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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Philip LaGreca

Australian’s self-managed super fund (SMSF) trustees have turned their focus to international markets to realise more gains, after continued low interest rates deliver un-inspiring cash returns, according to the latest Multiport SMSF Investment Patterns Survey.

In the June quarter 2014, cash holdings in SMSFs reached a record low of 18.29 per cent, the lowest level on record since the quarterly survey began in 2007. Coupled with a record low-interest rate of 2.5 per cent since August 2013, cash remains a less attractive option for investors.

AMP SMSF Administration Head of Technical Services Philip LaGreca said the significant decrease in cash holdings has mainly flowed into the international property and equity sectors.

“International equities have performed strongly throughout the year and we’ve seen an increase in funds in this asset class, as more investors move their investments away from under-performing asset classes, especially cash,” Mr LaGreca said.

“The strong performance of exchange traded funds (ETFs) has proved a compelling option for investors and we’ve seen holdings in ETFs consistently increase over the past two years. Overall international holdings being held via ETFs is now 17 per cent, an increase of 1.9 per cent in the last quarter alone,” Mr LaGreca added.

There has been a continued preference for managed funds over direct investment due to the complications still present in investing overseas directly. As a result, allocation to managed funds continues to increase, now at 17.4 per cent.

While there has been an increase in international equities, the allocation of funds to Australian equities has been lower than expected over the past three quarters due to the performance of Australia’s top 20 stocks.

“Australian shares are still the most popular for SMSF trustees with close to 40 per cent (39.3) of all funds allocated to this asset class. However, over the past three quarters we’ve seen slight decreases in the amount of funds invested in Australian shares. This is largely due to the higher weighting in the top 20 local stocks, which have under-performed the All Ordinaries in the 2014 financial year,” said Mr LaGreca.

During the last quarter of the 2014 financial year, there was a significant increase in the contribution levels made by SMSF members. The average contribution inflow per fund for the June 2014 quarter increased 27 per cent to $13,750.
“Generally we see contribution levels climb in the last quarter of the financial year as members add to their fund in-line with contribution caps. However, the increase in contributions for the 2014 financial year is the biggest we’ve seen in more than three years.

“This increase is most likely the result of the increase in the concessional cap for members over age 59 to $35,000 compared to a cap of $25,000 applying to all ages for the previous financial year. The increase in the super guarantee from 9.25 to 9.5 per cent would have also increased contribution levels,” Mr LaGreca said.

Property remains a popular investment option for SMSF trustees, remaining at 17.8 per cent of all assets invested in the fund. However the number of funds who are currently utilising a borrowing arrangement has declined to 15.6 per cent, compared to 16.8 per cent the previous quarter. The average property loan amount for the quarter was $272,000.

The quarterly Multiport SMSF Investment Patterns Survey covers around 2200 funds, a sample of the SMSFs Multiport administers and the investments they held at 30 June 2014. The assets of the funds surveyed represent approximately $2.2 billion.

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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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Graeme Colley

The wide-ranging responsibilities of SMSF trustees to all fund members are often misunderstood and unappreciated by their critics, says Graeme Colley, Director, Technical and Professional Standards, of the SMSF Professionals’ Association of Australia (SPAA).

“There is a common misconception that trustees are some how a ‘law unto themselves’ but nothing could be further from the truth. Their legal responsibilities are wide-ranging and onerous, and penalties apply if they don’t comply.”

Colley says that criticisms of SMSFs, whether it be around asset allocation, the use of leverage, or their administration, often fail to take into account the obligations trustees have to all fund members, not just themselves.

“They are often told to take decisions that would put them at odds with their legal duties. All this simply demonstrates is the lack of knowledge of what trustees’ responsibilities entail.”

Under the SIS law, trustees have a legal obligation to:

• Act honestly in all matters concerning the fund;
• Exercise the same degree of care, skill and diligence as an ordinary person would exercise in dealing with the property of another that they were morally bound to provide for;
• Exercise their powers and duties in the interests of beneficiaries – which means they do not act in their own selfish interest but consider all the members of the fund equally.

In addition, trustees are obliged, among other things, to execute the terms of the trust deed; defend the trust; be impartial among beneficiaries; account for actions and keep beneficiaries informed; not delegate; not profit; and not be in a conflict of interest position.

“In SPAA’s experience, trustees have largely accepted these responsibilities, showing a capacity to quickly adapt to any changes in the rules.

“Having set up their SMSFs to ensure they are self-sufficient in retirement, they understand better than anyone the importance of complying with the legislation to ensure the fund works to the benefit of all members,” he says.

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Graeme Colley

In the eyes of their critics it seems SMSF trustees can never get it right on the investment front, says Graeme Colley, Director, Technical and Professional Standards, of the SMSF Professionals’ Association of Australia (SPAA).

“In recent days we have been told trustees are overweight in Australian equities, especially the fully franked blue chips such as the banks and Telstra.

“It wasn’t so long ago these same critics were pointing their fingers at SMSFs for holding too much in cash and fixed deposits. Then SMSFs investing in property gets a hiding. Why can’t they ever make up their minds if there is a problem with SMSFs?”

Colley says these SMSF critics seem to ignore the fact that some APRA-based funds allow members to put all their money in the top 300 ASX stocks and some let you put it all in one asset class such as overseas shares.

“What’s worse, an APRA-based fund that lets you put all your money in one asset class or an SMSF that may be overweight in one asset class? I can’t speak for APRA-based funds, but in the case of SMSFs it might just be the case that an overweight allocation best suits the fund’s risk profile.

“If SMSFs are criticised for being too exposed to market risk then, guess what, the APRA funds that are in the same boat will fall just as heavily and their members won’t even know what’s happened as they are not engaged, unlike the SMSFs where members have high levels of engagement.”

Colley says these critics typically enter the debate when there is change in market sentiment and use this factor to assert that SMSFs have the wrong asset allocation.  The difference is barely noticeable compared with what APRA funds allow their members to do without proper advice and assessment of risk profiles.

“What this ignores is that the APRA figures conclusively show that SMSFs, on average, outperform their APRA-regulated cousins when markets are struggling and match their performance when markets are rising.

“This is shown in the latest performance information comparing APRA and SMSF funds that show there is a lower level of risk with SMSFs (see graph below).

“They also overlook the data published earlier this year by Rice Warner that showed over the eight-year period from 2005 to 2012, the SMSF sector outperformed the rest of the superannuation industry in six of those eight years. It was hardly a sea of investment tranquillity – the tail-end of a boom, the GFC, and slow economic recovery.

“With this armour to support the significance of SMSFs and the role they play in the superannuation industry, we now wait for the critics to fall on their swords.”

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Tim Humphreys

AMP Capital has made it easier for self-managed super fund (SMSF) investors to access listed infrastructure by adding its flagship global fund to the SMSF Suite.

The AMP Capital Global Listed Infrastructure Fund was established in July 2010 and the capability already has more than A$1 billion in assets under management from both institutional and retail investors.

The fund takes advantage of one of the biggest investment thematics globally: the need for both developed and emerging economies to increase their investment in infrastructure. This is driving strong performance in listed companies that are contributing to the infrastructure boom and, subsequently, the asset class.

AMP Capital Head of SMSF Tim Keegan said: “We have added the AMP Capital Global Listed Infrastructure Fund to the SMSF Suite because it can be difficult for SMSF investors to access the best opportunities in listed infrastructure on their own. Listed infrastructure is a relatively new asset class, which presents a lot of good growth opportunities particularly given our fund looks internationally for the best investments.”

AMP Capital Head of Global Listed Infrastructure Tim Humphreys said the fund only invests in what is considered ‘core and pure’ listed infrastructure assets such as water utilities, oil and gas pipelines, electricity transmission and distribution and transportation infrastructure such as airports, toll roads and seaports.

“We look for companies that deliver stable and predictable cash flows as this helps us deliver strong returns and downside protection to investors,” Mr Humphreys said. “SMSF investors can benefit from the diversification global listed infrastructure offers their portfolios while its high dividend yield will help them meet their income goals. It is also a low-risk way to access the growth potential of global equities.”

The SMSF Suite was launched in May with the AMP Capital Corporate Bond Fund and Wholesale Australian Property Fund. There has been a five-fold increase in flows to both funds since the launch of the suite.

Mr Keegan noted: “Through the SMSF Suite, we’re able to bring our customers unique investment opportunities they may not have otherwise considered or been able to access.

“SMSF trustees like the fact we’ve lowered the minimum investment for the Wholesale Australian Property Fund to $10,000 and they have also flocked to the Corporate Bond Fund, which is now the most popular AMP Capital fund among our SMSF clients.

“We’re looking forward to expanding the SMSF Suite next year to bring our customers additional investment options in equities, property and infrastructure.

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Ages 40 and 70 are crucial ages for aged care planning and SMSFs.

The US based senior care network, Home Instead, was the first one to refer to what is now universally known as the 40-70 rule. Since then, many operators in the aged care arena have picked up the term, as it succinctly encapsulates the need for the aged care discussion.

“Quite simply, the rule refers to the importance of the ages of 40 and 70 in aged care decision making; when they turn 40, children need to think about aged care issues in relation to their 70 year old parents. With the recent aged care reforms, and the accompanying complicated financial decisions that now need to be made when planning for aged care options, the 40-70 rule applies now, more than ever,” Ms Lawton says.

Both of these ages should also act as an advice alarm of sorts for advisers, and SMSF Trustees.

“Financial advisers with clients in their 40s, should consider having the conversation with their clients about the state of their parents’ health, and whether their parents have made their aged care wishes known to their children.

“For those with older clients in their 70s the question of aged care is also worth raising. Although it may seem difficult, it is easier to have the conversation about what they want for their future, now, compared to when they may be in hospital and unable to clearly make that decision for themselves.

“The 40-70 rule impacts trustees of SMSFs as well, particularly when the SMSF is made up of 70 year old parents and their 40 year old children.

“The issues faced by those considering aged care options are many and varied, and increasingly complicated. Decisions need to be made on the sale of the family home, the varying costs of alternative accommodation options; the level of the ongoing fees; as well as the impact of theses actions on pension entitlements.

“It is important that those aged 70 face this reality, and make the decisions on aged care for themselves, while they are able to,” Ms Lawton concludes.

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Graeme Colley

The in-house asset rules pose one the biggest pitfalls for SMSF trustees and their professional advisors, says Graeme Colley, Director, Technical and Professional Standards, of the SMSF Professionals’ Association of Australia (SPAA).

He says SPAA is concerned that these rules – one of the most complex set of investment rules in the SIS legislation – are the cause of a significant number of breaches of the legislation and, as a consequence, are exposing trustees to the dangers of  significant penalties, non-compliance of the fund or possible disqualification as a trustee.

An in-house asset is defined as a loan to or an investment in a related party of the fund, an investment in a related trust of the fund or a lease of a fund asset to a related party.

Colley says the introduction of education directions, rectification directions and administrative penalties from 1 July 2014 for SMSFs have meant a brush up of all provisions of the SIS Act and Regulations for trustees and professionals to ensure the fund meets the rules and penalties are avoided.

He says a key reason for revising the in-house asset rules has to do with the number of Auditor Contravention Notices received by the ATO.

“For the year ended 30 June 2013 the most reported breach by number were loan requirements at 21.3%, with breaches of the in-house asset rules coming a close second at 18.3%. However, by value, the in-house asset breaches accounted for 28.3% of all breaches.

“These percentages signal that many trustees and their advisors do not have an understanding of the in-house assets or the fund is not administered as required by the SIS legislation,” he says.

The in-house assets require a superannuation fund to manage the investments of the fund so that the market value of its in-house assets does not exceed 5% of the fund’s total assets at market value.

“The trustees of the superannuation fund must ensure they do not acquire, by purchase or transfer, an in-house asset unless the fund will continue to meet the 5% limit after the acquisition.

“At the end of a financial year the trustees are also required to measure the percentage of the fund’s in-house assets and if the 5% market value test has been exceeded at that time the trustees must put in place a plan by the end of the next financial year and dispose, by sale or transfer, of assets to ensure the fund corrects the position and the in-house asset percentage is no more than 5% of the fund’s assets by market value.

Colley says there are a number of publications and rulings from the ATO to assist in understanding the operation of the in-house asset rules.

“These include superannuation and income tax rulings on borrowings, trust income, business property and the general meaning of ‘in-house’ asset.

“In the end learning about the in-house asset rules is obtained from practical experience and a comprehensive understanding of how the in-house rules work.  Any one advising in this area also needs to understand how the in-house asset rules interact with other operating standards of the SIS legislation so that they can be considered an expert in this tricky area. For trustees, it highlights the need to get specialist advice.”

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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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Andrea Slattery

The SMSF Professionals’ Association of Australia (SPAA) welcomes the decision by ASIC to clarify the working of the wholesale investor test and how it relates to SMSF professionals and trustees.

SPAA CEO and Managing Director, Andrea Slattery, says the organisation has been advocating “long and hard” about the need to give SMSF professionals and trustees more certainty around the wholesale investor test and this ASIC statement largely achieves this end.

“The previous ASIC position, expressed in QFS 150, had created uncertainty as to when the wholesale client test applied to an SMSF trustee receiving advice on a financial product – a point ASIC acknowledged in its statement when it said ‘this had been an area of ongoing legal uncertainty’.

“SPAA strongly believed that the requirement that an SMSF had to hold $10 million of net assets was an incorrect interpretation when the advice was relevant to an investment being made by an SMSF trustee.”

ASIC’s clarification, issued on 8 August, allows SMSF trustees to be treated as wholesale clients where they have net assets of at least $2.5 million, or income of $250,000 a year for the past two financial years, or where the relevant investment is worth a minimum $500,000.

Slattery says SPAA believes that these tests are more appropriate for SMSF trustees seeking to be treated as wholesale clients.

Although SPAA fully endorses the ASIC clarification, the organisation believes there is still uncertainty about how the $2.5 million asset test applies to SMSF trustees.

“ASIC’s statement says that the threshold applies ‘if the trustee has net assets of at least $2.5 million’. We need clarification from ASIC whether this means only assets in the SMSF, the member’s balance in the SMSF, and also includes the trustees’ personal assets outside superannuation.

“The interpretation of this issue is fundamental to how the wholesale investor test functions, not only to trustees but to the accountants that issue certificates stating that an investor meets the wholesale investor test thresholds,” Slattery says.

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