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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Andrea Slattery

The SMSF Professionals’ Association of Australia (SPAA) has told a parliamentary inquiry that the education and training requirements for the financial advisory industry need to be radically overhauled.

In 21-page written submission to the Parliamentary Joint Committee on Corporations and Financial Services, SPAA argues that the current system of a minimum standard of education and competencies for financial advisors via ASIC’s Regulatory Guide 146 (RG 146) has failed the industry.

“We believe this (approach) has not succeeded in ensuring that advisors have the competencies required to provide high-quality advice to consumers,” SPAA’s submission says.

“RG 146 is not a flawed concept by itself as it simply outlines the minimum requirements expected by ASIC as a guide to advisors, licensees and education providers. However, too often the industry (licensees and educators) have interpreted the minimum requirements to be all that is required to be competent.

“This compliance-based approach leads to financial advisors being pushed towards a minimum level in a race to the lowest acceptable level rather than increased and improved skills that is the underlying aim of a professional level.”

SPAA CEO/Managing Director Andrea Slattery says the organisation outlined to the parliamentary committee five key steps to establish a profession for financial advice. They are:

• Adequate and appropriate education and experience requirements;
• A co-regulatory approach to regulating financial advice;
• Requiring professional association membership for market participants;
• Maintaining high ethical and professional conduct standards in the financial advice profession that each individual must be personally accountable for;
• Establishing professional remuneration models.

Slattery says by adopting this approach the industry would be embracing a “cultural shift” that embraces professionalism to encourage higher competencies rather than the current compliance driven approach.

“To achieve this outcome what is required is a co-regulatory approach that is more appropriate to lift standards of financial advice through education and training.

“It would allow professional associations to drive professionalism by setting their members higher levels and stringent competency and training requirements.

“ASIC would approve professional associations that can regulate advisors under this framework, replacing the regulator’s need to dictate and be responsible for minimum education standards.”

She says continuing professional development (CPD), as required under RG 146, is a prime example of why SPAA thinks the current system requires radical change.

“The need to undertake CPD is currently driven by a compliance-based approach where advisors are required to undertake a certain amount of CPD over a set period.

“This results in advisors often undertaking training that maintains their current knowledge to just meet the absolute minimum rather than being extended and challenged through new learning and improved knowledge.”

SPAA believes that professional associations should be given the task of setting the CPD requirements for their members.  This would ensure CPD would become more orientated to improving and challenging advisors’ skills rather than being viewed as a mere compliance requirement.”

SPAA’s submission stresses the importance of improving professional, ethical and educational standards in the financial services industry.

Slattery says: “SPAA is adamant that the professionalism within the financial services industry, especially in financial advice, needs to be lifted in order to create a robust industry that can consumers can trust and engage with confidence.

“This is particularly important as Australia shifts to an older demographic where financial advice will be crucial to ensure Australians can retire with dignity and increased self-sufficiency.”

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Andrea Slattery

The Government’s decision to again delay the introduction of the promised Superannuation Guarantee (SG) increases highlights the need for superannuation to be removed from the short-term political cycle, says SMSF Professionals’ Association of Australia (SPAA) CEO/Managing Director Andrea Slattery.

The decision, announced yesterday after the Government reached agreement with the Palmer United Party in the Senate, will put the current SG levy at 9.5% on hold until to 30 June 2021, when it will increase by 0.5 percentage points until it reaches 12% in 2025.

It reverses the Government’s announcement, made in the May Budget, to freeze the SG at 9.5% until 30 June 2018, and on 1 July 2018 to resume increasing it by 0.5% increments until reaching 12% in 2022-23.

Slattery says: “What this decision highlights is the urgent need to have an informed debate about measuring the long-term budget cost of superannuation and what is considered an adequate income for retirement, especially when it’s considered that people are now living, on average, into their mid-80s.

“In its submission to the Financial System Inquiry (FSI), SPAA recommended that major superannuation policy decisions be removed from the annual budget cycle and instead be subject to a five-year review as part of the intergenerational report. In light of this decision, the acceptance of that recommendation is more imperative than ever.”

She says the Government’s decision to make this short-term fiscal decision came at the expense of the long-term retirement goals of the Australian people.

“By linking the abolition of the mining tax with the decision to freeze the SG for seven years, the Government is again demonstrating that dipping into the superannuation ‘piggy bank’ is always an option when difficult fiscal decisions have to be made.

“SPAA was critical of the Budget announcement in May to delay the SG levy until 2018, and now Australians will suffer a further blow to their rightful ambitions to be self-sufficient in retirement.

“Moving the SG rate to 12% as quickly as possible was an important measure to ensure that Australians had adequate balances in their superannuation funds on reaching retirement.

“But this decision only works to undermine the public’s confidence in the superannuation system that’s the key plank to their long-term retirement planning,” she says.

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Andrea Slattery

The SMSF sector was a well-functioning, efficient and allowing many Australians to meet their retirement income goals, the SMSF Professionals’ Association of Australia (SPAA) said its final submission to the Financial System Inquiry (FSI).

SPAA CEO/Managing Director Andrea Slattery said the FSI’s draft report was “positive” about the SMSF sector, and where it did raise several queries SPAA was confident that its submission would allay any concerns.

“This was the final outcome with the Cooper Review in 2010 when it found the SMSF sector was a well-functioning part of the superannuation industry, and we believe the FSI will reach the same conclusion in its final report.

“SMSFs are essential to provide consumer choice and competition within superannuation and have been critical in increasing Australians’ engagement with their retirement savings.”

She said SPAA was hopeful the FSI’s final recommendations would give trustees, and the professionals who advise them, some fresh insights into how to achieve improved outcomes in the future.

She added that the fundamentals underpinning the SMSF sector were sound, and as such SPAA had strongly recommended to the FSI that there was no need for any restrictions on establishing an SMSF – either a minimum balance or trustee education requirements.

“SMSF establishment should be an informed and educated choice by an individual based on their personal circumstances and there should no barriers to them making this decision.  SPAA also recognises the need for appropriate and high quality financial advice to assist people make this important decision.”

Slattery says SPAA’s submission gave the FSI “hard evidence” that showed it did not need to be concerned about SMSF operating expenses.

“We showed that SMSF costs are generally low, driven by a range of SMSF administration service offerings that suit different trustee’s needs.

“The cost of operating an SMSF is only one factor in a person deciding to establish an SMSF with control, flexibility and planning for retirement other key motivators in establishing a fund,” she said.

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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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Andrea Slattery

The SMSF Professionals’ Association of Australia (SPAA) has developed a new online technical mentoring program for its specialist members, says Managing Director/CEO Andrea Slattery.

The new educational program, available to members holding a SPAA SMSF Specialist SSA and/or SSAud accreditation, will assist in enhancing and raising the standard of professional advice and skills and will give members the opportunity to ask SPAA technical staff for assistance on a range of complex technical issues.

Slattery says this is a unique opportunity for specialist members to complement their professional SMSF technical skills through a new fact-based guidance mentoring program that is designed to assist members understand and apply those enhanced skills to more complex and difficult situations through greater involvement from SPAA.

“Our specialist members are recognised as the leading professionals in the SMSF sector, and this is another avenue for them to strengthen their knowledge and reinforce their pre-eminent position in the market.

“SPAA has always placed enormous emphasis on the ongoing education of its members, and this online technical mentoring program is more evidence of our continued encouragement towards excellence. The pilot program will be available to 100 specialist members in early October and the full program will be available to all SPAA Specialist members at a later date.”

She says the specialist program is a service over and above the current membership and will incur an additional fee.

“It forms part of the collaboration between our SPAA Specialist members and the SPAA Centre of Excellence.

“Our specialist members have been requesting such a program and we expect that the participants will hail from small practices right through to the technical gurus.  SPAA’s thought leadership programs continue to remain abreast of the topical technical issues affecting its members and the SMSF profession,” says Slattery.

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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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Andrea Slattery

The SMSF Professionals’ Association of Australia (SPAA) has developed best practice guidelines for SMSF limited recourse borrowing arrangements (LRBAs) – with the National Australia Bank (NAB) agreeing to adhere to the two separate guidelines on lending and advice.

SPAA CEO Andrea Slattery says: “NAB is the first lender to sign up for both guidelines, and SPAA is continuing to work with the other lenders in this space. We are hopeful they will follow suit soon and adopt them.”

Slattery says SPAA has been “very conscious” of the concerns expressed about LRBAs by the Financial Services Inquiry (FSI) and the fact a “tiny rogue minority” has been spruiking this borrowing facility, and as such believes there is an urgent need to establish a set of guidelines that will ensure a responsible approach taken to all LRBAs.

“SPAA has always stood for best practice guidelines for the SMSF industry whether it be education, financial advice or auditing. The decision to adopt a similar approach to LBRAs is further evidence of SPAA’s commitment to building integrity for the industry and best practice behaviour for consumers.

“We believe that by publishing these guidelines, and with NAB signing on and other major lenders in the pipeline (the major banks are estimated to have more than 85% of this market), the Government and regulators can have a high degree of confidence that LRBAs are being used appropriately and that the industry has best practice guidelines for lending and advice in place.

“SPAA hopes that other lenders and providers of financial advice will take the opportunity to use the guidelines and make a public commitment with SPAA to adhere to them in their business practices.”

Slattery says two sets of guidelines have been developed for the industry – LRBA lenders’ best practice guidelines and LRBA advice best practice guidelines.

“The lenders’ guidelines are intended to establish banking industry standards that can complement individual LRBA Credit Policy and Practices regarding LRBA lending to SMSFs.

“The advice guidelines are proposed to create a best practice standard of advice that should be provided to SMSF trustees considering the use of LRBAs if they elect to seek personal advice.

“SPAA is confident that adherence to the guidelines by the banking and financial advice industry will ensure that LRBAs are being used appropriately by SMSF trustees, and is intended to encourage self-regulation in the SMSF lending sector whether by lenders or advisers,” she says.

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Jordan George

 The Financial System Inquiry and Government Pension Review have the potential to open up the availability of “relevant and appropriate” retirement income products, Jordan George, Senior Manager, Technical & Policy, of the SMSF Professionals’ Association of Australia (SPAA), told the organisation’s Technical Conference in Sydney yesterday.

The FSI, in its interim report, said the retirement phase of superannuation was underdeveloped and did not meet the risk management needs of many retirees.

“This is an assessment of the current state of retirement income products that SPAA agrees with and we will be working with both inquiries to achieve a better policy outcome for retirees.

“It is important that the FSI’s first consideration is the overall framework of our retirement system rather than just a focus on products. In this respect SPAA contends the SMSF sector is demonstrating just how well the Australian retirement system is working and meeting Government objectives by successfully providing income streams to retirees and is leading the industry in doing so .

“When it’s considered that about 35% of SMSF trustees are in the pension phase, and 64% of retirement phase assets are held by SMSFs, then it is obvious why this is an issue of paramount importance to SPAA.”

Jordan said the FSI was examining the option of providing policy incentives to encourage retirees to buy retirement income products that help manage longevity and other risks.

“Other policies they have flagged include the Introduction of a default option for how individuals take their retirement benefits; mandate the use of particular retirement income products; the role of Government long-term and inflation-linked bonds; and removing legislative impediments to development of annuity products.

“What the FSI is saying is that an important consideration is to have a more flexible, principles-based approach to determining the eligibility of retirement income products for tax concessions and social security concessions, as well as examining the capacity of the private sector capacity to provide the right solutions.

“When coupled with the Government Review of Retirement Income Products, which will look at the regulatory barriers restricting the availability of relevant and appropriate retirement income stream products and the minimum payment requirement for account-based pensions, it is clearly an issue that the Government understands has to be addressed.

“SPAA will prepare detailed submissions for both inquiries. But the organisation’s starting point will be the principle that whatever policy decisions are reached they must be based on people on not being compelled to adopt a defined strategy,” he said.

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