Featuring experts from SMSF Association, Stewart Partners, Moin Morris Schaefer and Practical Systems Super, the New England SMSF Information Day is an event for SMSF Accountants, Advisers and Trustees and will focus on developing your technical knowledge, practical skills and know-how in managing an SMSF.
The ATO has released updated guidelines for trustees around how to make changes to their SMSFs within a compliant framework.
The new guidelines contain details around what to do if members or member details change within an SMSF, when an SMSF needs to be restructured or wound up, and how trustees or directors can be removed or reinstated.
The ATO stated that it needed to be notified by trustees within 28 days if there was a change in trustees, corporate trustee directors, members, fund status or the contact number and address of the key person to which fund notices could be sent. It reminded trustees that they could not use their annual SMSF return as notification.
Trustees could notify the ATO of these changes online using the corporate key for their SMSF, through a registered agent, over the phone or manually using a change of details form.
The ATO also reminded trustees that they needed to ensure their fund remained within the legal definition of an SMSF, and if the fund no longer met this definition, it would either need to be restructured or wound up within six months.
Inaction on the part of trustees could result in the ATO issuing a notice of non-compliance or disqualifying the relevant trustee.
If a trustee became a disqualified person, the ATO stated, they must immediately resign as a trustee and inform ASIC if they were a director of a corporate trustee, or face penalties.
The other trustees in the fund had six months from the disqualified trustee’s resignation to either roll the trustee’s benefits into an APRA-regulated fund, appoint an APRA-licensed trustee or wind up the fund entirely.
Trustees who had been disqualified due to a dishonesty offence could apply to have their conviction waived, while those disqualified by order of the ATO could apply for a review of the office’s decision.
Trustees disqualified due to being insolvent could not have their conviction waived but could be reinstated once they were no longer insolvent, the ATO said.
Source: SMSF Adviser
The ATO has sent letters of concern to approximately 17,700 SMSFs that hold 90 per cent or more total investments in a single asset or asset class. The SMSFs’ auditors have also been contacted by the ATO, emphasising the need to consider the fund’s compliance with regulation 4.09.
What are the next steps for these trustees?
The ATO’s recent action regarding SMSF investment strategies has sparked discussion and controversy within the SMSF community. Important questions are being asked:
The answers are within regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994. Let’s start with the law and dispel some uncertainty.
Regulation 4.09(2) states:
The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
(a) the risk involved in making, holding and realising, and the likely return from, the entity’s investments, having regard to its objectives and expected cash flow requirements;
(b) the composition of the entity’s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;
(c) the liquidity of the entity’s investments, having regard to its expected cash flow requirements;
(d) the ability of the entity to discharge its existing and prospective liabilities;
(e) whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.
These are the minimum requirements for an investment strategy. In simple terms, this means that the strategy must be prepared and revisited often to ensure that it:
In substance, the requirements are not complicated. They are grounded in common sense.
However, the regulation’s language is difficult to translate in everyday pen to paper. Many trustees give up trying to prepare their own investment strategy. They rely instead on their accountant’s software to generate a compliant document. This is unfortunate, as trustees frequently don’t bother reading an investment strategy they have not written. And the “compliant document” (while saying all the right things in the right places) often has little relevance to a particular SMSF and no value as an investment planning tool.
The ATO is aware of this and is alarmed that a large amount of retirement savings may be afloat in rudderless ships.
So, let’s revisit these questions:
Is the ATO able to instruct SMSF trustees as to the adequacy of their investment mix?
Absolutely not. An SMSF by definition is “self-managed”. Provided the investment rules are complied with, an SMSF trustee can invest their retirement savings as they choose. The ATO is not going to tell a trustee that they cannot invest 90 per cent of investment value in cryptocurrencies, gold bullion or real estate.
However, the ATO will assess (via SMSF auditors) whether the trustees have properly documented their investment decisions in the investment strategy. This applies to all SMSFs, but those with a high concentration of value in certain assets are now on the radar.
Is it appropriate to hold 90 per cent of an SMSF’s value within a single asset class?
This may be appropriate, yes. Regulation 4.09 requires that the investment strategy consider diversification. There is no requirement to be diversified.
It is not for the ATO (or the SMSF auditor) to comment upon the suitability of SMSF investments. But if your SMSF’s value is concentrated in a particular asset class, the auditor will be looking to see the rationale for this investment decision in your fund’s investment strategy. If a financial adviser has been consulted, the statement of advice should also be provided to the auditor.
Does a financial adviser need to prepare an SMSF’s investment strategy?
No. Regulation 4.09 does not require the involvement of any professional in preparing the investment strategy. In fact, it is the trustee who must formulate, review and give effect to the strategy. Your auditor will check that the investment strategy is executed by the trustees. The trustee may obtain whatever guidance they choose — but they must be involved in strategy preparation on a personal level.
What does it mean to “consider the risks of inadequate diversification”?
In explanation of their recent concerns, the ATO stated:
We’re concerned some trustees haven’t given due consideration to diversifying their fund’s investments… Lack of diversification, or concentration risk, can expose the SMSF and its members to unnecessary risk if a significant investment fails.
In its letter sent out to SMSFs with highly concentrated assets, the ATO reminds trustees to provide evidence in their investment strategies of having considered the risks of inadequate diversification.
SMSF auditors are tasked to evaluate this evidence.
Evidence is tangible proof.
It is not just a statement confirming “we have considered the risks of inadequate diversification”. Most strategies already include this phrase, and it does not demonstrate any real consideration.
To show that they have considered these risks, the trustees need to record consideration of risk specific to their own SMSF and the member’s personal circumstances. Evidence will appear as an answer to the questions:
What could a lack of diversification mean for THIS fund, invested in THIS particular asset?
Notwithstanding, why is the investment appropriate in THESE circumstances?
Discussions with a financial adviser may be of great assistance in exploring and documenting these risks. From an auditor’s viewpoint, some of the best investment strategies are handwritten documents that set out the members’ goals for their SMSF and how specific investments suit those needs. The investment plan is usually reviewed annually. It is a down-to-earth, practical tool that works the way the legislation intended.
That being said, many homegrown investment strategies require fine-tuning to ensure the right words are used and can be “ticked” against the regulation. Trustees do not usually get it right the first time. It’s time-consuming and most trustees look for help. Many rely on their accountant’s specialised software to generate an investment strategy. However, any such template requires customisation for fund-specific circumstances — particularly if the SMSF has a highly concentrated investment mix.
The auditor will assess an SMSF’s investment strategy for this detail. At Peak Super Audits, we recommend that trustees explain their investment rationale and consideration of risk to their accountant or financial adviser, who can then assist by incorporating this within an acceptable investment strategy format. Accountants must be watchful of providing advice and take care that this line is not crossed.
The ATO’s investment strategy offensive must not be taken out of context. No SMSF trustee will be fined for a lack of diversification. However, the days of a cookie-cutter approach to investment strategies for these types of SMSFs are over. Trustees must become personally involved in preparing this document.
After all, they are operating a self-managed superannuation fund.
Written by Naomi Kewley
Source: SMSF Adviser
Recent market volatility and the aftermath of the royal commission has prompted many Australians to look a little closer at their superannuation fund and their options.
With more than 1.1 million Australians taking control of their superannuation by having their own self-managed super fund (SMSF), we explore the tips and traps to be aware of when considering this option.
Self-managed super funds are more cost-effective the more you have in them and while the Tax Office reports that the average size of an SMSF is about $600,000, many consider one when their balance is much less. Nearly half of all new DIY funds come from members aged between 25 and 44. Regardless of age, establishing an SMSF should be considered based on your stage of life and ability to contribute to the fund. For example, if you are a young couple with $300,000 in super and earning a good income where you are contributing $50,000 per year, you might consider an SMSF sooner, knowing that your balance is going to continually increase substantially each year. This is very different to someone who has reached retirement with the same amount of money and will draw down on their super over the next five to 10 years, reducing their balance substantially in a short period of time. When it comes to cost, ensure you have someone objective to look at your own personal situation and be wary of companies advertising to set up an SMSF for little or no fees.
Having your own super fund does give you a broad range of investments to consider but a common trap is to concentrate on only one major investment. While it might make financial sense for a business owner to consider their business premises as an option to hold in their super fund, having a sole investment, such as a residential property, can be dangerous, particularly when it comes to the liquidity of the fund. Diversification is key in any portfolio and your own super fund shouldn’t be treated any differently. Regardless of which super fund option you choose, it is prudent to ensure your investments are professionally managed and investment choices are run passed your adviser to ensure your fund stays compliant but is also diversified to mitigate risk.
As a controller of your super fund, you are responsible for running it, so it is important you understand your responsibilities and obligations. Some of these responsibilities are to ensure your SMSF lodges a tax return, reports member contributions and other regulatory information along with ensuring the financial statements are audited each year. While there are more duties with an SMSF, many trustees will partner with an accountant and financial adviser to help ensure the fund meets its obligations. Keep in mind that not all professional advisers are licensed to advise on SMSFs, so find one who has the expertise to run you through all your options when deciding on the best superannuation solution for you.
SMSFs are not appropriate for everyone but in the right circumstances can offer the many benefits that one million Australians are enjoying today.
Written by Olivia Maragna. Please note that Olivia’s advice is general in nature and readers should seek their own professional advice before making any financial decisions.
Source: Sydney Morning Herald.
A new ASIC report has highlighted demand for further advice on the specifics of SMSFs among the Australian population, particularly among those who have a financial planner.
The report, titled Financial advice: What consumers really think, found that 25 per cent of consumers who had recently received financial advice wanted more guidance around SMSFs.
Around 50 per cent of financial advice customers also wanted advice on retirement income planning, while around 45 per cent wanted guidance on growing their superannuation, highlighting the potential value for accountants in establishing a referral partnership with advice businesses to tap into this demand.
Within this group of consumers who had seen a financial adviser, 45 per cent chose their adviser based on their level of experience, while about 43 per cent chose them based on their ability to understand the consumer’s personal goals.
An additional 43 per cent selected their adviser as they were someone the consumer was comfortable talking to.
However, demand for SMSF advice was not limited to those who had seen a financial planner, with 15 per cent of the broader consumer population also indicating a desire for guidance around self-managed funds.
This broader group selected their adviser based primarily on their reputation (38 per cent), their experience (41 per cent) and their ability to talk to the consumer in a way they could understand (36 per cent).
Across all respondent groups, the majority indicated that the adviser would need at least five to 10 years in the industry to be trustworthy, the report said.
Source: SMSF Adviser
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