In mid-2009, the Federal Government announced a comprehensive review of Australia’s superannuation system to be headed by Jeremy Cooper. The review was broken into several stages. The stage involving the review into self-managed superannuation funds (SMSFs) has just been released. This article examines some of the more significant recommendations it makes.
SMSFs may borrow for at least the next two years
Since 2007, SMSF trustees have been allowed to borrow, assuming they meet strict requirements. This is often referred to as an “instalment warrant”-type borrowing. However, there was always a question mark over these borrowing arrangements. Many questioned whether the law would actually allow SMSF trustees to borrow to buy real estate. In April 2008, the Australian Taxation Office (ATO) confirmed that it did. However, people still wondered whether these laws would be repealed. The review considered this aspect.
Although the review does seem to consider the borrowing laws to be a concern, it does not recommend that they be abolished. Instead, it recommends a more cautious approach. It suggests that the laws allowing borrowing be reviewed in two years’ time to ensure that borrowing has not become, and does not look like it is becoming, a significant focus of superannuation funds.
Accordingly, SMSF borrowing is here to stay – for the time being at least!
Superannuation Complaints Tribunal
More and more money is being held in superannuation. Furthermore, now that superannuation monies do not have to be paid out upon retirement, more wealth is in superannuation upon death, rather than being held in individuals’ names upon death.
Of course, Wills typically don’t govern how superannuation fund assets are dealt with upon death; the rules governing a superannuation fund do. Therefore, rather than challenging Wills, more and more disappointed potential recipients are now looking to challenge a superannuation fund trustee’s decision as to how death benefits are paid out.
In the early 1990s, the Government established the Superannuation Complaints Tribunal (SCT) to hear such disputes as a quicker, easier and cheaper alternative to a court proceeding. However, the SCT does not have the jurisdiction to hear disputes involving SMSFs – only those involving non-SMSF superannuation funds.
The review proposes a change to this. It recommends that the jurisdiction of the SCT be extended to resolve death benefit disputes between an SMSF trustee and a beneficiary who is not a member.
If implemented, this will be a significant change. For disappointed potential recipients, it will be a godsend, since it will be much easier to bring an action. However, given this increased ease in bringing actions, it could see an even bigger rise in SMSF death benefit disputes.
No more in-house assets
Broadly, an in-house asset is an investment in a related party. Often these related parties run businesses that might employ fund members. Therefore, if superannuation fund assets are invested too heavily in the related parties, there is a risk that if the related parties get into financial difficulties, this can mean fund members can get hit with a double whammy. Whammy number one is that the fund members could lose their jobs and thus lose their employment income today. Whammy number two is that they could see their superannuation investments fall in value and therefore lose their retirement income tomorrow.
For this, and other reasons, a fund’s ability to invest in related parties has been restricted. Under current law, no more than 5 per cent of a fund’s assets can be invested in in-house assets. Therefore, an SMSF with $1 million in assets might still be able to legally invest $50,000 in a related party.
The review has advocated an end to this “5 per cent limit”. It also recommends that fund assets must not include any in-house assets. It must be noted that those fund trustees whose portfolios include in-house assets must dispose of those assets by 2020.
There are currently many exceptions to what is an in-house asset. Notably, these exceptions include business property that is leased to related parties and unit trusts that were invested in before 1999. The review does not recommend altering these arrangements. Rather, these arrangements would be grandfathered and should be able to continue indefinitely.
No more collectables or personal use assets
Some SMSF trustees invest in “exotic” or “alternative” assets. Such assets are broadly the same as the tax law concepts of “collectables” and “personal use assets”. They include things like paintings, jewellery, antiques, stamps, wine, cars, golf club memberships, race horses and boats. The review has formed the view that these should not be regarded as investments that build retirement savings. Accordingly, it is recommended that SMSF trustees be prohibited from making such investments. For SMSF trustees that have already invested in them, it is proposed that such assets must be disposed of by 2020.
No more off -market transfers of listed securities
Those SMSF trustees that invest in listed securities might acquire such securities from – or dispose of such securities to – related parties. To save on brokerage fees, these transfers are often done by way of off-market transfers.
The review recommends that, moving forward, off-market transfers will be prohibited and instead, where there is an underlying formal market (for example, the ASX), transactions with related parties must be conducted through that market.
Professional valuations and market valuations required
The ATO has always maintained that it is best practice to use a qualified valuer where assets are being acquired from related parties and those assets do not have readily observable markets (for example, real estate). Further, although SMSFs are not currently required to report assets on their balance sheets at net market values, the ATO has nevertheless encouraged it. See the ATO’s Superannuation Circular 2003/1. The review proposes that both of these best practices become a legal requirement.
Although some of the review’s recommendations result in more regulation, the review does give a nod to the special role of SMSFs in the superannuation industry and acknowledges that SMSFs are here to stay.
Bryce Figot is a senior associate at leading SMSF law firm DBA Lawyers – www.dbalawyers.com.au