – the number of people covered by the system and the level of income likely to be provided in retirement. It looks at the governance of the system and other integrity issues, and it looks at sustainability. The Mercer report says the Australian system could be improved by introducing a requirement that part of the retirement benefit must be taken as an income stream. It also recommends increasing the labour force participation rate amongst older people. It would like to see the introduction of mechanisms

28 . SPAA . 2013

GRAEME COLLEY

to increase the pension age as life expectancy continues to increase, and also increase the minimum access age for receiving benefits from private pension plans so that retirement benefits are not available more than five years before the pension eligibility age. The argument that there should be compulsory conversion of some super benefits into income streams has widespread support. The Institute of Public Accountants (IPA) is a strong advocate for change along these lines. The IPA‘s senior policy adviser for superannuation and financial services, Reece Agland, says around 75 per cent of the benefits of a MySuper account should be converted to a superannuation pension or annuity. The managing director of the consulting group Towers Watson, Andrew Boal, says longevity risk is the biggest issue facing the system, and is one that will have to be addressed.

THE ARGUMENT THAT THERE SHOULD BE COMPULSORY CONVERSION OF SOME SUPER BENEFITS INTO INCOME STREAMS HAS WIDESPREAD SUPPORT. THE INSTITUTE OF PUBLIC ACCOUNTANTS (IPA) IS A STRONG ADVOCATE FOR CHANGE ALONG THESE LINES.

Future of SMSFs

Boal is not convinced that compulsion is necessary to encourage more retirees to put their super benefits into pensions, but the government could help by facilitating the development of a wider variety of retirement income options.

TAKING UP THE SOCIAL MEDIA THEME, BOAL SAYS THERE IS AN OPPORTUNITY TO USE THE INTERNET TO GIVE FUND TRUSTEES AND MEMBERS BETTER ACCESS TO CALCULATORS AND OTHER TOOLS THAT WILL HELP THEM WITH THEIR PLANNING. He believes that a market for deferred annuities, to complement the established markets for account-based pensions and term annuities, would give retirees an income stream if they were to live beyond life expectancy. Another area where the Mercer Global Pension Index found the Australian system sub-optimal was in funds‘ asset allocations. It gave maximum scores to countries with an allocation of between 40 and 60 per cent to growth assets, such as equities, property and private equity. A growth asset allocation higher than 60 per cent (the average allocation to growth assets in Australian super funds is over 70 per cent) was deemed to expose the system to a high level of volatility, particularly in countries where fund members typically bear the investment risk (as in Australia). One proposal that is gaining widespread support is to adjust asset allocation over a working life. So-called lifecycle investing involves holding the majority of a member‘s balance in equities and other growth assets in the early and middle years, and then switching towards less volatile assets, such as fixed income, in the years approaching retirement. Taking up the social media theme, Boal says there is an opportunity to use the internet to give fund trustees and members better access to calculators and other tools that will help them with their planning. He says financial literacy levels are still too low, and one way to address the problem is to use social media and mobile technology to give people access to services when they want it. “The lesson of the internet in superannuation is that you have to allow people to use calculators and other tools when it is convenient for them. There is a lot more we can do, and I‘m sure we will do, in this area.”

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SPAA . 2013 . 29

SPAA Timeline

10 years of SPAA

Superannuation Reviews Significant superannuation changes since 2003

• Work test for under 65 ceases to apply • AFSL regime implemented and accountants‘ exemption SPAA developed introduced the first undergraduate equivalent SMSF Specialist program: January 2004

• SPAA established: 7 January 2003 • Business registered: 14 February 2003 • Association Launch: 28 April 2003, Sydney • National Knowledge and Skills Criteria (Standards) Launch: 30 July 2003, Melbourne

Superannuation co-contribution system introduced

Major SPAA Events

SPAA Members 156

296

National Conference location

2003

Inaugural Chairman: Peter Fry

210

Peter Hogan elected Chairman: November 2004

2005

2004

150

Chairmen

Specialist accreditation program

Sydney 8–10 March

Sydney

National Conference Attendees

Committees

551

SPAA developed the SSA designation (12-month grandfathering period)

Webinars VIC, SA, NSW & WA State Chapters established

State Chapter Groups

QLD State Chapter established

Sub-Chapter Groups

Offices

• SPAA established office in the PKF Building, Greenhill Road: January 2003 • SPAA moved to office in the Santos Building: July 2003

# of SMSF 240,000

$ in SMSF

Membership categories

30 . SPAA . 2013

$103 billion

General membership category offered

General and Specialist membership categories offered

SPAA Timeline

Simpler Super (06/07)

• SPAA developed guidance statements that underpinned the AUASB GS009: December 2006

2006

Sydney 1–3 March

• SPAA Conference Committee formed: March 2006 • SPAA Membership Committee formed: May 2006

SPAA adopted International, ethical and professional standards to support the SPAA Professional Standards, Code of Conduct and Education Programs. The Hon. Senator Nick Sherry, as Minister for Superannuation, invited SPAA to the Superannuation Consultative Committee to represent the SMSF sector for the first time in Canberra

935

672

230

• Simpler super reforms: • removal of reasonable benefit limits system • introduction of contribution caps • tax-free benefits for over-60s • account-based pensions introduced • New super fund borrowing rules introduced

Sydney 7–9 March

450

650

Graeme Colley elected chairman: March 2007

First SSA Examination was held in March in Sydney

2007

• Superannuation surcharge abolished • Defined benefit pensions banned

• SPAA introduced the first SMSF Auditor accreditation program set at Masters equivalent level: June 2006

Launch of webcasts allowing Regional Members the opportunity to enjoy the benefits of SPAA membership that those in capital cities have

ACT State Chapter established NSW Hunter Region SubChapter established SPAA moved to office at 72 Sturt Street, Adelaide: July 2005

SPAA House opened at Level 1, 366 King William Street, Adelaide: 17 October 2007

SPAA . 2013 . 31

SPAA Timeline

Superannuation Reviews Significant superannuation changes since 2003

10 years of SPAA Australia‘s Future Tax System Review Final Report (Henry Review)

Australia‘s Future Tax System Review: retirement income paper

Concessional contribution cap reduced from $100,000 to $50,000 for individuals over 50, and from $50,000 to $25,000 for individuals under 50

• Super guarantee rate to increase to 12 per cent by 2019–20

Super System Review (Cooper Review) Future of Financial Advice (FOFA)

• Super fund borrowing rules tightened

Major SPAA Events

SPAA Members

Brisbane 12–14 March

National Conference Attendees

1000

Committees

Specialist accreditation program

2008

Chairmen

1894

Adelaide 10–13 March

Melbourne 17–19 February

780 Sharyn Long elected Chairman: November 2009 • SPAA Regulatory Committee formed: March 2009 • SPAA Professional Standards Committee formed: May 2009

• SPAA developed the SSAud designation • First examination held on 29 September in Sydney, Adelaide, Melbourne, Perth and Brisbane

1050

2010

National Conference location

1538

2009

1438

Webinars

State Chapter Groups

Sub-Chapter Groups

NSW North Shore SubChapter established

Gold Coast, Sunshine Coast and Bendigo SubChapters established

NSW Central Coast SubChapter established

Offices

# of SMSF

$ in SMSF

Membership categories

32 . SPAA . 2013

General and Specialist membership categories offered

SPAA Timeline

• Draft amendments to the corps regulations released – all parties to a limited recourse borrowing arrangement to be licensed • New “market value” requirements introduced for SMSFs and other Stronger Super SMSF measures implemented • SMSF valuation guidelines issued • New trustee penalties to apply from 1 July 2013 – Bill introduced into Parliament • Draft legislation issued tightening related party SMSF

• New SMSF rules for collectables • MySuper and SuperStream reforms begin

SMSF auditors commence registering with ASIC

SPAA was acknowledged as the leading financial services professional association in Australia by the United Nations in partnering with CIFA

Brisbane 23–25 February

2011

2618

2533

Sydney 15–17 February

1144

Melbourne 13–15 February

1182

2013

2200

SPAA 10 Year Gala Dinner

1398

SPAA Education Committee formed: July 2011

2012

Andrew Hamilton elected Chairman: February 2012

• Successful introduction of webinars. • Introduction of tutorials for SSA and SSAud candidates

Western Sydney SubChapter established

Northern NSW, Toowoomba, Rockhampton and Albury Wodonga Sub-Chapters established

NT Chapter established: September 2012

SPAA office opened in York Street, Sydney: February 2012

489,000

$474 billion Student, Affiliate and Retired memberships offered

SPAA . 2013 . 33

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A stronger SMSF sector BY PETER BURGESS*

Over the past decade, there have been many events that have helped shape the growth and structure of the SMSF sector; however, one event – the Cooper Review – stands out from the rest.

n 2009, the government commissioned an independent review of the governance, efficiency, structure and operation of the superannuation system, to be chaired by Jeremy Cooper (the Cooper Review). The third phase of this review focused on the SMSF sector, with the review panel ultimately concluding that the SMSF sector is largely successful and wellfunctioning. However, new measures relating to service providers, auditors and the regulatory framework were recommended. Although it was concluded that no significant changes were needed to the SMSF sector, the measures recommended by Cooper – which have now started to be implemented by the government – are still expected to have important and far-reaching implications for the future governance, structure and efficiency of the SMSF sector.

34 . SPAA . 2013

Insurance for SMSF members

The Cooper Review Panel noted that less than 13 per cent of SMSFs have insurance, and that SMSF members were more likely to hold appropriate levels of insurance, or be able to hold insurance outside their superannuation, than members of other superannuation funds. In making its recommendation, the panel wanted to ensure that trustees appropriately considered the holding of insurance for SMSF members. To accommodate the new requirement for SMSF trustees to consider the insurance needs of members as part of the fund‘s investment strategy, sub-regulation 4.09(2) of the Superannuation Industry (Supervision) Regulations 1994 has now been amended. The following is amended sub-regulation 4.09(2) with the recent amendments in bold: 4.09(2): The trustee of the entity must formulate, review regularly and

give effect to an investment strategy that has regard to the whole of the circumstances of the entity, including in particular: the risk involved in making, holding and realising, and the likely return from, the entity‘s investments, having regard to its objectives and expected cash flow requirement the composition of the entity‘s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification the liquidity of the entity‘s investments, having regard to its expected cash flow requirements for a self-managed superannuation fund – whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund. In making the requirement to review investment strategies regularly

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and to consider the insurance needs of members an operating standard, the ATO now has the direct power to enforce compliance. Section 34 of the SIS Act provides that a person who intentionally or recklessly contravenes this standard is punishable by a fine not exceeding $17,000.

TRUSTEES OF SMSFS ARE EXPECTED TO BE SELF-RELIANT IN DETERMINING THE TYPE AND LEVEL OF INSURANCE COVER MEMBERS MIGHT REQUIRE, WHETHER WITHIN OR OUTSIDE THEIR SMSF.

Trustees of SMSFs are expected to be self-reliant in determining the type and level of insurance cover members might require, whether within or outside their SMSF. As noted, incorporated in the amendments to sub-regulation 4.09(2) is the requirement to review investment strategies regularly. Although the ATO is yet to provide any further guidance on what constitutes “regularly”, how regularly an investment strategy should be reviewed is likely to depend on the individual circumstances of the fund. Trustees can evidence compliance with this requirement by documenting decisions in the minutes of trustee meetings that are held during the income year.

Keeping assets separate

The Super System Review Panel found that many SMSFs were failing to keep assets separate. Common examples included SMSFs using the personal bank account of members, rather than having a separate account established for the SMSF, and assets being recorded in one or more members‘ names personally, rather than in their capacity as trustee of the SMSF. It was also noted by the Panel that contraventions of the existing covenant are among the most commonly reported contraventions reported to the ATO. With effect from 7 August 2012, Regulation 4.09A has now been inserted into the SIS Regulations. This new regulation allows penalties to be imposed where a trustee of an SMSF does not keep money and other assets of the fund separate from any money or assets held by the trustee personally, or by a standard employersponsor or an associate of a standard employer-sponsor. Prior to the inclusion of SIS regulation 4.09A, the requirement to keep assets separate was a covenant deemed to be incorporated into the governing rules of the fund. As the ATO is unable to enforce compliance with covenants, the ATO has previously relied on voluntary compliance by trustees; however, this is now an operating standard, and the ATO has the direct power to require SMSF trustees to comply with this requirement. Interestingly, while the new regulation requires that the assets of the SMSF be kept separate from the assets held personally by the trustee, there is no such requirement to keep the assets of the fund separate from the assets of the corporate trustee, assuming the corporate trustee is not a standard employer-sponsor of the fund.

Market value

New SIS Regulation 8.02B has now been inserted into the SIS Regulations. This regulation requires that for the year of income 2012–13 and any later year of income, when preparing accounts and statements required by subsection 35B(1) of the Act for an SMSF, an asset must be valued at its market value. Market value is defined in section 10(1) of the SIS Act as follows: “Market value, in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made: a) that the buyer and the seller dealt with each other at arm‘s length in relation to the sale b) that the sale occurred after proper marketing of the asset c) that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.” Jeremy Cooper

SPAA . 2013 . 35

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Prior to the inclusion of Regulation 8.02B, SMSFs were generally able to choose either the historical cost or market valuation accounting method to value their assets when preparing their financial statements. Only SMSFs in the pension phase, or SMSFs with in-house, were generally required to value their assets at market value. For financial reporting purposes, many tax practitioners prefer the use of “net market value” as it is a more accurate and meaningful measure of the actual value of fund assets. Net market value is the market value of an asset reduced by reasonable costs, which would be incurred by the fund if the asset was ever sold. With a shift to market value, arguably the net assets of the fund are overstated to the extent of the disposal costs. Therefore, in situations where the disposal costs associated with an asset are expected to be significant, consideration should be given to taking up a provision for disposal costs in the SMSF financial accounts.

SMSF auditor registration

The Review Panel found that while some approved auditors are subject to minimum competency standards through their professional associations, not all approved auditors are subject to the same enforcement actions. Given their crucial role in the regulation of the SMSF sector, the Review Panel considers it necessary that SMSF auditors have a high standard of competency. To give effect to the concerns raised by the Review Panel, regulations have now been passed that require SMSF auditors to be registered by ASIC from 1 July 2013. The regulations also specify the qualifications, practical experience, continuing professional development, professional indemnity requirements and auditor independence requirements that must be satisfied by auditors of

36 . SPAA . 2013

SMSFs, as well as the transitional arrangements that apply to SMSF auditors before 1 July 2013.

Related party transactions

In December 2012, Treasury released draft legislation in response to the Cooper Review findings aimed at tightening the rules relating to the acquisition and disposal of certain assets by SMSFs and related parties. The draft legislation will require that acquisitions and disposals of assets between related parties and SMSFs be conducted through an underlying market, where one exists. Where one does not exist, the valuation must be obtained from a suitably qualified independent valuer. The draft legislation enables related party assets to be acquired and disposed of without being conducted through an underlying market. If the asset is being acquired or disposed of solely as a result of a change to the trustees of the SMSF, there is no requirement to obtain the valuation from a suitably qualified independent valuer. The draft legislation will change the requirement from “must not

intentionally acquire an asset from a related party of the fund” to “must not acquire an asset from a related party”. Importantly, the removal of the term “intentionally” may have the effect of catching SMSF transactions where there was no intention on behalf of the SMSF trustees to breach the rules. This is especially relevant due to the complexity of the definition of “related party” in the SIS Act. It can result in entities being a related party of a fund, even where there is little evidence of a direct link between the fund and the entity. New administrative and civil penalties are being introduced for contraventions of the new related party acquisition rules. A clear distinction is drawn between listed securities and non-listed securities acquired or disposed of between a related party and an SMSF.

Listed securities

New section 66A of the SIS Act will prohibit the acquisition of a listed security from a related party of the fund unless the listed security is acquired in a way prescribed by continued on page 38

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continued from page 36

regulations. Similarly, new section 66B of the SIS Act will prohibit the disposal of a listed security by the trustees of an SMSF to a related party unless the listed security is disposed of in a way prescribed by the regulations. Regulations for the purpose of section 66A and 66B are yet to be released; however, it is expected that these regulations will provide a mechanism to enable a “crossing order”. A “crossing order” is where a broker completes a trade report and submits the report to the ASX. The trade report provides the name of the seller and the buyer, and the price at which the trade will occur. If the price is between the best bid and offer price listed on the ASX for that stock, the ASX will accept the trade, and the crossing occurs. To accommodate on-market crossing, amendments will be made to the Corporations Act to ensure that SMSF trustees who undertake an on-market cross do not breach the market manipulation provisions. Under the Corporations Act and the ASIC Market Integrity Rules, an onmarket crossing (commonly referred to as a “wash trade”) may otherwise constitute a serious offence. An on-market crossing will enable SMSF members to transfer listed securities they own into their SMSF in a similar manner to an offmarket transfer; the major points of difference being the price, which, in the case of a crossing, must be between the best bid and offer price listed for that stock on the ASX, and the brokerage, which, in the case of a crossing, will be incurred for both the sale and re-purchase of the stock. The brokerage costs associated with an on-market crossing will no doubt become a significant issue for the SMSF sector going forward. Given current brokerage rates, the brokerage costs associated with an on-market crossing could amount to many hundreds of dollars, or even thousands of dollars in some

instances where the value of the transaction is significant. SPAA has always argued against the banning of off-market transfers between related parties and SMSFs. In SPAA‘s view, there are more costeffective and equitable ways of addressing the issues raised by the Cooper Review Panel. For example, similarly to the approach taken for collectables and personal use assets, the legislative controls around off-market transfers could tighten by inserting a new SIS operating standard, which would require offmarket transfer forms to be submitted to the relevant registry within a prescribed period.

THE PROPOSED AMENDMENTS WILL REQUIRE THE MARKET VALUE OF A NON-LISTED ASSET ACQUIRED BY AN SMSF FROM A RELATED PARTY, OR A NON-LISTED SMSF ASSET SOLD TO A RELATED PARTY, TO BE DETERMINED BY A QUALIFIED INDEPENDENT VALUER. Non-listed securities

It is worth remembering that section 66 of the SIS Act (the general prohibition on acquiring assets from a related party) applies to all types of assets other than listed securities, business real property acquired at market value, and certain in-house

assets acquired under the exception in section 66(2A). It is also worth noting that the ATO has previously interpreted section 66(2A) as only applying to in-house assets where the asset concerned is an investment in a related party. Despite the wording in section 66(2A), in the ATO‘s view this exception does not extend to assets that are being leased to a related party at the time of acquisition, and that also satisfy the definition of an in-house asset. Therefore, the new rules that will apply to the acquisition of non-listed securities from a related party will, in a practical sense, apply to the acquisition of business real property and unlisted shares and units in a related party of the fund. Currently, there are no specific SIS provisions relating to the disposal of an asset from an SMSF to a related party (other than those relating to the sale of collectables and personal use assets under SIS regulation 13.18AA, and the general requirement that the transaction be undertaken on an arm‘s-length basis). The proposed amendments will require the market value of a nonlisted asset acquired by an SMSF from a related party, or a non-listed SMSF asset sold to a related party, to be determined by a qualified independent valuer. The exposure draft says a valuer will be considered a “qualified valuer”, either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community. This may be demonstrated through being a current member of a relevant professional body or trade association. However, there are many types of assets held by SMSFs (many types of collectables, for example), where no individual has the specific knowledge, experience and judgement necessary to be considered a qualified valuer. continued on page 40

38 . SPAA . 2013

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continued from page 38

Peter Burgess

40 . SPAA . 2013

In these scenarios, the absences of a qualified independent valuer may result in the SMSF being unable to dispose of the asset, which may then prevent the SMSF from being wound up, even if it is clearly in the member‘s best interest to do so. To overcome these issues, in SPAA‘s view, consideration should be given to removing the requirement to obtain a qualified independent valuation in situations where the SMSF trustees, after making reasonable attempts, have been unable to find a qualified independent valuer. In these situations, the acquisition or disposal of the asset at market value should suffice. The explanatory material could be used to explain and clarify what would constitute “reasonable attempts” for this purpose. There will also be situations in which a qualified independent valuer does exist, but the requirement to obtain a market valuation as determined by a qualified independent valuer provides little or no added benefit. Units held by an SMSF in a widely held unit trust are an example. In the vast majority of cases, the investment manager of the widely held unit trust will declare a regular unit price using valuations practices that comply with industry standards. Requiring the unit holder to obtain a market value for the units as determined by a qualified independent valuer in this scenario serves little purpose, and will only result in unnecessary transaction costs being incurred by the SMSF. To overcome these practical issues, in SPAA‘s view, the explanatory material could be used to outline scenarios in which the market value of an asset, which has been determined independently, would suffice as a market value determined by a qualified independent valuer. To overcome issues with outdated unit prices being used as the transfer value, and to uphold the integrity of these new provisions, it should be a requirement

that the last declared price prior to the date of transfer is used.

New trustee penalties

Currently, the ATO has a limited number of options available to address instances of noncompliance, including: making an SMSF non-complying for taxation purposes applying to a court for civil penalties to be imposed (criminal penalties may also apply for more serious breaches of the law) accepting an enforceable undertaking in relation to a contravention disqualifying a trustee of an SMSF. The Cooper Review Panel found that applying the current penalties can be costly and time-consuming, and the potential consequences (such as making the fund non-compliant) can be disproportionately high. In practice, the Review Panel found that the ATO is unlikely to use its existing powers except in cases of significant non-compliance with the law. The absence of graduated penalties results in a number of SMSF trustees avoiding sanction for breaches of the SIS Act and Regulations by simply rectifying the breach when it is detected. In some cases this may be appropriate behaviour, but it is not appropriate in situations in which trustees continue to breach the SIS provisions. The Review Panel recommended that the ATO be given additional tools, both educational and punitive, in conjunction with its existing powers. The power to give direction and impose administrative penalties for contraventions of the SIS Act will provide the ATO with effective, flexible and cost-effective mechanisms to issue sanctions that reflect the seriousness of the breach. In 2012, draft legislation was released that provides for administrative consequences for contraventions relating to SMSFs by

Technical

introducing: rectification and education directions that may be issued by the Commissioner for contraventions of the SIS Act and Regulations an administrative penalty regime for SMSF trustees for certain contraventions of the SIS Act. It is proposed that the provisions referred to in the draft legislation will apply to contraventions that occur on or after 1 July 2013. The draft legislation provides the ATO with the ability to give a rectification direction and/or an education direction where it reasonably believes that a trustee or director of a corporate trustee of an SMSF has contravened the SIS Act or Regulations.

A rectification direction will require an SMSF trustee to undertake specified action to rectify the contravention within a specified time, and provide the ATO with evidence of the trustee‘s compliance with the direction. An education direction will require a person to undertake a specified course of education within a specified time frame and provide the ATO with evidence of completion of the course. Trustees will also be required to sign or re-sign the SMSF trustee declaration form to confirm that they understand their obligations and duties as trustee of an SMSF. The ATO may approve courses of education for the purposes of the education direction, and providers of

courses must not charge the trustees a fee for undertaking the course. Trustees will be liable to an administrative penalty if certain provisions of the Act are contravened in relation to an SMSF. The amount of the penalty is an amount specified in the law. The provisions of the Act that may attract an administrative penalty, and the amount of the penalty as specified in the law are: An administrative penalty must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed. It is intended that costs imposed under the new administrative penalty regime will be payable personally by the person who has committed

124 (1)

Failure to record the appointment of an investment manager in writing.

5 penalty units ($850)

160 (4)

Failure to undertake a trustee course as directed by the regulator by the time required.

5 penalty units ($850)

254 (1)

Failure to provide the Commissioner with information in the approved form.

5 penalty units ($850)

347A (5)

Failure to provide statistical information to the Commissioner with information in the approved form.

5 penalty units ($850)

35B

Failure to prepare accounts for the fund for a financial year.

10 penalty units ($1,700)

103 (1)

Failure to keep particular books and records of the fund for at least 10 years.

10 penalty units ($1,700)

103 (2)

Failure to keep copies of minutes and records of decisions of the fund for at least 10 years.

10 penalty units ($1,700)

103 (2A)

Failure to keep a particular election for in-house asset purposes for at least 10 years.

10 penalty units ($1,700)

104 (1)

Failure to keep records relating to the change of trustees.

10 penalty units ($1,700)

104A (2)

Failure to complete and retain for 10 years the declaration of responsibilities as a trustee of an SMSF.

10 penalty units ($1,700)

105 (1)

Failure to retain member or beneficiary report for the fund.

10 penalty units ($1,700)

106A (1)

Failure to notify the Commissioner in the change of status of the entity.

20 penalty units ($3,400)

65 (1)

Lending money or providing financial assistance to a member or relative.

60 penalty units ($10,200)

66A,66B

Failure to comply with the acquisition of related party asset rules.

60 penalty units ($10,200)

67 (1)

Breaches of the rules that limit the fund borrowing.

60 penalty units ($10,200)

84 (1)

Failure to comply with the in-house asset rules for related party investments.

60 penalty units ($10,200)

106 (1)

Failure to notify the regulator of significant events about the SMSF.

60 penalty units ($10,200)

SPAA . 2013 . 41

Technical

the breach. If the trustee that is a body corporate becomes liable to an administrative penalty, then the directors of that body corporate will be jointly and severally liable to pay the amount of the penalty imposed on the body corporate. For example, if the individual trustees of an SMSF fail to ensure that the accounts and statements of the fund are prepared for a particular year of income, an administrative penalty

of 10 penalty units is imposed on each individual trustee. In contrast, if the trustee of the SMSF were a body corporate, an administrative penalty of 10 penalty units would be imposed on the body corporate, with each director jointly and severally liable to pay the administrative penalty.

Rollovers to SMSFs

The Review Panel found that, as trustees and members of an SMSF are

generally the same, there is greater scope for assets, once received in the SMSF, to be diverted for illicit purposes. Therefore, the Review Panel recommended introducing a new designated service to apply to rollovers of assets to an SMSF to ensure consideration is given to the money laundering/terrorism financing risks associated with the rollover of assets, and that appropriate member identification and reporting obligations exist when superannuation assets exit the formal financial sector. In late 2012, draft legislation was published that aims to amend the Anti-Money Laundering and CounterTerrorism Financing Act 2006 (the AML/CTF Act) to bring rollovers to an SMSF within the definition of a designated service. The amendment will have the effect of including rollovers to an SMSF as a designated service for AML/CTF purposes. This will mean the transferring fund will need to comply with a range of obligations under the AML/CTF Act effective 1 July 2013.

Illegal early-release schemes

The Review Panel found that stronger sanctions are needed to deter promoters of illegal earlyrelease schemes from undermining the government‘s retirement policy and disadvantaging members in the process. Illegal early-release schemes commonly involve requesting APRAregulated funds to pay a member‘s superannuation benefits to the bank account of a purported SMSF. In some situations, the promoters have taken commissions of up to 50 per cent of the member‘s superannuation balance. Currently, there are no specific penalties for promoters of illegal early-release schemes who are not themselves trustees of a regulated superannuation fund. This limits the Commissioner‘s ability to pursue continued on page 44 42 . SPAA . 2013

Technical

continued from page 42

IN LATE 2012, THE GOVERNMENT RELEASED DRAFT LEGISLATION THAT WILL AMEND THE LAW TO ENSURE THAT SUPERANNUATION BENEFITS RECEIVED IN BREACH OF LEGISLATIVE REQUIREMENTS ARE TAXED AT 45 PER CENT

existing penalties in the SIS Act. In late 2012, the government released draft legislation that provides for civil and criminal penalties for the promotion of illegal early-release schemes. This draft legislation implements the government‘s response to the Review Panel‘s recommendation, and will enable the Commissioner to seek civil and criminal penalties in order to discourage illegal early-release scheme promoters.

Unlawful payments

The Review Panel found that some members may be willing to forfeit a portion of their superannuation to tax in order to access a portion of their superannuation benefits. The Review Panel noted that some members will not pay tax at all due to their level of income.

In late 2012, the government released draft legislation that will amend the law to ensure that superannuation benefits received in breach of legislative requirements are taxed at 45 per cent (the current law operates to ensure that superannuation benefits received in breach of legislative requirements are included in a person‘s assessable income, and taxed at marginal tax rates). The draft legislation taxes amounts illegally released at 45 per cent. It is proposed that the amendments outlined in this Bill would apply to the 2013–14 income year, and later income years. *Peter Burgess was the former Technical Director at SPAA and remains a member of SPAA’s regulatory committee.

SPAA Honour Board FOUNDING DIRECTORS Nicholas Aston Peter Fry Peter Nicholson Andrea Slattery Brian Williams CHAIRMAN Peter Fry Peter Hogan Graeme Colley Sharyn Long Andrew Hamilton

2003-2004 2004-2007 2007-2009 2009-2012 2012-present

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2003-present

44 . SPAA . 2013

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Women a great untapped market for SMSF... but the control and flexibility these funds provide must be understood BY TONY FEATHERSTONE

When it comes to investing, generalising about the sexes is fraught with danger. But one of the great opportunities for self-managed superannuation funds (SMSFs) is to engage, educate and empower more women – especially younger ones – with their retirement savings.

n many ways, the SMSF industry is the leader within the financial services sector when it comes to advising women, either on their own or within a couple. Australian Taxation Office data for December 2012 shows that about 47 per cent of SMSF members are female. That, compared to 34 per cent of total superannuation accounts held by women, in funds regulated by the Australian Prudential Regulation Authority (APRA). But much work is needed to reduce the disparity between men and women in superannuation. Women had an average superannuation balance at retirement of just $112,475 in 2009–10, according to the Association of Superannuation Funds of Australia. Men, on average, retired with $198,000. About 73 per cent of women said they would fall short or were unsure about their retirement income, compared to 58 per cent of men, according to a 2012 survey by Russell Investments and the Self-Managed Superannuation Professionals‘ Association of Australia (SPAA).

SPAA last year said it expected the disparity in SMSFs between the genders to narrow as more women entered the accumulation phase of retirement savings and wanted to take control of them. Reasons for the gender disparity in super are well known: women are more likely to work part-time, have a different career pattern if they take time off to care for children, and return later to the workforce or not at all. The result is sharply lower superannuation compared with men. Leading SMSF advisers have recognised an opportunity to help women overcome this superannuation shortfall and grow their wealth. “Women are one of the great untapped markets

for SMSF,” says Aspire Retire managing director Olivia Maragna. “They like the control and security an SMSF can give them, and the greater flexibility in choosing how to invest their retirement savings.

continued on page 48 46 . SPAA . 2013

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Our industry can do much more to engage women.” Maragna believes women often let their male partner take the lead with SMSF decisions. “You hear stories about the husband only ever coming to the SMSF review, or dominating the discussion if he attends with his wife. I suspect most financial advisory practices are not nearly as focused as they should be with their current or potential female clients around superannuation.” She believes educating married women on SMSF is smart business. “From a risk management perspective, it is important that both the husband and wife understand how their SMSF works, how superannuation works, and how their funds are being invested,” says Maragna. Higher client referral and retention rates are another advantage. “Our firm‘s referral tracking data continually shows that women who are happy with the service tend to refer other women,” says Maragna. “We also find there is a high retention rate with women who have SMSFs. They are more likely to follow an adviser from one practice to another if they feel comfortable with that person.” Maragna says too many divorced women neglect their superannuation. “I‘ve seen many women say, ‘My partner can keep his superannuation, so long as I keep the house.’ It‘s a natural instinct for a lot of women to want to keep the home after a divorce, and look after the kids. Sadly, they soon realise that a house does not provide income, and that they need to urgently start rebuilding their super.” Younger women also find it easy to neglect super, says Maragna. “In general, I find many women are great at saving for a goal, but are not necessarily great investors. As an industry, we need to change that mindset and get young women thinking about long-term wealth

48 . SPAA . 2013

Patricia Curtin, Andrea Slattery and Olivia Maragna

creation through SMSF. Much more education is needed to help younger women understand SMSF and whether it‘s right for them.” Other advisers believe women are actively engaged in SMSFs. SLCA managing director Sharyn Long says couples tend to dominate SMSFs, and argues that both members of the fund usually have an active say in how it is invested and run. Almost 70 per cent of all SMSFs have two members, and 22 per cent of funds have one member, says Long. “Certainly, in my practice [Sharyn Long Chartered Accountants], women are actively involved in the running of the SMSF with their husbands,” says Long. “I don‘t see a significant gender bias in SMSFs, or lots of younger women who are averse to setting one up. The big obstacle is that many women may not have a sufficient account balance to justify the upfront and ongoing costs of an SMSF.” Long says $250,000 is a reasonable starting point to consider establishing

an SMSF, but with women retiring with an average $112,475, this is an unrealistic goal for too many. The answer, it seems, is twofold: federal government reforms to help close the gender gap on superannuation, as SPAA argued last year; and greater education from the SMSF industry to help more women understand the importance of saving for retirement, and the benefits of SMSFs in providing more control and flexibility, and lowering annual costs. It is not unrealistic to think that women, now just under half of all SMSF members, will outnumber men in SMSF in coming decades if government reforms can solve the broader issue of women, on average, being underfunded in retirement. Tony Featherstone is a former managing editor of BRW and Shares magazines, and consulting editor of the ASX Investor Update e-newsletter.

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2013

Legislation

Playing by the rules BY JAMES DUNN

Australia‘s army of self-managed super funds (SMSFs) – all 490,000 of them, at last count – know that the government is on their case.

t $474 billion in total assets, the SMSF sector has simply become too big to fly under the radar. Even before the government sent up a series of kites in early 2013 referring to the need to “improve fairness and equity” in the concessions on retirement savings – taken by many SMSF trustees as code for “we need you to help us fix our Budget” – the sector had been softened up by the Treasury for increased regulation. In November 2012, Treasury head Dr Martin Parkinson warned that SMSFs had become so popular that they threatened to test the integrity of the nation‘s superannuation system. For the flexibility of having control over their own retirement investment portfolio and strategy, Dr Parkinson told the Association of Superannuation Funds of Australia (ASFA) conference that SMSFs would, in the future, have to accept a greater focus coming to bear on the implications of operating an SMSF, as well as increased accountability requirements on SMSF trustees. The benefits of operating an SMSF do not come for free: SMSFs have long been subject to quite onerous regulations in commonwealth legislation, including all provisions of the Superannuation Industry (Supervision) Act 1993 (SISA93), the Superannuation Industry (Supervision) Regulations 1994 (SISR94) and the Financial Sector (Collection of Data) Act 2001, as well as some administrative penalty and reporting provisions in the Taxation Administration Act 1953, and provisions in the Corporations Act 2001 that apply to financial products.

54 . SPAA . 2013

The regulations governing SMSFs are clear. A self-managed fund must have a trust deed and trustees. The Australian Taxation Office (ATO) requires that every member of the fund must be a trustee (there are special rules for single-member funds), and with that comes trustee responsibilities. Since July 2007, all new trustees of SMSFs have been required by ATO to sign a trustee declaration formally acknowledging that they understand their duties, obligations and responsibilities.

A PORTFOLIO IN AN SMSF MUST MEET FOUR CONDITIONS: LIQUIDITY, RISK, DIVERSIFICATION AND THE MATCHING OF CASH FLOWS TO LIABILITIES IN THE PENSION PHASE. An SMSF must choose to be regulated under SISA93 to be eligible for the concessional tax treatment of super funds. Under the sole purpose test set out in the Act, the trustees must ensure that the fund is maintained for the sole purpose of providing retirement benefits to members. The trustees must “formulate and implement” an investment strategy for the fund, “having regard to liabilities, risk and return, diversification and liquidity”. If the

fund maintains reserves, the fund must have a defined strategy for managing those reserves, in line with its investment strategy and its ability to meet liabilities. A portfolio in an SMSF must meet four conditions: liquidity, risk, diversification and the matching of cash flows to liabilities in the pension phase. In considering risk, the fund has to look at the age of the members and when they plan to retire, and match its portfolio to those factors. If the trustees fail to administer the super fund properly and the fund loses its status as a “complying” fund, the penalties are severe, including penalty rates on the fund‘s earnings. If a fund becomes non-compliant, the top marginal tax rate of 46.5 per cent is levied on the assets of the fund. An SMSF is required each year to have a set of accounts prepared and audited, and a tax return for the fund must be lodged. The accountant that prepares returns cannot also do the audit. Not only do trustees have to ensure that their fund is operating in a compliant fashion for the purpose of providing benefits to its members upon their retirement (or their beneficiaries if a member dies), they must sign off that they understand (and ensure) that member benefits are only withdrawn when permitted by the super laws, that they understand that the assets of the super fund must be kept separate from their personal assets, and that there is adequate insurance. Trustees must acknowledge annually in their declarations that SMSF trustees cannot borrow money (other than approved super gearing loans), lend money to fund members

Legislation

or their relatives, purchase assets from fund members (other than certain exceptions) and other related parties, and that the SMSF must always invest on an arm‘s-length basis. Trustees must also state that they will not accept super contributions or pay a member benefit unless the super laws permit, and must commit to having the fund audited annually by an appropriately qualified auditor, notifying the ATO about any important changes to the trusteeship or membership of the fund within 28 days, and keeping certain fund records for at least 10 years. This broad legislative framework was augmented by the Superannuation Legislation Amendment (Stronger Super) Act 2012, the Australian Government‘s response to the recommendations

made by the Super System Review, also known as the Cooper Review, in its 2010 report. Since August 2012, trustees have been required to “consider insurance for members as part of the fund‘s investment strategy”, as well as to regularly review their investment strategy, keep money and assets of the fund separate from those held by a trustee, and from the 2012/13 financial year, value assets at market value for reporting purposes. Also in August 2012 – and again under the “Stronger Super” label – the federal government released draft legislation for a penalty regime that would greatly increase the ability of the tax office – as a regulator of selfmanaged super – to crack down on SMSFs that break any of these laws. The draft law provides for the ATO

to directly and personally fine trustees with a range of penalties to match the seriousness of the offence – without having to go through the courts. Further, the ATO would gain the power to instruct trustees to rectify breaches and to undergo special education. And the ATO would be empowered to take a much harder line against promoters of illegal early-access super schemes, as well as fund members who prematurely gain access to their super. The government intends for the measures to take effect from July 2013. The draft law does make it more dangerous to fail to comply with superannuation law in operating an SMSF, but that should be seen as an unambiguously good thing by the entire super system.

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SPAA . 2013 . 55

Profile

A snapshot of specialists BY JOHN KAVANAGH

Aaron Dunn Managing Director, SMSF Academy

Jemma Sanderson Partner, Cooper Partners

Aaron Dunn was working with SMSF clients at an accounting firm in 2009 when he started writing a blog as a way of working through the ongoing changes in the sector. Dunn says, “The best way for me to learn was to sit down and start making notes. That turned into the blog, and soon I was getting 10,000 visits a month.” The successful reception of his blog made Dunn realise there was a demand among SMSF professionals for training to increase competency levels, and he decided to start his Melbourne training business, SMSF Academy. Dunn has been a SPAA member for nine years, serving on the Victorian state committee for much of that time. He is the current Victorian chair. He believes the SMSF sector has developed through the strong relationships among the different industry sector accountants, planners, lawyers and auditors; and he believes SPAA has done more than any other superannuation body to build those relationships. “When I first got involved, there was a lot of talk about whether the sector was viable,” Dunn says. “SPAA‘s advocacy has been very strong, and has been a factor in turning the discussion around.”

Jemma Sanderson is an SMSF technical specialist at Cooper Partners, a Perth firm of taxation specialists and business advisers. As such, you might expect her to look forward to changes to the superannuation rules and the added complexity they bring. But Sanderson doesn‘t see it that way. “When changes are confusing, you can see clients losing confidence in the system,” she says. Sanderson gives advice to Cooper Partners‘ trustee clients and to other accountants. She says it is an area of work that is getting busier. “Governments set out to simplify things, like introducing contribution caps. But it doesn‘t always work out that way. In the case of caps, because different things count towards the cap, it can be quite confusing.” Sanderson joined SPAA in 2005, and has been involved with committees for the past three or four years. She is on the national conference committee and the regulatory committee. She is a regular presenter on technical matters at the association‘s events. What Sanderson values about her involvement with the Association is that it is a forum that brings together all the disciplines in the sector. “The high level of involvement across the SMSF sector is what makes it a successful organisation,” she says. She says it is also an organisation that helps practitioners gain recognition among their peers. “I have been presenting at SPAA events for eight years, first in Western Australia and then nationally,” she says. “It has certainly helped me get recognition.”

continued on page 58 56 . SPAA . 2013

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Profile

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Peter Fry Chartered Accountant and Financial Planner, Peter Fry & Associates Back in 2003, Peter Fry, whose practice had a substantial interest in the SMSF sector, became concerned by “noises being made by regulators” that too many SMSF trustees were flouting the rules. “There was talk about closing it down,” Fry recalls. He got together with a group of other professionals active in the sector to form a group that would advocate for SMSFs and raise professional standards. That organisation was the SMSF Professionals’ Association of Australia. Fry, who was SPAA‘s inaugural chairman, says, “SPAA has made a huge difference in terms of what superannuation is about. The quality and standard of advice was always our focus, and we have had an impact on the way the sector is regulated. “The base has been raised to a higher level as a result of our activity. The standards we put together for advisers were adopted in large part by the Australian Securities and Investments Commission.” Fry, who is still active in the Victorian chapter, says one of the Association‘s hallmarks has been its openness, which has made it a very powerful body for developing networks and contacts. “People find the contact very helpful,” he says. “It was a rocky road at the beginning, but eventually it got momentum. I believe we have achieved what we set out to do.”

Adam Goldstien Partner, Skeggs Goldstien Associates Adam Goldstien believes a key trend in the future of the self-managed superannuation sector will be the consolidation and industrialisation of trustee services. He sees AMP‘s acquisition of the SMSF administration businesses Multiport and Cavendish, and the establishment of an SMSF division, as indicators of where things are heading. Goldstien, who is a partner in the financial planning practice of Skeggs Goldstien Associates, says administration is changing, with more widespread availability of live data and other services that rely on upto-date IT support. He believes SPAA will continue to play an important role in this changing landscape. “SPAA‘s job is to maintain professionalism and knowledge in the advice community. That will continue, whatever the structure of the industry.” Goldstien received specialist training in self-managed super in 1998, and has been a specialist in the sector ever since. He was part of a group that formed the New South Wales chapter of SPAA – the Association‘s first state chapter. He is currently chair of the New South Wales chapter. “When it started, it was about building a network through chapter meetings and presentations. That was extended when we held the first national conference in 2005. Two hundred and eighty people came to that first conference; this year we had almost 1400.” Among SPAA‘s achievements, Goldstien lists the creation of specialist adviser and auditor designations, giving a voice to SMSFs in policy and regulatory discussions, and improving the level of professionalism among professionals working in the sector.

continued on page 60 58 . SPAA . 2013

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Profile

continued from page 58

Lou Delfos Managing Partner, ipac South Australia

Warrick Hanley Principal Adviser, Fitzpatricks Private Wealth

Lou Delfos has been a financial planner for 22 years, working for the same South Australian financial planning group (which changed its name to ipac four years ago) for that entire time. He is the group‘s managing partner, but still works with 10 clients, specialising in self-managed superannuation. Delfos says working with SMSF trustees is different to working with investors outside the superannuation system. “From a financial advice point of view their needs are the same, but SMSF clients want control; they are prepared to delegate but they want more see-through,” he says. “And then there are the peculiarities that arise because of different regulations. It is a different discipline simply because you do different things.” Delfos says that, before SPAA, there was a gap in professional development for specialist SMSF advisers. “The quality of advice for SMSFs can be more varied because you have access to a wider range of investments. That can create confusion about what is allowed, and also what makes sense for the client. To do it well, you need more experience.” Delfos was accredited by SPAA as an SMSF Specialist Adviser in 2006. “It is a good benchmark, and we encourage our advisers to get into SPAA and be involved. It is part of that broader experience that a good SMSF adviser needs.”

Fitzpatricks Private Wealth has offered a specialised SMSF service for the past eight years. The firm‘s principal adviser, Warrick Hanley, says that over that time, the service has evolved into what he calls a “project management” operation. Hanley says, “We started doing strategic advice and investment advice. Now we project manage for our clients. What that means is that we coordinate advice, auditing, banking, accounting and any other services the client needs. “We give everyone involved with the client the big picture on what the client is trying to achieve.” He says things have changed since the GFC. “A lot of trustees realised that they had more risk in their portfolios than they thought they had. They have had to take another look at their goals and their strategies, and there is definitely more emphasis on risk management.” Hanley has been a SPAA member since the Association‘s early days. He has served as chair of the Queensland chapter, sat on the national board and chaired the professional standards committee. “SPAA has been very important in helping provide the specialisation path that our firm and others have taken,” he says. “The education side is critical in this business, and SPAA is the body that puts you through the hoops.”

60 . SPAA . 2013

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SPAA . 2013 . 61

Overseas shares

The missing asset class â&#x20AC;&#x201C; international equities:

the right time to include it in your SMSF WRITTEN BY MARCUS TUCK, INSYNC FUND MANAGERS*

The latest ATO figures show that direct overseas shares account for only 0.3 per cent of total self-managed super fund (SMSF) assets. Including global equities managed funds held by SMSFs, the total would still be quite small.

s can be seen in Chart 1, SMSF holdings are dominated by Australian shares, cash and term deposits (rather than bonds), Australian managed investments, and property (particularly non-residential property). It would seem appropriate that Australian shares are currently well represented in SMSFs, particularly if those shares pay fully franked dividends yielding more than the cash rate. Australia has some of

Chart 1

Source: ATO, Insync

the soundest banks in the world, and some of the largest and most efficient mining companies. Those two sectors dominate Australiaâ&#x20AC;&#x2DC;s share market, with financials and materials accounting for nearly 65 per cent of total market capitalisation. However, banks are currently operating in a low credit growth environment, and, by their very nature, take on risks associated with high financial leverage. Mining companies, by their nature, are subject to wild swings in commodity

price cycles. Yet, many Australian investors are content to have these two sectors form the bulk of their share portfolio, whether through direct shareholdings or via indexbenchmarked managed funds or Exchange Traded Funds (ETFs). There are far more exceptional, world-class companies listed overseas than there are in Australia. Many operate in industries that are under-represented on the Australian Securities Exchange, such as the technology, pharmaceuticals, food and beverage, consumer brands and luxury goods sectors. Many of these global companies are selling into high-growth emerging markets, and have unrivalled track records of consistently compounding earnings and dividends at a rate and consistency that would be virtually impossible for a miner or bank to achieve. Yet, most Australian investors choose to ignore these exceptional overseas companies. There are probably several reasons why this is the case, including a normal home-market bias; the fact that, on average, Australian dividend yields are higher and can come with

SPAA . 2013 . 63

Overseas shares

dividend imputation credits attached, less familiarity with overseas stocks, higher transaction costs if dealing directly, and an aversion to exchange rate risk. Many investors who did hold unhedged overseas shares during the past decade suffered exchange rate losses due to the remarkable rise of the Australian dollar during that period, making some investors “once bitten, twice shy”. However, with the Australian dollar as high as it currently is, the investment case for Australians to invest offshore is much stronger now. The Australian dollar is well above its post-float average of 75.4 US cents (see Chart 2) and its estimated purchasing power parity level of around 69 US cents. While there is no guarantee that the Australian dollar will revert to these norms, the odds are in favour of it correcting in that direction, which would deliver exchange rate gains to unhedged investors. At the strategic level, there are diversification benefits that come from adding overseas equity and currency exposures to your portfolio. Moreover, from a tactical timing perspective, there is currently a good window of opportunity to buy these exposures. There is some anecdotal evidence that flows by Australian investors into overseas equities are picking up at the moment. For those investors who do want to access opportunities offshore, what is the best way of doing so? There are many options available, ranging from direct shareholdings, actively managed funds, index funds or ETFs. There is also the currency decision to be made about whether to be fully unhedged, fully hedged, 50 per cent hedged or to dynamically manage currency hedges depending on where exchange rates are at any point in the cycle. Unless you have particular expertise in these areas, it is usually preferable

64 . SPAA . 2013

Chart 2

Source: IRESS, Insync

to have your overseas equity portfolio professionally managed for you. For investors who are content to have the portfolio run on “auto pilot”, an index fund or ETF might be suitable. However, many investors will prefer to have active management of stock selection and currency hedging. Very few companies, even at the global level, are truly exceptional. It is possible to achieve good investment outcomes with concentrated portfolios of global shares, rather than buying the market index. Currency movements can be too important over the short to medium term to be left unmanaged. Many value-based investors will choose to be unhedged when the Australian dollar is overvalued, and hedged when it is undervalued. Although being unhedged might seem to be the best course of action at the moment, based on a mean-reversion value approach, that will not always be the case, and it needs to be continually monitored and assessed. A global equities fund, managed by an experienced investment team with a sound investment philosophy, strong track record and sensible approach to currency and risk management, is probably the

best solution for many SMSFs. The ease of buying and selling managed funds should improve over time due to the Australian Securities Exchange‘s Managed Fund Service (AQUA2) initiative. For those who prefer the direct investing route, but lack the necessary investment expertise to do it themselves, a solution can be found through having your direct portfolio professionally managed for you through a Separately Managed Account (SMA) service. Some fund managers provide access to their portfolios via either traditional unit trust funds or SMAs. Whichever solution you choose, the most important thing is to partner with an investment manager who understands the risks as well as the opportunities, and who is working in your best interests. * Marcus Tuck is a Partner at Insync Fund Managers, an independently owned global equity specialist firm based in Sydney.

We understand your SMSF needs At Lonsdale, we combine experience and choice. If you are looking for a flexible licensee solution, including an SMSF Limited Authorisation, Lonsdale can tailor a package that best suits your practice. Having worked with Financial Planners and their aligned Accounting practices for over 25 years, our experience, systems, and licensee solutions make us one of the most recognised and proven dealer groups in the SMSF space. Our forward thinking approach means you have the latest technology and administration platforms at your fingertips.

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