SMSFs: Untouched by Hayne; Jumbo size; Unwinding LRBAs


Michael Hallinan

SMSFs suffer no pain from Hayne

Two key issues on Superannuation from the Hayne Royal Commission were Agency Conflict and Invisibility of Fees (especially for no service). These two issues could be summarised as essentially poor and conflicted governance.

These structural issues are not present in SMSFs – as, in general, members and the controllers of the SMSF are identical.

Agency Conflict arises where the members are not the controllers of the fund and the controllers start operating the fund for their own interests or the interests of others. In the SMSF context, Agency Conflict generally does not arise as the members and the controllers are one and the same.

The Invisibility of Fees (fees for no service) does not arise in the SMSF context as SMSFs operate on a no fees basis. All fund expenses (audit fees, legal costs, accounting fees, investment fees, taxes, electronic service address fees) are incurred by the trustee and must necessarily be known to and implicitly authorised by the members (as they are the controllers of the SMSF).

In short, SMSFs operate on a not for profit basis and, differently from industry super funds, do not outsource significant functions to entities associated with the controllers of the industry funds.

Two very significant reviews relating to Superannuation have occurred in last 10 years – the Cooper and now Hayne, and in both reviews SMSFs as a savings structure have not been the subject of adverse comments:  it seems SMSFs have the right governance arrangements.

Jumbo (six member) SMSFs – legislation introduced

 The proposal, announced in the May 2018 Budget, has now been introduced as draft legislation.  The proposal is to amend the definition of “self-managed superannuation fund” in s17A of the Superannuation Industry (Supervision) Act 1993 by the simple device of changing “fewer than 5 members” with “fewer than 7 members”.  This change, if enacted, will apply from 1 July 2019.

Once enacted, corresponding changes will have to be made to the Superannuation Industry (Supervision) Regulations to replace references to “fewer than 5 members” with “fewer than 7 members”.

There are several advantages of Jumbo SMSFs including;

  • economies of scale – standing/fixed costs spread over more members and larger fund balances;
  • better utilisation of franking credits (should the current Labor proposal to deny refundability of excess franking costs be implemented);
  • greater maximum concessional contribution in flow – more cash to survive borrowings – in particular, for business principals to purchase business premises; and
  • the ability to shelter small SG contributions of children from retail/industry fund account fees.

Of course, there may be disadvantages too:

  • such as having to deal with more individuals;
  • children having greater knowledge of their parents’ financial matters; and
  • different age cohorts requiring different investment strategies.

Jumbo SMSFs may not be for everyone but they may be very useful for some.

Unwinding an LRBA creates flexibility for property improvement

Since its introduction, Limited Recourse Borrowing Arrangement (LRBA) has served many Australians to buy real property in their SMSF. We have seen an increase in the number of SMSFs that have repaid the loans and are unwinding the arrangements.

Unwinding involves transferring the property under the arrangement from the holding trustee (otherwise referred to as bare trustee or custodian) to the fund trustee after the loan has been repaid in full.

While an SMSF may comply with the superannuation laws without unwinding an LRBA there are obvious benefits to still do so. Transferring the property to the fund trustee would mean there is much more flexibility with changing or improving the property, and there would be less ongoing administration and professional fees associated with maintaining a corporate holding trustee.

The look through tax treatment means that there would be no adverse CGT consequences from transferring the property to the fund trustee, as the current taxation laws treat LRBAs as if the holding trust did not exist (i.e. the assets held by the holding trustee are deemed to be held by the fund trustee).

An unwinding transaction will incur costs to the fund including legal and other professional fees plus relevant government charges associated with transfer of a land. If it can be supported with evidence that the transaction was properly structured and implemented, the fund will be eligible for a concession or exemption on the stamp duty payable on the transfer (depending on the location of the property). Collating the required evidence for the concession and exemption may prove to be difficult over time and we recommend fund trustees to arrange an unwinding process as soon as possible once the loan has been repaid.

By Michael Hallinan and Jeff Song

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