Grant Abbott explains what constitutes the cornerstone of being a specialist SMSF adviser. In 2000, I had an impulse I could teach financial planners and accountants to read, understand and apply the superannuation and taxation laws. In a fit of energy, I built Australia’s first-ever SMSF specialist course consisting of five four-day modules where I took participants through the laws line by line and then applied them to a set of client facts. For me it was a great eye-opener. First and foremost, to be able to teach the law you have to know it very well, so my knowledge and teaching skills skyrocketed. Secondly, to see how many of my students went on to great things in the SMSF industry fills me with pride.
In 1994, with the introduction of the Financial Services Reform Act, which introduced consumer protection laws for financial products, SMSF education became very important. Why? Well suddenly, to many professionals’ surprise, SMSFs were now deemed a financial product and that meant to be able to recommend an SMSF and advise on contributions, pensions, death benefits and investment strategies you needed to be licensed or an authorised representative of a licensee, as well as meet the relevant competency standards for providing advice on SMSFs.
I was one of several experts who helped draft the relevant competency standards for providing advice on SMSFs. These apply to any person who advises on SMSFs, and with the accountants’ exemption now gone, this includes accountants. Without going into the full 70 pages of competency standards and assessments, the key theme is that a person is to be assessed as competent to provide advice on SMSFs if they can read, understand and apply the relevant superannuation laws. Of course, there was more, but this was the key theme.
Now this isn’t a simple test. It is a day in, day out requirement allowing you to show yourself as a specialist SMSF adviser. And that is important because in any legal action any advice will be assessed against the competency standards. Of course, any action will be taken against the Australian financial services licensee in tandem with the adviser.
Now I can determine an SMSF specialist or at least an adviser that meets the relevant competency standards pretty quickly. Over the past 15 years and at the commencement of each of my SMSF specialist adviser courses, I have had so many advisers and accountants tell me they really know their stuff and are only here for the certificate. But within two hours, not even by the first morning tea break, they are ashen white thinking of all the clients they have advised and the fact their legal knowledge probably only warranted a four out of 10 rating.
The measure of an SMSF specialist
To see if you are a specialist I would start at the very beginning with the absolute cornerstone of the superannuation laws. I call it a cornerstone because it brings into play a link between the Superannuation Industry (Supervision) (SIS) Act 1993 and the Income Tax Assessment Act (ITAA) 1997. So what is the cornerstone?
For me section 19 of the SIS Act is the absolute cornerstone of SMSF law. Why? Well the section provides that only regulated superannuation funds can access the taxation concessions contained in part 3-30 of the ITAA. So no regulated fund means no tax concessions and you can’t make a bigger mistake than that financially anyway.
SMSF specialist pop quiz
I have often thought of how a superannuation fund such as an SMSF, which was not a regulated superannuation fund, would be taxed. As a specialist on SMSF taxation, what do you think?The commissioner of taxation states that “where the trust accumulates net trust income (does not distribute it), the trustee is assessed on that accumulated income at the highest individual tax rate”. So, not a good outcome for an SMSF trustee of an unregulated super fund.
Let’s consider the legalities, issues, traps and pitfalls of section 19 of the SIS Act:
19 Regulated superannuation fund
1. A regulated superannuation fund is a superannuation fund in respect of which subsections (2) to (4) have been complied with.
Fund must have a trustee
2. The superannuation fund must have a trustee.
Trustee must be a constitutional corporation or fund must be a pension fund
3. Either of the following must apply:
a. the trustee of the fund must be a constitutional corporation pursuant to a requirement contained in the governing rules,
b. the governing rules must provide that the sole or primary purpose of the fund is the provision of old-age pensions.
Election by trustee
4. The trustee or trustees must have given to the Australian Prudential Regulation Authority (APRA), or such other body or person as is specified in the regulations, a written notice that is:
a. in the approved form, and
b. signed by the trustee or each trustee, electing that this act is to apply in relation to the fund.
Let’s break it down, SMSF specialist style.
What is a superannuation fund?
The definition of superannuation fund can be found in section 10(1) of the SIS Act, the key definitional section of the act, and is:
a. a fund that:
i. is an indefinitely continuing fund, and
ii. is a provident, benefit, superannuation or retirement fund, or
b. a public sector superannuation scheme.
For an SMSF, we need to show it is an indefinitely continuing fund and that it meets the criteria of a provident, benefit, superannuation or retirement fund. This can be assessed from a review of the fund’s trust deed. Generally, you would expect most legal drafters to have the superannuation fund criteria front and centre of the deed, even in the fund’s recitals.
Is there a trustee?
The next criterion, is that the fund must have a trustee. This is pretty obvious when starting up a fund and requires that the corporate trustee precede the establishment of the fund. However, it can be problematic on the death of a trustee, particularly individual trustees.A few years ago I came across a case where an accountant had advised on the distribution of death benefits from a fund where a member had died. On the face of it no problem, but any good SMSF specialist or lawyer knows that evidence is the key. What does the documentation say, not the accountant.
So the first port of call was to find the facts of the case. And what I found was the following:
i. the fund had two members, both of whom were trustees,
ii. the deceased member was retired, had an asset balance of $1 million and was the real driver of the fund,
iii. his wife, who had a much smaller balance, was also a trustee but had been in an aged-care facility for the past two years with Alzheimer’s disease, and
iv. there were no death benefit nominations.
On the death of the member, the executors of the deceased’s estate, which included the accountant and one of the deceased’s daughters, paid out the death benefits to one daughter on the premise that the other had been looked after by her parents well and truly over the years. The lawyer of the daughter that had been left out of the super fund distribution was instigating legal action seeking to obtain a just distribution for his client.
Where to start?
I looked at the fund’s trust deed and, in particular, the appointment of trustees. In some way or fashion the executors of the estate, which included the accountant, had become trustees – illegally I might add.The deed was an old one and the appointment of trustee power was limited to a majority vote by members of the fund. Well it doesn’t take Einstein to know that of the two members one was dead and the other incapacitated. In truth, no trustee could be appointed to the fund. The best legal avenue would have been to have the Supreme Court make a determination on this issue.
In the meantime, the fund and distribution of the death benefits of the deceased member have been frozen. But the executors purportedly appointed themselves as trustee and made a death benefit distribution illegally.
So the downside?
I had to inform the accountant of the strict liability section 55(1) and section 55(3) of the SIS Act where a person who has suffered loss or damages could recover those losses against any person who had breached the governing rules of the fund, which included the fund’s trust deed.I won’t go any further, but the accountant and the other executors were right in the cross hairs if the opposing lawyer was smart enough to get a good SMSF specialist or lawyer to advise them on the facts of the case. In addition, section 202 of the SIS Act would enable a criminal action against the accountant and daughter as well as the other executors.
Company or individual trustees
One of the first things I taught my students in my SMSF courses was the importance of a corporate trustee for an SMSF. To me there are a number of administrative and legal protection reasons for the use of a corporate trustee. But for me, section 19 of the SIS Act really puts a big strike through individual trustees. Why?Section 19(3) provides the following must apply for individual trustees: “The governing rules must provide that the sole or primary purpose of the fund is the provision of old age pensions.”
Now, before the SIS Act, the Occupational Superannuation Standards Act 1987 (OSSA) provided rules and regulations regarding superannuation.
However, the OSSA was always considered weak constitutionally as there was no specific provision in the constitution for superannuation. This meant any action under the act by the regulators was potentially invalid constitutionally. As such when the the SIS bill 1993 was being drafted, the legislators introduced section 19(3) to ensure a tie-in to the constitution and the specific powers of companies and old-age pensions. This ensured the regulators had power to administer superannuation funds provided they had a corporate trustee or the fund was set up to pay old-age pensions.
At the time of the SIS bill, I attended a number of explanatory sessions with the drafters of the legislation. Their view of section 19(3) for superannuation funds with individual trustees was that the fund had to be set up for the purpose of retirement pensions and any lump sum to a member had to be by way of a commutation of a member’s pension. Certainly a lot of the first SIS Act deeds only allowed pension benefits where the fund had individual trustees.
Section 19(3) creates a big problem potentially where a member with more than $1.6 million in superannuation benefits runs a retirement lump sum account, as well as a pension account in a fund with individual trustees. The section may well prevent the payment of lump sums from a specific lump sum account and not a pension account. For SMSFs with corporate trustees the retirement lump sum account is not an issue.
At the end of the day
I have only touched on one very small section of the legislation, albeit a cornerstone. But if you are advising on SMSFs, it is all part of proving your ongoing competency. As an aside and for the curious, have a look at section 42A and also section 218 of the SIS Act. Consider how those two provisions, along with section 55(3), apply to any SMSF client where an auditor has sent a qualification to the ATO in the past 10 years. Nasty and financially frightening.