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2019 SMSF roundtable: Back to the future

smsf roundtable 2019

In a year which has already seen a review of superannuation and a federal election, selfmanagedsupers annual SMSF Roundtable discussed the impact of key events in advice, policy developments, trustee education and the ongoing calls for a further review into the SMSF sector.

Back to the future

In the wake of the recent federal election, the selfmanagedsuper 2019 SMSF Roundtable considered what issues were likely to be back on the table, and which issues may never return. Unsurprisingly, franking credits are likely to remain an issue, while expanding fund membership and audit cycles still appear to be issues for a later date.

Franking credits

DTC: Franking credits played a large role in the recent federal election campaign. Has the result killed the policy?

Peter Hogan (PH): We’ve seen the end of it for three years. I believe there will be some work done on that policy and I would not be surprised if they put it forward again as an election measure next time round, whether it’s the same policy better sold in their words, using their terminology, or whether it’s one that’s modified to be more appropriate to target where the mischief is, and better illustrated I think as well.

Graeme Colley (GC): There was a perception, not only with superannuation funds but in the broad community of voters, where many people thought they were impacted by it, even when they didn’t hold shares. Maybe they were impacted through their superannuation funds, but they really didn’t understand it, and it could’ve been sold better. It may have gone away, but because it’s been raised it may continue to crop up every now and again, even though no action will be taken, and if there is a change of government at the next election, we may see the policies put forward in a different form and sold in a different way people might accept.

DTC: Is it surprising some trustees saw the concept as palatable but objected to the proposed implementation?

Chris Balalovski (CB): The feedback I was getting from SMSF owners is that it was just blatantly unfair and so that statement would surprise me. I will say though that I’ve had a number of SMSF owners who thought that the system was too good to be true and were waiting for the crunch to happen. Some were even embarrassed by the fact that they were getting such significant refunds. That’s not to say that there was overwhelming support for the change in any form. The vast majority of an engaged and astute cohort decried it as unfair, particularly because of its application to SMSFs and not other forms of superannuation savings.

Yvonne Chu (YC): I’m not surprised at the comment because depending on the clients or the adviser that we spoke to, those who didn’t have an SMSF and who aren’t retirees, many actually thought it was a good policy, which was quite surprising to many financial advisers. For clients who have an SMSF, they almost had that same mentality; they do feel a little bit sheepish and a little bit guilty sometimes about it, but on the other hand they’re not willing to give it up. One observation that has come out of this whole kerfuffle was that clients had to reconsider if they were investing in the right portfolio or should they be in an SMSF.

DTC: Would the inclusion of grandfathering or applying a cap have helped?

PH: It comes down to whose marginal tax rate is relevant here, and if you take the view that it’s the recipient of the dividend, that it’s their marginal tax rate that should apply not into the dividend but the franking credit that’s received, well then any variation on that is not good policy, and that’s clearly where the imputation system sits at the moment. You might argue probably that perhaps the tax rates of the individuals might need to change to reflect perhaps a better use of that, but I think that’s even less likely than some of the other options that are out there. So if you do take that view, it’s not the corporate rate which is a rate that must apply, but it’s the recipient of the dividends whose marginal rate ultimately must apply in order to make sure there’s appropriate tax equity through the various levels of income that are received.

Then even to argue that there should be a cap on the level of refunds you can get and so on is really just a short-term measure to acknowledge that previous policies allowed very large funds to be created, and we’re still waiting for those very large funds to work their way out of the system and they become irrelevant. When those large funds which are no longer really able to be created because the money put into superannuation is just not significant enough to create those multi-million-dollar funds, at least not overnight, as soon as you take those out of the system, then even a cap doesn’t tend to make a lot of sense because the vast majority of the taxpayers would be under even something as low as a $7000 refund cap. Most individual investors and the SMSF trustees would be below that cap.

Three-year audit cycle

DTC: Do we think the three-year audit cycle is a thing of the past?
CB: We certainly are probably hearing even less about the three-year audit cycle proposal than we are about the four to six member policy. It also doesn’t seem to be high on anyone’s agenda. There seem to have been enough voices on either side of the camp, trustees and auditors, to have deterred anyone from really revisiting this and therefore leaving it alone. We just haven’t had any further engagement from anyone in the sector on the issue. I think most are expecting that it’s finished.
PH: I think the industry gave such a negative response to what was a well-meant proposal that was seen perhaps as potentially a positive. The negative response I think is more around the practicalities of administering and running such a system as much as anything else, and I think even the draft legislation that was introduced demonstrated that if you have to have an audit to work out whether you don’t have to have an audit, where’s the benefit in that? It was almost what you had to do. So it was difficult and problematic from a practical perspective as much as anything else. From that point of view I’m with you. I’m not expecting it will necessarily see the light of day. I don’t think anyone’s banging on the government’s door saying “you must reintroduce this legislation” at this stage.
GC: So the closest might be the tax return which has got the new little label in there and then that’ll be it, we’ll never see it again.

Six-member SMSF funds

JS: The long laundry list of Labor’s proposed changes is off the table, but there are issues that the election result might bring back onto the table, and one of them is increasing members from four to six inside an SMSF. Do you think that’s going to get prosecuted further?

CB: When it was promulgated it was at the same time as the three-year audit cycle was suggested, and it did strike a lot of us as completely unexpected. I am not entirely certain of the philosophy behind going from four to six members other than appeasement of the SMSF sector in some way. I have not heard tremendous headwinds for it to be reintroduced. The industry is not necessarily baying for it as well. It doesn’t seem to be anything that’s high on the agenda for industry, member or government stakeholders at this point.

The policy does provide family groups with additional planning opportunities. I like to view SMSFs as a dynasty vehicle; they do have perpetual succession. Unlike other trusts, they don’t vest within a certain period and can continue in perpetuity, and that’s a really good family wealth protection and growth tool or vehicle. I see no reason why it can’t be extended to a broader family group, and as we have more blended families in Australia, it’s becoming increasingly relevant as there are more people who are potentially participants in an SMSF.

JS: Was the policy, in the lead-up to the election, just a foil by the government to the franking credit change?

PH: There was a suggestion that it was an opportunity to add new members in accumulation phase and have a tax liability, and therefore a greater opportunity to use up franking credits rather than to lose them, and those franking credits will go to all the members of the fund. That may have been a motive, but it is something industry has been asking for for a long time as well. So if we had a choice, I think we’d be encouraging the government to reintroduce that bill and to increase the numbers. We’re not expecting to be knocked over by the number of people who want to set up those funds. For the right clients wanting to put large assets like business or a property into an SMSF, the more members, the more assets they can have in the fund, the more manageable that type of arrangement is.

JS: What type of priority do you think this might get in Canberra?

YC: I’m not too sure on that. I don’t think it’s the top priority for anyone. I don’t think in the financial planning area advisers are going to advocate a push for it and you’ve got to question what sector are the politicians looking to appease.

GC: We’ll find out in July once the superannuation legislation may be introduced into the house how committed they are to what they’ve set prior to the election, because if the election gives them that mandate, then there’s no reason why they wouldn’t go ahead with the four to six. The original announcement was related to the franking credit issue, so this was a bit of a defence mechanism. When you did the numbers on it, it was only a very minor change anyway. It was basically if you put a couple more kids in the fund it was the equivalent of 15 per cent on the taxable contributions they could’ve put into a fund which would be offset by franking credits, which is not even chicken feed.

Non-arm’s-length expenses

DTC: Also back on the table are the new non-arm’s-length provisions, which deal with the expense side of things. Should we be expecting them to go through now?

PH: I would expect that they would be introduced as it’s an integrity measure. It’s been promoted by the ATO and Treasury and does not have a political source to the changes. It’s seen by the ATO as an important adjustment to the non-arm’s-length income (NALI) rules to pick up an area where there may have been a gap in the rules that is consistent with the broad policy about what should be treated as non-arm’s-length income.

DTC: How difficult a measure would the expense side of things be to enforce from a technical point of view?

YC: It’s actually going to be really hard because essentially you’ll be almost looking at nothing. On the income side, you have income and it’s a lot easier to identify whether it’s arm’s-length income or not. It’s going to be very challenging to identify an expense that should’ve been charged but wasn’t charged. Overall it will definitely be quite problematic in practice, but in principle I think it’s quite reasonable for it to be implemented.

DTC: Will it make fund administration more complicated?

GC: It’s an issue because some trustees don’t understand the expenses incurred in the SMSF and those incurred outside of it. So you’re gathering that information to work out what the true expense is in relation to a particular investment and it’s there in one way or the other. The processes you’ve got in place now to identify what the costs are for the investment will probably be no different going forward, but the auditor does have a challenge now to work out what an arm’s-length expense in relation to a particular investment is, no matter whether it’s listed shares on the stock exchange or it’s some backyard deal that they’ve got going on.

DTC: Are the regulators trying to make this too exact when it’s not really practical to apply NALI rules like that?

CB: I welcome the attempt at clarity because there is confusion and it makes it difficult as an adviser when explaining it to a client. It does sound near impossible because of the permutations and the inconsistency in the examples given on the tax commissioner’s material on how the measure would work in certain circumstances, particularly when a trustee was contributing services. It will remain nearly impossible unless you are going to be so precise and in every circumstance give a description of the outcomes.

I don’t envy the regulator’s task in trying to cover all of those bases. But if the measure is going to be implemented as expected, then I think the responsible thing to do is to be very clear about “in almost every circumstance these are the outcomes”.

Thinking big

Superannuation has long been a cash pot for governments to dip into when times are tough, and in this second part of the selfmanagedsuper 2019 SMSF Roundtable, the panel maintains it is time to move beyond that model while pointing out the role of advisers when governments hit the super system for cash.

Taking super out of the budget cycle

JS: During the election campaign Prime Minister Scott Morrison promised no new taxes in superannuation, so is it now time to take super out of the budget cycle and instead link it to the intergenerational report?

PH: It’s something the SMSF Association has been suggesting to the government for some time. It’s felt that too many governments have looked at superannuation to solve short-term budgetary issues and that it is such a large pool of money now that it can provide significant short-term repair to budget problems that have been caused in other areas. For that reason alone I think it’s right to take it out of the budget cycle to build some stability in that broad sense. Maybe it’s not appropriate to take out everything, but any major systemic changes or structural changes to the system should be taken out of that need to meet a budget requirement or need at a particular time.

One of the pieces of legislation we’d like to see back is the definition of what superannuation is and some more discussion around that, and perhaps a better definition than the one that was floated last time round. Replacing or supplementing the age pension seems to be lowballing the purpose of superannuation, and to have it as a system which actually funds a dignified and appropriate retirement for all Australians who wish to save using that vehicle is something that’s more appropriate, and fits into that idea it shouldn’t be part of the budget cycle as well.

DTC: Has the focus on single issues in superannuation decreased the view of the bigger picture and some of the issues that need to be addressed before the sector can move forward in a meaningful way?

PH: Franking credits are a great example of how that bigger picture of what superannuation is all about was lost when the first proposals were put forward. The integration of superannuation, retirement and tax is interesting and the government is talking about a review of that integration of those areas as part of a broader review of retirement income streams generally. That’s a great direction for the government to go and to have a minister whose sole responsibility is superannuation and financial services generally to focus on that. Retirement incomes and how the whole system works and the integration of the social security, superannuation and tax systems as we all know has been done poorly up until now and there’s been little appetite at the political level to do anything about it either.

DTC: Should we concentrate on the macro viewpoint rather than these smaller granular issues?

CB: We’d certainly welcome it, and there was a hint at that with the 1 July 2017 measures which were focused on superannuation not being used as an estate planning vehicle or tool. Whether that approach was right or wrong, at least we had some clarity from the government with regard to the purpose of superannuation. And then similarly equal debate or greater debate with regard to its interaction with other aspects of the ageing of Australians and the macro issues would be welcome. I thought we were going to see a lot more debate and engagement from government surrounding 1 July 2017, but that interest drifted away.

Preparing for change

DTC: The franking credit policy highlighted something important from an advisory point of view in the SMSF world around how you prepare for something which might not actually happen. What did we learn?

YC: I’ll answer that in a few stages. First of all, we learnt a lot in terms of client behaviour and advisers were surprised by the response of investors, some who were not even impacted, who became very alarmed. Clients do pay attention to what’s going on in the media and then they contact their advisers, who were taken aback by the externally led activity around this issue. Advisers feel they have to respond and as part of the ongoing service requirements, feel they have to provide guidance, but it comes to the challenging position of what guidance can you give where there’s uncertainty?

From a licensing perspective we provided training to advisers. There are hypotheticals – what are the potential strategies, what you could potentially do – and we added the caveat that you shouldn’t take action and that nothing’s done and dusted until it is actually law. We did see some conversations between the adviser and client, where the latter understood it was not law yet.

I don’t think it is adviser led, it is client instigated, but then it does highlight the importance of having an adviser. Despite the fact Labor didn’t get elected, it strengthened the adviser-client relationship. It did reinforce the fact that when something does happen, by having an adviser they have somebody to go to.

DTC: Have any of you come across any sort of modelling that can predict outcomes potentially when changes like that happen?

CB: There is no specific tool that’s available in the marketplace, but informally in my practice I do like to give the client some sort of indication of where they will be in five years, 10 years, 15 years’ time. I emphasise that it’s not just superannuation related, most of it’s broader advice. In the same way that we have regularly proposed changes and actual changes to the superannuation system, there are regularly proposed and actual changes to taxation, as well as commercial law, that impact on the broader advice that we give. In that context we shouldn’t be so precious with regard to superannuation, saying: “We’re being singled out and targeted.” Change is a constant, it’s happening in the broader system that we operate in regularly, so we need to acknowledge that. In my practice, and I advocate this for everyone, I have some sort of predictor that outlines what a client’s circumstances will be in five, 10 and 15 years if the law looks like a certain way and if their affairs are structured in a particular way.

YC: I’m not aware of any actual model and I don’t actually think a model is possible given we don’t know what the future changes were. The proposed policy did highlight one thing and that was the importance of knowing, out of all the clients of our advisers, where they’re investing, who may be impacted, so when a change comes we can provide better guidance to advisers. Ideally we were looking at whether it’s possible to provide a list generated out of databases, a list of clients that may be impacted and having internal tools to assist advisers. On one hand, we want to help advisers to act quickly, but on the other hand, from a risk management perspective, licensees do worry what will have an impact on a client and make sure actions are taken.

DTC: During the parliamentary committee hearings into the franking credit proposal, Labor MP Matt Thistlethwaite alluded that if you were a good adviser, you would have been able to anticipate that something was going to happen with the franking credit laws, and then advise your clients not to be so heavily invested and skewed towards that part of their investment portfolio. Is that fair?

GC: In those circumstances it’s assigning probabilities of the generosity to the concession and that’s one way of attributing how things might change – the more generous the concession the more likely it is that it will change. But what will replace it is a difficult thing to pick. I find that people who are coming up with those sort of statements really don’t understand what financial planning is about. It’s a craft as well as a science.

DTC: How much of a concern is there that a politician who can have influence over this industry would have an attitude towards financial planning like that?

GC: It’s an education issue for those that don’t understand what planning is about, let alone financial planning, and get them to be educated in the way in which a plan is constructed and what things you need to take into account. The only model I would see clients trying to understand is to go back and see their adviser to see if they’re getting good advice now. Go back and see whether there needs to be any change because some people do it all themselves and that’s where they end up in a mess because they need some structure around it.

CB: One of the benefits of an SMSF is they are not run by professional asset managers themselves, and that’s part of the charm of being a trustee of an SMSF. Yet that’s where the difficulty lies with people pointing at SMSF trustees and saying: “You’re doing too much of this and you’re not doing it right and there are better ways to do it.” It may apply to them or it may not. They are in a position and the law puts them in a position where they can choose, and that’s very much enshrined in the legislation and that’s where I would not like to see changes being made where the Australian Securities and Investments Commission (ASIC) or anyone else comes out and starts to tell trustees how much of their assets they could put into one particular asset class at any one particular time.

Super guarantee opt-out

JS: The super guarantee opt-out proposal is another issue that may be back on the table and is this a positive measure for SMSF members?
CB: I have a number of clients who have multiple employers for whom it will be very welcome. I see no reason why we shouldn’t have the measure, but only in specific circumstances where particularly a high net worth individual, whose savings are otherwise appropriately covered and up to the contributions thresholds, and if they’re already at that point and the measure is drafted, well, I see no reason why it shouldn’t be enacted.
YC: It’s a measure that makes sense. Without it we have certain high net worth income clients that are receiving excess notices, so if they avoid those, that will make sense. I do see a bit of a teething problem if it does come in because sometimes clients may change their employment arrangement during that quarterly period and there will have to be adjustments for that. I think it’s a good measure and hope it does come in and get legislated.
GC: From a policy point of view it makes sense. The administration of it needs to get sorted out because you’ve got to give notice 60 days before the quarter and then the ATO’s got to get back to you and then there’s got to be an adjustment with the employer, and then you’ve got to do a deal with the employer to make sure you get paid the equivalent of it.

Taking another look?

While there is little appetite for another review of the SMSF sector from the government, critics of the sector are maintaining their calls for one to take place, and in this third part of the selfmanagedsuper 2019 SMSF Roundtable, the panel outlines why the calls are hollow.

SMSF sector review

JS: There has been a good deal of questioning of aspects of the SMSF sector and prior to the election, parts of the wider super industry said there should be a specific inquiry into SMSFs. Have we averted that?

PH: I don’t think taxpayers’ money will be well spent doing a royal commission-style investigation of SMSFs in the same way it did for the broader financial sector. Any review I think is welcome, but we’ve had significant reviews and they’ve come out in those reviews saying the SMSF sector is not only sound, but actually in better shape than most of the other superannuation arrangements that are available in the marketplace.

From an engagement point of view, the members of an SMSF know exactly how much money they have, they know exactly where they’re investing it, they know what they’re doing with it, and have a far better feel of how they’re going to achieve their retirement goals than many other people in alternative superannuation arrangements. There are always poor examples, but when you have 600,000 of anything you’re always going to have a few people who either get it wrong deliberately or inadvertently or don’t do it well, but that’s not an excuse necessarily to hang the whole of the industry out to dry.

In all the previous reviews where SMSFs have been specifically looked at and targeted, we’ve come out the other end saying that it’s a strong sector that’s well run, and where people are engaged. We constantly have the same critics coming back saying the same thing over and over again, and we constantly answer those critics to the point where their concerns are reasonably addressed and yet they still come back.

JS: Is Canberra aware the SMSF sector has been reviewed three times in the past nine years?

CB: It’d be naïve to say that they’re not aware. I think that they’re very well aware. Of course, it does feel, and I completely concur with Peter, that the calls are coming from the same sector of the industry over and over again. It feels like prosecution and we’re going through the process of starting in the lower court and moving through to the intermediate courts, and we’ve been to the high court and there have been decisions and the umpires have made their calls. It looks as though certain parts of the industry are looking for all possible angles to attack the SMSF sector. I’ll be very open about that.

So it would be naïve for anyone to think that Canberra isn’t very well aware of it, and that is at times frustrating for us in knowing that they know of the volume of work that’s been done and the output of that work, and yet still there seems to be entertainment of the idea that there is something else to be done to clean up the sector. It’s perhaps just a little bit more than frustrating to be honest.

JS: Is there recognition the SMSF sector is multifaceted or is it tarred with one brush based upon the bad operators in the space?

CB: It’s very welcome to see that the regulators, plural, are taking action with regard to what everyone’s acknowledged here today – some of the things that do happen in the SMSF sector that we’re not proud of and we don’t want perpetuated. I don’t think that necessarily everyone is being tarred with the same brush by the regulators. I sincerely don’t believe that. It, however, has repercussions in the broader industry and those who would advocate against SMSFs are using it as the flag to say: “We told you so. We told you that there are systemic problems in the sector.” I think time and again it’s been proven that it’s not systemic. There are the bad apples and I’m very happy to say that the regulators are taking that action.

PH: It does show a difference I suppose in the way that the different superannuation arrangements are run and supported as well. So clearly Australian Prudential Regulation Authority (APRA)-regulated funds take professional advice in relation to the investment decisions they make from very large organisations and businesses that specialise in asset allocation and international companies and so on. On the other hand, they tend to see an SMSF as being small, poky, run like a cottage industry. So it’s seen as small scale and perhaps more prone to error, to mistake, to fraud, and all those things they seem to think can’t happen in the larger funds which are so professionally run using professional people and so on. I think that’s a lot of where the difference or the attitude comes from that surely these can’t be run well because they haven’t got these high-powered professional advisers and so on involved in running the fund, and that there’s not a real gap between the person making decisions and the person benefiting from those decisions, being the trustee and the member are the same person. So I think there’s some perception differences in size, in the way that different arrangements are being serviced and so on which fuels this to some extent.

DTC: Is there a danger that reviewing the SMSF sector is somewhat like a blood sport?

PH: The other added dimension is you could ask why the people calling for reviews aren’t concerned about the individual investor investing outside of superannuation who’s making exactly the same investment decisions with probably the same amount of money, investing perhaps too many of their dollars in the Australian share market or property market, and who are negatively gearing those property investments. They’re doing everything a trustee of an SMSF is doing but not in a superannuation context and yet there are no inquiries into their conduct. I think the reason is the cost to revenue of superannuation with regard to the tax concessions attached to superannuation which the government sees as a concern. We all know it’s a big cost to the bottom line of the budget, and that’s something that the government needs to be mindful of and quite rightly should be aware of. They don’t want people taking those tax benefits and then frittering those benefits away by their actions later on. So in that context they’ve got a right to at least keep an eye on it.

DTC: Does anyone have concerns over the sector suffering from review fatigue?

YC: Absolutely. From an advice industry perspective, especially over the last few years, you’re seeing more examinations like the ASIC reports 575 and 576 with a lot of scrutiny on the provision of advice in this space. It has to some extent scared certain advisers away from the space and I’m referring to those advisers who are servicing perhaps 20 or fewer SMSF clients. I think these practitioners can reach a point where they ask themselves whether one of their activities is attracting more scrutiny from regulators and is it worth it.

Send trustees to SMSF school

Two major reports from ASIC released in late 2018 posed some difficult questions about how well trustees knew their obligations and about the quality of advice they receive. In this fourth part of the selfmanagedsuper 2019 SMSF Roundtable, the panel considers the reports, their implications and plans to assist trustees.

ASIC reports 575 and 576 and trustee education

DTC: With reference to ASIC reports 575 and 576, were any of the findings concerning?

CB: I think so to the extent that they are representative, but I have a personal view on the methodology used. That aside though, some of the findings were concerning with respect to trustees’ level of understanding of what it is that they’ve got themselves into, the consequences of certain decisions and their personal obligations. Now I’m happy to say though that there have been certain measures at government level since those reports that have gone a way to alleviate those potential problems with regard to trustee education, with regard to their understanding of their obligations as well. My experience, however, is contrary to some of the findings, such as the one stating 30 per cent of the SMSF trustees weren’t aware of the estate planning consequences of the vehicle that they had entered into. That’s certainly not my experience with my clients. I might be very lucky and I’ve got a very engaged and intelligent cohort, maybe, but again I go back to the methodology and their random selection of the number of files they had reviewed. If that is played out right across the sector with 600,000 funds, that is of concern; a lack of knowledge about how it interacts with their broader affairs and the legal consequences.

DTC: To that point one of the attitudes uncovered suggested if anything went wrong with the SMSF, the trustee would then just be able to sue their adviser, indicating they’d be absolved of all responsibility. Does this indicate more trustee education is required?

GC: I think so, but I think that’s part of the blame game. As administrators we find that happens regularly where some decisions they make or don’t make leads to an unacceptable outcome in their mind and they’re willing to blame their lawyer, they’re willing to blame their administrator and anybody else that’s a professional. So I see it as a particular personality trait. I service about 25,000 funds and that group contains trustees that take their responsibilities very seriously. These are not the people ASIC is questioning in its biased sample. Individuals in ASIC’s study would appear to be those who have $50,000 in an SMSF, are retired and have been put into a limited recourse borrowing arrangement. I mean that is just abhorrent. We all agree unanimously that that’s silly. So I think they’re the ones who need to be educated and told: “If you’ve got $50,000 in super, you probably shouldn’t have an SMSF for a whole range of reasons.”

PH: I think it also raises another interesting issue around the adviser client trustee relationship whereby advisers with SMSF clients do not clearly articulate what their responsibilities are with regard to the services they provide. They’re being paid money and their clients may think, well, that gives them the right to sue if anything goes wrong because they’re paying them a fee to actually avoid that. It is interesting some clients believe that someone who has done nothing more than agree to provide investment advice for the SMSF suddenly is responsible if there’s an in-house asset problem in the fund, or if suddenly there’s a problem because they didn’t pay their tax bill on time. So I think the advice industry generally can do better at clearly articulating what it is that they are providing for the money being charged to the trustee, and where the adviser’s responsibilities lie and where the line is to be drawn, such that they don’t find themselves in that situation where suddenly they are responsible for everything. It’s an issue I come across a lot and I think, particularly now that accountants and financial planners are more regularly engaged in lots of activities in SMSFs on a day-to-day basis, that crossover of who’s responsible for what is now far more important than ever and it isn’t as well articulated I think as what it needs to be.

JS: Who then should be responsible for educating the trustees?

YC: I think everybody needs to take some responsibility for the education process to be honest. I think advisers certainly need to take on this responsibility and a licensee definitely would push for providing education for its clients. But if the messages come from a variety of sources in addition to the advisers, such as associations and the media, they can be reinforced and that would help. We also have to recognise there is only so much an adviser can do here. They can provide clients with fact sheets and ATO material, but how can they ensure the client has read and understood the information? They can’t quiz the client or make them sit an exam. There is only so much a disclaimer can achieve and it may not amount to much. It’s an interesting question but I’m not sure I have a solution.

GC: Well think of that declaration the ATO brought out that trustees have to sign when setting up an SMSF. What did that achieve apart from getting a signature on a form? It was pointless.

PH: It’s important to clarify that trustees ultimately under the legislation have the responsibility. They can’t delegate that away. They can delegate activity but not responsibility. So it’s not as if the adviser is saying: “Well I’m going to be responsible for this bit so you’re not responsible for this anymore.” They’re simply saying: “I can provide you with advice, you’re still responsible for this if it goes wrong. If I’m responsible for it going wrong then, yes, you’ll have some recourse against me as an adviser, but you are still ultimately the one who’s responsible for the fund and how it’s run.” That is the most important piece of education I think that trustees can learn right up front.

DTC: The ATO is in the process of developing an online test for trustees. Is this an indication we’re headed down the path of a mandatory trustee education requirement again?

GC: I don’t think so, particularly with the current government because it’s not their philosophy to control things. But it goes back to a person’s choice and the ability to get people to exercise choice, but also in the case of superannuation being responsible for it.

CB: It’ll be interesting to see. I don’t want to peg myself to an opinion either way. I think it is a possibility, albeit perhaps not a strong one. It would be unpalatable and there might be enough resistance to ensure that it never sees the light of day. Although, as Yvonne was making the point, no single part of the community is especially or strictly liable for the education of trustees. Instead the entire SMSF community is – associations, professionals, trustees and government – and the government must be seen to be doing its bit in this respect. So it must be serious in contemplating compulsory education, but I think it will just go away. But it’s a possibility.

YC: I would just like to add if that does come in, where do you draw the line? If someone wants to take control of their own super and they have to sit for a test, then why don’t individuals wanting to become company directors have to do the same? Why do we have to target SMSFs and show such little trust in them? It goes against a lot of other social principles we all adhere to. On the other hand, I agree if the government can come up with a way to assist the education piece to aid trustees to better understand their responsibilities, it would be welcomed. It certainly would help advisers tremendously, but the issue is how do we get there. There is also the issue of how much protection is enough. The sector is always evolving and clients might understand their responsibilities upon establishment, but do they know what they are upon the death of a member. Education is not a finite thing, so where do you draw the line in the sand and how will it be conducted? I think that will be very interesting.

TBAR and estate planning

The introduction of the transfer balance account report (TBAR) in July 2017 and ongoing legal interpretations around the use of pensions have given SMSF practitioners plenty to chew on, and in this final part of the selfmanagedsuper 2019 SMSF Roundtable, the panel reflects that one of these issues seems settled while the other has yet to be played out fully.

The progress of TBAR

JS: Changing the subject to TBAR, how do you think it’s going?

GC: I think it’s going reasonably. Now that might be a harsh assessment of it, but there’s some kinks in it, which is causing people angst. I’ve been having a look at some reversionary pensions where they get double counted or counted in an unfair way. Now I’ve got one client whose wife died on 27 June last year and he’s still grieving her loss and he’s a very sad man, and we’re trying to make sure that he doesn’t get an excessive determination on 28 June this year, and that’s bloody hard because of the way in which the system works against some of those things and they’ll get excess determinations in situations where they probably shouldn’t. With regard to the reporting of it, we should thank the ATO for its generosity because we were still getting used to a whole range of new concepts in the 2017 arrangements and it gave us a year to get some of that information in, and in some cases a little bit longer up until the end of October, so that worked pretty well.

But the ATO I think is getting a little bit tired of some of the things that are going on where people are coming back and providing additional information or different information from what was originally provided. As such, I don’t think it’ll be long before there are some determinations which the ATO will have a closer look at like it did with some of those reasonable benefit limit matters many years ago, a closer look at what’s actually gone on to work out whether a determination should be issued in those circumstances.

JS: How long do you think it will be until the ATO will take a harder stance on TBAR and will it be determined by a declared period of time such as a nominated 24 months?

GC: I don’t know. They’ve indicated they’re going to look at those things and I don’t think they’re going to draw the line in the sand. I think it would be good, but often you see the educational approach gets extended and extended. So the regulator may take the approach of taking action on the worst TBAR efforts and rein it in like that; a bit of a ring fence sort of approach to it.

PH: Overall it is a complex system that is very difficult for people to get their heads around and presents a very difficult transitional period to go through and plan for. We’re probably comparatively at the easier end of the TBAR system now having hopefully navigated most clients through the more difficult transitional arrangements and so on that needed to be done as well. There are still obviously bits of it that don’t work well and we’ve been highlighting those when we can to the government to say that there are still issues that need to be addressed. The reversionary pension issue is very clunky, far more clunky than what it looked like it was going to be. To say you’re going to have 12 months to report this sounded pretty fair until you discovered that actually you’ve still got to report it all at the time it happens, it’s just that it doesn’t count until 12 months later. There are just some funny little quirky things I think that’ll come out of the system from a practical point of view and it wouldn’t hurt to be looking at and reviewing them again. They’re clearly in many instances unintended consequences. I still think one of the more interesting amendments to the legislation was the removal of the ability to segregate assets if you have one member with more than $1.6 million in superannuation, the fear being that they would start moving assets in and out of the accumulation and pension pool to avoid tax. That opportunity has been there since 1988 and it’s never been a systemic problem. There are bits of the legislation that were introduced for legitimate reasons, I guess you must say they were legitimate concerns, but it would be a useful time, now that we’ve had it for a couple of years, to perhaps review some of those quirkier aspects of the legislation to see whether they still have a relevance or if it could work a bit better.

JS: Are there any recurring mistakes you are seeing when it comes to TBAR?

YC: Actually not really. The only error but probably not a regular one is the rollover of time-allocated pensions, or lifetime pensions. The ATO did flag there could be some double counting here, but I don’t think there has been further guidance on it.

GC: No, I mean Stuart Robert, when he was assistant minister to the treasurer, made some announcements, so we’ll see what happens in the next month or so.

YC: I’ve only ever had one adviser who filled out the TBAR form incorrectly and we went through the whole process of resubmitting it. The exercise was actually relatively easy once you knew what to do. So at this point in time it’s perhaps better than I anticipated, but the process getting here was indeed quite challenging.

GC: The timing involved was frustrating and where people were rolling over money from APRA-regulated funds to SMSFs and vice versa, you ended up with double reporting. The ATO was great. When amendments were needed because of that mismatch, provided the SMSF notified the ATO of that, then the ATO made the correction, which was great.

PH: That was always inherent. One of the reasons the ATO was keen for SMSFs to report more regularly from day one was to avoid that issue. Clearly when you’ve got someone who’s reporting virtually on a daily basis and someone who reports annually nine months after the event, all sorts of problems and mismatches can arise. That wasn’t the case and in the end it was decided that particular idea wasn’t sufficiently important enough to pursue it or impose it upon self-managed funds in the short term. It’s going to be interesting to see how reporting develops in the SMSF space in the future, and how more transparent it becomes and how quicker it becomes in terms of real-time reporting.

SMSF and estate planning

DTC: We’ve just touched on pensions with reference to TBAR, but recently we’ve seen an increasing number of court cases regarding reversionary pensions and death benefits. Is this going to be a continuous trend?

PH: I suppose the interesting thing is that at the moment if you aren’t a member of an SMSF and you feel aggrieved around how much you didn’t receive of your deceased relative’s superannuation, then you need to go through the court system. With a new omnibus sort of complaints tribunal that we are going to have, the Australian Financial Complaints Authority, that will incorporate the Super Complaints Tribunal, people who are disgruntled will be able to actually go to that ombudsman-type arrangement to have that argument rather than going to the Supreme Court, Federal Court, somewhere along the line. That in itself will increase the number of people who will go and be complaining that they didn’t receive enough of the superannuation arrangements from someone who’s passed away because of the way that whole system is structured. It’s a much different process to go to a Supreme Court or Federal Court to argue your case. Now I’m not entirely in tune with procedural aspects of this new body, it incorporates all of the other groups that have been operating independently in the past, but those type of bodies, where you can go with a complaint and it doesn’t cost you anything, will only encourage more people to do so.

JS: Does this place more pressure on advisers to get estate planning right?

YC: Absolutely, absolutely. As a technical person I actually have a big estate planning case every few months I’ve found very interesting. The recent Marsella case I find extremely interesting where the facts are very similar to Katz v Grossman, but the outcome was very different. So with reference to your question, we probably will continue to see court cases being held, and subsequent clarity with regard to these estate planning matters. Estate planning is something that a lot of advisers include as part of their offering, but you have to ask how many really get it right. I think absolutely estate planning is not something that advisers can ignore, especially with an SMSF because it is a crucial part of the deed and the associated documentation is really important. A lot of things can go wrong as we have seen over the past few years with all these court cases. It presents a huge risk.

DTC: Are we likely to see another landmark case like Katz v Grossman?

GC: I’d say yes. The reason is there is a lot of evolution still taking place. Superannuation’s been hard from the government’s point of view to come to grips with and it’s taken a long time to get to where we are now and will continue be like that. I think it’ll be an evolutionary process a bit like family law; that’s much more settled now than what it was initially. As part of that you’re linking in trust issues so there are much broader issues involved. The estate planning aspects of it, particularly for high wealth earners where if you die and your spouse takes over the money, anything over $1.6 million has got to come out of your fund because you’ve died. So I think those issues will become common because of the amounts involved and that people will argue over them as well. You’re seeing much more money in superannuation, you’re seeing an older population.

PH: It also raises an interesting point as well in that you mentioned family law. You have family law taught as a separate subject in a law degree right? Estate planning is inherently a legal issue and yet the legal profession doesn’t seem to have embraced that opportunity at all, and the financial planning industry almost by default has taken over the advice and planning side of that. Yes they can’t do the legal documentation, but so many lawyers have decided documentation is all they want to do in this space and nothing more. We have a lot of members through our association who are lawyers who are very active in this space and have taken up that challenge, but it is surprising that there is not an estate planning superannuation subject because the amount of work is enormous, just as the amount of work in family law is enormous. So it’d be interesting to see, as the pot gets bigger and bigger and the number of disputes increases, whether in fact the legal profession starts to win more of this space. They’re not showing any signs that they will, apart from those who have chosen to specialise in this area particularly, but they’re not a large number of the law firms in Australia at the moment.

Chris Balalovski (CB)
Chairman of the Self-managed Independent Superannuation Funds Association and partner at BDO Business Services.
Peter Hogan (PH)
Head of education and technical at the SMSF Association.
Graeme Colley (GC)
Technical and private wealth executive manager at SuperConcepts.
Yvonne Chu (YC)
Head of technical services, wealth and capital markets at Australian Unity.

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