A year of challenges ahead

Darren Kingdon

The Small Independent Superannuation Funds Association (SISFA) believes 2013 will deliver more shocks to the SMSF sector as governments, competitors and regulators try to cope with the fastest-growing sector in what is a rapidly maturing financial services industry still reeling from the global financial crisis.

Pushback against SMSFs to be expected

SISFA expects more attacks from the industry funds and those parts of the public offer sector not embracing complementary SMSF strategies.

The planned departmental review of limited recourse borrowing arrangements for property assets held inside SMSFs should report in 2013 and leaves a question mark over this burgeoning sub-sector in SMSF investment strategies. Allegations of too many paperwork errors, residential property purchases following ill-advised share sales and questions over investment strategy issues, such as the merits of holding the majority of SMSF assets in one geared property, could provide fodder for larger funds to question the capabilities of trustees in managing portfolios. Our concern is that these ill-informed messages from the big end of town may unduly influence government policy to the detriment of SMSF trustees who want the right to choose their investment strategy.

In-specie share contributions expected to be banned

The official line is there are concerns at the Australian Taxation Office (ATO) and government levels that contributing listed shares to superannuation funds has resulted in tax and contribution cap manipulation to illegally benefit the SMSF or the related party. However, there is no evidence to this effect.

The practical reality is that there are a number of dates that could lie between the time of signing the relevant off-market transfer form and the date on which the transfer actually occurs at the share registry.

The draft legislation is very broad and the precise impact on in-specie share contributions is not yet known, other than to say SMSFs cannot acquire listed securities from related parties unless they are acquired in a way prescribed by the regulations.

Rather than use a sledgehammer to crack a nut, the lawmakers ought to simply prescribe the date on which the market value is determined if it really is a problem. The matter is already the subject of various ATO rulings.

Additional restrictions have also been imposed on in-specie benefit payments.

What is the mischief in this? Any restrictions on transferring an asset in specie out of an SMSF would have unintended consequences. For example, they may impede or prevent the winding up of an SMSF.

While it could be argued there is a potential mischief for off-market transfers into an SMSF, there is no basis whatsoever for in-specie transfers out of the fund.

More heartache with excess contributions taxes

The current system of capping of concessional and non-concessional contributions is inflexible, unindexed, doesn’t accommodate the changing nature of the workforce and severely taxes excess contributions to the point of discouraging retirement savings. It almost penalises those who do not start saving early and consistently, or allow for significant events affecting the adequacy of the retirement assets. SISFA has always been in favour of a more flexible or dynamic approach, such as adopting a ‘lifetime’ cap on concessional and  non-concessional contributions to allow people to catch up at times when they are able to or alternatively use a system of rolling caps over a period of, say, five years.

Extra restrictions for insurance arrangements

There is also the matter of the proposals to ban self-insurance inside super funds, which appears to apply to SMSF self-insurance arrangements as with other regulated funds, unless funded via traditional insurance policies.

Also to be outlawed are funds holding insurance policies that don’t match the necessary conditions of release. So presumably this means funds holding trauma policies are to be outlawed and some total and permanent disablement policies are to be outlawed (for example, those linked to own-occupation or other restricted disability classifications). This is because the permanent incapacity condition of release is closely linked to the any-occupation disablement classification.

2013 – a testing year

The effects of the new ‘speeding ticket’ penalty regime introduced from 1 July 2013 coupled with tighter regulations for separation of assets and investment strategies will place increased pressure on trustees and their advisers in 2013.

SISFA expects a testing year on the legislative front as well, but we would like it to be a fair and open discussion on the sector as a whole rather than the divide and conquer approach so often used to target the SMSF industry in the past.

Let us preserve the rights of the investor to make their own decisions and not be dissuaded by broader industry chatter and obstruction.

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