Many have missed the point that renovations can only occur for ungeared property if trustees are seeking favourable tax treatment for the work done.

What has always been allowed for any property is the ability to provide maintenance and repairs which are tax deductible within clear criteria.

“Some SMSF trustees borrowed money to buy an older property and are stuck with a deteriorating asset on which they cannot carry on renovations.

“The ATO has given no indication that the rules on renovating older properties will be changed to allow geared residential properties to be renovated.

“To have the capacity to buy a property freehold and then renovate to add significant value is more in the realm of wealthier SMSFs, where cash is available to make a large capital purchase such as a property.

“SMSF trustees wanting to add wealth with renovation strategies need to ensure that sufficient cash is available and that contributions (if needed) can be made to finish the renovations,” said Peter Townsend, Managing Director, Townsends Business & Corporate Lawyers.

“The sole purpose test has to be observed in any transaction inside superannuation. The usually long-term nature of renovation process has to be shown to fit that test. The sole purpose test demands that superannuation is used to benefit the member in retirement, not when the property market comes good,” said Mr Townsend.

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SPAA CEO Andrea Slattery says: “It is correct that SMSF trustees have fewer avenues for legal action against fraud and theft compared with trustees of the APRA-regulated superannuation funds; but it’s wrong to say they have no available options. 

Slattery praised the recent release of information on the Australian Taxation Office (ATO) website about the legal options available to SMSF members who suffer losses due to fraud or theft. 

“It’s not just SPAA saying SMSF trustees have legal options; the (ATO website quite clearly states this is the case.” To quote the ATO: “SMSF trustees do have certain rights and options available to them if their fund suffers a financial loss due to fraudulent conduct or theft. 

“For example, SMSF trustees can choose to take legal recovery action against a person or persons who engaged in the fraudulent conduct or theft. Under Corporations Law, if the trustees received advice or services from an Australian Financial Services Licensee who was involved in the fraudulent conduct or theft, legal options are available. 

“SMSF trustees may also approach the Financial Ombudsman Service (FOS) if the trustee’s adviser, or other service provider involved in the fraudulent conduct, is a member of FOS. However, access to these legal options gives no guarantee that the fund will be compensated for fraudulent conduct or theft. Depending on the circumstances the fund may receive no compensation or limited compensation.”  

Slattery says this view from the ATO reflects SPAA’s long-held stance on this issue. “SMSFs do have legal options, but they are fewer than those available to the APRA-regulated sector. And they don’t guarantee a successful outcome. 

“The problem is most of the discussion about SMSF compensation only focuses on the option of government compensation and makes no mention of the broader legal options that are available to SMSFs,” she says. 

Slattery said the information recently released on the ATO website is welcomed because it is not just a discussion about the limitations of government compensation. 

“It also covers off the broader range of compensation options often available to SMSF members,” she says. 

Slattery also addressed ASIC’s recently raised concerns about SMSFs being oversold by some advisors and statements to the effect that investors with less than $100,000 are being pushed into SMSFs. 

“This is simply not supported by the statistics. The most recent release of the ATO’s “SMSF statistical overview” (2009-10) shows the average and median balance of an SMSF member trending clearly upwards since 2006. 

“The report also shows that the percentage of SMSFs with balances under $50,000 has declined from 11% in 2006 to 6.8% in 2010. These statistics suggest there is no systematic issue here.”

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“The Overview confirms some very interesting macro information,” said Aaron Dunn, Managing Director of The SMSF Academy. “For example, it confirms what the industry has long suspected – that there has been steady growth in the sector, both in the number of funds and also in total super assets. Significantly, there has been a jump in the number of younger people – those in the 35-54 age group – setting up their own funds. This suggests that SMSFs have moved from being a retirement vehicle for baby boomers to a retirement vehicle of choice for people who wish to become more engaged in their superannuation savings.”

Mr Dunn said the Overview also reveals the continued growth in SMSF net flows which includes total contributions and benefit payments. “These statistics support that not only did the Simpler Super reforms provide an incentive to get money into super, but also to take money out – in the form of benefit payments – particularly for those aged over 60,” Mr Dunn said. “This could be also due, in part, to the popularity of transition to retirement strategies.”

However, Mr Dunn said that while the macro information contained in the Overview was useful, in order to better understand all the elements within the SMSF life-cycle, and to aid the SMSF industry’s response to the Stronger Super reforms, the Overview needs to also look at the statistics from a micro level.

“Disappointingly, we see no break down in the contributions, in particular member contributions, that are provided as off-market or in-specie asset transfers. This information is readily available within the SMSF Annual Return,” Mr Dunn said. “Not providing this information hampers the SMSF industry’s ability to put forward a valid argument on the Stronger Super reform recommendation to abolish the off market transfer of listed shares into SMSFs from 1 July 2012.”

Mr Dunn said that the Government has responded to a Cooper Review recommendation to ban off market transfer of listed shares predominantly on hear-say. “It would be valuable to not only look at contributions to SMSFs at a macro-level, but also understand how these contributions got into the fund – for example, as business real property or listed shares transfers.”

Mr Dunn said providing more information on benefit payments and how they are being withdrawn would also help the industry and the Government better understand the direction retirement income stream policy needs to be taken in the future.

“As longevity risk is one of the biggest issues this century, it would be good to be able to identify things such as whether, on average, members are living beyond their means and from that information estimate how long their money will last against their average life expectancy.”

Key Findings from the Overview:

• Only one in every 10 new SMSFs established are within a corporate trustee
• While growing in the area of post-retirement benefits, very few establish funds and commence income streams immediately (only 11%). 49% of funds commencing pensions within 2009, had been in existence for five or more years
• The concept of a ‘family fund’ doesn’t appear to be gaining traction… only 4% of funds have three or four members
• The entry point for SMSFs appears to be dropping. Growth has occurred in all ranges up to $500k. This may be due to performance dissatisfaction as a result of financial markets – historically the number of new SMSFs has grown in poor financial markets Conversely, there has been an asset size decline in member balances >$500k. This will have come about from a variety of reasons including the impact of GFC coupled with an increasing trend in benefit payments
• SMSF trustees appear to have taken an active response to their investment strategy as a result of the GFC, with a move to cash and term deposits. Holding of real property has also grown which would incorporate the law changes to allow limited recourse borrowing from 24 September 2007. It will be interesting to see in future data, when SMSF trustees look to make that shift back into listed equities.

The ATO Statistical Overview 2008-09 is available at the following link http://www.ato.gov.au/corporate/content.aspx?menuid=0&doc=/wp-content/00301485.htm&page=1&H1 More discussion on this topic is available now on Mr Dunn’s blog thedunnthing – www.thedunnthing.com

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The ATO is concerned some trustees are lending money from their fund to people who provide advice or assist in the running of the fund. This may not be in the best interest of the SMSF, and may place retirement savings at risk. When a loan agreement is not in the best interest of a SMSF – for example, giving discount loan rates or favourable terms – this could have serious consequences. In addition to putting member’s benefits at risk, the SMSF could be found to be non-complying and would, therefore, not qualify for concessional tax rates.

Before lending any money, your client should consider the fund’s investment strategy and determine whether the investment is appropriate and, in particular, whether lending money to people providing you with services or advice is in the best long-term interests of the SMSF. The ATO recommends SMSF trustees seek advice before entering into such arrangements.

If the trustees go ahead and lend money from the SMSF, they should write an appropriate loan agreement and have it signed by all the parties involved and ensure the loan agreement specifies all the terms of the loan, such as:

• what the security for the loan is
• the repayment period
• when repayments will be paid
• the amount of the repayments
• the interest rate.

They also need to ensure the interest and repayments are received by the fund according to the loan agreement, take appropriate action to protect the fund’s investment if the loan agreement is not followed and ensure the loan is sensible and does not put the members’ benefits at risk. Clients also need to ensure that the conditions of the loan agreement do not provide the borrower with favourable terms.

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Chris Freeman, Head of BT Wrap, said the model portfolio enhancements reinforce Wrap‟s position as market-leaders in the platform market.

“Our product innovation program truly sets us apart from our competitors,” Chris said.

“By working closely with our advisers, we know the trend towards more highly personalised service and tailored portfolios brings with it higher administration costs, increased compliance risks and time pressures.

“Model portfolios delivers a solution that allows for a more efficient, controlled and cost-effective way to create, customise and manage client portfolios.”

“The model portfolio enhancements, which work in any compliance regime, and the launch of a new Dealer Group DeskTop provide dealer groups greater comfort and control and advisers streamlined efficiency.”

Chris said the enhancements were part of BT Wrap‟s three-year development program, an investment of more than $18 million.

“This program really sets the benchmark for platform innovation and has already delivered a listed securities trading centre, SMSF administration enhancements and multiple client bulk trading,” he said.

“We‟ve continued our client-centric approach to the development of our platform by working with advisers and their staff to anticipate their needs – an approach that supports our commitment to maintaining a market leading Wrap platform.”

The enhancements will be launched to Wrap‟s Dealer Group partners on Monday, 20 September and all advisers on Monday, 11 October:

• Monday, 20 September – New Dealer Group Desktop The new intuitive Dealer Group DeskTop allows Dealer Groups to create model portfolios for their advisers, control adviser model access levels, and monitor model portfolio usage. This capability delivers increased control and oversight of the advice process.
• Monday, 20 September – New trading and ‘order status’ enhancements New real time cash updates for equities mean advisers can re-invest the proceeds from equity sales in the equities market without delay. The new ‘order status’ screen allows advisers to view all equities and managed funds orders for a single client– or across all clients.
• Monday, 11 October – New Model Portfolio tools The new Model Portfolio Tools allow advisers to link their clients to appropriate model portfolios containing equities, managed funds, cash or a hybrid of the three, and to tailor the blended portfolio for individual client preferences including substitutions, locked and excluded holdings The integrated rebalance and trading functionality makes it easy for advisers to implement portfolio transactions. This capability streamlines the advice process, enabling advisers to spend more time strengthening client relationships and less time on administration.

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