Commenting further, Subramaniam describes the current situation regarding responsibility for compliance as the grey or ‘fuzzy’ area of managing an SMSF.  “The trustee maintains it is the role of the adviser whilst the adviser believes it’s the function of the trustee.  With hefty ATO tax penalties of up to 47% plus the Medicare levy on the total value of the SMSF, it is an immensely important area that demands clarity and certainty for investors”.

Currently, in stalemates between the administrator, adviser and trustee, the problem ends up with the administrator to address at the administrator’s cost.

Whilst there are many advantages and benefits of an SMSF, they can be quite complex and the onerous nature of the administration process requires specialist service providers such as ASC to ensure that all legal and compliance requirements are strictly adhered to.

However, the ATO and the specialist service providers continue to find non-compliance in areas beyond the norm where SMSF trustees have failed to maintain assets separately from their personal assets.  In some cases assets were not in the name of the fund but in the name of one of the trustees, exposing the asset to loss if the trustee were declared bankrupt or their business went into receivership.

Subramaniam continued, “Currently there is no requirement to disclose who is responsible for the SMSF compliance as ultimately it all falls into the lap of the trustees as per the regulations – but herein is the problem.  Each SMSF trustee is different and there is no consistency in whom they use as their service providers i.e. investment adviser, financial planner, accountant or administrator”.

“Although there are specialist providers such as ASC, the bulk (perhaps as many as 80%) of trustees use their accountants to service their SMSF obligations and this mainly entails a once a year catch up to have the financials audited and an annual ATO return lodged”.

Subramaniam further asks, “How can compliance and the regulatory requirements be addressed with such a rudimentary and modest level of attention?”

With more and more regulations being passed the administrative process associated with compliance has become the most challenging area for the industry and it is not being helped by advisers and trustees brushing this away and placing the burden onto the administrator service providers.

Over its 20 year history, ASC has invested significantly in technology and is able to provide dedicated ‘real time’ SMSF administration and compliance services which encompasses an online portfolio monitoring and reporting facility for trustees and members of self managed superannuation funds.

The ASC iComply model has proven to be an effective gate keeper and ensures trustees take compliance seriously by informing the trustees and advisers of what can and cannot be a complying transaction whilst ensuring all supporting compliance work and documents have been done.

The ASC team take great pride in providing check lists to ensure any transaction is compliant – including processes to ensure the annual requirements etc are met to maintain compliance.

Subramanian also highlighted the top 4 areas of difficulty for compliance –

1. Related Party Transactions and the complexity of SIS Part 8 associate rules – some transactions may require independent legal opinion to ascertain if Part 8 has been breached
2. LRBA – do not put the cart before the horse and instead have the bare trust in place before any transactions are entered into, etc.
3. Private Unit Trusts
4. Collectables

Although very confident about the future of SMSFs, Subramaniam believes that many advisers are still not conversant with compliance issues.  In his experience the advisers that have the best handle are the dedicated practitioners supported by specialist qualifications such as SSA from SPAA.

“SMSF administration and compliance is an area that demands many years of experience in order to provide this service and facility competently. ASC is determined to maintain its technological edge and position as an industry leader through a steadfast commitment to integrity, professionalism, technology and innovation,” concluded Ravi Subramaniam.

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Graeme Colley

Understanding the self-managed super fund lifecycle and knowing how to use that knowledge to benefit clients is the theme of the 2015 SMSF Professionals’ Association of Australia (SPAA) National Conference – the pre-eminent event on the SMSF calendar.

The conference, to be held in Melbourne at the Convention and Exhibition Centre from 18^–20 February, will be appropriately titled “Lifecycle” and boasts more than 36 conference sessions, 50 expert speakers, the world’s largest SMSF exhibition and numerous networking opportunities with like-minded professionals.

Graeme Colley, SPAA’s Director Technical and Professional Standards, who heads the National Conference committee, says: “Every year we face the challenge of making the national conference bigger and better than the year before.

“We know the importance that our members place on the National Conference in terms of technical content, industry updates, networking, and socialising, so the onus is on us to ensure it continues to be the premier event on the SMSF calendar

“Once again we have a high-powered list of speakers including another plenary session that will have the three regulators (ASIC, the ATO and APRA), as well as the Federal Treasury.

“I know from the feedback I got last year how much delegates got from this session, and I am confident the representatives of these four key government bodies will again deliver some fascinating insights into the SMSF sector and the superannuation industry more broadly.

“We have also managed to entice academic Michael Drew to present on the topic of how behavioural issues and what people want influences decision making in superannuation, and Andrea will address the issue of “The SMSF advantage – For all life stages?”

“She will outline why SMSFs are unique and show how the current system is working well to meet the needs of Australians, highlighting the importance of the emerging SMSF profession to help trustees achieve their retirement goals throughout their life.”

Colley says the conference is not all about hard work. Over the three days there will be several social events as well as networking opportunities this event always affords time for.

Registrations are now open, with Early Bird offers available until 30 November, so make sure you secure your seat. In addition, there is the opportunity for industry professionals to sign up as a SPAA member to take advantage of the pro rata annual membership.

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Professor Deborah Ralston

The pre-eminent retirement incomes research organisation, the CSIRO-Monash University Superannuation Cluster, has secured another significant private sector backer with the decision by ANZ Wealth to join its ranks.

ANZ Wealth will join five other organisations as the key supporters of the $9 million research project that brings together academics from four universities, Monash, Warwick, Griffith and Western Australia, as well as the CSIRO, to examine the challenges facing the Australia’s retirement system.

The other five organisations are BT, Cbus, Mercer, Vanguard and Challenger, which, together Treasury, the ATO, the ABS, ASFA, National Seniors and AIST, form the Cluster’s Steering Committee with eminent researcher, Professor Hazel Bateman from the University of NSW. The Australian Centre for Financial Studies (ACFS), which promotes thought leadership in the financial services sector, leads the project for Monash University.

Patrick Clarke, Head of Direct Super and Investments at ANZ Wealth, said it was a privilege to be involved with the CSIRO-Monash University Superannuation Cluster.

“Over the past 18 months the work done by CSIRO and Monash in examining the dynamics and inter-relationships between superannuation and the wider economy, as well as the transition and retirement phase of Australians over 60, has been first class.

“We believe it’s critical that this research continues so that both the public and private sectors can base their decision–making on hard data in the vital area of superannuation.”

Dr Sarah Dods, CSIRO’s Research Director, Digital Economy, Digital Productivity and Services Flagship, said it was a tribute to the research done by the Cluster that such a significant player in the wealth management sector had decided to come on-board.

“We believe the research we have been conducting in areas such as ways to improve the participation of older workers is critical if we are to get the superannuation policy settings right, and for an organisation of the reputation of ANZ Wealth to give its support further endorses the value of our work.”

ACFS Executive Director, Professor Deborah Ralston, said the sheer size of the superannuation pool, at $1.8 trillion, posed important policy issues that the Cluster had been addressing.

“In the past, much of the research focus has been on asset allocation and the accumulation phase. But much less focus has been given to the post retirement phase and Australians over 60; a better retirement system is broader than superannuation, including pensions and private savings.

“What is critically needed for better policy and product development in post-retirement is a research evidence base.

“Funding for better health and welfare, accommodation and transport, they all have a bearing on the quality of the life enjoyed by older Australians and are important issues that demand a policy response, so the fact ANZ Wealth is giving its support to the Cluster is testimony we have the right focus and are adding to the pool of knowledge around retirement incomes policy.”

–END–

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Michael Hallinan

The ATO has confirmed the long held view that a rollover/benefit transfer to an SMSF in respect of a member will be treated as a contribution for the purpose of applying the active member test.

This test is one of three tests which is used to determine whether a complying superannuation fund has lost its residency status and transformed from an Australian superannuation fund to a non-resident superannuation fund.  The loss of residency status will cause a special tax to be imposed on the fund at the rate of 47% on the asset value of the fund (less undeducted contributions).

In short, once a member of an SMSF becomes a non-resident – no contributions, rollovers or benefit transfers by or in respect of the member should be received by the SMSF.

If not, the SMSF may fail the active member test and therefore cease to be a complying superannuation fund.

By Michael Hallinan – Special Counsel at Townsends Business & Corporate Lawyers

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Arian Neiron

The assets of Australian self-managed superannuation funds (SMSFs) surged in value to a record $557.1 billion in the June 2014 quarter, according to ATO data released last week, creating a huge opportunity for the local exchange traded funds (ETF) market to attract funds from this sector, according to Arian Neiron, Managing Director of Market Vectors Australia.

SMSF investment into listed shares increased to $177.6 billion in the June quarter, up from $174.8 billion in the March quarter accounting for around one third of all SMSF assets. Another $20.7 billion was invested in listed trusts (including ETFs) in the June quarter, up 2% from $20.3 billion in the March quarter.

SMSFs continue to amass record amounts into cash investments, which rose to a record $157.9 billion during the June 2014 quarter, up 1.7% from $155.3 billion in the March 2014 quarter. Those cash holdings represent 28% of all SMSF assets.

“SMSFs should consider investing greater amounts of their assets into ETFs, which are convenient, cost effective vehicles offering growth and diversification opportunities,” Mr Neiron said.

“Statistics show that SMSFs are increasing investment into listed trusts, such as ETFs, but there’s still a lot more work to be done.  ETF providers need to address the lack of awareness about the benefits of investing in ETFs to the SMSF sector, which is still largely sticking to the safety of cash.

“Many SMSF trustees are not aware how ETFs are creating new and easily accessible investment opportunities on the ASX. ETFs are ideal tools for SMSF trustees to build cost effective, diversified portfolios in asset classes such as international and Australian shares.  ETFs also offer flexibility to SMSF trustees,” Mr Neiron said.

Market Vectors recently launched an education microsite designed to provide a holistic overview ofinvesting in ETFs to help Australian advisers and investors better understand and navigate the ETF industry.

“We are fully committed to engaging with SMSF trustees and their advisers to help them better understand what comes with investing in ETFs. The ETF industry, like Self-Managed Superannuation, has come a long way and we hope both industries continue to grow. Education is a key part of that growth,” Mr Neiron said.

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Paul Resnik

Self-managed superannuation funds’ (SMSFs) investment exposures at the end of the June quarter reveal high equity concentration risks, which leave many retirees vulnerable to an Australian share market downturn, according to Paul Resnik, Co-Founder of FinaMetrica, which specialises in the risk profiling of investors.

Data from the Australian Taxation Office (ATO) reveals SMSFs invested $177.6 billion in listed Australian shares at the end of the June quarter, up from $174.8 billion in the March quarter. Listed Australian shares accounted for around one third or 32% of all SMSF assets in the June quarter, which hit $557.1 billion in the June quarter, up 1.6% from $548.1 billion in the March quarter of this year.

SMSFs cash investments rose to a record $157.9 billion during the June 2014 quarter, up 1.7% from $155.3 billion in the March 2014 quarter. Those cash holdings represented 28% of all SMSF assets.They devoted $65 billion to non-residential property and another $19.5 billion to residential real estate.

SMSFs invested just $2.3 billion in international shares, with another $437 million in overseas managed investments. Another $20.1 billion was invested in listed trusts in the June quarter and $48.9 billion in unlisted trusts, which includes managed funds.

“There are three areas that SMSF trustees, advisers and members need to think carefully about: their over exposure to Australian assets which could be much higher than 90% of total assets; their under exposure to professional investment management, which might be as low as 20%; and their overall exposure to risky growth assets, typically at around 70%, which is likely to be more than they need to take to meet their financial goals.

“By being so heavily exposed to Australian asset classes, SMSFs leave themselves vulnerable to our local market collapse when that happens – and it will,” Mr Resnik said.

“Many SMSFs don’t understand, can’t easily access or accept the importance of international diversification and so they don’t invest meaningfully offshore. Many SMSF investors don’t understand ETFs and hold managed funds in low esteem so they stick to what they know, and what they think they can control, and so they invest mainly directly in Australia.

“In addition, SMSF investors seem to be taking on more investment risk than they might naturally accept if they invested consistently with their risk tolerances. Taking into account the Australian tax and social security systems, and often large SMSF account balances, they may also be taking on more risk than needed to achieve their goals,” Mr Resnik said.

“With SMSFs moving toward de-accumulation there’s a growing need to understand and manage ‘sequence risk’. When investments have been set aside to provide regular retirement income for members, it’s important that there is a plan to work through potential deep and sustained asset value declines which, unless managed carefully, are likely to dramatically diminish their members’ retirement plans.”

FinaMetrica’s widely acclaimed Risk and Return Guide presents a comprehensive analysis of historical portfolio performance across the risk/return spectrum in a manner that is meaningful to clients in the context of their risk tolerance. By using the Guide, financial advisers can show their clients the impact of market downturns on their portfolios.

“Many SMSFs look to be in need of good investment advice.  By better understanding how financial markets work, and the impact of asset allocation on portfolio behaviour, SMSFs can be better prepared for market downturns when they happen,” Mr Resnik said.

“No member of an SMSF should be surprised by portfolio behavior. At worst they should just be disappointed that their portfolio didn’t do better. And if they care about their families they shouldn’t be taking on more risk than they can afford.”

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Olivia Long

There should be no barriers to establishing an SMSF, either educational or fund balance, said Olivia Long, CEO of Xpress Super and Super Guardian, the specialist self-managed super fund (SMSF) administrator, in a submission to the Financial Service Inquiry (FSI).

“We would urge the FSI not to impose a minimum of funds under management before people are allowed to establish a SMSF,” she said.

“In 2010, the Cooper Review looked at minimum balances and decided against setting a limit, and we are hopeful that the FSI will reach the same conclusion.

“Since Cooper’s report there’s been no evidence that trustees are proving to be anything less than diligent managers of their superannuation, whether it’s judged in terms of compliance or investment returns, which strongly suggests the status quo should remain.”

Long says that SMSF trustees with low balances do pay a higher percentage in fees compared with APRA-regulated funds, but we argue “these people have decided that’s a price worth paying to be engaged with their superannuation.

“It will have long-term benefits in terms of these people being more likely to be self-sufficient in retirement as our evidence shows they quickly get their funds under management up to a limit where their fee structures are on a par or even cheaper than the APRA funds.

[Australian Taxation Office (ATO) statistics show that the average operating expense ratio of SMSFs fell over the four years to 2010–11 and was stable in 2011–12. This contrasts with the estimated average operating expenses of APRA funds that increased from 2010 to 2012.]

“In addition, there are flow-on benefits to all other areas of their financial lives – provided they are given all the facts when they set up a fund, their balance should not be determining factor.

“As people live longer, it is even more important that they are engaged in their superannuation at an earlier age, not less.

“The recent Roy Morgan Research ‘Superannuation Satisfaction’ report shows, people using trustees are more engaged with their superannuation compared with the industry and retail funds.”

Long also cited ATO statistics to dismiss claims that SMSFs trustees are naïve in their investments.

“The ATO found that ‘SMSFs are both flexible and resilient in their ability to concentrate or diversify asset portfolios with an ability to respond to changing economic circumstances’.

“The numbers show this: the ATO reported that the estimates of the return on assets for the SMSF sector was positive in 2011–12. And while lower than the positive returns in 2009–10 and 2010–11, the trend is consistent with APRA funds. 

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Olivia Long

Industry funds expecting to reap the benefits of disillusioned SMSF members winding up their funds and re-joining the APRA-regulated sector are grasping at straws, says SuperGuardian, Xpress Super CEO Olivia Long.

Australian Taxation Office (ATO) figures for the five years to 30 June 2013 show that, on average, for every five SMSFs established, one was wound up, with gross SMSF establishments of 34,800 a year and wind-ups of 7800 a year.

Long says these numbers would clearly suggest that SMSFs are increasing in popularity, with growth over this five-year period of more than 27%, with the ATO ascribing it to improved community confidence in the economy and the adaptability of the SMSF sector.

“This hardly presents a picture of disillusionment”, she says.

She was responding to statement by Care Super CEO Julie Lander that SMSF trustees and members “were increasingly finding it a costly and time-consuming exercise they misunderstood before setting up. Worse still, closing an SMSF can be a very labor intensive and technical process.”

She expects the number of DIY investors looking to wind up their SMSFs to grow and a service to aid wind-ups will spur that process along.

Long says it’s always amazing how the retail and industry funds point to the number of wind-ups and conclude that suddenly the SMSF sector is losing its appeal when, quite clearly, the figures suggest the exact opposite.

“In addition, it is often implicit in their statements that trustees are quitting their SMSFs because of complexity, time, or because they have been closed down by the ATO.

“No doubt these are causes of some SMSFs being wound up. But I can add three other valid reasons that often apply:

• Death or ageing of a trustee. With more 55% of SMSF members over age 55, this is likely to be the cause of a larger number of natural wind ups;
• The taxation benefits of the SMSF are no longer relevant for retirees so they draw out the money and invest personally;
• People move overseas – at which point they roll over to an APRA-regulated fund as the easiest option.

“The reality is there is no hard and fast data on why SMSFs are being wound up. What we do know, conclusively, is that far more are being established than are being closed down, and the vast majority of these new SMSF members are coming from the ranks of the APRA-regulated funds,” Long says.

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Know what to do if your client has their identity stolen.

Identity theft is a multi-billion dollar problem – and growing. To the extent that financial advisers help guide their clients in protecting against risks, the topic of identity theft is arguably one that advisers can credibly discuss, and not just because financial product communications are often targeted by those by criminal intent.

Stories like this recent one – from a member of our team – are becoming commonplace:

“A few days ago I received a Facebook friend request from a good friend of mine. It seemed odd – not only have we been friends for years, we’ve been Facebook friends for years. I assumed she’d had a tech disaster and needed to re-establish her Facebook account. Just as my finger hovered over the ‘accept request’ button, I thought better of it, and sent her a message to check. She’d been hacked.

Although my friend had privacy settings in place, the hacker was able to access sufficient information to clone her account. They copied her photo, used her name, her school’s name and her friends list to send out dummy requests. By the time she realised, the clone had access to full Facebook profiles (and friend lists) of 45 of her friends.”

Through such actions, criminals can see photos of your home; see that you’re having a wonderful overseas holiday and that perhaps that home is unattended. Posts bemoaning banks and service providers open the way for targeted phishing scams. People lay their lives open on social media, not expecting to provide intel for criminals to exploit.

And that’s just the tip of the iceberg. There’s no disputing that technology and the internet has made life easy – getting cash from an ATM, using PayPass to ‘tap and go’, going online to pay bills or shop for bicycle parts. It’s hard to imagine life without technology; however it also comes with a downside…increased risk of identity theft.

It’s not just technology that makes us vulnerable. An unsecured letterbox provides access to bills, bank statements, part-filled credit card offers and sometimes the cards themselves. It’s not unknown for criminals to go through bins looking for useful papers – a credit card statement, superannuation fund advice, even a phone bill. Anything with identification can be used by the savvy.

Why should your clients be concerned about identity theft?

People steal identities for a number of reasons, commonly for fraudulent financial gain, but sometimes for more sinister purposes According to the Australian Bureau of Statistics (ABS) Personal Fraud Survey 2010-2011, Australians lost $1.4 billion due to personal fraud.  The same survey estimated that 1.2 million Australians over the age of 15 had suffered at least one incidence of identity theft in the previous 12 months (a 50% increase compared to five years prior).

Once a criminal has the information they need, using your clients’ details they could:

• apply for a credit card, bank account or other financial service
• run up credit card debts or obtain loans
• apply for identification vehicles such as birth certificate, driver’s licence or even a passport
• access superannuation and other savings
• apply for Centrelink benefits.

A quick-acting criminal could quickly run up tens of thousands of dollars worth of debt that takes time and effort to untangle. As well as being extremely stressful, your client’s credit rating can be negatively affected and they could experience a period of financial hardship as a result.

Tap and go technology brings fresh risks

With credit card signatures to be phased out in August this year, most cards issued over the last 18 months or so have included an inbuilt RFID (Radio Frequency Identification) chip, which allows the ‘contactless’ ’payment technology such as ‘tap and go’ to function.

Whilst most appreciate the convenience of being able to simply ‘wave’ your card in front of the special scanners, the downside is that an inexpensive credit card reader can get at the data from a few inches away, even if the card is in a purse or wallet.

How can your clients protect themselves from identity theft?

An important part of safeguarding your clients’ financial future is to ensure they’re aware of potential vulnerabilities and take action to protect them. Older clients in particular should be warned about email scams; not the amateurish requests to transfer money for an African prince, but the alarmingly sophisticated requests to verify bank data, or print off delivery labels for bogus parcels. The scary thing is that these techniques can be like a Trojan horse, silently running in the background of a computer, recording every keystroke and relaying them back to the scammer.

Tips to share with your clients include:

• put a lock on your letterbox and clear it regularly
• keep personal and financial papers secure, shred when no longer required
• ensure that virus and security software on your computers and mobile devices is up-to-date – new threats emerge daily, so currency is important
• don’t use the same PIN and password across cards and websites
• don’t use unsecured wifi for internet banking or financial transactions
• never respond to scam or phishing emails promising huge rewards for information or punitive actions for non-response
• regularly review financial statements and report unauthorised transactions immediately
• always use the most secure settings on social media sites and never accept unsolicited ‘friend’ requests
• if starting a new job, only provide your TFN to the new employer once you have commenced – the ATO warns of employment scams that seek to access TFNs.
• If you are travelling, or just extra conscious of the risks around RFID data theft, you can protect your cards in special wallets, usually made of aluminium or some other material that blocks signals.

Steps to take if a client’s identity is stolen

If a client does become a victim of identity theft, it’s important to act swiftly. While the extent and nature of the theft will dictate specific action, it’s important that these first steps are taken and documented for future reference:

• contact all financial institutions – highlight disputed transactions, change PINs and passwords and discuss whether other account changes are required
• report the matter to the police with as much documented evidence as possible
• contact the Credit Reporting Agency and explain the situation; regular checks on credit status should be made in the following months
• contact any other agencies such as the ATO, Centrelink or the Australian Passport Office.

If your clients aren’t sure that their online security practices are adequate, you can get them to take the ATO’s self assessment. It covers business and personal security practices.

Discuss this issue with your clients

It may be tempting – and legitimate – to decide this issue is not really an adviser’s responsibility. But this is undeniably an area where your clients can be exposed to financial risk, and those advisers who get on the front foot and discuss this issue with clients are likely to be rewarded with increased trust and loyalty.

—————-

Important information: The information in this article has been prepared by Zurich Australia Limited and is intended for Advisers use only. It is not intended for use by any retail client. The information is current as at 23 June 2014 and is derived from sources believed to be accurate as at this date. The information in this document may be subject to change. While all reasonable care has been taken in preparing this document and the consents of this document are presented in good faith, no warranty (express or implied) is given by Zurich as to the completeness or accuracy of the information in this document, and Zurich will not be liable (in contract or tort, including negligence, or otherwise) to any party or person if, and to the extent that, they rely on any information provided.

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Andrea Slattery

It’s official. The numbers of SMSF members has now topped one million, according to the Australian Taxation Office’s March 2014 SMSF statistical report. 

The report shows the number of SMSF members at 1,006,975 – a net gain of 11,384 compared with the 31 December 2013 figure of 995,591. Over the past four years the number of members has increased 26.6% from 795,563 at 31 March 2010.

Over the same three-month period to 31 March 2014, the net establishment of SMSFs was 6374, taking the number of funds to 528,701. Over the four-year period net establishments have risen 26.5% from 417,862 at 31 March 2010.

The SMSF Professionals’ Association of Australia (SPAA) CEO Andrea Slattery says: “The number of trustees and members exceeding one million is an important milestone for the SMSF industry, clearly demonstrating that there is a growing number of people wanting to take direct responsibility for their retirement savings.

“It now compels everyone involved in the industry to ensure that these trustees and members have access to the best professional advice, and certainly SPAA is committed to this outcome.”

She says that although the figures show that while number of SMSF establishments continues to grow, the pace of growth is softening.

“SPAA is encouraged by this trend. It suggests that people are only opting for an SMSF after doing their due diligence and deciding whether an SMSF is the appropriate retirement savings vehicle for them. As such, SPAA believes this growth is sustainable over the longer term.”

The ATO statistics also show that investment in residential property rose 17.2% to $20.5 billion in the 12 months to 31 March 2014.

Although that represents solid growth, Slattery says it has to be put into context.

“Residential property still only represents 3.7% of total SMSF assets of $558.5 billion, and is still dwarfed by non-residential property assets at $68.4 billion or 12.2% of total assets.

“In addition, most of that growth occurred in the first nine months to 31 December 2013, and was starting to ease in the last quarter.

“It’s also interesting to note that limited recourse borrowing arrangements only increased 1.6% in the March quarter and now stand at $2761 million or 0.5% of all SMSF assets. Again SPAA would suggest this number illustrates that trustees and members are adopting a conservative approach to gearing.”

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