The imminent death of self-managed superannuation funds (SMSFs) has been enthusiastically predicted many times since the concept came to prominence in the mid-1970s. However, by a combination of reforming legislation and enlightened self-interest, the sector has managed to overcome many challenges, transforming SMSFs from shameful tax scams into safe storehouses for the retirement savings of many Australians.
Sundry challenges remain today. These include proposed changes in legislation by both major political parties, such as further limits to contributions and benefits which may cause the economic viability of SMSFs to be questioned.
Another challenge is the longer-term effect of recent laws allowing borrowing by trustees, usually for the purpose of gearing into real estate. This misguided legislation reintroduced significant risks into the sector, the absence of which was a fundamental principle on which SMSFs have been supported by governments for decades.
This support has been especially evident in a softer approach to the regulation of SMSFs, as opposed to the more stringent approach taken to the regulation of public offer funds. There have been many calls for this legislation to be repealed, most notably by the Murray Commission of Inquiry into the Financial System. The government recently chose to reject the Inquiry’s recommendation, preferring to “review progress” in three years.
Super no longer ‘bulletproof’
And then there is the overarching issue of whether SMSFs remain consistent with the original principle of superannuation as a tax-effective, taxpayer-subsidised system to build retirement savings for ordinary Australians, who would otherwise claim the age-pension (which we are told governments are increasingly unable to afford). It seems that some Australians and their professional advisers still view superannuation as a bulletproof method of wealth accumulation and estate planning.
Stories abound of SMSFs containing many millions of dollars in tax-protected assets, the members of which clearly have no intention of accessing, unless forced to do so by law. Their clearly stated intention is to pass on those assets to their children. That’s a fine intention from generous parents, but it is not an intention that should receive handsome subsidies from the people of Australia.
So, perhaps, the SMSF sector is facing the prospect of lower growth in numbers as a result of the not-so-slow paring back of superannuation tax concessions by governments which are understandably focused on limiting those breaks to the people who need them. It makes no sense to give generous concessions to wealthy people to help them build a large ‘nest egg’, knowing that those people are never likely to access social security benefits.
Having said all of this, we must never underestimate the strong desire by many Australians to exercise direct control over the accumulation of their retirement savings. Understanding this is the key to understanding why the SMSF sector is so large and continues to grow.
This point leads into the ultimate challenge to the sector’s viability. It is a challenge that receives scant acknowledgement and discussion. There are well over 500,000 SMSFs in Australia. This represents over 99 per cent of all superannuation entities. The number is growing. Each of these funds must have trustees or trustee directors, all of whom are required, as a general rule, to be a member of his/her fund. That sounds sensible. It’s often said that no one will look after your money more carefully than you do.
Growing reports of ‘elder abuse’
But what happens if you become incapable of looking after that money – and doing all the administration – in a complex structure like an SMSF? Inevitably, many of us reach a point in our lives where money management is beyond us.
At that point, we become vulnerable.
There have been reports of a growing number of “elder abuse” cases. I have observed some of these myself when in practice as a chartered accountant. Often, they involved money in SMSFs and the desire of unscrupulous relatives and others to get hold of it.
It would be too easy to dismiss these concerns with unrealistic claims about the oversight role of regulators, auditors, lawyers, administrators and even of other trustees in the relevant SMSF. As for the latter, my experience indicates that in most cases there is only one trustee/trustee director who has much interest, willingness or ability to engage in the financial affairs of the fund.
The least we should do as a profession and as a community is to recognise the issue, assess its potential for causing harm at many levels and to suggest practical public policy prescriptions to resolve it. I do not claim to have the answer, although I can think of several options, all of which will involve decisions that are likely to be politically difficult. But it is a discussion that must happen with some urgency, not only for the sake of the sector’s integrity, but more importantly, for the sake of all Australians who are depending on their SMSFs to see them through.
