Over the past year, several significant issues in the SMSF sector have come to light, with some of them continuing to generate debate. With this in mind, selfmanagedsuper hosted a roundtable to find out what some of the industry professionals’ views are regarding these topics.
DTC : Welcome to the selfmanagedsuper roundtable discussion and thank you for your participation today. Let’s start by looking at zero interest related-party loans used in limited recourse borrowing arrangements (LRBA). The Australian Taxation Office’s (ATO) recent private binding rulings (PBR) suggest its treatment of these arrangements has changed. What do you think about that, Grant?
GA: I’ve seen a lot of commentary where the ATO has said there’s no drama in terms of contributions and in terms of breach of the non-arm’s- length rules in the Income Tax Assessment Act (ITAA). But obviously some people have taken it to the nth degree. I’ve always said you shouldn’t apply zero per cent interest, you should probably use the Reserve Bank rate because if you’re using zero interest, it’s very difficult to show consideration in terms of client agreement. But people are applying amounts of up to $30 million, so the ATO has decided they have to determine where the line is going to be drawn because they want to stop it.
Really it should go back to Treasury to fix it up, but the way they’ve done it is extremely strange. What I believe the industry’s missed out on is they’re actually calling this bear trusts and fixed trusts and as a fixed trust I don’t think it works out. A fixed trust means you’ve actually got a trust that’s caught under the income tax principles. That means the income comes into that trust, you take expenses from the trust, then you distribute the trust income down to the beneficiaries, which would obviously be the super fund in some cases. It would mean every LRBA that’s been set up has been set up incorrectly because it’s all based on the assumptions of using a bear trust rather than a fixed trust.
And they should have eight years’ TFNs (tax file numbers), two tax returns and all that. That’s the way the commissioner is looking at it because he’s saying “well hold on, if you’ve got less expense, the net income of the trust is a lot greater than it should be”, so therefore it’s not arm’s-length income.
The problem with that I believe is the commissioner has missed the point that the super fund is doing the borrowing, not the bear trust. The bear trust simply holds that particular title. Personally I think the smarter thing would be for Treasury to simply draw a line in the sand and say “here are the new rules and this is the way it goes”. But people should be concerned. For example, for everyone lodging their 2013 returns, does that mean they actually have to lodge a return for the bear trust?
RP: Well, it’s certainly creating a lot of confusion, especially amongst the audit fraternity to what is actually right and what’s wrong. The fact that it is just a private ruling makes it difficult to interpret as to whether it is or isn’t law. The retrospectivity of it is the hard part in understanding what was communicated from the tax office not long ago to where we are at the moment, which is, in my mind, uncertain. Where we’re very concerned is what could happen from 1 July with the trustee penalty regime about to start, and as auditors, whether it does become a reportable breach or a contravention or even a disqualification. Getting that wrong has a lot of implications for the trustees and it certainly is bothering us from the professional indemnity insurance perspective.
GA: Well, actually you’d be in a lot of trouble. I’ve heard some commentators saying in order to do it you have to have exactly the same LVR (loan-to-value ratio) as the banks. But all banks have different LVRs. So no one knows what the determining criteria are. Is it LVR? Is that an issue? Is there a set duration so you can’t go beyond 15 years? So because the banks are so flexible, how do you know what is the market value?
AC: Well, you don’t. From an adviser’s perspective, we give advice and the risk factors are enormous. So a lot of financial advisers now have to sign off when lending from institutions, saying it is a reasonable transaction in all cases. But on the back of that, as an adviser, you need to be sure that you’re doing the right thing and the right thing is often making sure the trustees are obeying the law. And when you sign off, it’s not just yourself, it’s the accountants, the auditors, so everyone involved in the transaction will be liable. Often with these transactions there’s no precedence. A few years back, the ATO clarified the look-through provisions. Well if the look-through provisions indicate how it’s going to be treated under the SIS (Superannuation Industry (Supervision)) Act, this interpretation now is treating the trust as a separate entity. That’s incongruent with the current legislation. So there needs to be a precedent set and until that precedent is set, we’d rather err on the side of caution and charge interest on the loan rather than not.
GA: Actually, just going back, Ron, I hadn’t thought about it before, but because they’re using the ITAA to rule on this, all your penalty rules won’t apply because they only apply for specific rules in relation to SIS.
DTC : The problem has been born from one PBR and all PBRs deal with very specific circumstances. So are we reading too much into it?
GC: This is one of the five private binding rulings. This one came out recently, which is a couple of years after the last one. It’s interesting because it’s based on the original model for instalment warrants that came out in 2007. Treasury based that on Macquarie Bank and a few other instalment warrant arrangements that were in place where trusts would be provided over parcels of shares. So every parcel of shares had its own trust and that’s what the original Section 67 of the SIS Act was based on. When you have a look at this private-binding ruling, it’s very, very close to that and apart from the fact that there’s a zero-interest loan and the LVR’s based on 100 per cent of the value of the asset. Now, if you are a doctor and you want a loan from a particular bank at the moment, they will give you up to 110 per cent of the LVR. So you would say that that would be a commercial LVR for those particular circumstances. With a zero interest loan, the original commentary from the ATO said, for the purposes of section 109, zero interest is okay. It was a shame at that time they didn’t cover the other aspects of SIS because had they done that, they would’ve put a warning out then.
DTC: So is a legislative fix required to achieve clarity about zero interest loans?
GA: No. Quite often, you’d see the ATO put out an alert or something like this PBR that effectively stops it. I can tell you it would mean no zero interest loans or any even small discounted loans anymore now. Everyone, I’m sure that is using an LRBA with a related party will actually be doing it using a full freight interest rate. So I think the commissioner has achieved what he was seeking to do.
GC: Maybe you’re right. Personally, I don’t think there needs to be a change to the law and I think the reason why there seems to be a number of other similar PBRs in the wings is maybe the commissioner wants to see an appeal against the private binding rulings. You’ve always got to temper that as to whether you would appeal against a private binding ruling because you’ve got to put it into play to exactly challenge what the commissioner’s saying, and it may be safer to wait until an assessment comes out from the commissioner and then object against that and go through that process. To me, it’s a far cleaner way of doing it rather than relying on a bunch of words which at the time the facts might not have been crystallised.
One thing I find difficult with non-arm’s-length income, as I did in special income, is seeing the commissioner making rulings on income that’s yet to come into that superannuation fund. So you’re looking at the statutory or ordinary income coming into the fund that hasn’t yet occurred and the likelihood of that occurring may be very rare because you don’t know what’s going to happen in two or three years’ time as the currency of that ruling ends.
GA: It’s like the Bamford case all over again where you have uncertainty for such a long time. Then finally it gets to the High Court, and once the High Court makes its decision, then you know with certainty because then they change the law to follow that decision.
DTC: Are we worried about something that’s not all that significant? I mean, how many zero interest loans are there at the moment?
RP: Well, we audit quite a number of funds, but the reality is that we don’t actually see that many LRBAs. I think it’s just a whole lot of hype. I don’t think the commissioner likes LRBAs. I think the whole instalment process came about by default and it just had to be allowed. We actually haven’t seen a zero per cent LRBA. I would be very surprised if we do come across one and even if we do, I’d be very surprised if they’re now not being amended to put them back to a commercial rate.
AC: My comment from adviser land would be predominantly SMSFs being the realm of accountants and financial advisers. And what we’ve seen as a development more recently of particular concern is around property spruikers and having vertically integrated institutions giving advice with the sole objective of selling a property through leverage rather than actually explaining to the trustees, the members, these are your responsibilities and you should err on the side of caution when entering into these transactions. And really there won’t be that practice until something significant happens and we really wouldn’t want something like Storm Financial coming about through the property market. The biggest risk when you’re talking about a non-arm’s-length transaction is the potential for the fund to be found as non-complying. It’s a risk to the member entitlements and that’s a huge risk.
KL: If we move onto the broader topic of LRBAs, are they a real problem for the sector or do they actually offer enough benefit to outweigh any concerns?
RP: One of the things we came across the other day was the super fund that was behind a number of apartments in the same block. In fact, the question is asked, do we have to set up 13 seperate LRBAs for this acquisition and that in itself can be a deterrent to go through that whole process just for the end result of getting that property into super. I think it can be quite restrictive.
GA: I think in general LRBAs are great. Australians like property in one shape or form, particularly if you live in Sydney. There are a number of under-45s who have got quite a significant amount of their income each week going into super. So when you’ve got young kids wanting to rent or take out mortgages in Sydney, at the end of the day they don’t have much money. They can’t go out and build a deposit to get another investment property. It’s just too hard. So there’s that money in super, maybe in a retail or industry fund, and some of them are going to make up their mind to go and do it themselves. And the fact that they can go out and borrow to go into property, which is what they would do outside if they had the money, but because the government’s diverting it all into super, it just isn’t an attractive plan for them. But the issues that are raised, like it’s actually overheating the market, are false. If you have a look at who’s talking LRBAs down, you’ll see it’s usually a bank financial planner or someone from the industry funds. All those funds have the capacity to set up an LRBA, but the only people who actually do it are self-managed superannuation trustees and that’s the issue. It’s almost like class warfare again.
AC: To strategic advisers like myself It’s the clients’ goals, needs and objectives that are important. What do they want? Some people are property people. Some like to invest in shares. My only comment would be, from a strategic perspective, is how tax effective is it? I mean, if you do have a property outside of super, would you want to own a property again inside superannuation if that was your only asset? That’s my only concern. If your super fund is large enough where you can use gearing in superannuation and have an investment portfolio, where you diversify, then that ideally would help them achieve their retirement scenario, or their financial freedom, without the risk of putting all their eggs in one basket.
GC: I mean, is it a good thing? It’s certainly not inflating the property bubble in any way and I mean the Reserve Bank and that statement last year, I was a little bit disappointed because it did talk about the increase in size of SMSFs as an asset class. Limited recourse borrowing is a very, very small proportion of total assets, in fact, it’s less than 1 per cent. It’s going to take a huge movement into property, especially with limited recourse borrowing to inflate the market size with superannuation.
KL : So is a review of LRBAs needed?
GC: It is included in the wider Financial System Inquiry and we’ve spoken to them. It surprised us from the point of view that the original terms of reference were quite general, yet when we go down to specifics, they said there are a few self-managed fund things we’d like to talk to you about and one of them was limited recourse borrowing. Now, what I think they may have done there is that recommendation by Cooper that limited recourse borrowing be reviewed after two years has been folded into this.
GA: Look I don’t think it’s an issue really. Should there be reassessment? At the moment there are some very open conditions in the way that it’s specified and there’s no regulation that just simply says you can borrow to acquire an asset. I don’t believe it needs a general reassessment. But then again I think with the Financial System Inquiry and the tax inquiry we’ve got targets on our backs – the whole SMSF industry. There was an article a couple of weeks ago saying SMSFs actually pay negative tax and they get more refunds than the government is getting because of the imputation credits. Again, that comment was issued by someone who’s not an SMSF lover, but you can imagine if those comments get out there, then I really think that’s going to be a big issue for us.
GC: Well there are two responses to that that I’ve got. One is that the rules are there, so why wouldn’t you use them in the way they’re required or they can be used without fiddling around at the edges. And the other one is that if you have a look at the large superannuation funds, the statistics that are published by APRA (Australian Prudential Regulation Authority) indicate that they’re very similar to self-managed superannuation funds. No large superannuation fund pays the full 15 per cent tax on its taxable income. Depending on the years, they were paying negative tax in some years and in other years they’re paying around two-and-a-half per cent to 5 per cent tax.
DTC: Moving on to a more macro and fiscal view, do you think there will be increasing budget pressure on high net worth SMSFs?
GA: Absolutely. We’ve been very lucky the government has kept to their policy saying that there’s not going to be an impact on superannuation the first term, but after that, I think out of all of the reviews we do, there may well be some changes, because I’m sure Treasury and the tax office will be quite happy increasing the tax take from not just self-managed, but superannuation as a whole. There’ll be backlash against it, but I can imagine the people are probably lining up to try and increase the take from us.
DTC: Graeme, are you seeing any indications or evidence this might be the case?
GC: There was [Treasurer Joe] Hockey’s statement about superannuation there a couple of months ago, which seems that it might be in this term of government, but if you have a look at the inquiries, we’ve got the FSI (Financial System Inquiry) interim report coming in on the 15th of July. Then sometime later we’ve got the review of the pensions and annuities. That seems to be around by the end of this year the paper will come out. And then as for the tax white paper, I think that that’s a long way off. It might be towards the end of next year, from what we’ve gathered on that. So what hole will superannuation fit into. Firstly, you’ve got the interim report from FSI. That’s about investments, so will that impact on the tax take from superannuation? Probably not, apart from maybe some investments being encouraged, like the infrastructure investments. Pensions and annuities, we may see something coming out about the rules surrounding pensions and annuities, both superannuation and all of the arrangements coming out of that. As for the tax white paper, I mean I think recently the Henry report was declared as good as dead. I think that’s just sitting in the bag there, waiting. It’ll rise again. Some of those recommendations of the Henry report will probably come through, so whether it’s this term depends on the urgency of the government. But I think definitely the next term. As Grant said, let’s keep our eyes peeled on that and see what goes on.
DTC: Andrew, this falls into legislative risk. Do your clients raise concerns about the ever-changing rules governing superannuation?
AC: Absolutely. We focus very much on retirement planning, and if someone comes to you 10 years out from retirement, and we start building a strategy in which we’re going to play within the rules, and maximise all the benefits that you’re entitled to, why not? We all pay taxes and they can complain, as Grant said, all they want about the fall from revenue from income tax, but here we are with the ageing population, and we have self-funded retirees. That’s really what has driven this great pool of the $1.4 trillion worth of assets, that people are taking responsibility for their future. Now to go and change the goalposts on these individuals? These are our high performers. What are you telling our talent in Australia of where to live if you’re going to change the goalposts for them? And what it will do is provide uncertainty.
We saw certainly with the Labor government in the final stages last year that people weren’t looking at superannuation. They had lost confidence in the sector. But now with the Liberal government they have been true to their word, and they said superannuation will not change, so please continue to save your money. So people are. But if there is any more uncertainty, I think, like anyone, that there will be behavioural scarring. From the government’s perspective, I’d say for every person that could self-fund – if it’s a couple, that’s two people I don’t have to pay $60,000 to every year, indexed twice a year. So instead of thinking short term, what the government needs to do is think long term. How do we continue to manage the balance sheet, not for a political term, but for the next 20, 30, 40, 100 years?
DTC: Compliance is also commonly affected by the changing goalposts. Do you get a lot of feedback about confusion and loss of confidence too?
RP: Well, I guess it’s all about compliance in our world, and I suppose the burning question that I’ve had for a long time is, why is it that we don’t have a superannuation commissioner that can take responsibility and be the go-to person for dealing with these high-level issues?
DTC: Do we think that would be a good idea?
GC: Well, I’d say no. I don’t think it’s the time to aggregate organisations that should be regulated in different ways. Self-managed superannuation funds are quite unique. Internationally, there are only a few systems like it and the reason for that is I think it’s been regulated correctly. That is, it’s a more technical regulation of those rules, and it’s probably a better way to look after those funds. If you have a more prudential approach, I would suggest that non-compliance would become greater because if you have a look at the big funds, that prudential approach works when you’ve got audit committees and things like that. Maybe there are some technical problems with some of those funds, but generally they run reasonably well, whereas self-managed funds are the opposite. You’ve got to technically control them in some way rather than say have you got an audit committee and you’ve got this committee, because those people don’t understand what that’s about.
RP: Well, I’m interested in hearing what everyone else is saying around it because I thought there should be a single point of responsibility. I wasn’t proposing it should be APRA; I thought it should be within the ATO that we have that person inside.
GC: Well, what would they do? Would they look at the superannuation system including the age pension and from a revenue point of view? When people say, you should put all the responsibilities of the current organisations in regard to superannuation, people are saying, well you should incorporate some of the roles of ASIC (Australian Securities and Investments Commission) into this new body and the ATO and then APRA. You end up with so many ideas that you wonder what their true role is. And how would they perform a general management role in relation to retirement incomes?
GA: I think the big issues that we’re facing, which is uncertainty around the law because there is so much money going into super. I’d just say again the National Tax Liaison Group that used to meet quarterly was pretty transparent, gave everyone an opportunity to feed through their relevant association issues. The tax office gave great consideration to this and some of the stuff that came out like the business real property ruling was good. That gives clarity for all of us, particularly a lot of issues that are raised. So I think there’s a lot to be said for that dialogue, but more importantly, that the dialogue doesn’t go on behind doors, but it’s actually minuted. Everyone can then rely on it, even if there’s a delay. I’m sure the commissioner likes it too because he’s actually hearing from you guys about what’s going on out there in the marketplace.
AC: And why wouldn’t you? I mean APRA regulates superannuation funds, but they don’t have the audit committees. They don’t have investment committees. They don’t have compliance committees. They need someone that has a voice, a legislative voice, to actually set guidance on what they can or cannot do, so then that from a technical point of view, they’re managing a self-managed super fund, you can be confident that you’re doing that within the realms of law and policy governing going forward.
GC: I suppose APRA looks after financial institutions in a very broad definition, whereas superannuation controls a lot of money and so do banks and credit unions. You can see the similarities in those types of organisations, but to put self-managed funds in there seems a bit strange. There’s that small business history.
AC: No I’m not saying APRA. APRA is a prudential regulator. Why is it a prudential regulator? Because the banks and non-banking financial institutions provide borrowing. You can’t lend it out of self-managed super funds above 5 per cent. So there’s no requirement for capital adequacy. And you are going to overlay Basel requirements onto a self-managed super fund? I definitely think not.
KL: Speaking of regulators and compliance, how do you feel the auditor registration process has developed so far?
RP: Interesting question. From what I understood there were over 12,500 auditors prior to introduction of the audit registration piece. I haven’t got much visibility on where it’s heading other than talking to a few audit practitioners. What I’m hearing is that of the 7000 who have managed to get grandfathered through the process, they took the opportunity to go and get registered because it was easy and it didn’t cost much. It’s going to be interesting, in my view, to see where those numbers fall for the end of this financial year and maybe into the next calendar year as well. I’m a bit dubious as to whether that number will rise. I’m not really sure. I personally think it might reduce slightly. It’s becoming more difficult in the audit world.
I mentioned earlier that the new trustee penalty regime is going to put a lot of pressure on auditors going forward. If we miss something, because we only sample check and it doesn’t come through in our testing piece, there are a number of people in the firing line and we’re obviously number one. Fortunately the limited liability scheme has been reintroduced again. But I think there’s a number of factors around that auditor registration piece. There’s the price war that seems to be happening out there and a number of cowboys and girls who are playing in the field.
GA: I’ve seen people signing off for $100.
RP: It’s really scary as to what they’re not doing. But I think for those who are starting to embrace some form of technology and who are maintaining a focus on quality, I don’t think price will become that much of an issue because if you look at the recent press from the tax office, whereby the tax office is using the contravention reports to scale the extent of the audit activities that they’re going to undertake with the trustees who have had contravention, that’s going to put a lot of emphasis back to the auditors to make sure that they’re getting it right, and either they are reporting contravention when they should or they actually shouldn’t be reporting contravention when it need not have been reported because of the consequences for the trustees. It’s going to be very interesting over the next 12 to 24 months and I’m not really sure as to where we go with it.
GA: Somewhere along the way, someone must have put their hand up and said there are benefits of having auditor registration with ASIC as opposed to the tax office. Am I missing something because it just doesn’t seem to me to make sense that ASIC’s doing the auditor registration. I can understand the licensing for accountants, but the auditor registration I just don’t understand it.
RP: It’s interesting then as to who imposes any penalties on the auditors when they are subject to disciplinary action. From what I understand, it’s no longer obligatory as an auditor to be a member of any accounting body, which used to be the requirement. So is that going to encourage auditors to drop their accounting body registration? Personally I think it would be stupid to go and do that.
AC: I think it’s because ASIC has the registers that you can search. They’ve already got the IT systems and I don’t think it went beyond that. From an investor point of view, mums and dads, they can go to one site to go check if it’s an authorised accounts firm, authorised auditor, authorised financial adviser.
GA: Personally, I don’t think ASIC wants anything to do with it. I mean they’ve just had their budget cut and I think they’re probably happy just doing their big company activity and I don’t think they want to be involved.
AC: As Ron said, it’s relying on self-reporting. Well, the ones that are self-reporting, I would say, they’re the good ones. What about the ones that you’re unaware of? How can you scale your audits to pick up the people who are contravening the rules?
KL: Are 7000 registered auditors enough to service the whole sector?
RP: I think what’s going to start happening is there will be a shift in audit approaches that just has to happen naturally. Those who are still doing it by paper will really struggle to get any level of scale. So, as I said before, technology really has to start being embraced going forward. Will there be the defragmentation in the audit world that’s been happening in the super administration world? Well, we haven’t seen it yet and I suppose that’s because not too many people want to invest in an audit business. I’m very passionate about it, but it is a risky business to be in. It’s going to become very interesting to see what the scalability of a lot of these smaller practices are. There were still a number of statistics around where some registered auditors are still doing less than five to 10 audits. I don’t think the tax office has released or has had access to any data recently to be able to confirm what those changes have been.
GA: So what are you going to do in the case where you’ve looked at an audit and noticed there’s a contravention? Do you go back to the client and say: “If I put this into a contravention report, then you’re up for a penalty?” Is that what’s going to happen?
RP: Well, every auditor takes a different approach. I think the most sensible approach is refer it back to the adviser or to the accountant to determine whether that rectification can occur prior to the lodgement of a contravention report. From what I understand, the tax office is looking very closely as to whether the contravention has been rectified, yes or no. I think a no answer would indicate a level of mischief that is still repeating itself. Whereas rectification tends to dilute the investigational scrutiny the tax office will take.
GA: Have you heard about how the tax office is going to enforce the penalties? When the contravention notice comes in, are they going to follow it up? I haven’t heard anything at all.
RP: I read something just recently saying that they are starting to risk rate the contraventions and starting to focus on those higher risk pieces first.
AC: Well, you just commented that the auditors technically could fracture between high-quality service and potentially the low end. So is there a point in the future where instead of waiting to the very end to do your contravention report, to maybe bring trustees in a bit earlier into the process to have a quick look, maybe on one or two months out, to just see what has gone on throughout the year so the adviser has enough time to work with the trustees to resolve these issues if they come about by accident.
RP: That’s already started to happen with the technology that exists in the super software in the administration piece. So the real-time analysis is starting to be present now. And I think the adviser world is a bit different to what it is for an accountant and an administration who may not necessarily be advising that client and may not be alert to the fact that there is a problem looming. Typically it gets picked up in arrears and that arrears piece is anywhere from one to 14 months after the event.
AC: There is a piece in self-managed super funds and that’s compliance that just doesn’t sit anywhere really. So SMSF administration, technically, that’s where it should be in applying on systems and audit is the last line of defence. But if you have good advisers, when you set up your self-managed super fund to begin with, and they’re giving you advice along the way proactively, it should make the process very easy for the auditors to say yes they’ve done the right thing, all the balls line up, that’s fine to sign off. But if you have a fund set up without understanding all the requirements and that education piece is missing because there’s no one sitting in the adviser’s seat. As a trustee, you are meant to engage with some of the necessary advice whether it’s around legislative risk or investment risk, so you’re in the right position to govern your funding in a way that it is compliant or continues to be compliant with the ATO.
GA: The big change probably over the last few years has been everything moving to the cloud, which just makes the auditor’s job so much easier rather than having to get all those work papers from some server somewhere in some accountant’s office. It just makes it a lot easier now to start a program that will allow you to actually find your risk, which means, at the end of day if you do that, all audit prices will continue to drop down the track. The days when some of the audit fees were around $2000 to $3000 for a self-managed super fund are gone. You can’t do that now unless you’re one of the big four firms.
RP: Well, I think you’re right, Grant. Not even going back beyond about three of four years, there used to be an expectation that audit fees would go up by 10 per cent. That’s a very big expectation.
GC: But do you think that will happen? I mean you’re talking 7000 auditors now. Many of those auditors, from what we understand, are still auditing less than 10 or 20 funds, so surely they don’t have a critical mass to make any money out of it. So whether that will all aggregate and maybe you’ll end up with 2000 or 3000 auditors who will actually have a critical mass to really influence the sector, and then maybe in the longer term the prices will increase annually.
RP: I think the audit fees have sunk a bit too low from what I can understand in terms of maintaining quality.
GA: So what do you charge per audit?
RP: Well, it just depends on a number of factors. We’re very technology based in our business. I personally think the audit fee for a typical accounting practice shouldn’t be below the $400 to $450 mark for just a standard cashier managed fund on market transactions. When you’re starting to get into some LRBAs and collectables and taxi licences, that takes time. So I think the smaller operators who are in that $200 or $400 less audit fee territory, I think they’ll probably start getting a bit concerned as to whether their quality standards are sufficient for the ATO.
AC: That’s the difficult thing about the registration process. If you’re choosing an auditor with your client and you don’t know what the quality of the auditor is, just because they charge less is not what clients are concerned about. What they’re concerned about is that they don’t end up with a fine or criminal and civil liabilities. It’s the importance of having someone who’s not handing it down to a junior who’s actually looking through line by line to give you that rubber stamp and keep you confident that you’ve done the right thing. So the registration process, in my mind, would probably reduce the number of auditors in the pool.
DTC: Speaking of compliance, the ATO has just been given new enforcement powers to issue fines to trustees. What do we think of the new measures?
AC: If a fund has four members who are trustees so you have to pay four times the penalty for the same contravention as the corporate trustee, who only gets issued one fine, it’s really unfair when compared to the corporate trustee scenario.
GC: It was something that when we saw the draft legislation we said well surely it means five times for a company because that’s how the corporations law works. And they said no and that was the end of the story. We’ve lobbied that a couple of times saying maybe there should be an equivalent penalty if it’s a corporation. Being in the industry for so long and having a look at what the original idea behind SIS was, it was to have sort of a system of parking tickets and it’s only taken about 20 or 30 years to get there.
GA: All the fines were there in the first place, but they’ve never been used.
GC: They’ve never been truly used because the regulators had been reluctant to use them because they were considered too heavy. But, I mean these penalties, they’re automatic, there’s no gradation of them. You cop $10,200 if you say you breach the in-house asset rules. In talking to Nathan Burgess from the ATO only recently, he was saying if there’s more than one penalty, then maybe we’ll only pick the worst penalty and then remit the other penalties. But it’ll be interesting to see what happens and I think it will be interesting from the point of view that when we see appeals against these and the objections against the penalties, what the courts will say on that. One of the things for Ron and auditors is that if you put in a contravention report, technically it means they can penalise any one of those, but by risk rating that, it’s not going to happen and I think the ATO will keep to its word on that. Otherwise you’ve got the great unwashed out there who are not going to audit the superannuation fund or be slack in the way they fill out the contravention report and they’ll get away with it and that’s not what we want. They’re the ones that need to be picked up and penalised if necessary.
DTC: Does the new regime place auditors under undue pressure, considering they have an obligation to report contraventions but don’t want unnecessary fines imposed on their clients?
RP: There are a couple of aspects to that. The first thing is what this penalty regime is doing is moving the importance of the audit from being one of what used to be just a commodity or necessary evil to one that can be a value-added piece. We often are contacted by our clients, being the accountants, the advisers, the administrators, ahead of advising us that there’s a contravention and seeking advice on how best to go and deal and rectify it. The other part of that is that I really applaud the new independence rules that are mandatory. That, to an extent, should circumvent the pressure that may be put on auditors from their clients not to report something because of the ramifications that it might have, not only for the client, but also for the adviser who might have incorrectly given that advice in the first place. We’ve come across that a few times. Unfortunately, as an auditor, you’ve just got to stand your ground and execute your role, which is to be the agent for the tax office.
GC: Well you’ve got a statutory role too. The penalties for not reporting certain breaches are on your head. It’s not on the client’s head is it?
DTC: Some of you have said the new fining regime is too harsh on individual trustees, so will the end result mean all SMSFs established from now will have a corporate trustee?
GC: When you consider that 90 per cent of all new funds have got individual trustees going back some years, it beggars belief because from a business asset protection point of view if you go bankrupt, if the assets are in the super fund and it’s owned by a corporate trustee, it’s much safer than if it’s in individuals’ names. The liability issue with the penalties, well most funds won’t be penalised anyway. So is that an issue? I think it adds a little bit of icing on the cake.
AC: Financial planning is definitely about assessing the risks of not what is just now, but what will come. If we’re talking about property, involving LRBAs or not, with tenants in the property there are significant risks and you definitely would have a corporate trustee under those circumstances. If you have an SMSF where they’re just investing normally in shares, managed funds, fixed interest, and it’s all listed, there’s not much risk that’s there and apparent. So you really need to think about what you’re doing and why you’re setting up an SMSF, having a real discussion with professionals, your solicitors, adviser and accountant and just say this is what I’ll be using it for and so this is how I would manage it. Again we need some clarification around how they’re going to penalise contraventions because I dare say if you had to pay $10,000 times four, $40,000 is a substantial sum of money.
GA: There’s not one argument I could possibly even imagine for individual trustees. People move in and out of super funds, they become incapacitated. So there’s always change and that means you’re going to change all the assets at some point and that’s easier with a corporate trustee.
RP: I think the biggest issue we’ve seen around not having corporate trustees, as Grant mentioned before, is the separation of assets issue. When you’ve got movements, particularly into the fund, it just becomes too hard to go and change your assets’ title each and every time.
