Cooper Grace Ward partner Scott Hay-Bartlem entered the SMSF sector during a period of significant change when the Superannuation Industry (Supervision) Act was introduced. He speaks to Malavika Santhebennur about the importance of a watertight estate plan, the holes that can spell trouble for members and his concerns about members comprehending the complexity of the sector.
How did you become involved in the SMSF sector?
I began working with SMSFs as the Superannuation Industry (Supervision) (SIS) Act was introduced back in 1995 and there was a lot of change happening within the SMSF industry. Back in those days they were called excluded funds. It was an interesting time to work in that area because everything was changing so much. At the same time we had a lot of commercial clients who were requiring more sophisticated estate planning work beyond simple wills, and a lot of them had money in SMSFs. So the two kind of naturally collided at that time and it was interesting work because every one of those clients had a different story and the work has just really grown since then.
How did you find entering the industry during a period of such significant change?
There was a lot of learning and there was a lot of work at the time because we had to update all super fund trust deeds. So there was a lot of that activity and there was a great need to get on top of the new legislation – 31 March 1995 was the deadline to get all of that stuff lined up. The industry has changed and the rules have changed so much ever since. It’s a constantly evolving environment. The SIS Act had an election process and a new requirement stipulating for the deed to either have a rule that required companies to be trustees, or one stating the purpose of the fund was to pay benefits as age pensions, so there was a great need for the updating of deeds to accommodate this and take the old Occupational Superannuation Standard Act rules out. So that was keeping us busy at the time I joined the group. Since then it’s grown a lot. The estate planning is a really interesting intersection with SMSFs and is very important for people to get right.
What other services do you provide at Cooper Grace Ward?
In my group we do a range of tax, superannuation, business structuring, estate planning and administration services because they intersect quite a bit. We do everything from straight tax advice, through business structuring to provide the most efficient structure using the best tax reconstruction we can, through to specific SIS Act compliance-type advice. We handle estate disputes, helping people administer estates, general commercial advice for businesses and general trust advice as well. It all comes together in the one spot.
What impact has all the legislative change to super in the 2016 federal budget had on SMSFs?
The first one is that SMSFs look different. Previously it was okay for a husband and wife in an SMSF to have all of their assets in pension phase, but due to the new transfer balance cap some funds have had to roll a portion of those assets back into accumulation phase. So where we had a purely pension interest, we now have an accumulation and pension interest and that means the fund looks totally different. I’ve had clients who have taken money out of the super system as a result. I had one client who could distribute income to people who were paying no tax. But because she now had to pay tax at 15 per cent in her SMSF on part of her balance, we removed some of the fund’s assets and put them into the family trust so she could then distribute the income off by the family member. So sometimes it is more advantageous to hold assets outside the super system now so clients’ asset holding structures look different. Prospectively we’re doing estate planning for clients. The old default of just having money sitting in a pension by the survivor won’t work anymore.
How has the nature of your work changed since the 2016 super reforms?
For me the focus has been to make people aware of the different options they have to manage their super when they die or lose capacity and to help them make informed decisions about what their planning should look like in case of incapacity and death. There’s no cookie-cutter default position for everyone. There is a different answer for everyone depending upon their situation and we’ve got to make sure we get that right.
How has this impacted on what were once iron-clad estate plans?
The 2016 reforms really mean what our iron-clad answer used to be will probably change for a lot of people or require further thought because the old answers don’t apply anymore. So the answers become more complicated in some cases and anyone who had what they considered an iron-clad estate plan should be reviewing it to make sure it will still stand up. We will need to make sure there is an appropriate trust deed so we need to read the deed, read the deed, read the deed as I like to say to people. It means making sure the deed will allow us to do what we want to do. Quite often we find trust deeds and other documents, such as pension documents, in place actually don’t allow the result we want, so we need to make sure everything lines up together. Super and death benefits are like the frontier in estate disputes and people are asking more questions. Often we’re finding that a document that was not done properly 10 years ago can undo what otherwise would be a good iron-clad estate plan.
What holes have you seen in this area that have landed people in trouble?
Missing documents where we can’t find an old document that we need to have, an old document that hasn’t been prepared properly, one that hasn’t complied with an old deed if we can find it, and documents that don’t contain what we would now consider to be best practice terms. In particular, pension documents have really evolved over the last decade and things like locking in reversions are often not done adequately. There are some really good SMSF trust deeds out there and some really appalling SMSF trust deeds and we need to make sure every strategy is compliant with the deed. It means making sure things are signed properly and all consequences have been thought through and we put in place an easy solution that suits everybody.
What are your thoughts witnessing the signing of deeds through electronic signatures?
I’m old-fashioned. I like to see ink on a bit of paper because that’s clearly our best evidence. I know people like to scan things and destroy original documents, but in court your original document is always going to be your best evidence. Again, lots of these things end up in court these days so we need to presume that what we’re doing may end up in court and we should be planning appropriately.
What’s the biggest change you’ve seen in the SMSF sector?
I think the Costello reforms of 2007 were enormous and I think 2007 saw the introduction of those contribution caps for the first time where you couldn’t just throw in as much money as you could so that really turned super planning on its head. It went from saying “you can put as much in as you want, but we’re worried about how we get it out” to having to work out how we get it in in the first place. That was a big change to SMSFs and super. Before 2007 you could put as much in as you wanted as a non-concessional undetected contribution. It introduced a whole new breed of planning around how you got money into super in the first place, which wasn’t an issue before then. Exciting times. It makes it interesting and it does challenge you to think about new solutions for clients to work within the new rules and how to achieve the result they want.
What’s the one thing you would change about the SMSF sector?
It is way too complicated. I’ve had lots of meetings with clients who just don’t understand the $1.6 million cap. Capital gains tax (CGT) cost base resets, the rollover is easy in theory but complicated to actually administer. The most complicated thing is determining if you qualify because there are a whole lot of things you can do without realising they will make you ineligible for the CGT relief. For example, if you are fully in pension phase and you’ve accepted a contribution, that will then technically make the fund use the unsegregated method, which will affect how you apply your CGT relief. There’s a whole lot of real complexity that’s come in with contribution caps and transfer balance caps and a simpler system would make it easier for everybody. People are getting caught out because they just don’t understand and things that seem logical just don’t work. The rules are really complicated. Lots of really intelligent people who are not in the industry just don’t get them and I can completely understand why.
What’s the biggest challenge facing the SMSF sector in the coming year?
The big challenge will be to make sure all SMSFs go through a health check ensuring funds comply with the new caps and all the documentation is available and correct. A lot of work around SMSFs is about record-keeping and compliance and you need to make sure it all stacks up and works as it should do. But I’m a lawyer so that’s what I get excited about.