Phil Broderick

The Institute of Financial Professionals Australia do not believe that a factor-based approach which leads to an effective tax rate of 90% is the correct way to deal with a general expense breach. Head of Superannuation & Financial Services, Natasha Panagis, said other changes should be made to the law to deal with non-arm’s length dealings.

“Although the proposed legislative changes to the non-arm’s length expense (NALE) rules are an improvement to the initial proposal to tax NALE at a rate of 225% (ie, a five times multiple), we continue to oppose the concept of a multiple,” Ms Panagis says.

“Under this proposal, small funds will still have the obligation to prove that all their expenses are at market rates or pay extra tax. As a result, SMSF trustees will be required to obtain benchmark evidence to prove that the amounts to be charged, or that the amount paid to another party, is at arm’s length/market rates to minimise the risk of the non-arm’s length income (NALI) provisions applying.

“Identifying whether an expense is NALE may not be a straightforward task as benchmark evidence can be difficult to obtain as expenses/costs can be subjective and can vary widely between providers. In addition, it will be often difficult to determine whether activities are undertaken in a trustee/director role for which no charge is required and other activities which must be charged (and supported by benchmark material). This means the proposed method will likely mean an increase in costs for smaller funds, both from an administration and auditing perspective.”

Ms Panagis notes that the superannuation system already has sufficient regulatory tools to deal with non-arm’s length dealings.

“Existing regulatory powers such as treating the non-arm’s length dealings as contributions (as per Taxation Ruling TR 2010/1), using the current tax penalty regime on top of a proportionate NALI tax assessment, abiding by the sole purpose test and the arm’s length dealings rules (sections 62 and 109 of the SIS Act), and relying on the ATO to use its power to issue SIS Act penalties, rectification orders, disqualification of the SMSF trustees and/or making the SMSF non-compliant, are just a few existing solutions to deal with NALE.”

Ms Panagis says exempting large APRA-regulated funds for both general expenses and specific expenses but subjecting SMSFs and small-APRA regulated funds (SAFs) for both general and specific expenses of the fund is also unjust.

“The proposal as it stands will result in an unlevel playing field between APRA-regulated funds and smaller funds and does not promote tax neutrality/equality across the superannuation sector.”

Board Member and Chair of the Superannuation Technical and Policy Committee, Phil Broderick, says there must be consistency between general and specific expenses and NALI/NALE should be proportionate.

“Rather than using a two times multiple for general expenses and the “existing” NALI treatment apply for specific expenses, it is our view that general and specific expenses be treated the same. In particular, we believe the NALI tax rate of 45% should only apply to the amount of underpayment/non-payment of the expense,” Mr Broderick says.

“It is also our strong view that NALI and NALE should be made proportionate – that is, only the additional income (over and above an arm’s length income) or the underpayment of expenses (ie, below the arm’s length expense) should be subject to the NALI tax rate of 45% (plus penalties, as applicable)”.

Mr Broderick says the proposed legislation is overly complex and the proposed amendments will make the NALI/NALE rules even more difficult to interpret: “We believe the NALE rules should be abolished rather than amended. However, if the proposed changes are retained, we suggest that the rewrite be redrafted in a simpler style.”

Mr Broderick notes the association is disappointed that the consultation paper has failed to address a number of critical points that have been raised by the industry over almost five years of lobbying.

“Issues such as specific expenses were not addressed, the lack of clarity between duties undertaken in a trustee capacity versus an individual capacity remains unsolved, the interaction with other tax provisions is unclear, particularly the capital gains tax regime and the contributions rules, and the NALI provisions provide no opportunity for trustees to rectify any unintended errors,” Mr Broderick says.

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Ms. Panagis takes up the position of Technical Specialist and adds further strength to the Strategy Steps specialist technical and investment team.

Assyat David, Director Strategy Steps said “Natasha has been instrumental in developing the new advice tool in Desk Caddie called the “strategy matrix” which is an easy-to-use tool to help advisers develop tailored strategies for clients based on their age profile and/or life event”.

Ms David added “Each matrix will step out an advice process to guide advisers in developing tailored strategies for clients based on a sequence of questions. A customised PDF is generated for each client.”

“Natasha’s appointment would put the group into an even stronger position to cater to the growing needs of its client base, which included small and large dealer groups as well as fund managers. She brings a great depth of skill, knowledge and industry experience to the mix“ said Ms David.

“Strategy Steps is well positioned to provide client and revenue opportunities to financial service businesses which is timely given the changing face of financial planning, lack of in-house expertise within many financial planning groups and the importance now more than ever before of the need for quality advice tools to help advisers meet the challenges of efficiently delivering ‘quality’ advice that satisfies the ‘best interest’ rules” according to David.

Ms Panagis brings more than 11 years’ experience of providing technical and strategy support to financial advisers. During this time, Natasha has trained financial advisers on a broad range of wealth management areas with a focus on the practical implications for their clients. This experience allows advisers to create business opportunities and utilise strategies to enhance their client’s financial wellbeing.

Her most recent role prior to joining the group was as Technical Services Manager at Centric Wealth. Natasha is well qualified with academic qualifications including a Bachelor of Business (Management), a Bachelor of Business (Applied Finance), an Advanced Diploma of Financial Services (Financial Planning). She is also a Certified Financial Planner (CFP) and a SMSF Specialist Advisor (SSA).

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Estate planning can require special focus for same sex couples .

Centric Wealth has said that even without recognised gay marriage, there are many areas where those in same sex relationships are given the same rights as traditional couples.  However, as legislation varies amongst states and territories, it is imperative that same sex couples seek estate planning and financial advice to ensure their partner is taken care of in the future.

Natasha Panagis, Centric Wealth technical specialist said that same sex couples who are in a registered relationship with their partner or live with their partner in a de-facto relationship will have their partner recognised as their spouse under legislation for superannuation, taxation and social security purposes. “As most states and territories now allow the registration of a de-facto relationships, be they same or opposite sex, the broader definition of spouse means that same sex couples must ensure that adequate provision is made in the will for their beneficiaries such as their spouse or children. Thus, to avoid problems in the future, it’s important that same sex couples obtain advice on achieving their estate planning goals and how to minimise disputes after death. “Its natural for younger people not to want to make a will as few of us relish contemplating our mortality, which is at the centre of the will making process. Happily, though, more and more people are realising the making of a will is simply good financial housekeeping and that it is never too early to make one.

“It is highly recommended that a will be drawn up with the assistance of a lawyer given the importance of the document. These professionals will provide advice and most importantly help ensure a person’s estate planning wishes occur,” Ms Panagis said.

“All too frequently what may be fought over in a legal suit can get consumed in legal bills and everyone loses as the cost of the dispute is generally incurred by the estate which erodes the amount for intended beneficiaries.

Ms Panagis said superannuation death benefits can also be paid to a same sex partner if they are in a de-facto or a registered relationship. In the past, the partner needed to establish financial dependency or show an interdependency relationship.

Similarly, same sex couples can also make binding financial agreements, also known as prenuptial agreements, which can allow a couple to consider how assets will be divided if the relationship breaks down. Couples wishing to consider binding financial agreements for their situation should seek legal advice. These agreements can be made before, during or after a relationship.

Ms Panagis said that dying without a will (ie. dying intestate) means control over who will receive the assets in your estate will be taken out of your hands and will be determined by intestacy legislation, which varies across the country. To die without having a legal will may leave those you love with unnecessary distress, uncertainty and expense.

“The three soundest pieces of advice I would give same sex couples who are in serious long term relationship is to ensure their relationship is de-facto or registered, for both partners to make a will with the assistance of a professional adviser and to create a binding financial agreement. The importance of estate planning and financial advice cannot be underestimated”.

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Poorly managed SMSFs may have a national impact.

Leading Wealth Management firm, Centric Wealth, today said the growth of self managed super funds (SMSFs) could cause problems for retirees and create further strain on the nation’s budget, if large numbers of SMSF trustees fail to correctly manage their retirement funds.

According to ATO statistics, the SMSF sector is currently worth $500 billion (about one-third of all superannuation assets) and has nearly one million trustees.

Phil Kearns, Centric Wealth Chief Executive Officer said the latest research from the SMSF Professionals’ Association of Australia shows an additional 1.4 million people are considering setting up an SMSF over the next three years.

“This will mean the number of self managed retirees will swell to almost 2.5 million.  Is it likely that all these people will have the knowledge, experience and time needed to manage their SMSF effectively?   In my view, this could create a number of problems for the individuals and the government, who may end up financially supporting these people down the track.”

Mr Kearns says many people incorrectly believe running an SMSF is just a matter of getting the investment strategy right,.

“Managing an SMSF is no easy task.  While many SMSF trustees are highly proficient at managing their strategy, compliance and investments, others may not appreciate the complexities involved or the implications of the role of being a trustee.”

Natasha Panagis, Centric Wealth’s Technical Specialist, said complex and ever-changing requirements and regulations mean you need to have a very thorough understanding of the rules to avoid large fines.

These individuals will all need the time, resources and knowledge to ensure they abide by government regulations, maintain adequate insurance and receive good investment returns. Getting this wrong can have an even greater negative impact than simply missing investment returns.

“Aside from onerous reporting requirements, there is also the issue of costs.  It is not uncommon for clients to be paying their accountant over $6000 a year to administer their fund and ensure correct audit and compliance requirements are followed. Some administration providers will quote one headline low fee, but hit the trustee with a range of fees for various products and services.”

“We tell our clients that they need to have at least $500,000 in assets, plus other alternative assets like investment property, before an SMSF is worthwhile.  However, even if an individual has this level of assets, it does not mean they should manage their own super.  There is much to be said for relying upon professional advice and spending your time and effort on other areas of your life.”

Mr Kearns said he believes the government needs to provide more education to potential SMSF trustees.

“If the government does not act on this issue now, they could find vast numbers of Australians retiring without adequate retirement savings.  This will mean strain on the nations Aged Pension budget.  Ensuring that anyone setting up an SMSF has the right knowledge – or the right support by way of an appropriate qualified financial adviser – is the first step in avoiding the pitfalls of running their own fund.”

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According to Centric Wealth, one of Australia’s leading financial advisory firms, a constantly changing regulatory landscape means it is now more important than ever for SMSF trustees to seek professional help to better manage and protect their funds.

Natasha Panagis, Centric Wealth Technical Specialist, says it is becoming more and more difficult for SMSF trustees to meet all of their legislative and compliance requirements.

“Take for example the latest changes that came into effect on 7 August this year, which require all trustees and directors of SMSFs to consider providing insurance to their members as part of the fund’s overall investment strategy.  We think it would be very difficult for most Australians to understand the full scope of their insurance requirements without some sort of formal training,” she said.

“Although this change is mandatory, it is up to the trustees to determine the appropriate type and level of insurance cover they should offer to members, whether inside or outside of their SMSF.”

“Whilst members of larger super funds are often provided with some form of automatic death and total permanent disability insurance cover, automatic cover is generally not provided by most SMSFs. Indeed, recent Federal Government figures indicate that only 13 per cent of SMSFs have some form of insurance,” Ms Panagis said.

“We certainly recommend an adequate level of insurance to all our clients so their families can remain financially secure in the event of the main income earner passing away or having a major accident which prevents them from returning to work in the future.”

Ms Panagis said the risks of not having insurance cover can certainly be significant, particularly given the recent surge in SMSFs accessing loans to buy investment property.

“Where trustees have borrowed money to buy property, not having life and total permanent disability cover can become a major problem if one of the members passes away unexpectedly or becomes disabled and can no longer contribute into super. The key risk here is that the SMSF will go into negative cash flow, which could be exacerbated if there are existing debt arrangements in place,” she said.

“Trustees should also consider obtaining general insurance cover such as rent protection insurance in order to safeguard their hard earned retirement savings”.

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