self managed super: Issue 29

QUARTER I 2020 | ISSUE 029 | THE PREMIER SELF-MANAGED SUPER MAGAZINE

PROFILE LARA BOURGUIGNON

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FEATURE

STRATEGY

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AUDIT

NALE Nature and ramifications

High-end funds Characteristics and issues

Property holdings New regulations imposed

Investment strategy Professional implications

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COLUMNS Investing | 24

Value and growth approaches not mutually exclusive.

Investing | 28

Issues to consider with holding direct property.

Strategy | 32

What high-balance SMSFs are like.

Compliance | 38

Ingredients for a sound investment strategy.

Legal | 41

Possibility of state-based legislation becoming a reality.

Strategy | 44

The strength of an enduring power of attorney.

Strategy | 47

Unconventional ways carry-forward contributions may play a role.

Investing | 50

A look at the past decade and what the next one holds.

Audit | 53

NALE THE NEW ARM’S-LENGTH HEADACHE Cover story | 16

FEATURE Where to now for accountants’ licensing | 20

Accountants’ licensing once again under examination.

Professional obligations in reviewing the investment strategy.

Compliance | 56

New items to consider for reporting on property holdings.

Strategy | 59

The significance of fettering for estate planning.

REGULARS What’s on | 3 News | 4 SMSFA | 5 CPA | 9

PROFILES Lara Bourguignon | 14

CEO describes the restrictive nature of constant legislative change.

Leo Guterres | 36 Practice founder believes providing financial advice is a great opportunity for accountants.

SISFA | 10 IPA | 11 CAANZ | 12 Regulation round-up | 13 Super events | 62 Last word | 64 QUARTER I 2020

1

FROM THE EDITOR DARIN TYSON-CHAN INAUGURAL SMSF ASSOCIATION TRADE MEDIA JOURNALIST OF THE YEAR

What’s it all about?

During the final quarter of last year, the powers that be decided to extend the reach of the non-arm’s-length income (NALI) provisions to have them include non-arm’slength expenditure (NALE). As we all know by now, it means if any income of an SMSF was generated incorporating a situation where the fund benefited from receiving services charged on a non-commercial basis, that income is subject to being treated as NALI and as such taxed at the top marginal rate.

Given the lack of foresight we’ve seen from Canberra in recent times, I’m really not sure if the implications of these new provisions were really understood when being formulated. To that end, the NALE rules now have a lot of accountants who have their own SMSFs running scared.

That’s because they may have been performing the administration function for their fund at no cost, a situation that could now trigger the NALE provisions, putting all of their SMSF’s income at risk of being taxed at the top marginal tax rate. This includes capital gains.

Considering the significant and severe nature of the NALE rules is now beginning to be understood, illustrated by the accountants’ situation, it’s difficult to understand what is trying to be achieved here.

When the NALI legislation was enacted it was clear why it had come to pass. It stemmed from related-party loans to SMSFs that were issued with a 0 per cent interest charge. The ATO deemed this to be unsavoury and likely to cause compliance issues for the funds involved, so worked to put a stop to the practice – basically a legal amendment made to address a specific problem.

But why was NALE introduced? What type of unfair advantage, or perceived rort, were SMSFs engaged in because some of their trustees could

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use their own personal skill to help them run their own superannuation fund? Was it a fear real estate agents were getting a leg-up in acquiring a property for their SMSF? Was it a concern financial advisers were getting a benefit from knowing how to construct an investment portfolio for their SMSF? Or was it a concern accountants were potentially getting a free administration service for their SMSF? Surely none of the scenarios mentioned above can justify the severity of the NALE legislation as it seems to be the epitome of using a sledgehammer to crack a walnut.

Or have the new provisions been introduced with a more sinister motive of capturing additional government revenue, with one senior SMSF stakeholder believing this windfall might be as much as $30 billion.

And as for the problems, we’ve only just scratched the surface. If, say, accountants have to charge their SMSF a commercial rate for an administration service they personally provide, what would be deemed an appropriate rate?

Would it be based on the cheapest accounting fee available within a certain geographical radius or some other rate? After all, this situation does not present itself to having a ready-made yardstick like commercial interest rates for loans.

This point alone would introduce additional complication to running an SMSF and additional work for the ATO in policing these rules – something of which the regulator is no doubt aware.

Since the motivation for introducing NALE is not apparently obvious, the question must be asked if this is a situation where legislation is being introduced as a solution to a problem that doesn’t even exist.

Thankfully the NALE consultation period is still alive, giving the sector hope the legislation will be changed to be more reasonable and practical.

Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au Senior journalist Jason Spits Journalists Zoe Paterson Tharshini Ashokan Sub-editor Taras Misko Head of sales and marketing David Robertson sales@bmarkmedia.com.au Publisher Benchmark Media info@bmarkmedia.com.au Design and production RedCloud Digital Printer Newstyle Printing 41 Manchester Street Mile End, SA 5031

WHAT’S ON

Super Sphere How to audit an SMSF VIC 3 March 2020 Crown Melbourne 8 Whiteman Street, Southbank NSW 12 March 2020 Sheraton on the Park 161 Elizabeth Street, Sydney QLD 20 March 2020 Sofitel Brisbane 249 Turbot Street, Brisbane WA 26 March 2020 Duxton Hotel 1 St Georges Terrace, Perth

DBA Lawyers Strategy Seminars TAS 11 March 2020 The Sebel Launceston 12-14 John Street, Launceston WA 13 March 2020 Mantra on Hay 201 Hay Street, East Perth NSW 17 March 2020 Quality Hotel Noah’s On the Beach Corner Shortland Esplanade and Zaara Street, Newcastle 18 March 2020 The Portside Centre – Symantec House Level 5, 207 Kent Street, Sydney QLD 19 March 2020 Christie Corporate Conference Centre 320 Adelaide Street, Brisbane

To have an upcoming event featured on the What’s On page, please contact darin.tyson-chan@bmarkmedia.com.au.

VIC 19 March 2020 The Savoy Hotel 630 Little Collins Street, Melbourne

WA 26 March 2020 Mercure Perth 10 Irwin Street, Perth

SA 7 May 2020 Sage Hotel Adelaide 208 South Terrace, Adelaide

QLD 31 March 2020 Sofitel Brisbane 249 Turbot Street, Brisbane

ACT 19 May 2020 Canberra Rex Hotel 150 Northbourne Avenue, Braddon

NSW 1 April 2020 Rydges Sydney Central 28 Albion Street, Surrey Hills

Institute of Public Accountants 2020 Victoria Congress VIC 5-6 March 2020 RACV Healesville 122 Healesville-Kinglake Road, Healesville

2020 WA Congress WA 12-13 March 2020 Optus Stadium 333 Victoria Park Drive, Burswood

SuperConcepts SMSF Specialist Course NSW 10-12 March 2020 SuperConcepts Level 17, 2 Chifley Square, Sydney VIC 17-19 March 2020 SuperConcepts Level 3, 530 Collins Street, Melbourne

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SMSF Professionals Day 2020 Inquiries: Jenny Azores-David (02) 8973 3315 or email events@bmarkmedia.com.au

QLD 21 May 2020 Hilton Brisbane 190 Elizabeth Street, Brisbane SA 26 May 2020 The Playford 120 North Terrace, Adelaide VIC 28 May 2020 Pullman Melbourne on the Park 192 Wellington Parade, East Melbourne NSW 2 June 2020 Swissotel Sydney 66 Market Street, Sydney

VIC 24 March 2020 Rydges Melbourne 186 Exhibition Street, Melbourne

QUARTER I 2020

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NEWS

Good traction for advice JV model

By Darin Tyson-Chan Advice licensee Crescere Partners has experienced a good take-up of its joint venture offering to accounting practices, having formed 18 partnerships with accounting firms to date.

“What we’ve found in doing this is that it’s resonating with accountants. We’ve got agreements with 18 accounting firms now and if we decided to, we could accelerate the number of joint ventures we have quite quickly,” Crescere Partners chair David Smith told selfmanagedsuper.

Smith noted the licensee would be very happy if it could strike up another 12 joint ventures before the end of the year, but admitted the expansion process had to be managed carefully.

To that end, he said it was

Accounting advice JV takes hold. vital for his organisation to recruit financial planners who understood the nuances of working with accountants.

He noted any expansion for his business would ideally include joint venture arrangements with accounting firms located in Melbourne and Brisbane to add to Crescere’s current presence in Sydney and Adelaide.

Under its joint venture model, Crescere operates as an advice

business with its financial planners operating under the control of the relevant accounting firm.

“We are essentially a financial planning firm, but our planners walk around with a different business card depending on which accountants they’re working for,” Smith revealed.

“So if we have a joint venture with an accounting firm, our planner will work for their clients from their office under the firm’s

own wealth brand. So for all intents and purposes the client feels it’s the accountant is providing the service and then all of the hard yards of doing the plans, managing the business and all the compliance is done by us.

“We then have a revenue share arrangement in place with the accounting firm so it gets a stream of revenue with the ownership established on a 50/50 basis.”

One of the strengths of the model is the absence of a lock-in clause if an accounting firm wants to terminate the arrangement, he said.

“The accounting firm can at any time buy us out if it wants to go its own separate way. It means the accounting firm is building a capital asset at the same time,” he said.

“The model really is resonating and it seems to me it could be one of the future directions for how the community is going to receive financial advice serviced via accounting firms.”

Two-lump-sum limit too restrictive

By Tharshini Ashokan The SMSF Association (SMSFA) has labelled the two-lump-sum limit on the payment of deceased SMSF member benefits unnecessary and has called for its removal.

In its 2020/21 budget submission, the SMSFA proposed the federal government remove the two-lump-sum limit, blaming the restriction for causing pointless complexity for trustees upon the death of a fund member.

“We believe this unnecessary restriction is not needed in the current superannuation environment with the compulsory cashing rules designed to ensure that death benefits are dealt with as soon as practicable, and with the introduction of the transfer balance cap

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(TBC) limiting how much money a beneficiary can retain in the concessional superannuation environment,” the industry body said.

“We believe the maximum two-lumpsum restriction is outdated and does not allow multiple access to lump sum superannuation benefits in the event of common administrative delays, such as delays in receiving insurance payouts in the event of death or managing a recipient’s member’s transfer balance account.

“We also believe that this limit is inconsistent with other parts of the law which allow for the flexibility to fully commute an account-based pension.”

Pointing out the current super system did not allow individuals to use lump sums to avoid tax and required them to cash benefits as soon as practicable, the SMSFA said its

proposal to remove the two-lump-sum rule had the benefit of carrying no revenue or integrity risk.

It also offered an alternative to its proposal, suggesting the government consider an amendment to the Superannuation Industry (Supervision) (SIS) Regulations 1994 instead.

The two-lump-sum limit could be retained if the government introduced a new subregulation to the SIS Regulations, allowing lump sums resulting from transfers in kind and the commutation of a retirement-phase income stream payable under the current regulations to not be in breach of the cashing restrictions, it noted.

“The risk associated with this recommendation is negligible, with no impact on the operation of the TBC or taxation of death benefits,” it said.

NEWS IN BRIEF

New education program from SMSFA The SMSF Association has launched its accredited educators program with Heffron, Smarter SMSF and SuperConcepts the organisations to have been approved as the body’s inaugural accredited educators.

The program has been established in response to member feedback calling for greater flexibility from the SMSF Association’s educational framework that would allow them to fulfil their continuing professional development (CPD) obligations more easily.

According to the association, the new program will be advantageous to members because it will make it easier for them to meet their CPD education requirements, as well as those imposed by the Financial Adviser Standards and Ethics Authority, will give them better access to high-quality, comprehensive and up-to-date content presented by leading technical experts, and give them the ability to experience a greater variety of SMSF training and education from a number of providers.

In addition, it will provide members with the assurance that any education received from an accredited educator has met the SMSF education industry standard and is SMSF Association compliant.

Review needs longterm focus The Retirement Income Review (RIR) should collect information that will lead to the long-term improvement of the retirement sector rather than short-term fixes to current perceived problems, according to the Self-managed Independent Superannuation Funds Association (SISFA).

In its submission to the RIR, SISFA stated it supported the key objective “to establish a fact base of the current retirement system that will improve understanding of its

operation and the outcome it is delivering for Australians”, but added the fact base should have a forward-looking focus.

“We submit that the panel should be careful, however, not to present the government with data and facts relating to the current performance and position of the retirement sector as this might misdirect their policy formulation to focus on fixing perceived anomalies with the current situation to the detriment of the long-term sustainability, fairness and adequacy of the system,” it said.

SISFA also stated it believed government policy changes in the past had focused mainly on short-term impacts to the budget and not on the long-term economic and social benefits of an effective retirement incomes system.

Bushfire effect beyond properties Trustees can expect valuations on properties affected by bushfires to have a direct impact on some SMSFs, a technical expert has warned.

SMSF Alliance principal David Busoli said while most SMSF trustees with properties in fire-affected areas were unlikely to notice the immediate financial effect on their super, the full impact of the bushfires on contribution eligibility and pension levels would be made obvious at the start of the next financial year.

David Busoli “Pre-fire valuations will be used for the 2019 financials so will still be a determinant for each member’s 2019 total

super balance. They will also contribute to closing pension balances, which will determine the minimum level of pension that must be drawn for the balance of this financial year,” Busoli noted.

“Apart from a possible shortfall of income to fund such pensions, due to a lack of rent from fire-affected properties, the effect of the fires on contribution eligibility and pension levels will not become apparent until the beginning of next financial year.”

Priority is capital protection The latest research into investor behaviour has revealed capital protection as opposed to capital growth is the priority for many individuals based on a predominantly pessimistic view about the Australian share market.

The Investment Trends “Investor Product Needs Report” showed the main objective of investors over the coming year is to protect assets and income from market falls, with 15 per cent of respondents expressing this sentiment as opposed to 11 per cent in 2018.

Survey participants showed a similar attitude toward the goal of maximising the capital gain from their investments, with 21 per cent confirming this was still important to them in 2020, down from 26 per cent last year.

“More investors are prioritising capital preservation and generating a stable income stream. To effectively achieve these priorities, many realise they need a diversified portfolio, which has led to the rising adoption of managed investment products,” Investment Trends senior analyst King Loong Choi said.

The aforementioned objectives of those surveyed reflect their pessimistic outlook regarding the expected performance of the Australian share market, with the average investor anticipating a 1.9 per cent rise in the All Ordinaries Index in 2020, despite an 11 per cent gain in the index in 2019.

QUARTER I 2020

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NEWS IN BRIEF

Specific SMSFs rising A mid-tier accounting firm is witnessing an increasing number of SMSFs being established to play a more strategic and specific role in client wealth building and retirement activities.

any negative and unwarranted misconceptions and worries in the minds of stakeholders.

SMSF Association chief executive John Maroney used the ATO’s recent activity scrutinising the investment strategy of particular funds to illustrate this point.

financial services royal commission.

“Principal advisers and owners of small practices have explained that their clients now ask who licenses the firm and which products they are able to recommend,” recruitment specialist Hays said in its January to June 2020 jobs report.

As a result, the employment agency said smaller wealth management firms are avoiding associations with the banks and larger dealer groups, with many of them changing licensees.

The report also highlighted the effect the royal commission is continuing to have on adviser numbers at all levels with senior practitioners exiting the industry and fewer senior individuals taking on other roles within financial services.

John Maroney Andrew Yee “From our client base we’re seeing less and less people setting up funds in order to do everything themselves, like buying equities. More so they are setting up SMSFs to purchase a business property to lease it out to themselves, as well as residential and other commercial [properties],” HLB Mann Judd superannuation director Andrew Yee said.

Many of HLB Mann Judd’s clients are satisfied members of either a retail or industry fund and as such are unwilling to change their situation completely by rolling all of their retirement savings into an SMSF, he noted.

However, Yee warned individuals using SMSFs for these purposes might encounter problems given the current regulatory climate regarding fund investment strategies.

Better regulator comms needed The SMSF Association has called on financial services regulators to improve their communication regarding the sector so as to eliminate

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“The ATO caused a bit of a kerfuffle when it wrote to 18,000 self-managed super funds saying it was concerned about the levels of exposure to a single asset class.

It turns out [the ATO] was just focused on funds that have over 90 per cent of their assets in a single property with gearing,” Maroney said.

“Now we’re concerned about property shops and other things, but we think the ATO could have clearer communication rather than frightening everyone in the whole system. “[Why] frighten 1 million people when the concern was [over] a particular subset that perhaps needed to think again about whether their investment strategy and the way they were executing that was fine?”

Licensees in client spotlight A recruitment firm has noted financial advisory clients are increasingly conscious and concerned about the dealer group or licensee to which their planner belongs in the wake of the disagreeable industry practices of some organisations uncovered by the

Class buys NowInfinity SMSF software and administration service provider Class has purchased compliance and documentation platform NowInfinity in a deal valued at up to $25 million.

Class announced the deal in January, stating the transaction would be paid for using $10 million in cash plus $10 million in Class shares, escrowed for two years, and both payments would take place on completion of the transaction.

Deferred consideration payments of up to $5 million will also be paid in April and October of this year, which will be dependent on the successful integration of NowInfinity into the Class business, which will partly fund the deal with a new $10 million debt facility.

The transaction is expected to be completed by 1 February 2020 and the founder and chief executive of NowInfinity, Amreeta Abbott, will remain with the business in the role of NowInfinity chief growth officer.

Class stated the deal was its first complete acquisition and will be a strategic pillar in its Reimagination strategy, which aims to boost the company’s presence as a technology services provider.

“A real eye-opener and opportunity to realise just how rapidly our industry is changing!”

– Michael Roohan, MJR Accountants

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It’s an amazing event – nothing else like it” – Kylie Parker, Lotus Accountants

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SMSFA

Common-sense approach needed to legislation

JOHN MARONEY is chief executive of the SMSF Association.

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New legislation has the potential to strip some SMSF trustees of their concessional tax benefits, with the possibility they might have to pay a 45 per cent tax rate on any taxable income their SMSF earns in a financial year.

That doomsday scenario hasn’t come to pass yet with the ATO still working with the industry on how the legislation – the Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019 – will be implemented.

Industry insiders are hopeful the ATO will adopt a benign view of the legislation, but, at the same time, are extremely mindful of the fact a strict interpretation by the regulator could leave trustees who do their own accounts or improve an asset in their investment portfolio, such as an investment property, financially exposed.

The ATO’s thinking behind this legislation was quite transparent: it wanted to end any confusion around an SMSF’s non-arm’s-length expenditure (NALE). To put it bluntly, the regulator wants to be assured all of a fund’s expenditure and income are at arm’s length, and where trustees fail to ensure that happens, they will fall foul of the long arm of the ATO in the form of tax penalties being imposed on any income-producing assets the expenditure has affected.

A good example of how this might work is an SMSF trustee who uses the services of an accounting firm where they are employed to do their fund’s accounting work for free. In these circumstances the ATO could decide the SMSF has received the accounting services under a non-arm’s-length arrangement, with the consequences for the trustee being quite dire. How dire? Well, the regulator could declare all the income earned by the SMSF in that financial year to be nonarm’s-length, meaning the trustee’s tax liability will be at their top marginal rate. To ensure this doesn’t happen, the trustee must pay the accounting firm the market fee for any accounting services.

But it’s a different matter if SMSF trustees, acting in their capacity as trustees of a fund, do their own accounting services. In these circumstances they don’t have to ‘pay’ themselves and, more importantly, their fund will not lose its tax concession. But even in these instances where trustees do their own work in a private capacity, there can be pitfalls. For example, they can’t use their firm’s equipment or assets or lodge the annual return using their tax agent registration.

From the perspective of the SMSF sector, legislation introduced to clarify non-arm’s-length expenditure might result in it being more confusing, especially when it comes to distinguishing between what trustees do in their professional role as opposed to their trustee role. And assuming they inadvertently cross the NALE line, should the penalty – being taxed at their top marginal rate – be so draconian.

After all, accounting fees that haven’t been paid occur too late to have any discernible impact on producing or affecting income, and, as such, it would seem the penalty does not fit the crime. It’s the same with other fees, such as legal, financial planning and advice, except in this case they are incurred too soon in the process so any infraction of NALE should be seen in this light.

Professional services are not the only grey area when it comes to this legislation. Trustees providing specific services for an asset in their fund could also find themselves to be in breach of the act. Take, for example, a builder who uses his professional equipment to work on a property he has acquired as an investment for his SMSF. By doing so he could potentially be in breach of the non-arm’s-length legislation and lose tax concessions, although, in this instance, there is a saving grace: the penalty is isolated to the specific income-producing asset, that being the investment property.

The message is clear. Trustees providing free services to their fund that duplicate their commercial operations are treading a fine line. Charging market rates might be the best option.

The SMSF sector has been heartened by the fact the ATO is cognisant of just how tricky this legislation is and that determining whether a service or transaction is at arm’s length or not is not always straightforward, and is working with the sector to provide guidelines. What might be helpful is giving trustees a guide to what are typical trustee services, for example, accounting, bookkeeping and related record keeping, and minor property repairs, and therefore fall outside the scope of this legislation – and its harsh tax penalties.

Such a guide would be a good starting point. But nothing more than that. By its very nature tax law is always complex and it will take the SMSF sector and the ATO time to ensure there is understanding about how this legislation will be enforced. As always, seeking specialist SMSF advice can help avoid any pitfalls.

CPA

Regulators eye off low-balance funds

RICHARD WEBB is financial planning and superannuation policy adviser at CPA Australia.

A focus in recent times has been on the minimum balance needed to make the use of an SMSF worthwhile given the fees and costs trustees are likely to face.

The Productivity Commission in 2018 found SMSFs with less than $500,000 in assets were likely to perform significantly worse than Australian Prudential Regulation Authority (APRA)-regulated funds on average, whereas SMSFs with a balance of $1 million or more were “broadly competitive”. The commission also found costs for funds, relative to assets, had increased over the years. ATO figures cited by the Australian Securities and Investments Commission (ASIC) for 2016/17, in response to a question on notice, also showed funds with average assets of up to $200,000 posted negative net earnings, whereas larger funds showed positive returns.

Although ATO figures are averages where outliers may potentially skew results, the attention low balances have received from regulators is a sign they are being closely scrutinised. Yet, according to ASIC research, control over investments is consistently cited as the main reason consumers set up an SMSF, suggesting the fees and costs are of less importance among SMSF trustees.

The mismatch between preferences and outcomes fuels a genuine public policy issue: given the taxadvantaged environment superannuation provides, at what point does a preference for control become detrimental to retirees’ own retirement savings or taxpayers more broadly?

SMSFs, of course, have flexibility in ways APRAregulated funds are unable or unwilling to fully provide, with advantages ranging from basic taxation differences through to estate planning. The situation is also likely to continue where SMSFs can accommodate specialist investments that APRA-regulated funds cannot, meaning the decision to recommend this type of retirement savings vehicle to clients, regardless of balance, may sometimes be a necessity. For example, the need to set up an SMSF with a zero or low balance in readiness to receive certain assets, such as real property, or even a rollover. In such cases, there is no realistic cost comparison with APRA-regulated funds.

The cost consciousness of SMSF members itself is not insignificant. ASIC research found around

one-quarter of members were concerned what their previous fund charged and cited this as the primary reason for them to set up an SMSF. While the Productivity Commission recently concluded these were more costly than they could be, earlier research performed by Rice Warner for ASIC in 2013 suggested the annual costs of operating an SMSF could be competitive with APRA-regulated funds for balances over $250,000, provided the trustees undertook some administration obligations.

ASIC ‘s guidance in Regulatory Guide (RG) 175 highlights a number of factors that should also be considered by financial advisers when recommending SMSFs, including the desire to minimise fees and costs, together with access to the other benefits an SMSF can provide. The factors in RG 175, key client needs and objectives, as well as the risks of an SMSF, should all be considered as part of compliance with the best interest duty. Given ASIC’s research suggested in nine out of 10 cases the best interests of clients were not considered by financial advisers, it is no surprise SMSFs will be an ongoing focus for this regulator as outlined in its Corporate Plan 2019-23.

The Financial Adviser Standards and Ethics Authority Code of Ethics, in particular Standard 10, the duty to develop, maintain and apply a high level of relevant knowledge and skills, means the risks for advisers recommending SMSFs in marginal situations are high. A purely quantitative view of benefits and costs in favour of commencing an SMSF, for example, is likely to fall at the first hurdle if a client is not able and willing to assume trustee responsibilities.

In any event, the risks and costs of starting an SMSF or transferring an individual’s super balance into an SMSF must be understood by a prospective trustee.

While not exhaustive, ASIC’s Information Sheets 182, 205 and 206 provide further detailed guidance.

The public policy question asked about taxpayers more broadly is presently under review. The Retirement Income Review has been tasked with identifying the impact of current policy settings on public finances.

The attention being paid to fees and costs for accounts with low balances is unlikely to go unnoticed, particularly if there are likely to be future implications for tax and social security expenditure with an ageing population.

QUARTER I 2020

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SISFA

A take on the Retirement Income Review

MIKE GOODALL is a board member of the Self-managed Independent Superannuation Funds Association.

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You will likely be aware the federal government, under the auspices of Treasury, is conducting a review of the retirement income system and the Self-managed Independent Superannuation Funds Association (SISFA), like a number of other organisations, is providing a response.

Such a review is timely for in 2020 it will be 28 years since the superannuation system was made compulsory. Individuals who entered the workforce in 1992 will now be around 48 years of age with retirement on the horizon and starting to focus on the level of income and lifestyle they will be able to afford when they get there. They are the first generation who will have had the benefits of compulsory superannuation throughout their working lives.

The baby boomers (born between 1946 and 1964), however, have already retired or are close to retiring, many having spent half their working lives without any form of superannuation. A significant number of baby boomers are facing the reality their retirement savings will not last the distance, meaning they will need to fall back on the age pension.

Now the millennials (born between 1980 and 2000) are in the workforce, there is the opportunity to ensure the retirement system is set up to be sustainable and predictable so as to provide most of this generation with a super system that is adequate and fair and reduces the reliance on the age pension.

As people live longer, their retirement savings become stretched and may not cover the final phases of their lives when care and health costs could be high. Superannuation policy settings, especially the concessional contribution limits, need to be set high enough to allow people to save enough to support themselves throughout retirement and old age.

SISFA’s analysis has demonstrated the current $25,000 concessional contributions limit is inadequate.

As the compulsory superannuation system affects virtually all working and retired Australians, it is clearly important government policy decisions and supervision of the superannuation sector are based on a comprehensive understanding of its role in people’s lives and its function in the economy.

We believe government policy changes in the past have focused too much on short-term budget impacts and not enough on the longer-term economic and social benefits of an effective retirement incomes system. In addition, many of the legislative changes

in recent years have been aimed at high-income earners or members with higher balances. While these measures may impact on those people directly, the additional complexity such changes bring affects all superannuants. This is especially so on the basis that the complexity of such changes may decrease the engagement of taxpayers and increase the need for, and cost of, retirement advice.

While in past opinion pieces we have listed what we believe are the shortcomings of the current system, there are some features that could be readily changed to improve its adequacy, fairness and effectiveness.

The main ones are listed below: • reduce uncertainty – devise a way to lock in changes to the system for a long period, • clarify the purpose of the retirement system – withdraw the 2016 Superannuation (Objective) Bill, still shelved in the Senate, because it proposes an inadequate definition of super. Enshrine a target replacement rate as an objective of the system, • improve current constraints – increase the current annual cap on contributions or replace it with a percentage cap and index any absolute dollar figures involved in super by average weekly ordinary time earnings, • focused use of tax concessions – raise the income level at which superannuation becomes compulsory, giving lower-income taxpayers the right to have their employers pay their super guarantee sum directly to them rather than into a superannuation account. Reduce the ability for superannuants to withdraw a lump sum if the amount left is not enough to fund their retirement, • reduce complexity – require government departments to take into account the impact of the increasing complexity of the behaviour of Australians and their cost of super, perhaps requiring an external (non-government) auditor of such a process, and • improve understanding of the system and dispel myths – require Treasury to also report tax expenditure for super on an ‘expenditure tax’ basis as recommended by Dr Ken Henry in his tax review.

We sincerely hope broadly agreed principles on the purpose of superannuation and how changes in policy settings should be managed as the system evolves and matures will arise from this review.

IPA

Changes significantly affect vacant land

TONY GRECO is technical policy and public affairs general manager at the Institute of Public Accountants.

Until recently, a taxpayer could claim deductions for losses or outgoings incurred to the extent they relate to holding vacant land if the losses or outgoings were incurred in gaining or producing assessable income or if they relate to the taxpayer carrying on a business in order to derive assessable income. This is no longer the case.

Changes for deductions pertaining to vacant land were first mooted as part of the 2019/20 budget under the heading “Tax Integrity – denying deductions for vacant land”. The policy intent was to target taxpayers who have been claiming deductions for costs associated with holding vacant land when it is not genuinely held for the purpose of gaining or producing assessable income. Understandably, it is difficult to enter into the mind of the taxpayer to substantiate intent to ensure a deduction is not improperly claimed where the land is not genuinely held for this purpose. The problematic nature of proving intent has resulted in the government introducing a new section, being section 26-102 of the Income Tax Assessment Act (ITAA) 1997, to deny deductions for expenses incurred in relation to holding vacant land. There are two main exceptions to the denial of deductions as follows: • firstly, land used or held available for use in carrying on a business by the taxpayer or taxpayer’s affiliate, and • secondly, it will not apply to a corporate tax entity, managed investment trust or a superannuation plan, excluding an SMSF. In effect the changes will impact on individuals, SMSFs and discretionary or non-public unit trusts holding vacant land that is not used in carrying on a business for the purpose of producing assessable income. SMSFs do not traditionally carry on a business so the first exception does not apply.

SMSFs that had purchased land for development purposes will now be denied deductions on their holding costs.

If land that is vacant includes residential premises, associated expenses will not be deductible until the premises are leased, hired, licensed or made available for these purposes. These rules may apply to deny SMSFs a tax deduction for holding costs where the fund purchases a block of land on which a building is intended to be constructed. Costs commonly incurred in this scenario include borrowing costs, interest

incurred for loans to acquire the land, land taxes, council rates and the costs of maintaining the land.

Take for example a fund that purchased a block of land in August 2019 on which it intended to construct a residential property. The property was completed and advertised for rent in November 2019. What this means is the holding costs incurred by the fund would only be deductible from November 2019, when the property was available for tenants.

The loss of deductions may go into the cost base for capital gains tax (CGT) purposes, as part of the third element of the cost base, but is not included as part of the reduced cost base. In the event the costs would create or increase a capital loss, then they are permanently denied.

The definition of vacant land for the purposes of the measure is as follows: • There is no substantial and permanent structure in use or available for use on the land having a purpose that is independent of, and not incidental to, the purpose of any other structure or proposed structure.

Loss of deductions could potentially apply to newly constructed apartments affected by structural defects.

For the purposes of determining whether the land is vacant, section 26-102(4) of the ITAA treats a building as not being a substantial and permanent structure if it is residential premises constructed, or substantially renovated, unless the residential premises: • are lawfully able to be occupied, and • are leased/hired/licensed or available to be leased/ hired/licensed.

Due to its potential application to investors who have purchased apartments with structural defects, amendments were made to the bill before it was enacted into law. The net effect will be that the loss of deduction will not apply if the land becomes or is treated as being vacant due to significant and unusual events or occurrences outside the reasonable control of the entity, such as fire, flood or substantial building defects.

Investors affected by apartments with substantial building defects will therefore not lose their ability to claim deductions through no fault of their own, but the concession is only available for up to three years in these circumstances.

Lastly, the new law applies to costs incurred on or after 1 July 2019, regardless of whether the land was held prior to this date.

QUARTER I 2020 11

CAANZ

Learnings from Dawson v Dawson

TONY NEGLINE is superannuation leader at Chartered Accountants Australia and New Zealand.

12 selfmanagedsuper

The case of Dawson v Dawson last year contained some important takeaway messages with regard to an enduring power of attorney (EPOA) and how it operates in conjunction with the appointment of an SMSF trustee.

The case involved the circumstances of Peter and Estelle Dawson, who created an SMSF in 2005. Since establishment, the fund had individual trustees and the fund’s trust deed had never been updated.

In 2012 they separated and Estelle commenced proceedings to reach a financial settlement between them, including the money held in the SMSF. These matters were settled in March 2014.

It would appear both Peter and Estelle were receiving pensions from the fund, but there was no evidence Peter had nominated a reversionary beneficiary. He also had not completed a binding death benefit nomination. Peter died in December 2015.

As a result, a job of the trustee was to determine who was to receive a death benefit and how it was to be paid. At the date of the hearing in April 2019 nothing had been done to pay Peter’s benefit out of the fund.

Peter had been deemed to have lost capacity to act for himself in late 2013 and in March 2014 gave his son, from a previous relationship, Tony, his EPOA. This in turn meant Tony replaced Peter as a trustee of the SMSF. As part of the separation and financial settlement, Tony and Estelle were required to sell real estate owned by the SMSF, including land near Barrington Tops in New South Wales. Ultimately Estelle was to leave the fund and take her benefits out of it.

For reasons that are unclear, the sale of the land was delayed and was subject to litigation, which finally settled in March 2018 after mediation. Tony and Estelle had represented the SMSF at these negotiations.

In April 2018, Peter’s executor, George Holland, sought to replace Tony as trustee of the fund from the date of death. Holland, and others including the fund’s accountant, believed Tony’s appointment terminated with the power of attorney when his father died.

It is important to note Estelle is the primary beneficiary of Peter’s estate and when this judgment was handed down, Tony had made a family provision claim under this estate. At the time of writing, the outcome of the claim was not yet known.

Peter’s benefit in the fund at 30 June 2016 was about $1.3 million.

At issue here was the wording of the fund’s trust deed, which was dated from the time the fund was created.

Under the fund’s deed there were four situations when a trustee would cease to hold that office. The main situation of interest to us here concerned a trustee dying or becoming of unsound mind. The deed further said that if the trustee’s position became vacant, then the trustee’s legal personal representative could appoint another natural person to act as trustee and fill that vacancy and the person would have the same powers and may act as they had originally been appointed as trustee.

All parties agreed that on Peter’s death the EPOA terminated. But did this mean Tony’s trusteeship terminated too?

Tony argued before the court he had been appointed in his personal capacity and not through an EPOA and as such his trusteeship did not cease on Peter’s death. The court accepted this version of events, making the following observations: • the law recognises that a trustee is personally appointed, • a trustee cannot delegate their decision-making via a power of attorney (under the NSW Powers of Attorney Act 2003), and • this means a person appointed trustee under a power of attorney acts in their personal capacity, which means the person is personally liable for any breaches of trust and may be subject to civil or criminal penalties for breaches of trustee duties.

The judge in this case took the view that the fund’s trust deed was consistent with Tony being personally appointed and there was nothing in the deed that terminated his appointment on Peter’s death when the power of attorney terminated. He also said Tony did not act as the trustee for or on behalf of Peter pursuant to the power of attorney. “If that were possible, there would have been no need for the plaintiff [Tony] to be appointed a trustee in Peter’s … place,” he said.

As there was no provision in the trust deed for that personal appointment to be terminated when Peter died, and the power of attorney terminated, Tony’s trusteeship continues until he ceases to hold office as provided in the trust deed or is replaced by some other means.

REGULATION ROUND-UP

Louise Biti Director, Aged Care Steps Aged Care Steps (AFSL 486723) specialises in the development of advice strategies to support financial planners, accountants and other service providers in relation to aged care and estate planning. For further information refer to agedcaresteps.com.au

AGED CARE STEPS

Law removes salary sacrifice disadvantages Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Bill 2019 Legislation has been enacted to remove disadvantages for employees who engage in salary sacrifice.

From 1 January 2020, employers can no longer use salary sacrifice contributions to satisfy superannuation guarantee (SG) obligations or base SG calculations on the lower post-salary sacrifice earnings base.

SG obligations must be based on an employee’s ordinary time earnings (OTE) base, which includes the salary sacrificed OTE amounts.

These changes mean employers need to pay the same SG for an employee based on total OTE, regardless of how the employment package is structured.

ATO reviews top 100 auditors SMSF auditor checklist (NAT 75229– 09.2019) The ATO is currently reviewing activities of the Top 100 auditors.

The first 51 were reviewed in 2018/19 and the ATO hopes to complete the remaining reviews this financial year.

The top 100 auditors are responsible for auditing 33 per cent of all SMSFs, which account for $186 billion in assets.

Auditors in this category audit more than 500 funds a year, but on average audit 1500 funds.

The ATO is auditing this group as part of its compliance program, with a focus on understanding the methods, processes and controls used.

By the end of 2018/19, half of this group had been reviewed, with a review examining three-to five-audit files each.

The results were: • only 10 auditors were fully compliant, • a further 36 auditors required further education, which they received by letter, and • and three auditors were voluntarily deregistered, while another two were referred to the Australian Securities and

Investments Commission.

The main ATO concerns were insufficient audit evidence being obtained or failing to evaluate the evidence to demonstrate how the auditor came to an opinion.

Also worrying was the number of unsigned financial statements evident.

Following the findings, the ATO produced an SMSF auditor checklist to indicate what the regulator is looking for when it reviews an auditor.

This provides a good practice checklist for auditors.

Legislation has been enacted to remove disadvantages for employees who engage in salary sacrifice.

Timing of income tax deductions for contributions ATO Practical Compliance Guide 2019/D8 Tax deductions for super contributions are only allowed in the year the contribution is made.

This is deemed to be the date the super fund receives the contributions, not the date received by a clearing house or the date a bank transfer was requested.

As such, the timing of contributions made near the end of the financial year is important.

For practical purposes, the ATO has proposed to not apply penalties if an employer pays contributions to the government’s Small Business Superannuation Clearing House, provided the contribution is made before close of business on the last business day that occurs on or before 30 June, and as long as the payment is not subsequently dishonoured or returned.

This leniency is not proposed to apply to commercial clearing houses.

QUARTER I 2019

13

PROFILE

One on one with…Lara Bourguignon SuperConcepts chief executive Lara Bourguignon has had a career-long involvement with superannuation. She discusses with Darin Tyson-Chan the difficulty in balancing elements of fund administration with the fundamental characteristics of SMSFs and the restrictive nature of constant legislative change.

How did you come to be involved in the superannuation and SMSF sectors?

I’ve spent my whole career in financial services.

I’m an accountant by trade, but decided to take the commercial route rather than the chartered accounting route. I worked in a number of organisations in an accounting and finance capacity for the first half of my career, but in a superannuation context. Then I got the opportunity to move into the superannuation side of the business I was in, which meant spending time in corporate superannuation, group insurance, looking at the members and customer experience side and then more recently running SuperConcepts. So this is actually my first foray into SMSFs.

So how are you finding your first experience with SMSFs? I’m loving it. I recently attended an SMSF think tank hosted by ATO SMSF segment assistant commissioner Dana Fleming that included some of the better-known people in the sector, such as [Heffron SMSF Solutions managing director] Meg Heffron and [SMSF Association vice chair] Andrew Hamilton, and it made me realise it is such a unique part of the industry. There’s such diversity in terms of the geographic spread of service providers. The breadth of the market is so wide, but the players in

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it really work together for the benefit of the industry and that’s what I’m really enjoying about it. It’s fascinating. I learn something every day and you go from micro-technical issues all the way up to big macro opportunities. It’s great.

SuperConcepts provides SMSF administration services. Is this one of the most competitive and challenging areas of the SMSF market?

Yes absolutely. One of the paradoxes I think we’ve got to manage in this space stems from the unique characteristics of the sector. The appeal of SMSFs, and their difference, is the fact you can hold whatever you want in a fund and yet administration is a scale game really.

Through the different systems being used, such as data feeds, you’re trying to build scale into something that, by its very nature, is complex and differentiated.

Does that make the need to continually innovate imperative?

Yes. We launched our innovation lab about six months ago for this very reason and we’re about to go to market with some new developments. The other really important thing we’ve been refocusing on is the client experience and making sure we’ve got that connection with our clients. In servicing 20,000 funds we tread a constant fine line between retaining the pedigree of the local community-based-type ecosystem characteristics of the SMSF sector while at the same time, by necessity, implementing some institutional practices to enable us to

PROFILE LARA BOURGUIGNON run a business of that size sustainably.

Is there still a lot of scope for SMSF software development?

I think we’ve got a way to go. One of the biggest challenges in the industry still is the manual nature of a lot of what we do. So I do think through things like artificial intelligence and conversational UI (user interface) and robotics we will be able to remove some of that manual work. In that context we’re thinking more of the value proposition to the accountant or the adviser to then enable them to spend more time with their clients. So I think there is a way to go, but I’m sure at some point we might tap out, but who knows where we’ll be then.

How has the SuperConcepts business strategy evolved, particularly in light of AMP’s experience following the royal commission?

When I arrived the strategy had been to grow and consolidate and there was a five-year transformation road map that was really looking at how we were going to simplify the operations. The strategy is still right, but we’ve really spent the last nine months trying to consolidate, continue on the simplification agenda, making sure we’ve got that client proposition right and focusing on getting the basics right. The fact AMP has also been refreshing from the board to the CEO to the strategy means there are now similarities in the challenges both business arms are facing.

But it’s been really good for us to be able to batten down our end-to-end business, I guess in some respects, unimpeded. The proposition from AMP ownership, alongside owning an end-to-end business they were letting run autonomously, involved a strategic hypothesis that the organisation was one of the only providers in the market to offer default, choice, master trust, wrap and SMSFs with regard to superannuation. That hasn’t gone away, but we’ve also started to think about the capabilities we’ve got here at SuperConcepts we could almost sell back into AMP. So if you take the innovation lab as an example, that would be software as a service that will be saleable to our software clients, but it will also be usable by SuperConcepts in the administration of our funds and arguably applicable to a lot of work AMP does. We’re starting to think outside the boundaries of just

SMSF administration in the software space and that’s were there would be an opportunity to add value back into AMP and we’re trying to build that out over the coming 12 months.

SuperConcepts is also an education provider. How much of a priority is that?

We think it’s really important and in the last couple of years in the SMSF space the importance of education has continued to heighten and improve. We’ve probably had about 1000 trustees come through the courses we run over the last six or seven years and we put a lot of value on that. We’re very passionate about education and it’s the element that can really make a difference in helping trustees understand their obligations in running an SMSF, like the importance of having an investment strategy and maintaining proper documentation, and achieving goals like ensuring adequacy with their retirement savings.

How do you think the Financial Adviser Standards and Ethics Authority (FASEA) education requirements and the issues regarding limited licensing affect accountants providing advice?

We don’t support the reintroduction of the accountants’ exemption. We think there should be the same sets of requirements or clients should be afforded the same sort of protection regardless of whom they get their advice from. Whether it be accountants or advisers, I think we will see a mass outflow of practitioners over the next couple of years due to the education requirements and just some of the compliance obligations as well. We’re trying to make sure the things we’re working on will make it easier for accountants and advisers to do their jobs in a compliant way.

Are there too many changes being made to the retirement savings system?

I think the amount of change undermines Australians’ confidence in the superannuation system. I wouldn’t ever want to point to one particular piece or five particular pieces of legislation and say they were unnecessary compared to other pieces of legislation because I think in general it’s all well intentioned. But I do think ongoing changes

impact people’s confidence in the system.

Also, every time something changes it redirects the focus of administrators and software providers and means we concentrate on compliance instead of other things that could be adding value. That’s important as many people running an SMSF use an administrator because we give them comfort they are compliant. I’m not saying that’s not important, but I’d rather be innovating than having to think about we record things differently. I think we’re going to get to the point where SMSFs have to report more frequently, so focusing on that and making sure we can provide trustees with easier ways to do this is more meaningful than investing in regulatory changes.

What’s the most significant change you’ve seen in the sector?

It would be the change in the advice landscape with developments like FASEA and the regulatory requirements on the adviser to be able to look after clients. It’s just such a fascinating time to be in the industry to be able to see the way all of that is being applied and who will decide to retire and who’ll stay and what their business models will look like. Also the advances in technology that I think will continue.

If you could change one thing about the sector, what would it be?

It would be to stop the continual regulatory change. It would be nice to be able to run the business and focus on education, great reporting that provides valuable insights, great technology that makes running an SMSF more efficient and effective.

What’s the biggest challenge facing the space in the next year?

Getting the compliance items like the transfer balance account report right. Indexation may be introduced later this year and the current time delay with SMSF reporting and servicing clients who are still wedded to annual reporting for their fund will potentially be a significant challenge. So our business will be facing the test of how to help remain compliant within the new framework without moving to much more frequent reporting. Working with the ATO and other segments of the industry to facilitate that in a way that’s not hugely burdensome for trustees and administrators could be challenging.

QUARTER I 2020 15

FEATURE

THE NEW

NON-ARM’S-LENGTH HEADACHE SMSF advice professionals have been left waiting on the sidelines following last year’s introduction of new non-arm’s-length expenditure provisions from Treasury and the ATO. Jason Spits takes a look at what it means for the advice sector and whether the new playing field will favour them when the regulator releases its revised set of rules.

16 selfmanagedsuper

FEATURE NEW NALE RULES

In the classic children’s story Alice in Wonderland, the title character enters a nonsensical world of talking animals and animated playing cards after falling down a rabbit hole before waking and discovering it was just a vivid dream.

For the SMSF sector, the non-arm’s-length wonderland was partly closed on 1 July 2018 when legislation was amended to capture non-arm’s-length income (NALI) and tax it at top marginal tax rates.

Since that time, NALI has become a known and accepted quantity within the SMSF sector, but looming in the background has been the issue of how non-arm’s-length expenses (NALE) would be treated, and on 9 October 2019 the SMSF sector was invited to its own version of the Mad Hatter’s Tea Party with the release of ATO Law Companion Ruling (LCR ) 2019/D3.

Origins of NALE The release of the LCR – which it should be noted is only currently in draft form – and even the emergence of NALE should not be considered a surprise as it was first put forward in superannuation legislation in 2018 that did not pass through parliament prior to the May 2019 federal election.

That legislation, the Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019, did pass through both houses in mid-September last year and received royal assent on 2 October, carrying with it the original start date of 1 July 2018, effectively making the NALE provisions retrospective from the moment the act became law, and leading to the release of the LCR a week later.

This document has raised serious concerns for advisers and accountants who run their own funds, as well as for their trustee clients who may maintain an asset or investment using their own skills and resources, because while the LCR not only demonstrated how NALE would be processed, it also raised questions as to how deep the rabbit hole will go in applying it to expenditure or expenses related to the fund.

Nexus brings it all together The LCR states it “clarifies how the amendments to section 295-550 of the Income Tax Assessment Act 1997 operate in a scheme where the parties do not deal with

each other at arm’s length and the trustee of a complying superannuation entity incurs non-arm’s-length expenditure (or where expenditure is not incurred) in gaining or producing ordinary or statutory income”.

Importantly, it also introduces the issue of a nexus between the NALE and the ordinary and/or statutory income derived by the fund. In short, where a fund acquires services under a non-arm’s-length arrangement, such as those of an accountant or adviser running their own fund, that nexus is sufficient to render all income in the fund as NALI and taxed at 45 per cent.

DBA Lawyers director Dan Butler says the nexus issue “is an extreme and an extraordinary outcome which the legislative provisions were not intended to produce” and if enacted as proposed in the LCR will be an ongoing problem.

“Extrapolating the ATO’s view on this point would lead one to consider that any future income or net capital gain on all assets held by the fund at that time would also give rise to NALI,” Butler wrote in a recent technical article detailing the nature of the nexus.

“Based on the current draft ATO view, for example, a $100 reduction in an accounting cost for an SMSF could expose all future income and, on an extrapolation of the current ATO view, all future net capital gains on all assets to NALI. “While this example is an absurd outcome, it reflects the ATO’s current view that a general expense has a nexus to the derivation of all the fund’s ordinary income and statutory income, which includes a net capital gain,” he says.

Interestingly, the application of NALE in the LCR seems to differ from that presented in the Explanatory Memorandum to the act, which states, in paragraph 2.38, that “where there is a scheme that produced non-arm’slength income by applying non-arm’s-length expenses, there must also be a sufficient nexus between the expense/s and the income, that is, the expenditure must have been incurred ‘in’ gaining or producing the relevant income”.

This would appear to exclude any discounted fees or services from an SMSF adviser or accountant as they have no impact on the NALI situation.

However, Butler points out the LCR must

“Even where a professional charges their fund an arm’slength fee, for example, for accounting services, there is still the risk that in a subsequent AT O audit of their fund that it is decided that the fee charged is not arm’s length, potentially resulting in all the income of the fund being assessed as NALI and taxed at 45 per cent.”

Mark Ellem, SuperConcepts

also be considered when dealing with non-arm’s-length arrangements and that document makes it clear, in paragraphs 16 and 18, that a nexus can exist between NALE and ordinary or statutory income earned as a result of those expenses, and it can also Continued on next page

QUARTER I 2020

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FEATURE

clients as they will be forced to ask questions about transactions that never took place.

“As professionals we understand NALI and can see the transactions and ask questions about them, but with NALE, actions will have occurred but there is no sign of anything and we will have to look for what is not there with no way of being sure of what we need to find,” he notes.

Continued from previous page extend to all of the ordinary or statutory income earned by the fund.

Who you are matters The reason for this nexus creating such a widespread effect comes down to the issue of ‘capacity’, which, according to the LCR, is how the ATO views an SMSF accountant, adviser or trustee at the time they use their skills or resources to administer their own fund.

If they act in their capacity as a trustee, not drawing on any resources used in their profession or employment, including licensing, qualifications or insurances related to their work, they are considered to be acting in their capacity as a trustee. If they do draw on any of these resources, they are considered to be acting in an individual capacity and the NALE provisions will apply.

DFK Everalls managing director Rob Shelton sees this approach as running counter to the underlying ethos of SMSFs and the ability for people to be directly engaged in their superannuation.

“SMSFs are the best way to be engaged in superannuation and to beef up a retirement outcome by bringing your own expertise to the task, but saying someone can no longer use those skills is nuts,” Shelton says.

“This impacts more than just advisers and accountants and will include real estate agents managing their own property and tradespeople who own and maintain their real estate investments. Being told we can’t use the skills that are available to us is nonsensical.”

His view has been reflected in a number of submissions made to the ATO in October and November last year seeking changes to the nexus and capacity definitions within the LCR. In a submission from SuperConcepts provided to selfmanagedsuper, technical services and education general manager Peter Burgess says: “We are not convinced that discouraging professionals from using their own skills and expertise to manage their fund is an appropriate policy outcome.

“Whilst these individuals could simply choose to charge their fund an arm’s-length fee for the activity, we suspect many will

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Information underload

“Questions remain as to how auditors will administer NALE and how they will pick it up and work out in what capacity a trustee acted when the expenditure took place, which will become an expensive and bespoke process.”

Julie Dolan, KPMG

choose not to provide the activity given there may be uncertainty about what constitutes an arm’s-length fee and the severe consequences of getting it wrong,” SuperConcepts SMSF technical services executive manager Mark Ellem adds: “Even where a professional charges their fund an arm’s-length fee, for example, for accounting services, there is still the risk that in a subsequent ATO audit of their fund that it is decided that the fee charged is not arm’s length, potentially resulting in all the income of the fund being assessed as NALI and taxed at 45 per cent.”

Shelton says this uncertainty about what should be considered NALE will also affect advisers and accountants dealing with trustee

He is also concerned about the scarcity of information about the NALE provisions given the potential impact on the advisory sector and trustees.

“There is no education campaign at all and the only information we have to work from is the legislation, the LCR and the Practical Compliance Guide, and which trustee will read those? We are still working out what questions we need to ask ourselves and our trustee clients,” he says.

KPMG enterprise director Julie Dolan says there is a lack of information and awareness extended to auditors as well, with many still unaware of the depth of the issue.

“Questions remain as to how auditors will administer NALE and how they will pick it up and work out in what capacity a trustee acted when the expenditure took place, which will become an expensive and bespoke process,” Dolan notes.

“At present, I don’t see auditors as being aware or practically able to apply a specific expense approach given their separate workload around SMSF investment strategies and the extra information they will require for NALE.” Referring to the consultation period and submissions received on the NALE issues, she says the SMSF sector was in limbo as it waited for a pragmatic outcome from the ATO.

Temporary relief To this end, the regulator has taken some of the pressure off SMSF professionals with the release of Practical Compliance Guideline (PCG) 2019/D6, which states it will not enforce compliance with the NALE provisions for the 2019 and 2020 financial years.

Yet even this act of relief carries a hidden trap, according to Ellem, who says the transitional relief offered under the PCG only

FEATURE NEW NALE RULES

Quantum of mischief One of the key questions behind the NALE provisions is what amount of revenue the ATO and Treasury may be missing out on as result of SMSF practitioners, and trustees, not charging their own funds for work completed to administer the fund or its underlying assets.

In response to this question, the ATO states it is analysing industry submissions on the matter, while Treasury directed selfmanagedsuper’s attention to the Explanatory Memorandum for the act, adding “the NALI measure as a whole is estimated to result in a total gain to revenue of $30 million over the forward estimates period, reflecting the additional tax paid by non-arm’s-length lenders on interest income earned on loans”.

When questioned about the revenue expected to be recovered from SMSF advisers and accountants under the NALE provisions, its response was: “Treasury does not

refers to general expenses incurred by an SMSF, but not specific expenses.

He points to paragraph 9 of the PCG, which states the relief only applied to NALE of a general nature that had a nexus to income derived by an SMSF during those two financial years, and which is confirmed in paragraph 10, which adds the relief “does not apply where the fund incurred non-arm’slength expenditure that directly related to the fund deriving particular ordinary or statutory income during the 2018/19 and 2019/20 income years”.

“Consequently, accountants, administrators and those involved in preparing the SMSF annual return for the 2018/19 and 2019/20 income years still need to consider and review SMSFs where they incur non-arm’slength expenditure or where expenditure is not incurred and such expenditure has a direct connection to a specific source of income,” he says.

Uncertain future Beyond this, though, there is little SMSF advisers, accountants, trustees and the wider sector can do but wait for the ATO to respond to the submissions made during the consultation period last year. That does not mean there is a shortage of possible solutions

separately publish detailed splits of the revenue impacts of the provisions as they apply to different activities or entities.”

KPMG enterprise director Julie Dolan, however, believes the figure could be much higher.

Dolan says if the $745 billion SMSF sector returned a weighted average rate of earnings of 4 per cent annually, that would equate to close to $30 billion for the current year.

While the exact level of income earned by funds held by advisers, accountants and other sector professionals is unknown, it would still equate to tens of millions of dollars which could be considered as NALI and taxed accordingly.

“Based on these numbers there is a sufficient motivation to implement the NALE provisions and pursue the potential revenue off the back of fund-related expenses, which may be significant mainly due to the massive size of the earnings in SMSFs and the assets under management,” Dolan says.

being put forward.

Butler says the ATO has in the past treated any free service that added value to an asset as a contribution, and in this case could consider it a non-concessional contribution provided by the member that reflected the value of the service, effectively neutralising the need for the ATO to apply the NALE provisions.

It is an idea SuperConcepts has also put forward in its submission to the ATO, where it suggested the creation of a safe harbour threshold for all NALE, including general and specific expenses, and only expenditure beyond the threshold should be covered by the new provisions. “The safe harbour threshold should be sufficiently high to ensure the typical activities undertaken by the trustees to comply with the legislation does not give rise to NALE if the fund doesn’t incur arm’s-length expenditure in relation to those activities,” Burgess’s submission says.

He adds the activities that should be considered under a safe harbour provision would include the preparation and lodgement of an SMSF’s annual returns, the maintenance of records of the fund’s financial transactions and statements, investment advice and any activities required to comply with the sole purpose test.

Alternatively, Shelton recommends

the ATO could adopt a Part IVA approach, effectively dropping the general enforcement of NALE provisions except where the regulator deems it necessary to apply them.

“Bad policy gives rise to bad solutions and in this case attacks every cent of income with consequences not commensurate with the problem at hand,” he says.

“A better approach would be to use a Part IVA model that could be applied in extreme circumstances and where the ATO has found problems with non-arm’s-length arrangements. As the regulator it has the tools to go looking for these types of issues and to detect and expose them, instead of applying a measure to the SMSF sector that will not be applied to APRA (Australian Prudential Regulation Authority) and industry funds.”

Currently there is little indication the path the ATO will head down, with the regulator stating it has yet to confirm a release date for a finalised LCR as it is still processing the submissions related to the draft version.

Advisers, accountants and trustees are hoping it will be sooner rather than later.

While the PCG offers temporary relief, many SMSF professionals are preparing work on 2018/19 annual returns and are hoping for a more practical solution than the one currently on the table.

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FEATURE

WHERE TO NOW FOR

ACCOUNTANTS’ LICENSING The issue of licensing requirements for accountants wanting to provide SMSF advice is again under examination. Zoe Paterson finds out what the relevant stakeholders think the solution might be.

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FEATURE ACCOUNTANTS’ LICENSING

Ask almost any financial services practitioner and they will tell you the regulatory system for SMSF advice just isn’t working.

Reforms over the past two decades aimed at improving advice to consumers have resulted in multiple licensing and registration regimes, overlapping codes of ethics and continuing education obligations for accountants and advisers who work in the area.

Complying with the requirements is a huge expense, CPA Australia head of public practice Keddie Waller says. It costs $112,414 a year for a CPA practice with 400 clients, including 120 SMSF audit clients, to offer holistic financial planning services, according to CPA Australia’s analysis.

“Accountants are struggling to pass the costs on to their clients, so it becomes a loss leader in their practice and that’s not a sustainable business model,” Waller explains.

Rising costs have led some accountants who advise clients on SMSFs to stop offering that service. CPA Australia surveyed its members in April 2019 and found 36 per cent were considering dropping financial planning advisory services and 23 per cent were considering no longer providing SMSF audits.

Meanwhile, consumer demand for financial advice, including on SMSFs, is increasing.

The Australian Securities and Investments Commission (ASIC) found in its report, “Financial Advice: What Consumers Really Think”, that 41 per cent of consumers intend to get financial advice in the future, while 27 per cent had received advice in the past.

Deloitte Australia partner and national SMSF leader Liz Westover says accountants are in an excellent position to provide advice on SMSFs due to the robust educational, professional and ethical standards they already uphold, plus their existing relationships with consumers.

“Accountants have a unique opportunity in that they engage with their clients at least on an annual basis because of the tax obligations that our clients have,” Westover suggests.

“That is such a great opportunity for clients to be able to ask questions of their trusted adviser around some simple strategies and questions about superannuation and retirement savings. If we don’t make the most of that, the advice gap

“Accountants are struggling to pass the costs on to their clients, so it becomes a loss leader in their practice and that’s not a sustainable business model.”

Keddie Waller, CPA Australia

is going to grow even bigger.”

She plans to keep offering advice to SMSFs, but is frustrated with the existing regime.

“It’s expensive. It’s complex. And it’s really difficult to navigate all of the rules and requirements, and in particular how they interact,” she says.

The priority in any revision of the system should be to ensure the level of regulation is appropriate, Institute of Public Accountants (IPA) advocacy and technical group executive Vicki Stylianou says.

“In this country we tend to swing too much one way and then we swing too much the other way. It’s a case of striking the right balance so you’ve got the integrity and

regulation, but not to the point where it’s strangling the ability of consumers to get the advice they need,” Stylianou observes.

Professional accountants have obligations under ASIC, the Tax Practitioners Board (TPB) and the Financial Adviser Standards and Ethics Authority (FASEA). In addition, they may be members of an accounting professional body, the Financial Planning Association (FPA) and the SMSF Association.

Each organisation charges levies or fees.

Each has its own continuing professional development (CPD) requirements and code of ethics, and these are often inconsistent.

“For example, advisers are having to do a lot more CPD hours than they would otherwise have to do, which adds to the cost.

And that’s just one small thing,” Stylianou points out.

Harmonising the requirements of each organisation and reducing duplication would go a long way towards cutting costs, but the latest round of regulations, introduced by FASEA, is making matters worse.

Additional complexity Many accountants provide advice to SMSFs under a limited Australian financial services licence (AFSL).

The limited licensing regime began on 1 July 2016, replacing a previous exemption to ASIC licensing requirements that allowed recognised accountants to advise clients on establishing and winding up an SMSF. Under a limited licence, accountants can give personal advice about SMSFs, some aspects of a client’s existing superannuation holdings and so-called class-of-product Continued on next page

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Continued from previous page advice, such as whether or not to invest in ASX 100 shares. However, they cannot advise on specific products, such as an individual Australian Securities Exchange-listed company’s shares.

But FASEA’s education requirements, exams and code of ethics do not consider people who work under a limited licence.

Accountants who provide financial advice as a small part of their service offering must complete the same breadth of training as fulltime advisers operating under a full AFSL. Waller says this adds costs, but it’s the mentoring requirements of the FASEA professional year, rather than the study itself, that present problems for accountants.

“If I’m a professional accountant running my own practice and I want to become a financial adviser as well and bring that discipline into my practice, I have to be mentored for 12 months under the supervision of a financial adviser. You have to have the equivalent of 12 months’ full-time experience. If I’m running a practice and only doing financial planning one or two days a week, it’s going to take me five years to get that experience, which is not achievable,” she says.

“The other thing is the perception. If you’ve had a relationship with your clients for the last 10 years and suddenly you have to tell them that your professional adviser is someone they’ve never met and they have to oversee the advice, that’s quite a challenge.”

According to Chartered Accountants Australia and New Zealand (CAANZ) leader of advice Bronny Speed, the FASEA code of ethics, which came into force from 1 January 2020, creates another complication for people who work under a limited licence.

“The most recent FASEA code of ethics requires that you must look more broadly at your client’s position, but a limited licensee only allows you to look at what you’re licensed to do. In my view, therein lies a conflict. You must do research to find out what are the ramifications of your advice, but if you’re not licensed to do that, how do you do that?” she says.

The continuation of the limited licence has been up for debate since last August when a

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Treasury review of the TPB suggested a return to the accountants’ exemption. That proposal has been widely rejected by the industry.

CPA Australia, CAANZ, the IPA, the SMSF Association and the FPA have formed an alliance to work with regulators to find a preferable alternative.

CAANZ has been conducting workshops to seek members’ views. The workshops revealed members want to be able to give strategic advice that provides more than basic factual information, but less than full licensing would allow. They want to reduce red tape and therefore costs, while increasing education standards and maintaining consumer protections.

“That’s where we’ve got to get to, otherwise we’re going to have accountants leave in their droves,” warns Speed, who in addition to her role with CAANZ is the founding director of AccountantsIQ and works with accountants to integrate financial planning advice into their practices.

Speed is encouraging accountants to retain their licences or authorities to advise.

She is optimistic the five industry bodies, working collaboratively, will be able to come up with a solution that benefits consumers and the industry.

SMSF Association chief executive John Maroney would support a move to make it easier for accountants to provide strategic advice to SMSF clients on topics such as contribution levels, starting a pension and how to close down a fund that has become uneconomic or too difficult for a surviving

“Accountants have a unique opportunity in that they engage with their clients at least on an annual basis because of the tax obligations that our clients have.”

Liz Westover, Deloitte Australia

spouse to manage after their partner has passed away. SMSF clients find it frustrating when they can’t get simple answers from their accountants about self-managed superannuation, Maroney says.

“We really want SMSF trustees to be able to get basic SMSF support and advice from accountants or others without having to go through the full rigmarole of statements of advice,” he adds.

Product v strategy At the root of the issue is the fact SMSFs are considered under financial services

FEATURE ACCOUNTANTS’ LICENSING

regulation to be financial products.

Accounting bodies and others in the financial advice industry have long been arguing they should be treated as structures rather than products, and different rules should apply.

“There is a lot of advice and guidance that accountants have traditionally provided to SMSFs that was not product related but was more strategic, and we think that is something that accountants could do,” Maroney says.

However, not everyone agrees.

Regulators classified SMSFs as financial products through the Future of Financial Advice reforms, despite protests from accounting and advice bodies.

Self-managed Independent Superannuation Funds Association managing director Michael Lorimer says while accountants have a critical role to play in assisting SMSF trustees in the technical and administrative tasks involved in establishing, running and winding up the funds, they should not be specially treated when it comes to giving financial advice.

“It makes total sense that accountants as a professional, as a trusted adviser, should still be able to provide services in this space, but ultimately, I personally believe, there shouldn’t be any special carve-out just because we’re dealing with self-managed superannuation funds,” Lorimer says.

He does not draw a distinction between an SMSF and any other type of superannuation fund, be that industry, retail or small Australian Prudential Regulation Authority fund.

“A super fund is just a structure, granted, but a membership interest in either an SMSF or a non-SMSF public offer super fund is a financial product, full stop. That’s how the framework works, so to steer somebody towards an interest in any superannuation structure is financial product advice,” he says.

He agrees there are flaws in the existing regulatory system, but he does not see a need for a strategic advice category to cover SMSFs. “My view is that you are either operating in the regime of the Corporations Act with a full AFSL or you’re not,” he says.

Without a licence, accountants can advise clients on topics such as the procedures involved in establishing or winding up an SMSF, how an SMSF could be structured, how to add new trustees or members to an existing SMSF and how to process fund transfers or rollovers.

“The vast majority of compliance services to SMSFs are still provided by accountants, so there’s a huge benefit in allowing that to continue. There are a lot of things that accountants can do for SMSF clients which are business as usual,” Lorimer notes.

Individual registration One option to simplify the existing licensing system, put forward by CPA Australia, is to individually license or register practitioners who offer financial advice.

“The advantage of having an individual licensing or registration mechanism is that it holds you as the individual accountable,” Waller says.

“You are accountable for complying with your obligations. You are accountable for your conduct and behaviour. And you are then responsible for ensuring you are reporting or meeting your ongoing obligations,” she says.

This approach is common in other professions and the TPB already operates along these lines, she points out.

The FPA supports individual registration, but chief executive Dante De Gori says companies employing those people should still be required to hold a financial services licence to help protect consumers.

“Licensing is about a financial service business as opposed to the practice of financial advice. Just because you’re a good practitioner, doesn’t mean you’re good at running a business, therefore they should be two separate things,” De Gori explains.

A corporate entity holds the licence and takes responsibility for running the financial services business, supervising practitioners and complying with regulations. Individual practitioners are responsible for the advice process and client interactions, not necessarily running a business.

Whatever licensing solution is adopted, the shape of the regulatory environment for accountants advising on SMSFs will depend on how effectively any overlapping requirements can be streamlined. It will also hinge on how successful the accounting bodies, the FPA and SMSF Association are in making their case that SMSFs deserve to be treated differently from other superannuation funds.

Advisers are having to do a lot more CPD hours than they would otherwise have to do, which adds to the cost.

And that’s just one small thing.”

Vicki Stylianou, IPA

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The false contradiction of value versus growth

The philosophies of value and growth investing are often viewed as mutually exclusive. Charlie Aitken challenges this approach and explains how the two ideas can work in harmony.

CHARLIE AITKEN is chief investment officer of Aitken Investment Management.

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Firstly, I want to wish all readers a very happy and prosperous 2020.

The start of the new year saw equity markets continue their seemingly unstoppable march higher, with major indices hitting new all-time highs on a near-daily basis. Given the substantial outperformance of growth stocks over the past decade, and 2019 in particular, there is currently a robust debate around whether it’s time to switch to a more value-oriented portfolio. In my view, this is an over-simplification of the issue, given that it reduces both concepts to

quantitative factors driving markets. In reality, growth and valuation are two sides of the same coin when selecting stocks for long-term investment.

To take a step back, value investing is broadly defined as trying to determine the intrinsic value of a future stream of cash flows and paying less than that value to acquire rights to the stream of cash flows in question – buying $1.00 for $0.80, in essence. In contrast, growth investing is generally defined by what it is not, that being value investing. I think this interpretation lacks nuance. I have yet to encounter the

Given the substantial outperformance of growth stocks over the past decade, and 2019 in particular, there is currently a robust debate around whether it’s time to switch to a more value-oriented portfolio.

Graph 1: Split-adjusted share price of Amazon.com from inital public offering (May 1997) 2250

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value investor who doesn’t believe the future growth potential of a business they own is not reflected in the current stock price, nor a growth investor who would not prefer to pay less than intrinsic value for future potential growth.

I suspect the issue lies with how the major indices define these terms, using the shorthand of multiples or reported historical growth rates as a tool for classifying a business into value or growth buckets, instead of delving into the economics or prospects of a company. Many value indices are constructed by selecting a basket of stocks that trade at low price-to-earnings or price-to-book ratios. This approach assumes the stock price relative to historical financial information is a proxy for value, where real-world experience would suggest the fundamentals of a company are much more reliable indicators.

The same goes for growth indices, which look to historical growth trends and extrapolate this to a short-term forward earnings per share growth rate. All this information has the drawback of being backwards looking, relying on the current

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price and historical numbers (which, if you believe in efficient markets, should already be reflected in the price).

No less than the Oracle of Omaha, Warren Buffett, agrees, writing in the 1992 letter to Berkshire Hathaway shareholders: “… most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth’. Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.

“We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. In addition, we think the very term ‘value investing’ is redundant.

What is ‘investing’ if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price –

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should be labelled speculation…

“Whether appropriate or not, the term ‘value investing’ is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price-tobook value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in their investments. Correspondingly, opposite characteristics – a high ratio of price-to-book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a ‘value’ purchase.

Similarly, business growth, per se, tells us little about value. It’s true that growth often has a positive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain…

“Growth benefits investors only when the business in point can invest at incremental returns that are enticing – in other words, only Continued on next page

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Continued from previous page when each dollar used to finance the growth creates over a dollar of long-term market value.”

The last sentence is critical: all else equal, one wants to own businesses that can deploy capital at rates of return that exceed the cost of capital on a sustainable basis. Owning this type of business over the long term – as if you were a business owner and not a speculator – is the path to compounding wealth.

Currently, the traditional indicators of value seem to be concentrated in the financials, materials, energy and industrials sectors. There are, of course, exceptions, but in general many of the businesses in these sectors are generally price-takers and are reliant on external drivers to provide growth, and therefore struggle to consistently generate the excess returns on capital Buffett refers to above. With this in mind, I do not think switching into value-friendly pricetakers to capture a short-term factor rotation is a sustainable way to generate superior investment performance.

I believe Phillip Fisher gave investors a solid framework to assess when to sell a stock in Common Stocks and Uncommon Profits, first published in 1958. He recommended selling only under three circumstances: a) when you were wrong about the facts and your investment thesis is invalidated; b) when the facts have changed and the business can no longer generate the returns you bought it for, or c) when there are better opportunities to be had elsewhere and there is a lack of cash to invest in them. He was abundantly clear on not selling out in fear of market corrections, which are part and parcel of equity investing.

Consider Graph 1, which shows the split-adjusted share price of Amazon.com from initial public offering (May 1997) to present on a weekly basis. Each one of the areas indicated by a blue circle represents a price decline of 30 per cent or more, peak to trough. (In some cases, that was closer to 60 per cent – and that excludes the dotcom sell-off in 2000, which saw a whopping 94

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per cent drop in the price).

Admittedly, some sell-offs have been more sudden than others – the fourth quarter 2018 global markets sell-off was particularly violent – but increased volatility is the price you pay when discount rates are as low as they are.

Picking Amazon comes with a huge amount of hindsight and survivorship bias, but the point remains the same: there were ample opportunities to fully cash out in 2000, 2003 to 2006, 2008, 2011, 2014 or late 2018. Only by remaining invested for the long term was the compounding effect allowed to gain traction. By that token, a truly long-term investment horizon means portfolio turnover is kept to a minimum.

Does this mean valuations don’t matter?

No. Given the run in January, we have chosen to follow Fisher’s rule number three, and have redeployed capital from names that we considered as trading above our assessment of fair value into other portfolio holdings. However, this does not mean we are selling the more fully-priced stocks out of the portfolio in their entirety, nor that we are about to buy an optically cheap value stock that does not have a compelling long-term investment rationale and a proven ability to generate excess returns on capital sustainably.

Can markets experience a correction over

Can markets experience a correction over the near term?

Given the strong run we’ve had since October, almost certainly. That doesn’t mean it’s time to head for the hills, though.

the near term? Given the strong run we’ve had since October, almost certainly. That doesn’t mean it’s time to head for the hills, though. If anything, it means sticking to a process and owning quality businesses. The alternatives, owning value to benefit from a factor rotation or trying to time the market by trading in and out of stocks, just don’t add much value to performance in the long term.

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INVESTING

The implications of direct property investing

Holding direct property in an SMSF is appealing to many trustees, however, for all of the benefits the strategy offers there are also disadvantages to take into account, writes Peter Hogan.

PETER HOGAN is head of education and technical at the SMSF Association.

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Investing in direct property is an investment opportunity many SMSF trustees consider. The clear advantages of owning direct property in an SMSF include receiving the rental income paid to the fund for use of the asset and a lower capital gains tax rate on selling the property.

The rental income adds to your retirement savings and is taxed at the concessional rate of 15 per cent.

But there are disadvantages too, including restrictions on the use by members, their relatives and other related parties, lack of diversification and dealing with unforeseen events such as the early death of a fund member, which could require the forced sale of the property at an inappropriate time.

The purpose for which direct property is used also has implications for how SMSF trustees can deal with these types of assets. To this end, certain questions are pertinent. Is it owned to derive passive rental income or is it used in a business context? Can SMSF trustees conduct business-like activities with direct property they own, such as property development activities,

and what implications are there for the SMSF? This article examines some of the relevant issues of which SMSF trustees need to be aware in order to understand the consequences of their investment decisions regarding direct property.

Can an SMSF carry on a business of any kind?

A threshold question is whether the trustee of an SMSF, in their capacity as a trustee, can legally run a business.

This was a question that was considered by the full Federal Court in Federal Commissioner of Taxation v Radnor Pty Ltd (1991). This decision made it clear it is wrong to say the trustee of a superannuation fund can never, in any circumstances, run a business. However, the fact certain activities are being performed in the capacity of a fund trustee is an important and relevant consideration in determining whether business or business-like activities are being undertaken.

These observations suggest there is a strong presumption trustees acting in that capacity are

considered investors first. This presumption can be overturned only where there is a strong set of circumstances supporting the view the trustees have gone much further than this and are running a business.

An example of a business that has been carried on by trustees without raising any issues with the regulator is share trading. So how does the possibility of running a business

by SMSF trustees relate to property ownership and is there a different application of the rules when dealing with this asset class?

What constitutes a property rental business?

It is unlikely for the ATO to accept the ownership and leasing of residential property on its own is a business activity undertaken by SMSF trustees. Even where management of the properties, collection of rent and doing maintenance are undertaken by trustees, it is likely the ATO will treat this as a separate business activity from the ownership of the residential properties. It follows that it is unlikely residential properties owned and leased either by the members wishing to sell them to their SMSF, or residential properties owned and leased by an SMSF, will satisfy the definition of business real property for the purposes of superannuation law. This will be done using a case-by-case assessment as to whether the indicators of business activity are significant and dominant enough to rebut this presumption of investment rather than business activity. So what are the relevant issues for purchasing residential property by SMSF trustees?

Can I sell my rental property into my SMSF? Typically, no, although there are a few exceptions.

What are the restrictions on how my SMSF acquires residential property?

There is no question SMSFs can own residential property acquired from unrelated parties as part of a normal market transaction.

Residential property can also represent a significant proportion of the SMSF’s total

assets if that is what the trustees genuinely believe to be in the best retirement interests of all fund members and the investment strategy allows the fund to hold property assets.

There are, however, substantial restrictions on investing in residential property and diversification and liquidity concerns also need to be considered.

Is it possible under the superannuation rules for your SMSF to acquire residential property from any related parties to the fund?

Superannuation law typically prevents SMSF trustees acquiring any assets from related parties. This is regardless of whether the transaction is proposed to be at market value or not. But there are limited exceptions.

However, the only exception to your SMSF acquiring property from related parties is if the property is within the definition of business real property under superannuation law.

Residential property is deliberately not listed as one of the exceptions to this general rule.

Can my rental property be treated as business real property?

A question often asked by SMSF trustees is why their rental property does not qualify as business real property. They point out they are earning rental income from the property and are claiming expenses to maintain the property and so on. They view their activities in relation to the property as business-like and consider themselves to be operating a property rental business.

What type of property is treated as business real property?

Generally, real property will be treated as business real property for superannuation purposes provided certain criteria are met.

Renting real property is not treated as a business use The starting point for all taxpayers, including SMSF trustees, who invest in and rent out residential property is that they are property investors and not running a business.

Running a business requires more than owning and receiving rent as an owner of

The only exception to your SMSF acquiring property from related parties is if the property is within the definition of business real property under superannuation law. a rental property. Even where the owner is more actively involved in the management of the property, the strong presumption is that this is property investment rather than a business. The most critical component when looking at the above definition is whether the property is used “wholly and exclusively in one or more businesses”.

Will residential rental property ever be eligible to be treated as business real property?

Yes. For example, short-term rental accommodation as part of a motel or hotel complex or a bed and breakfast arrangement will qualify as property used in a business.

When will an SMSF be carrying on a property development business?

Given the strong presumption that SMSF trustees are investors, in what circumstances will they step over the line to be treated as running the business of property development? The other question that also needs to be answered is if they are running a business, what does that look like from a practical point of view and what does that mean from an operational and compliance perspective?

The business of property development Clearly an SMSF can run business or businesslike activities. The criteria that will indicate Continued on next page

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In failing the sole purpose test, the SMSF is at high risk to be considered not to be operating as a genuine retirement fund with the consequence that it may lose its complying status.

Continued from previous page there is such an activity being undertaken are the same as for other taxpayers and will include profit motive, scale of the undertaking and capital invested, and paying wages.

Running a business in an SMSF This is the title of a document on the ATO website that examines the consequences for SMSF trustees where they are running a business. In particular, it examines the specific compliance requirements for SMSF trustees that must nevertheless be observed by the fund while running its business activities.

There are several clear requirements, including being allowed under the terms of the trust deed, meeting the sole purpose test and observing specific Superannuation Industry (Supervision) (SIS) Act rules.

Sole purpose test and property development The sole purpose test sets out the types of benefits that can be paid by superannuation funds generally and the circumstances that must be satisfied before those retirement benefits can be paid to a member. This test can be broadly stated as being that all superannuation funds must be maintained for a retirement purpose for all members.

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Trustees and related parties in receipt of present benefits Are the trustees influenced in acting in a particular way by the offer of a short-term benefit to them or other related parties of the SMSF? Is that benefit received by the trustees or related parties at the expense of the SMSF? Are the benefits sought by trustees small or incidental, but represent a pattern of trustees seeking and benefiting from the receipt of inappropriate benefits?

A positive response to any of these types of inquiries will cause the ATO to question the retirement purpose of the SMSF trustees when entering into these transactions.

SMSF used as alternative business vehicle In a similar vein, where trustees are using their SMSF as an alternative business vehicle to a company or discretionary trust, for example, the sole purpose test may also be compromised. Circumstances that indicate the SMSF is being used inappropriately include where all the fund’s assets are expended in the development activity.

Consequences of failing the sole purpose test In failing the sole purpose test, the SMSF is at high risk to be considered not to be operating as a genuine retirement fund with the consequence that it may lose its complying status. This is to be avoided at all costs.

Acceptable and unacceptable activities of SMSF trustees running a property development business Acceptable activities Using genuine third-party contractors to undertake the property development activities of the SMSF is one way trustees can avoid many of the pitfalls when undertaking these activities. The SMSF pays for and owns the finished product on arm’s-length terms and conditions. As the SMSF trustees are not dealing with related parties in this scenario, it would be highly unlikely for any of the investment standards contained in the SIS Act to be breached as these are primarily

designed to limit or prohibit related-party transactions.

Less acceptable or unacceptable activities Once the trustees of an SMSF introduce related parties into the business activities they undertake, it becomes more complicated.

This is because the investment standards and operating standards in the SIS Act and SIS Regulations are designed to prohibit or limit these transactions between these parties.

If a member or related party was to undertake the construction work involved in building a residential or commercial property for the SMSF, then the possibility of breaching several provisions may follow.

The process of avoiding any complications is complex and involves the SMSF paying directly for all materials and paying the related parties an hourly rate at market value for their services. This can effectively make the process cumbersome and even unworkable.

CONCLUSION The above analysis of the potential investment activities of SMSF trustees and the approach by the ATO as regulator shows the ownership of direct property in an SMSF can be achieved in any number of ways. The ownership and development of direct property and the derivation of income from the use of that property can have different consequences from a compliance and/or tax perspective, depending on the method of acquisition and use of the property once purchased by the SMSF. Being able to distinguish between property investment or property development and the different approach of the regulator is a critical part of the advice process for SMSF trustees who wish to own property.

STRATEGY

What the top end looks like

While SMSFs are categorised as one segment of the superannuation system, they are really a collective of individual funds and thus have different characteristics and associated matters to deal with depending on their circumstances. Liz Westover analyses what the funds with higher balances look like and the issues they are facing.

LIZ WESTOVER is superannuation, SMSF and retirement savings partner at Deloitte.

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With 600,000 SMSFs, the features of each are always going to be diverse. From asset allocation to ATO scrutiny, the nature and complexity of issues will vary, largely based on the size of the fund. While there are consistencies in attributes and systemic issues across the entire population of SMSFs, larger funds will typically have a different profile and have their own issues to deal with. So let’s look at these unique funds using statistics from the ATO’s “Self-managed super fund quarterly statistical report – September 2019” to define their situation.

What does the ‘high end’ look like?

For our purposes, we have determined the ‘high end’ is a fund with more than $5 million in assets. These types of funds represent 3.5 per cent of the total SMSF population, around 21,000 funds, and hold 25.2 per cent of the sector’s total assets. Table 1 shows the

number of funds in each size category together with the proportion of assets held by those funds. Clearly there is an inverse relationship between the number of funds in each band and the total assets held by those funds.

The ‘really high end’ There are currently 22 SMSFs that hold more than $100 million in assets. These funds represent 0.004 per cent of the total number of SMSFs, yet hold 0.5 per cent of the total assets. The top 100 SMSFs collectively hold more than $8.3 billion in assets. All of these funds each have more than $40 million of assets.

Asset allocation High-end funds typically have a different asset allocation profile than smaller funds.

In total, 20.7 per cent of all assets in SMSFs are held in cash and term deposits. High-end funds, however, will typically have significantly less of their assets in this asset class (between 12.4 per cent and 17.9 per cent).

By comparison, smaller funds with less than $500,000 hold between 29.8 per cent and 53.6 per cent in these types of investments.

SMSFs in total invest 30.5 per cent of their assets in listed shares. Mid-range funds are fairly consistent with this level. Smaller funds are mildly below average (22.3 per cent to 26.5 per cent), with the really large

funds typically well below average – 10.8 per cent in the case of funds with assets above $100 million.

High-end funds will also typically have much higher levels of investments in unlisted trusts, non-residential property and limited recourse borrowing arrangements (LRBA) than their smaller counterparts.

While assets held in collectables and personal-use assets only constitute 0.05 per cent of total SMSF assets, the larger the fund, the less likely it is to hold these types of assets.

High-end funds also invest more heavily in what has been identified as ‘other assets’.

While it is unclear exactly what constitutes these other assets, high-end funds invest consistently above the industry total of 2.56 per cent. Funds with more than $100 million hold 7.5 times the SMSF average in these types of assets (19.3 per cent), demonstrating a willingness of these funds to invest in nonconventional assets.

LRBAs While funds in the $200,000 to $1 million

While it is difficult to compare returns and expenses for the SMSF sector, as the variance per fund is likely to be significant, overall larger funds consistently outperformed smaller funds in the five years to 30 June 2017. This could, in part, be attributable to the fact larger funds are likely to have advisers and are more likely to be sophisticated investors in their own right. As would be expected, larger funds consistently had lower expense ratios than the smaller funds.

including appropriate use of superannuation tax concessions.

The ATO has determined 35 per cent of these funds warranted a closer look, particularly in relation to the following: • use of LRBAs, • reported contraventions (16 per cent), • rapid and excessive asset growth rates (10 per cent over the past four years), • non-arm’s-length arrangements, and/or • risks identified by the ATO private wealth area (13 per cent).

It should not be discounted that where issues are identified in this cohort of funds, the ATO will extend its review and audit activities to other high-end funds. If these issues are identified in the top 100, it is likely there are similar issues elsewhere.

ATO scrutiny

Related-party transactions

The ATO undertakes a program of risk profiling the top 100 SMSFs – the “really high end”.

The body of work focuses on aggressive tax planning arrangements to ensure assets are acquired and held in compliance with the law,

Investments in unlisted assets, particularly trusts, are often associated with related-party transactions. Unit trusts are often used as a vehicle for purchasing business real property, which is then leased back to related parties.

category are heavy users of LRBAs, so too are high-end funds. As a percentage of assets, funds with more than $100 million are the highest users of all. The ATO has identified this as one of the areas of concern warranting a closer look within the top 100 funds.

Returns and expenses

Continued on next page

Table 1: Number of funds in each category and proportion of assets Size of fund by assets

Proportion of funds by asset range (%)

Total proportion of assets (%)

< 200k

15.6

1.0

$200k to $500k

22.4

6.2

$500k to $1m

25.0

14.1

$1m to $2m

20.4

22.6

$2m to $5m

13.1

$5m to $10m

2.7

14.4

$10m to $20m

0.653

6.7

$20m to $50m

0.128

2.8

$50m to $100m

0.013

0.7

>$100m

0.004

3.5

0.5

25.2

Total

100

100

100

100

96.5

30.8

74.8

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STRATEGY

Continued from previous page Pre-1999 unit trusts feature frequently in these high-end funds as they tend to have been in existence for a longer period of time. Further, it is not unusual for members of these highbalance funds to hold significant wealth and have complex financial arrangements outside of super and often operate their own or a family businesses. All of these factors lead to an increased propensity for high-end funds to engage in related-party transactions. While related-party transactions are permissible in an SMSF, they must always be conducted on an arm’s-length basis. The ATO has identified nonarm’s-length arrangements as an issue in the top 100 SMSFs, so clearly a number of these funds may not be getting it right.

Valuations The higher rates of investment in unlisted assets, including trusts, shares and nonresidential property, by larger funds means attaining year-end valuations becomes a bigger issue for them. All SMSFs have been required for some time to report market valuations on assets at year end. For some assets, such as cash and listed securities, it is relatively easy to obtain year-end valuations. Unfortunately, it can become far more difficult for unlisted assets. The ATO requires substantiation around valuations used. While not necessarily prescribing the methodology for all assets, it does state valuations must be accompanied by objective and supportable data. Recent case law involving auditors has resulted in auditors seeking far more information and support for assets and valuations than they ever have before. Accordingly, trustees of these high-end funds need to be prepared to undergo greater scrutiny and provide more solid support for valuations used. A director’s declaration is likely to be insufficient in the absence of other support.

Contributions One of the challenges for larger funds is the inability of their members to make larger contributions to increase their balances. Any members with a total super balance of more than $1.6 million will be unable to make further

34 selfmanagedsuper

non-concessional contributions, relying on (where eligible) concessional contributions to inject capital into the fund. After that, increased balances will be reliant on investment growth.

Administration High-balance funds typically hold a welldiversified portfolio, frequently using a range of portfolio managers, brokers and advisers.

They are more likely to have overseas assets, unlisted assets and assets or transactions with related parties and assets classed as ‘other’.

Overall, this means high-end funds tend to have more complex administration needs than their lower-balance counterparts. Gathering reports, valuations, support and compiling transaction lists, as well as undertaking and maintaining compliant transactions, can be time consuming and difficult. In most cases, high-end funds will need the support of and typically are supported by a range of specialised SMSF advisers.

Dealing with death While most SMSFs are likely to have to deal with the death of a member at some stage, estate planning is one of the most significant issues for high-end SMSFs, with many of their trustees and members still not fully appreciating how superannuation benefits are dealt with upon their death. Particularly with sizeable balances and in an age of blended families, it is imperative individuals make provision for how their benefits are to be distributed upon their death.

The introduction of the transfer balance cap provisions significantly compounded the issue. Previously, a reversionary nomination for an income stream was taken to deal with such matters as the whole member balance in retirement was typically in pension phase.

With the certainty now of an accumulation balance in these larger funds, a reversionary nomination will have limited application.

Provisions for payment of these accumulation balances must be considered.

Control of the fund is the priority issue, ensuring the remaining trustees or legal personal representative (LPR) making the decisions on payment of death benefits are likely to distribute in line with the members’

wishes. It is important to ensure an LPR has the ability to pay benefits to themselves (if desirable) so they aren’t necessarily compelled to pay benefits to the deceased’s estate to be distributed as per the terms of a will – remembering decisions of the trustees generally can’t be disputed, but a will can be.

Binding death benefit nominations can be useful, particularly with blended families or where a partner/spouse has pre-deceased an individual, but should not be the default position as the binding nature of them can cause more problems than they solve, particularly when it comes to tax.

The rise and fall of high-end funds There was much discussion (and awe) when commissioner of taxation Chris Jordan revealed a number of years ago that there were four SMSFs with over $100 million in assets each.

At the time there was a general feeling SMSFs of this magnitude were a legacy issue, with observations that contribution caps would make it very difficult to inject monies into an SMSF and the age demographic of those members with big balances meant their impending demise would necessitate large death benefits being paid out of the system.

Yet, in the ensuing years, their growth has continued both in number and in assets held. Over the four years to 30 June 2018, the percentage of high-end funds grew consistently as did the percentage of total assets held by them. In fact, the number of high-end funds grew from 2.7 per cent to 3.5 per cent in the period with the assets held growing from 21.3 per cent to 25.2 per cent.

It’s hard to imagine many new SMSFs, subject to current contribution caps, would easily grow to these balances without aggressive and fortuitous investments and the reality is large death benefit balances subject to transfer balance caps can no longer be retained in super. Increasing the number of members within a fund to six might facilitate an increased SMSF size (currently, 93 per cent of SMSFs have one or two members). Therefore, while not impossible, the truly high-end funds are likely, in the long run, to be an endangered species and the largest funds will have a significantly lower balance.

SMSF TRUSTEE EMPOWERMENT DAY 2020 SYDNEY 8 SEPTEMBER

MELBOURNE 10 SEPTEMBER

SAVE THE DATE More information at www.smstrusteenews.com.au/events

BRISBANE 15 SEPTEMBER

PROFILE

One on one with…Leo Guterres Central Securities founder Leo Guterres gained entry to the SMSF sector when looking to improve his business network as an accountant turned financial adviser. He tells Tharshini Ashokan about his concerns over the number of financial planners exiting the industry and how providing financial advice is such a great opportunity for accountants.

How did your involvement in the SMSF sector happen?

I come from an accounting and finance background. My father was an accountant and my grandfather was a stockbroker. I was an accountant first and I tried all sorts of versions of chartered accounting – auditing, insolvency and small business accounting. Then I came to the realisation it didn’t quite hit my mark. It took me a while before I got into the SMSF space. I was in general business for eight or nine years and then, in the mid-nineties, I took a turn of career. A colleague of mine said the best thing for me to do would be to get training from the banks because they had the resources and they were looking for financial planners. So I joined Westpac to get my first authority in 1997 as a bit of a foray into this area. You might be trained before as an accountant and as a general business person, but there are certain skills you need to pick up. Certainly, you must know the products, you must know the rules.

And you’ve got to get to know people. I had to figure out how I was going to get clients, so I approached chartered accountants who were in business and just introduced myself. In my quest to network I joined and helped run the sub-committee of the financial planning chapter of Chartered Accountants Australia and New Zealand (CAANZ) in New South Wales. Accountants began making referrals to me to look after the investment side of their clients’ SMSFs, which I enjoyed. After that I started taking on SMSF clients directly.

What services do you offer at Central Securities?

I take a holistic view of things so while I may be mostly thinking about SMSFs, I will not reject

36 selfmanagedsuper

someone who does not want to set up an SMSF. For new SMSF clients, I set up the trust deed for them and I source various people to help me so I can provide them a full service.

My passion is in the investment space. There is a small subset of people who enjoy the investment side of things, and some people outsource it, but I really enjoy that space. With regard to SMSF administration, I have always searched for innovative ways to provide a solution for people. I have an outsourced team here in Sydney who are focused on providing SMSF admin services for clients. Obviously, there’s a good trust relationship between us and everything is directed by me.

How challenging is the technical aspect of SMSF advice?

I’ve been in this business for nearly 20 years, where most of the time you need to comply with the standard compliance regime. I find attending SMSF conferences and networking is purposeful for me in terms of helping me refresh my technical knowledge. The good thing about attending industry conferences is you are introduced to people who you know you can call on for assistance with the technical side. I often draw upon the Top Docs technical team. Also my own SMSF administration provider has a law degree, so when I’ve got some technical things to check, I’ll check with him. In addition, I sometimes contact Macquarie and Colonial First State, who both have strong technical teams. If I need to make a call to just crosscheck my concepts, I will do that. As long as you tell them what you are trying to achieve, and obviously I will come to them with an idea, they will actually send me a technical

reference. So the technical side I’m not too worried about.

Has your accounting background helped you in the SMSF space?

From the client’s point of view, it has helped me gain credibility very quickly. It’s definitely helped in the SMSF space, especially with compliance. Cross-checking investment strategy, cross-checking trustee declarations, these are all things you’re used to when you come from an audit background because you have so many checklists to complete. I think my accounting background keeps me out of potential trouble down the track. If a client wants to do something interesting, something fancy, I will ask them who their auditor is and contact the auditor myself. It’s much better to go to the source before you set things up.

Is there too much legislative change in the sector?

Absolutely. I think what has happened is because the SMSF sector is now responsible for such a large portion of assets, politicians can no longer ignore it. They are more cautious and, as a result, the pendulum in terms of regulation has swung too far in that direction. I feel for the chartered accountants. It would be a very small proportion of SMSF accountants that have actually breached regulations and compliance, yet the legislation seems to be more and more focused on them.

Is the provision of SMSF advice a lucrative area for accountants?

The answer is yes. I think there is a gulf between what they used to do with tax, providing advice there, and financial services

PROFILE LEO GUTERRES and financial products. I have first-hand experience where an accounting firm has specifically chosen not to give financial services advice because the managing director sees it as a risk. He sees it as a sideshow, whereas we advisers see it as an essential component.

I think there’s too much worry on the compliance side and licensing side, and that’s why accountants are not pursuing it. I have an inner desire to try to marry these together, but I need the accountants to buy into this and not see advisers as charlatans. I tried to ignite this buy-in back in 2001 and 2002 when I was involved with the CAANZ sub-committee.

It was when all the financial services reforms were starting to evolve. I look back on it as an opportunity that was lost for accountants to step up into the advice arena back then.

Even now I still don’t believe they have caught on to this opportunity. If they would just put aside the mass media noise that bashes financial planners, they’d be able to seize the opportunity, but I think they’re fearful they’ll be tarnished with that same brush.

Association, it was mainly accountants and auditors involved who were already technical.

The change I’ve seen since then is having financial planners engaging in the SMSF sector. In the beginning, I knew some financial planners who said SMSFs were too difficult and that they preferred using a platform and managed funds. Now, maybe because of media focusing on the benefits of the sector, I think financial planners have gotten more involved in the SMSF space.

How do you feel about the new Financial Adviser Standards and Ethics Authority (FASEA) educational and compliance requirements?

What’s the biggest challenge facing the sector in the coming 12 months?

For myself, it means that I have to go through the procedure of attending the financial advisers exam. Fingers crossed, between the CAANZ and SMSF Association, I should get enough credits. I even contacted my old university, UNSW, a few months ago for a copy of my academic transcript so I could check the subjects I had taken. I see it as a bit of an inconvenience and I think, very sadly, the industry will lose quite a lot of experienced advisers as a result of the changes. In terms of whether the changes to FASEA requirements will drive accountants away from wanting to enter the advice space, I don’t know what the answer is. You can be sure some of them will completely opt out. I think for some accountants who were on the fence about entering the advice space, they won’t even look at this as an option anymore. Ultimately, I think there will be some flux in the short term, followed by some stability.

What’s the most significant change you’ve seen in the industry?

When they started the SMSF Professionals’ Association of Australia, now the SMSF

If there was one thing you could change about the sector, what would it be?

It would be good if politicians didn’t use it as a political football. Even that alone would be a great benefit.

To give us the confidence, to give the consumer the confidence, that things won’t change, I think that is quite an important thing.

I think it would be the FASEA requirements and exams. There are a group of people that are depressed about this and it’s actually getting a bit serious.

Another challenge for some is the change to grandfathering commissions. I think that’s going to affect some advisers quite seriously. In the industry, there are advisers on their second marriages and through family law provisions they’ve given their first wife or husband the family home.

They’ve then borrowed money to buy a business. And suddenly, by mid-next year, they’re going to lose their revenue. How do you reconstruct your life after that? I think that’s the biggest challenge.

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COMPLIANCE

Charting the course

The SMSF investment strategy has been under increased scrutiny in recent times. Rob Lavery takes a look at the items to be considered when formulating an SMSF’s investment plan.

ROB LAVERY is senior technical manager with the knowIT Group.

In a 2018 report, the Australian Securities and Investments Commission (ASIC) found, having surveyed more than 450 SMSF members, almost one-third did not realise their fund was required to have an investment strategy. What’s more, 28 per cent of those surveyed admitted to giving no consideration to members’ insurance needs through the fund.

The new year is a good time to revisit the investment strategy requirements of SMSFs and to take the time to review those that are in place to make sure they comply with the law.

The legislation The obligation for all SMSFs to have an investment strategy is captured in section 52B of the Superannuation Industry (Supervision) Act 1993. It states each trustee of the fund must formulate, review and give effect to an investment strategy that considers the whole of the fund’s

38 selfmanagedsuper

circumstances. Furthermore, this section outlines the sorts of issues an investment strategy should include, being: • the risk of the investments and the likely return from those investments given the fund’s cash-flow requirements, • the diversification of the fund’s investments, • the liquidity of the fund’s investments, given cash-flow requirements, and • the ability of the fund to pay its liabilities.

The accompanying regulations add the investment strategy should also consider whether the fund should hold insurance policies over the lives of one or more members.

It is worth examining the role investment strategies play through the lens of these three obligations: 1. formulating the strategy, 2. reviewing the strategy, and 3. effecting the strategy.

Now is the time for SMSF trustees to ensure their investment strategy is welldocumented, up to date and reflective of the investments held by the fund.

Formulating the investment strategy All SMSFs are required to have an investment strategy that considers the factors noted above and to ensure the strategy is properly documented. Failure to do so can result in fines of up to 20 penalty units, currently $4200. So how is an investment strategy formulated?

There are a number of online document services that offer templated SMSF investment strategies. That said, a template alone won’t ensure the fund’s strategy document is compliant.

Outline the members’ situations A good starting point is to outline the situation of the fund’s members. By identifying, at a minimum, the name, age and superannuation stage (that is, either accumulation or retirement) of each member, the fund’s trustees can ensure the strategy links directly back to these individuals’ needs.

Information on the overall make-up of the fund is also recommended. The total investable assets of the SMSF, as well as the fund’s regular liabilities, are worth noting to ensure the fund’s cash-flow and debt requirements are clear. The SMSF’s liabilities do not need to be noted in great detail, however, acknowledging regular outgoings, such as tax, administration fees and potential member payments, will help inform the fund’s liquidity requirements.

State the fund’s investment objectives It is common to state the investment objectives of the fund in the strategy document and this may start with a stated return benchmark as compared to an index or inflation rate. It is also good practice to outline the classes of investment the fund is allowed to hold and the platforms that can be used to hold them. Often these are quite broad statements to ensure the fund does not have to regularly redraft this section of the strategy when considering new investments.

A target asset allocation table by class is a feature of most investment strategies. One approach had been to provide target ranges that stretch from 0 to 100 per cent for each asset class to ensure maximum flexibility, however, the ATO has confirmed it does not view such an approach as compliant with the law. As such it is incumbent on trustees and their advisers to put more thought into target asset allocations.

The driving factors when considering such target allocations include: • the need for cash flow from investments to meet liabilities, • the risk profiles of members, • the need for capital growth to meet members’ goals and objectives, and • the need for liquidity for members.

Commentary around the asset allocation table should link the target ranges to these factors.

Single-asset funds In late 2019, the ATO commenced a review of all SMSFs that have more than 90 per cent of their investments in a single asset or class of assets. The ATO sent letters out to 17,700 SMSFs in this situation.

It is important to note such concentration of investments does not, of itself, contravene any obligation trustees have under superannuation law. That said, the fund’s investment strategy must reflect this situation, must identify the risks to which the fund is exposed as a result of a lack of diversification and must outline steps the fund is taking to mitigate these risks.

Particular problems can arise where an SMSF has a property as the fund’s sole asset.

It is hard to identify strategies to protect against such lack of diversification and the property’s cash flow will need to be sufficient to meet all the fund’s needs. These issues are exacerbated when the property is geared and loan repayments are added to the fund’s liabilities.

Exit strategies In Information Sheet 205, ASIC provides guidance on the issues that must be considered by financial advisers when recommending a client commence an SMSF. One area that must be considered by advisers is a potential exit strategy should the SMSF no longer be appropriate for its members.

When reviewing the quality of SMSFrelated financial advice in 2018, ASIC found the absence of information on the importance of an exit strategy to be the primary failing of advice when it came to risk disclosure.

Information on a potential exit strategy is not explicitly required to be included in a fund’s investment strategy, however, it should be acknowledged. This is particularly the case where the fund has large, illiquid assets that will prevent members from leaving the fund or closing it down in an expedient manner.

Insurance needs An SMSF’s investment strategy must consider the insurance needs of its members. It must also explore the fund’s role in meeting these needs.

Implicitly, this requires the investment strategy document to consider the insurance held by each member outside of the fund, as well as inside. Commentary on the adequacy of the policies held by each member need not be extensive in the strategy document, however, it must be present.

Review process It is good practice to include the investment strategy’s review process in the strategy Continued on next page

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COMPLIANCE

Continued from previous page itself. This should consider the time interval between regular reviews, as well as the circumstances that would give rise to additional reviews outside of these regular intervals.

Reviewing the investment strategy The trustees of every SMSF should review their investment strategy document at regular intervals – annually should be considered a minimum. That said, there are a wide range of events that should trigger an automatic review of the strategy on top of these regular reviews, including: • the death or exit of a member, • the addition of a member, • the marriage or separation of a member, • a major alteration to a member’s assets or liabilities, • the shift of a member from accumulation phase to retirement phase (or vice versa), and • a significant change in the assets of the fund.

The requirement that every SMSF’s investment strategy consider the insurance needs of each member has added a number of situations to the list of those that demand a review of the strategy. Each client’s insurance needs will be dictated by a number of factors, some of which would seem to be otherwise irrelevant to the operations of their SMSF, such as the member’s liabilities outside of super.

Operating as the trustee of an SMSF is a significant legal obligation and any major change in life situation should trigger a member to consider whether the SMSF is the right superannuation vehicle for them.

Review your investment strategy now For those trustees of funds that have not reviewed or updated their investment strategy in the past 12 months, now is the time to act. The ATO has indicated the relevance and quality of investment strategies is a major compliance issue it is targeting. Trustees need to make sure their

40 selfmanagedsuper

documented strategies are up to date and meet the requirements of the law.

Effecting the investment strategy Given the thought and effort that needs to go into each SMSF investment strategy, it is important to ensure the final leg of each trustee’s obligation is met – that of effecting the investment strategy.

To ensure this is the case really only requires trustees to ask one simple question about their fund: Is the fund doing what it says it will in the investment strategy?

There are a wide range of reasons why SMSF trustees may find that their fund is not, in fact, doing what its investment strategy requires. A common issue will be that the strategy has not been reviewed for some time and, consequently, the fund’s members’ situations have changed. This is not the only potential reason however.

Blown off course

Particular problems can arise where an SMSF has a property as the fund’s sole asset.

It is hard to identify strategies to protect against such lack of diversification.

Where an SMSF has a range of well-diversified assets, it is common to find the proportions of these assets move over time. Capital value of a higher-risk investment, such as a share portfolio, will typically fluctuate, whereas the capital value of many income-based investments will not. Such fluctuations may cause the fund’s investments to slip outside of the target asset allocation ranges outlined in the investment strategy.

This issue will be exacerbated in times of high volatility. During the global financial crisis, even an indexed Australian share fund could drop by over 50 per cent in value in a matter of weeks. Likewise, market recoveries can be rapid as well, causing SMSF portfolios to slip outside their target asset allocation ranges.

such investments.

Even something as ubiquitous as a managed account product may not have been considered by an investment strategy drafted as recently as five years ago. As such, it is important to ensure the SMSF’s investment strategy is updated before any major change in its portfolio is enacted.

A new investment

Getting your ducks in a row

The investment industry is nothing if not inventive and the introduction of new investment structures and investing platforms is a constant part of the industry. Established SMSFs may well find their investment strategies were written at a time when the latest trend in investing was not yet invented – consequently they do not permit the use of

Now is the time for SMSF trustees to ensure their investment strategy is well-documented, up to date and reflective of the investments held by the fund. The regulator has shown the age of broad or vague investment strategies has come to an end and it is looking to these documents as a way to govern trustees’ sound investment practices.

LEGAL

Are the states coming to tax super?

Superannuation legislation has traditionally been enacted at a federal level. Grant Abbott suggests a few anomalies in the legal system might open the door for the individual states to enter this arena.

massive pushback and the two big factors going against such a situation are competition and the constitution of Australia, but New South Wales has introduced laws sneaking into super already and perhaps the next step may be a death benefits levy.

Competition – states fighting for business

GRANT ABBOTT is a director of I Love SMSF.

The states of Australia are voracious when it comes to increasing revenue to build infrastructure, provide subsidised transport services, pay for their public servants and, of course, their politicians. Originally able to levy income taxes, this power was ceded to the newly formed Commonwealth by way of the Commonwealth of Australia Constitution Act 1900.

From that time, states have introduced a raft of taxes, including payroll taxes, stamp duties, landholder duties, foreign investor surcharges, royalties, fines and goods and services tax (GST) revenue allocated from the federal government.

But there is only so much they can tax and if, say, the property market slows, great holes appear in their revenues. Also, the federal government is more likely to slow GST grant revenue or reshape it with strings attached.

In this article I am going to look at the very real chance the states will work to levy, tax or somehow place a charge on their residents’ superannuation, not directly, but indirectly. Of course, there would be

Each state imposes much the same sort of taxes and levies relying on similar budgetary Income items, but with some well-directed exemptions and concessions that can make a particular state more attractive than others to business, families, retirees and property owners.

A classic case in point is death duties, where, until the 1980s, Australian states levied both death and probate duties. However, then-Queensland premier Joh Bjelke-Petersen, in order to promote the state as the retirement capital of Australia, started the first move to abolish death duties with a total inter-spousal exemption from death duties introduced in 1975, followed in 1977 by the total abolition of estate and gift duties. Retirees flooded in from all states and soon the other states followed suit, such that all death and probate duties were removed, with the final bastion being Tasmania in 1982.

From an SMSF perspective, NSW was one of the first states in Australia to provide concessional stamp duty for Continued on next page

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LEGAL

Table 1: The big superannuation honeypot Year

Consensus private sector forecast ($billion)

Treasury 2008 asset forecasts ($billion)

2020

2900 – 3100

2815

2025

3500 – 4500

3830

2030

5000 – 6500

5075

2035

6100 – 8500

6650

2040

9000 – 10,500

8645

Source: assorted forecasts. Treasury RIMM Group and Cooper Review.

Continued from previous page the transfer of property from an individual to an SMSF either directly or via a limited recourse borrowing arrangement (LRBA), provided it is for their retirement purposes and segregated from other assets and members of the fund. No such exemption exists in Queensland. South Australia introduced a stamp duty exemption for transfers of industrial or commercial property. Each state government has its focus, but at the end of the day the main drivers of revenue are GST grants and stamp duties on land transfers.

If one state reintroduced death duties on, say, the payment of death benefits, it would cause a furore, but would a resident of a state relocate because of a death benefit tax?

Some may, but like the foreign surcharge on property, once a new tax or surcharge takes hold it sweeps through all states.

Can a state introduce a tax or draft laws that would impact on super?

Table 1 shows the current and projected statistics for superannuation in Australia and wouldn’t the states love to have even the smallest slice of it – even a 1/1000th of a per cent tax on it. It would solve so many budget issues and I am sure there could be cogent arguments put to advance the case. But could they?

Starting point – the constitution Section 5 of the Commonwealth of Australia

42 selfmanagedsuper

Constitution Act 1900 provides: “This Act, and all laws made by the Parliament of the Commonwealth under the Constitution, shall be binding on the courts, judges, and people of every State and of every part of the Commonwealth, notwithstanding anything in the laws of any State; and the laws of the Commonwealth shall be in force on all British ships, the Queen’s ships of war excepted, whose first port of clearance and whose port of destination are in the Commonwealth.”

In effect, all of the states chose to come together in 1900 to create one Commonwealth of Australia and provide rules and laws in relation to a wide range of things and matters including:

51 Legislative powers of the parliament “The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: (ii) taxation; but so as not to discriminate between States or parts of States; ( xx) foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth; (xxiii) invalid and old age pensions; (xxix) external affairs.”

Of course, in 1900 there was no superannuation power in legislation and there still isn’t to this day. As such, federal parliament does not have, prima facie, powers to make

laws dealing with superannuation. This was the major concern I raised decades ago in relation to the Occupational Superannuation Standards Act 1987 enacted by the federal government. I questioned if it was in fact constitutional. This issue was addressed by the introduction of the Superannuation Industry Standards Act 1993, which provides at section 19 for a superannuation fund to be regulated, and thereby entitled to tax concessions under the Income Tax Assessment Act 1997. It has to be established by way of a company or for the sole or predominant purpose of old age pensions – two of the constitutional powers above. This is a very roundabout way to regulate superannuation, particularly as the core companies power lies in the Corporations Act 2001 and with the Australian Securities and Investments Commission.

State v federal government powers – the Tasmanian dams case The seminal constitutional case on state versus federal government powers is Commonwealth v Tasmania [1983] HCA 21; (1983) 158 CLR 1 (1 July 1983). In short, the Tasmanian government sought to build a hydroelectric dam in Tasmania and the federal government, following Bob Hawke’s Labor Party win, passed the World Heritage Properties Conservation Act 1983, which, in conjunction with the National Parks and Wildlife Conservation Act 1975, enabled it to prohibit clearing, excavation and other activities within the Tasmanian Wilderness World Heritage Area.

In a split decision – 4:3 – the High Court held that: “Section 9(1)(h) of the World Heritage Properties Conservation Act 1983 is valid. In consequence, except with the consent in writing of the Commonwealth Minister, it is unlawful for any person to do the following acts in relation to particular specified property adjacent to the Franklin River, including Kutikina Cave and Deena Reena Cave: (a) carrying out works in the course of constructing or continuing to construct a dam that, when constructed, will be capable of causing the inundation of that property or any part of it; (b) carrying out works preparatory to the construction of such

a dam; (c) carrying out works associated with the construction or continued construction of such a dam.”

It is clear that where the commonwealth has a power to legislate, such as companies and taxation, the states do not have such authority. But superannuation? Also, the Tasmanian dams case was only a 4:3 majority on a specific area that parliament has the power to make laws on.

The door opens – Family Provisions Act (NSW) 1982 and updated Succession Act (NSW) 2006 – can super be affected?

There has been much argument from estate planning lawyers, although never challenged or used, that the Succession Act NSW 2006 and specifically the rules in relation to a deceased’s notional estate apply to superannuation. Can a state parliament make laws to direct a trustee of a federally authorised body to do something, even if it means the trustee is breaching the federal law?

Let’s start by looking at the all-important idea of making a family provision claim against a deceased’s estate. Law Access of NSW provides the following guidance: What is a family provision claim?

A family provision claim is an application to the Supreme Court of NSW for a share or a larger share from the estate of a deceased person.

You can make a family provision claim if you: • are an ‘eligible person’, and • have been left out of a will, or • did not receive what you thought you were entitled to receive.

A family provision claim must be filed with the court within 12 months of the date of death (where the deceased person died on or after 1 March 2009). It is not necessary to obtain a grant of probate or a grant of letters of administration before making an application for family provision.

Who is eligible to make a family provision claim?

A family provision claim can only be made by an ‘eligible person’.

An ‘eligible person’ includes:

• the wife or husband of the deceased, • a person who was living in a de facto relationship with the deceased (including same-sex couples), • a child of the deceased (including an adopted child), • a former wife or husband of the deceased, • a person who was, at any particular time, wholly (entirely) or partly dependent on the deceased, and who is a grandchild of the deceased or was at that particular time a member of the same household as the deceased, • a person with whom the deceased was living in a close personal relationship at the time of the deceased person’s death.

What will the court consider?

Before making an order, the court will consider the following: • the relationship between the applicant and the deceased person, • any obligations or responsibilities owed by the deceased person to the applicant, • the value and location of the deceased person’s estate, • the financial circumstances of the applicant, including their current and future financial needs, • whether the applicant is financially supported by another person, • whether the applicant has any physical, intellectual or mental disabilities, • the applicant’s age, • any contribution made by the applicant to increase the value of the estate, • whether the deceased person has already provided for the applicant during their lifetime or from the estate, • whether the deceased person provided maintenance, support or assistance to the applicant, • whether any other person is responsible to support the applicant, • the applicant’s character, • any applicable customary law if the deceased was Aboriginal or Torres Strait Islander, • any other claims on the estate, • any other matter the court may consider as relevant.

The notional estate A notional estate only comes into play in the Supreme Court when there is a family provision claim and there is a relevant property transaction. In Kelly v Deluchi [2012] NSWSC 841, the judge looked at whether the payment of a death benefit from an SMSF was a relevant property transaction. In that regard the judge stated: “I am satisfied that the basis of a relevant property transaction for the purposes of section 75 has been established and that it is taken to have been entered into immediately before, and to take effect on, the occurrence of the resolution of the Trustee, in February 2010, that is to say, after the deceased’s death …. In all the circumstances of this case, I propose to make an order designating part of the property held by the Trustee as notional estate.”

The end result was that children of the deceased had the bequests their father left them in the will doubled and more than $150,000 in costs awarded against the trustee of the SMSF. Interestingly, there was no argument from counsel of the SMSF trustee that the Superannuation Industry (Supervision) (SIS) Act 1993 has it’s own laws for death benefits and that such a direction by the courts to the trustee of the SMSF would breach various sections of this piece of legislation.

There are so many questions to this case: What would have happened if there was a reversionary pension? Would it have to be commuted? Could the trustee of the SMSF take action against the court for breach of the SIS Act 1993.

SUMMARY

The NSW Succession Act 2006 opens a door that if not closed or put to bed constitutionally, may result in the states one day levying duties on superannuation death benefits, super benefits or who knows how inventive they may get. Is that what we really want?

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Keeping an SMSF healthy An SMSF should be structured to be able to withstand the most challenging of circumstances. Tim Miller explains why an enduring power of attorney is a critical element in achieving this goal.

TIM MILLER is education manager at SuperGuardian.

Whether it be a car, the human body or an SMSF, performing regular health checks gives us peace of mind that everything is okay or a kick up the backside to sort out minor or potentially major issues.

In late 2019, as was well reported, the ATO sent communications to about 18,000 SMSFs and their auditors identifying that 90 per cent or more of their savings were held in one asset or a single class of asset. Theses funds all had limited recourse borrowing arrangements in place and 99 per cent of them held property.

It’s fair to say a portion of the SMSF industry lost their collective minds and asked what right the ATO had to question trustees about the investments they held, on the assumption those investments are allowable under superannuation law. The ATO copped its whack and identified it probably could have better communicated the message, but what it was doing was reminding trustees of their obligation to properly formulate an investment strategy that gives consideration to diversification and to consider the risks associated with an undiversified portfolio.

Ultimately, the ATO has acted as a prudent regulator in this instance to identify a risk and ensure those trustees take reasonable steps to satisfy their obligations, namely those identified in the trustee covenants. As a result, many practitioners have taken a renewed interest in their clients’ investment strategies, so the ATO engagement has been a positive one.

Key health check items While there are many items that could be considered under an SMSF health check, the following, in addition to regularly reviewing the investment strategy, should be upfront in the minds of anyone establishing an SMSF, taking over an SMSF or participating in an annual review with clients: • Do your clients have a plan for what happens if one

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or more members become incapacitated?

• Do your clients have an enduring power of attorney for each member?

• Are all death benefit nominations valid beneficiaries?

• Have clients prepared a will and nominated an executor?

Obviously, superannuation doesn’t form part of a deceased member’s estate unless it is directed there, but there is synergy between nominating an enduring power of attorney and an executor to an individual’s estate as these parties can have some significant power to wield. Critically there is also some precedence now with regards to trustee appointments in the event of lost capacity versus a member dying, which of course means having an up-to-date trust deed is also vital in any health check.

Dawson v Dawson [2019] NSWSC 826 The question of control is a significant one for SMSFs and it is often heard that whoever holds the purse strings controls the fund. The reality of that can be frightening, but in some instances it can also be positive. Dawson v Dawson highlights just how important trustee appointments are, but also perhaps the importance of that synergy between an enduring power of attorney and the executor of an estate.

In Dawson v Dawson, the member’s son (from his first marriage) held an enduring power of attorney over his father and was legally appointed as trustee of the fund when his dad lost capacity. A key to this case, and something the ATO considered in its 2012 SMSF ruling, ‘SMSFR 2012/2 – Self Managed Superannuation Funds: the scope and operation of subparagraph 17A(3)(b)(ii) of the Superannuation Industry (Supervision) (SIS) Act 1993”, is that any appointment of a member’s enduring power of attorney is a personal appointment, that is, the

By appointing an enduring power of attorney, clients are eliminating the potential stress and expense on their loved ones should they lose mental capacity.

nominated person is appointed in their own capacity and they are personally liable, as well as subject to any SMSF penalty regime. Once appointed they are not acting under the power of attorney.

At the crux of this case is the member subsequently died and he had appointed the son-in-law of his second marriage as the executor of his estate. The argument was whether the son, who was legally appointed as trustee, is considered removed given the power of attorney is no longer in force and whether the appointment of the son-in-law was appropriate from the date of death until the death benefit was paid.

Ultimately the judge ruled in favour of the son who was appointed in his own capacity, but of course there were many factors, including the deed, that led to this decision.

It does highlight the importance of a person who holds an enduring power of attorney and identifies that when a power of attorney is no longer in force, perhaps due to death or an improvement in mental capacity, it does not automatically result in that person being removed as trustee.

It makes the decision about having an enduring power of attorney a critical one.

Why is an enduring power of attorney essential?

We all recognise the need for a will when we

begin to plan for our future and the future of our loved ones, however, many of us do not realise an enduring power of attorney is just as important.

An enduring power of attorney is a legal document that permits another individual to conduct financial and business affairs for a person when they do not have capacity to make the decisions themselves.

The person appointed enduring power of attorney can make decisions on an individual’s behalf even if the individual is unable to (lost legal capacity). Legal capacity is a term that describes the ability and power under law to make and accept responsibility for important decisions having legal consequences.

People can lose capacity for decisionmaking for many reasons, including: • intellectual or psychiatric disability, • injury (for example. motor vehicle injury), • dementia and stroke, and • temporary illness (for example, delirium).

Losing capacity does not just happen to people as they are getting older. A loss of capacity can occur at any age and may be temporary or even permanent.

Having the capacity to make decisions simply means a person can: • understand the nature and effect of a decision, • freely and voluntarily make those decisions, and • communicate the decision in some way.

If there is any doubt about whether a person has capacity, it is recommended they obtain a written opinion from a qualified medical practitioner.

make informed financial decisions, they will be unable to operate a bank account, pay bills, sell property, complete their tax return, manage investments or deal with any of their financial affairs.

This can become stressful for loved ones as they will be unable to make these decisions for the individual unless they have been appointed an attorney. Instead, they will need to apply to the Guardianship and Administration Tribunal to be appointed as a guardian, which can end up being an expensive process.

Enduring power of attorney and SMSFs It is extremely important individuals have an enduring power of attorney if they have an SMSF. This is because a member’s attorney can act as trustee of the fund, or director of the corporate trustee, if needed and still comply Continued on next page

Why appoint an enduring power of attorney?

By appointing an enduring power of attorney, clients are eliminating the potential stress and expense on their loved ones should they lose mental capacity.

Once someone loses capacity to

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Continued from previous page with the superannuation law requirements.

This is built into the definition of an SMSF, that is, a fund is still an SMSF if the member’s legal personal representative, who holds an enduring power of attorney, is appointed as trustee in place of the member.

This also means if a member departs overseas for an indefinite period of time, that member’s attorney can act as trustee in their place. This will avoid fund residency issues and allow the fund to continue being treated as a complying Australian resident fund.

Beware though that as important as it is to appoint them correctly, it is equally important to remove them when the member returns from overseas or regains capacity if that occurs.

Client scenario Geoff and Sue were trustees of their SMSF and were both in receipt of an accountbased pension. On a recent overseas trip, Sue noticed Geoff’s erratic behaviour, including decisions he was making that had financial consequences for them both. On return, Geoff was diagnosed as bipolar and Sue obtained medical support that he was unfit to make financial decisions. As Sue held an enduring power of attorney for Geoff, she took the appropriate steps to remove him as trustee of the fund and appoint herself.

Despite already being trustee of the fund, this satisfied the requirement for the fund to retain its status as an SMSF. This also saved the fund significant capital as Geoff attempted on numerous occasions to sell all the assets to take his money out of the fund, but he was unable to do this once he was removed as trustee.

Without the enduring power of attorney and a supporting deed, things may have been different for Sue.

Who should be appointed as an attorney?

Given an enduring power of attorney can have enormous power over an individual’s financial and SMSF affairs, it is important someone is appointed who the member trusts completely and who can manage their affairs

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in a responsible way.

A spouse, child, relative or close friend can be the most logical choice when considering who to appoint as attorney. However, for SMSFs it is important to make sure the person appointed as an attorney is not a disqualified person, as defined by the SIS Act, as they will be unable to act as trustee on the member’s behalf.

A member can appoint more than one attorney to act on their behalf, which was confirmed in SMSFR 2012/2.

When should you appoint an enduring power of attorney?

Like any important document, don’t wait until unforeseen circumstances force your clients to appoint an enduring power of attorney.

The time to appoint an attorney is right now.

It can be very difficult to appoint someone to act on someone’s behalf after they have had a serious accident or lose capacity, and so it is important to appoint an attorney when they are healthy, aware and in control.

Individuals can nominate when they want the enduring power of attorney to commence: either immediately or only when, or if, they are incapable of making decisions.

Each state has different legislation to deal with the appointment of powers of attorney and this must be followed. For example, some

Like any important document, don’t wait until unforeseen circumstances force your clients to appoint an enduring power of attorney.

The time to appoint an attorney is right now.

states will require registration of the enduring power of attorney.

It is essential the authority is drafted including the express authority to act on behalf of the individual’s superannuation affairs. It is important to make sure the enduring power of attorney does not have an exclusion clause related to superannuation and/or financial affairs as this will not constitute valid authority for the SMSF.

STRATEGY

A contribution bonus outside the square

The ability to carry forward unused concessional contributions caps commences in the 2020 financial year. Meg Heffron suggests advisers should think less conventionally to maximise the benefits of this rule for their clients.

MEG HEFFRON is managing director of Heffron.

The concept of carrying forward unused concessional contribution caps has been discussed for over three years, having been first announced in the May 2016 federal budget. However, the measure is finally having an impact in 2019/20, explaining a recent revival of interest.

Historically, the annual concessional contributions cap operated on a use-it-or-lose-it basis and any unused cap could not be carried forward to a future year. But from 1 July 2019, certain individuals are able to increase their concessional contributions

cap in a particular year by the amount of any unused concessional contributions cap amounts carried forward from previous years. Only unused amounts from 2018/19 and beyond can be carried forward. This means in 2019/20, individuals have (at most) one extra $25,000 cap amount available.

In 2020/21, the scope will expand to include unused amounts from both 2018/19 and 2019/20, eventually maxing out at five years’ worth of unused Continued on next page

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Continued from previous page amounts in 2023/24 and beyond.

The ability to actually use the concession is only available to individuals with a total superannuation balance of less than $500,000 (not indexed) as at 30 June of the year immediately preceding the year in which the higher cap amount is to be used. This does limit its value considerably, but there are nonetheless some interesting opportunities to consider.

Children reaching adulthood A little-known feature of contribution caps is we all have them, it’s just some of us can’t use them. For example, a child aged under 18 today who is not working is not eligible to make a personal contribution for which they claim a tax deduction.

By and large, therefore, they can’t have concessional contributions. But they still have a concessional contribution cap.

This means any child reaching 18 during 2019/20 who had little or nothing in superannuation at 30 June 2019 will actually be able to make concessional contributions of up to $50,000, being: • $25,000 carried forward from 2018/19, and • $25,000 for 2019/20.

In fact, a further $25,000 is possible if they belong to an SMSF and make a contribution in June that is not allocated to their member account until July. I have ignored this for now.

In other words, they had a cap carried over from last year even though back then they couldn’t have used it.

Of course, not many 18 year olds fancy contributing $50,000 to superannuation.

And few have the level of taxable income that would be needed to make doing so particularly tax effective.

But let’s imagine a situation where, for example, their parents’ family trust had recently generated an unusually high level of taxable income. An 18-year-old, particularly one without a job, would be a strong candidate for at least some of that money. The existence of this new concession means an even higher amount could be

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There are many cases where the carryforward concessional contributions cap concession will genuinely allow those who have missed out on superannuation contributions for a time to catch up on their concessional contributions.

distributed to them highly tax effectively if the family was prepared to see the money go into superannuation. Naturally that’s a big decision. But depending on the family situation and the amount of income involved, this may well be considered. Remember too that the First Home Super Saver Scheme will allow at least some of the amount contributed to be released later for the child’s first home.

In superannuation, some strategies fall into the category of being something to consider for everyone at some point in their lives. Others are only relevant for a niche group. The idea of making large contributions for a young adult definitely falls into the latter. But at the right time it could be invaluable for that group.

High-flyers racing up the salary ladder Discussion about the carry-forward concession is often focused on the very large amounts some people will be able to contribute.

In fact, the measure will provide a very effective incremental benefit for virtually every younger client with a steep career trajectory.

Consider an individual in their 30s with strong earnings over several years, but who has not made salary-sacrifice contributions because they needed all their discretionary income to meet their living costs.

At some point, higher earners will reach the stage where the $25,000 concessional contributions cap will become a constraint.

This might coincide with paying off their mortgage or perhaps having their children leaving home. Or it might simply be that their salary has increased to a point where it makes more sense from a tax planning point of view to salary sacrifice than to pay additional amounts off their mortgage. It’s likely their super balances will still fall short of $500,000 when this happens.

At that point, it will be highly beneficial to identify how much, if any, in unused amounts they are still carrying forward from the previous five years and ensure their contributions increase before they become ineligible, because of the total superannuation balance threshold, to use those carried forward unused amounts.

This might be as simple as allowing them concessional contributions of $30,000 or $35,000 for a few years.

This is often discussed for the more obvious case of someone receiving a large bonus – a group that should definitely consider this concession. But in fact I expect it will be relevant for a vastly larger group, that is, the one including pretty much anyone reaching the top marginal tax bracket while still in their 40s.

Reserve allocations As a general rule, people over 75 don’t need concessional contribution caps because they can’t make concessional contributions. But like the under 18s, they have them. The one time a contribution cap can be valuable for someone in their 80s is if they have a large reserve they are trying to wind down before death.

An example from our client base looked something like this: • the husband had recently died with a lifetime non-reversionary pension leaving a reserve of $300,000, • the surviving spouse had an accountbased pension of $500,000, • there were no other members of the fund, and • there were four children.

The plan was to allocate the reserve to the widow over time, ideally as quickly as possible. The family was keen to ensure it was allocated to her before she died and while she was in good health. She had recently turned 80.

The new carry-forward contributions cap concession provided some extra opportunities: • For 2019/20, 2020/21, 2021/22 and 2022/23 the trustee resolved to allocate just under 5 per cent of the widow’s balance to an accumulation account for

A little-known feature of contribution caps is we all have them, it’s just some of us can’t use them.

her. In the first year this was just under $25,000 (5 per cent of $500,000), in the second year it will probably be just under $26,250 (5 per cent of $525,000) and so on.

• By June 2023, it’s likely the widow’s total superannuation balance would be something in the order of $600,000, including both her accumulation account and account-based pension. A big dent would have been made in the $300,000 reserve, but not enough to remove it completely (let’s say it remained at around $200,000).

• In June 2023, withdraw enough to ensure her total superannuation balance is under $500,000 at 30 June 2023. Remember, her total superannuation balance does not include the reserve. The withdrawal would therefore be around $100,000.

• In July 2023, allocate $150,000 of the reserve to her (the five years carried forward plus the 2023/24 contribution cap). Remember even though her balance was over $500,000 during the 2019/20 to 2022/23 period, the only time this actually matters is 30 June 2023 in order to use the concession in 2023/24.

Of course, there are many variations that could be considered, but even this simple option: • allow her to use the 5 per cent rule to allocate reserves while her balance is above $500,000 – carrying forward her concessional contributions cap each time, and then • switch to allocating more (which means the allocations would be assessed against her concessional cap) at a time when her

cap is at its very highest.

In fact, she could even consider allocating the full $200,000 left in reserves in 2023/24.

The full amount would count towards her concessional contributions cap and $50,000 would be treated as an excess contribution.

But here it pays to think carefully about exactly what happens when the concessional contributions cap is exceeded: • the excess is treated as assessable income, and • it is taxed at marginal rates less a 15 per cent tax offset (15% x $50,000 = $7500).

What if she has little or no other taxable income? The 15 per cent tax offset will basically negate the tax in this case, meaning there is virtually no cost to triggering the excess. Interestingly, the way the law works means she is still entitled to this 15 per cent tax offset even though the amount causing her excess is a reserve allocation (from which no tax will have been deducted as it is not a contribution) as opposed to a contribution (which will have been taxed on entering the fund). Of course, there is a small excess concessional contributions charge – effectively interest on her extra tax bill – but this would be negligible in this case.

Finally, she could either have the superannuation fund refund the excess or retain it and have an amount count towards her non-concessional contributions cap. As was the case for concessional contributions, even though she has no ability to actually make non-concessional contributions in her mid-80s, she has a cap of $100,000 like everyone else.

Conclusion There are many cases where the carry-forward concessional contributions cap concession will genuinely allow those who have missed out on superannuation contributions for a time to catch up on their concessional contributions. But it pays to remember the concession applies to anyone who meets the eligibility rules. The three cases considered here were almost certainly not top of mind for the politicians and Treasury when the rules were drafted, but might in fact derive more benefit from the concession.

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Lessons from the past for the future

Michael Wayne examines the performance of equity markets over the past 10 years to see what implications it might have for the decade to come.

With the 2010s behind us, I feel it’s appropriate for investors to take the opportunity to reflect on the year and decade just passed and use those reflections to prepare for the decade ahead.

2019 delivers best performance since 2009

MICHAEL WAYNE is managing director at Medallion Financial Group.

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In direct contrast to 2018, 2019 was a positive year for the majority of key asset classes, with shares, property and fixed income securities all performing strongly over the calendar year. The past year will be remembered as a year of strong returns despite significant bouts of volatility and elevated levels of risk aversion. As global interest rates fell in response to weaker global growth, the attraction of equities appeared to rise even further.

It is worth noting that throughout 2019 the small-cap index outperformed the ASX 200 and the ASX 20.

For the second year in a row, the best-performing sectors were healthcare and information technology (IT), while the worst-performing were utilities and financials

excluding property. Pleasingly, all sectors finished the year in positive territory.

Health (44.9 per cent) and IT (37.4 per cent) posted the highest total returns in 2019. Both sectors are dominated by growth stocks and benefited from higher valuations in response to a decrease in longterm interest rates. Financials (13.6 per cent) was the worst-performing sector over 2019. The fall in bank shares, which account for 23.5 per cent of the Australian market, in late 2019 was a key reason why the Australian Securities Exchange (ASX) still lagged global equities despite the strong return.

A decade in review Over the past decade the ASX generated a total return of 8 per cent a year. Although this is below the market average of 10 per cent a year since 1920, the 2010s had lower inflation compared to most prior decades, as such delivering superior real returns. For what it is worth, the best and worst decades were the 1980s (17.7 per cent a year) and 1970s (3.2 per cent a year), respectively.

It’s important for investors to consider that just because a company is large and well-known today, it doesn’t necessarily mean it will remain that way into the future. Equity investors need to overcome familiarity bias and focus on the future; what is to come rather than what

has happened in the past.

For instance, banks underperformed modestly over the 2010s, with an average total return of 7.4 per cent a year over the decade.

While the early 2010s were a solid period for the banking sector, for each of the past five calendar years they have underperformed relative to the market. Of the return generated, dividends contributed 84 per cent. As such, the recent dividend per share cuts would have many investors concerned.

With the China-driven commodity super cycle ending in 2011, resource stocks derated over the 2010s and their ASX 100 weight declined 9 per cent to 20 per cent.

To give it some perspective, industrials (9.7 per cent a year) outperformed resources (1.9 per cent a year) by 7.8 per cent a year over the past decade.

At a sector level, health was the best performer over the past decade, appearing to benefit from the broader thematic of an ageing global population and the increasing affluence of densely populated emerging markets.

Pharmaceutical and biotech posted an annual total return of 23 per cent. Of some concern perhaps is the sector’s price-earnings (PE) expansion from 16.1 times in 2009 to 35 times in December 2019.

The changing face of the market Those investors who fail to identify emerging market trends and themes may well fail to capture the rewards on offer from investing in the development of embryonic businesses and industries. It is arguably too late for investors to latch onto these names only once they’ve become large constituents within notable indices, with much of the upside and optimism already embedded into the share price.

Value v growth Broadly speaking, value investing dominated the investment landscape for at least three decades until the late 1990s, launching the careers of the most famous stock pickers in the process. In the years since, the relative performance of value investing has been either very volatile (from 1996 to 2007) or poor (since 2008) against both growth and quality.

After 12 years of value strategies

underperforming those of growth in the United States, value strategies are now trading at the highest discount against growth for more than a decade. Naturally, much has been made of the diverging fortunes with commentators and investors intellectualising as to whether the trend is sustainable or likely to see a reversal.

Aside from fleeting moments of optimism for a return to the heady days of value investing, time and again all hope has been extinguished with quality and growth approaches continuing to win out in both developed and emerging markets.

There is little doubt many of the bestperforming businesses globally look ultraexpensive based on traditional valuation metrics, yet their prices continue to push even higher. On the flip side, many businesses that are typically considered value opportunities with low PE multiples have, broadly speaking, been among the poorer performers.

The question is: What’s causing the divergence in performance and is it simply a matter of growth strategies being in vogue?

A deeper look at the underlying performers appears to reveal some underappreciated elements driving the trend. First things first: the story isn’t as simple as value versus growth.

Instead, it appears to be equally as much about low-quality versus high-quality businesses.

The question many value investors need to continually ask themselves is whether a quality business is truly exhibiting value or simply junk and cheap for a reason.

The reality is whether a company has a high or low PE ratio has had little bearing per se, with the distinction between the two being somewhat overstated. The fact is in many cases quality businesses exposed to capital-light growth sectors have continued to demonstrate strong momentum in both the balance sheet (quality) and share price and have been outperforming those cheaper businesses in more traditional capital-heavy sectors.

Rightly so the market focus has been on the merit of a result in isolation, rewarding businesses that have exceeded expectations while harshly penalising those businesses that have missed expectations.

Analysts at Macquarie Group have addressed the same phenomenon through a

slightly different lens. Their analysis indicates “value styles have outperformed growth and quality only when central banks were less aggressive while economies were benefiting from a stronger reflationary pulse. In other words, when economies functioned the way they are supposed to, without artificial supports. In all other permutations of liquidity and reflation, growth and quality had widely outperformed value styles.”

The key is that value investors believe in private sector-driven business and capital market cycles, and hence in mean reversion of margins, profits and/or valuations. Macquarie makes the point that “unfortunately, over the last two decades, and in particular since the global financial crisis (GFC), the world moved away from private cycles and worked hard to subdue and distort price discoveries and volatilities. History is important to value investors, but technology, financialisation and desire for uninterrupted growth are working to eradicate history.

“We do not believe that conventional business cycles will ever come back, hence value investing is never likely to return.”

Traits of ‘quality’ growth businesses At Medallion, we would agree with those sentiments in principle, but are nevertheless always cautious to utter the notoriously dangerous words in financial markets: “This time is different.”

For us, when comparing the performance of growth and value strategies, many of the quality growth businesses that have emerged in recent decades have been capital light in nature and have management teams that have reinvested revenues to drive future growth at the expense of short-term earnings.

What use is a PE or price-to-book (PB) ratio as a value measure when the earnings have been artificially driven lower and the businesses don’t possess many tangible assets? For these businesses the argument is that today’s investment will deliver a high multiple on the invested capital over time.

As for the so-called value businesses, often these are asset-rich businesses that require large Continued on next page

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Continued from previous page fixed capital investments to service and expand their large asset base just to maintain and generate revenue growth.

Key traits we look for when identifying quality new-age growth business are:

Capital light As touched on above, over the past decade, companies have moved increasingly toward capital-light business models where a simple idea is enough to generate economic value without the need for much physical capital.

The composition of market indices away from heavy manufacturing towards sectors such as IT is undeniable, and investors need to decide whether they can ignore this structural change in the economy and the market.

having to replace the number of customers who have left. The holy grail for businesses is being able to increase prices and increase customer spend without losing clients or customers.

High margins A common trait of quality high-growth businesses is that they exhibit high gross margins. Capital-light businesses with low levels of tangible assets typically have high margins.

Conversely, the more mature businesses that are the incumbent traditional powerhouses typically associated with financial markets tend to be capital intensive with a large tangible asset base. These businesses often operate on slim margins, which in the event of an economic downturn can rapidly see profits evaporate should top-line revenues compress.

High free cash flow Intangible assets An interesting piece of research by one of the world’s largest fund managers, DWS Group, suggests that since 2007 about 40 per cent of the current global equity market has seen zero earnings growth since the GFC, with the real position masked by quantitative easing, share buybacks and cost-cutting. Negative earnings growth was attributed to companies not investing early enough in intellectual capital, which includes other intangible things such as human capital and Intellectual property. The team goes further to highlight that companies with intangible assets have almost doubled their earnings and their market capitalisation has followed, while the market capitalisation is unchanged for those without intangible assets.

Low churn Most businesses experience what is called customer churn. This is the scenario where a customer ceases their relationship. Naturally, the lower the churn rate, the better for any business. In some circumstances, businesses can achieve a negative churn rate. This phenomenon is achieved when a company loses customers, yet the additional revenue generated from the existing customers collectively increases by more than the amount lost from the departing customers, without

52 selfmanagedsuper

A resulting feature of businesses moving increasingly toward capital-light business models has been a sizeable jump in the amount of free cash-flow (FCF) generation and return of capital (ROC) in the form of dividends and buybacks. As a general rule, dividends and buybacks over time will equate to a company’s FCF. As such, a disproportionate emergence of capital-light businesses has resulted in a rise in the amount of capital being returned to shareholders; an increase that is not reflected when looking at earnings. The divergence of FCF relative to earnings explains why these valuation metrics are so depressed, while PEs are above their long-term averages. As it stands, multiples such as price/FCF and price/ROC are now trading at substantial discounts, 20 per cent and 40 per cent respectively, below the historical averages as companies look to invest money today in the hope of capturing a greater number of customers in the future.

Sacrifice profitability for growth High-quality growth businesses often sacrifice profitability for growth, that is, management has the capacity to efficiently invest a dollar of revenue in opportunities that enhance future profitability. By repeating this consistently and successfully, management can ultimately deliver compounded value-enhancing growth. An

obvious example is research and development (R&D) and marketing. Hypothetically and well-placed investment in R&D can eventually produce a better, more indispensable product that delivers higher margins, while a successful marketing campaign may unearth new customers who become incrementally growing annuity streams. The point, of course, is none of this is reflected on the balance sheet immediately, often distorting investor perceptions of value. The benefits transpire over time, by which time management has already repeated the cycle.

Growth at any price?

Despite the attractive attributes many of these high-quality growth companies possess, investors still need to be cautious when looking at opportunities in these growth sectors.

Investors need to be careful not to get caught up and mistake momentum as recognition of quality, and ensure they continue to look for quality growth at a reasonable price.

Although over the past 10 years there has been outperformance of companies with highquality attributes and strong growth, the reality is that it has been the outperformance by a small number of high-growth/return stocks that have skewed results in favour of growth over value.

On an equal-weighted basis, the results are less favourable where the average high growth has actually underperformed a value approach.

Recent research by Goldman Sachs shows high-growth and high-PE companies in Australia, as defined by earnings per share growth above 20 per cent, are now trading at exorbitant 12-month forward earnings well above the long-term average and above the lofty levels reached at the height of the dotcom boom. In addition to trading at a 135 per cent premium to the market PE, Australian growth stocks trade on a multiple more than 60 per cent greater than their international peers.

That’s not to say some of the businesses that make up those readings aren’t worth those multiples, having continuously proven doubters wrong. However, investors obviously need to proceed with caution with numbers deviating so obviously from historical averages and global peers.

AUDIT

The auditor’s investment strategy conundrum

An auditor’s professional obligations with regard to the SMSF investment strategy are not necessarily straightforward, writes Belinda Aisbett.

BELINDA AISBETT is a director of Super Sphere.

So much has been written and commented on with regard to the ATO’s diversification letters sent to 17,700 SMSFs in September 2019. Responses have ranged between welcoming the ATO’s involvement to outright condemnation. The letters resulted in confusion and concern as to why the regulator was getting involved in the wording of fund investment strategies at all and what trustees should be doing in response to receiving a letter. Many trustees felt they were being obligated to divest of single assets held and invest in a diversified portfolio of assets. This was not the case and not the purpose of the ATO correspondence.

First off, I believe the letters were a positive step in the ATO supporting and assisting auditors in this post-Ryan Wealth era. After the judgment in the Ryan

Wealth v Baumgartner case, the focus has been on what the auditor should be looking at and what the auditor is responsible for, even if this might be considered outside the scope of our engagement.

I found the ATO letter a timely reminder of what the trustee of each SMSF should be considering and what they should be responsible for, in addition to reminding the auditor of their obligations under the Superannuation Industry (Supervision) (SIS) Act and Regulations.

At the end of the day, the trustee sets their investment strategy and the trustee must decide on whether that strategy meets the needs of the members.

Continued on next page

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Continued from previous page The auditor is responsible for ensuring the strategy has given due regard to the relevant SIS requirements, and whether the strategy, as documented, has been given effect to.

The auditor does not receive any share of the profits on investment choices and so we should not be held responsible for a share of any losses.

It can be challenging for auditors to raise issues or concerns with regard to the investment strategy – pushback is common from accountants who refer us work. We are often told it’s a guide only and not to be too serious when reviewing the ranges set down by the fund trustee. We are told we can’t assess it as a snapshot in time, even though any other approach would be impractical and unworkable. We are regularly given barely veiled backdated strategy documents in an attempt by either the trustee or their accountant to get one more audit query off the list of things to do. So it is positive to see the ATO remind trustees the strategy document is important and it has specific requirements that must be met if it is to pass our audit scrutiny.

Auditors are required by the ATO to sign off in our audit report that the fund has complied with regulation 4.09 of the SIS Regulations, which requires the trustee to have an investment strategy that takes into account risk, return, liquidity, diversification, cash-flow requirements and insurance, and that this document needs to be given effect to and regularly reviewed, all the while taking into account the whole of the circumstances of the fund.

There have been some in the sector suggesting the assets held outside the fund by members personally should be considered when evaluating compliance with the investment strategy. This is incorrect. Our requirement as the auditor is to review the fund has a strategy and the strategy complies with the SIS requirements. The next arm of our responsibility is to review whether the strategy has been given effect to. Any asset held outside the fund does not form part of

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the asset allocation assessment, nor does the assessment of diversification, for example, take into account personal assets. It is a fund strategy, not a member strategy, being audited.

To detail what an auditor should consider when reviewing the fund investment strategy depends largely on the content of the strategy provided by the trustee. A broad strategy is easier to review and requires less assessment when compared to highly complex or detailed strategies. A strategy that simply requires returns to be considered proves easier and quicker to assess whether it has been given effect to when compared to a strategy that requires the trustee to achieve a return of 2 per cent above the consumer price index (CPI) over a rolling 10-year period with no more than one year of negative returns in any five-year period.

Historically auditors were less concerned with the wording of the investment strategy, and my office would look for those key words – risk, return, liquidity, diversification – and once checked off we would be comfortable the strategy complied with the SIS Act and Regulations.

But, post the Ryan Wealth case further time has been spent on the detailed wording of client strategies. Whereas in the past we wouldn’t spend time determining if the fund

It can be challenging for auditors to raise issues or concerns with regard to the investment strategy – pushback is common from accountants who refer us work.

had in fact achieved 2 per cent above CPI on a rolling 10-year basis, we now feel we have to. Failing to do this might result in the auditor signing an audit report indicating the fund has complied with regulation 4.09, when in fact the fund may not have hit these return benchmarks and may be guilty of failing to give effect to the documented strategy.

In the past, my approach has been that if the fund didn’t hit the return objectives, the trustee would have changed their investment mix had that concerned them. If the strategy or investment mix remained the same year after year, I took comfort that the trustee

must be okay with their aspirational returns not being met, otherwise they would have changed their strategy or their investment mix. I don’t think we can take this approach anymore.

With the ATO diversification letters came a renewed focus on whether the fund had truly considered diversification and, more importantly, the SIS Act requirement to document in the investment strategy the risks associated with an exposure to a lack of diversification.

But how are auditors supposed to assess whether a fund has diversified or not, or be able to assess what risks should be documented?

Auditors are not typically licensed financial advisers and we have the real issue of not necessarily being able to assess if a fund has achieved sufficient diversification to avoid having to comment on the risks from not diversifying. It may sound like a simple assessment, but in reality it is anything but straightforward for some clients. For example, is a fund that has a 10 per cent allocation to cash and a 90 per cent allocation to listed share investments a diversified fund? Is the answer different if the 90 per cent of share investments is spread across numerous companies over numerous industries? What if the fund has 100 per cent in cash – certainly not diversified - but what are the risks from not diversifying the ATO would expect to be documented by the trustees, who are clearly very risk averse?

The ATO diversification letters were sent to trustees post-30 June 2019 and as a result there are many trustees who hadn’t considered the risks a lack of diversification exposed the fund to at year end. The timing of these letters was problematic for a couple of reasons.

Firstly, any trustee who magically has a new investment strategy dated 30 June 2019 that discusses in detail the risks from their lack of diversification will simply evidence their ability to backdate an investment strategy. These strategies can’t be accepted by the auditor as being the investment strategy in place at the time we are required to sign off on it.

Secondly, not to produce a strategy that considers the risks from a lack of diversification where the fund has not diversified with either a single-asset strategy or a dominant-asset strategy clearly hasn’t complied with the legal requirements. In the absence of any further information, the auditor would then have to qualify their audit opinion to comply with the law, as well as report the fund to the ATO under the mandatory auditor reporting guidelines.

To assist my clients document the requirement to consider the risks from a lack of diversification, and hopefully avoid a qualified opinion and ATO reporting, we have suggested the trustee hold a meeting and document the fact the regulator has raised awareness of the strategy requirements, and, in particular, their risks from a lack of diversification. Minutes should be taken at this meeting and dated when the meeting is held, not backdated to year end. I believe considering these minutes subsequent to year end assists me as the fund auditor to conclude the legal requirements have been met because the fund is simply documenting what was in place at year end.

Now to decide which funds should be holding this meeting. Diversification is not a simple requirement and it is therefore not a simple assessment, and auditors need to establish a benchmark range to guide their audit time to those funds that might be at risk of having limited diversification. This assessment is not done to insist or require the fund to diversify; this assessment must be done to ensure the auditor is reviewing the strategy to determine if the trustee has documented the fund is exposed to risks from a lack of diversification.

There is no legal requirement an SMSF must diversify. The trustee is self-directed and can therefore decide to have a single or dominant-asset strategy. Where this is the case the auditor must be given additional review time, either to be comfortable the investment strategy documents this or to determine if a meeting with the trustee is needed.

The ATO has said it doesn’t want to see trustees simply stating they have considered

the risks from a lack of diversification, but instead wants the trustee to detail exactly what these risks are. The SIS legislation does not require a detailed assessment of the risks from a lack of diversification, only that these risks are considered, so I believe a strategy documenting any risks to the SMSF by the present lack of diversification would be sufficient to satisfy the SIS legislation requirements. More detail might be ideal, but it is not necessary in my opinion.

The regulator has also said the practice of some SMSFs documenting the investment ranges for each asset class at 0 to 100 per cent is unacceptable. The ATO believes these broad investment ranges indicate the trustees have not fully considered their objectives.

The regulator would perceive this type of recorded strategy as evidence the trustee is treating the document as a basic compliance obligation rather than a well-considered investment strategy.

While I agree with the overall concept a 0 to 100 per cent allocation band would suggest a less-than-engaged or targeted investment approach, I don’t agree broad ranges are unacceptable. From the auditor’s perspective, ranges are not required to be documented in the strategy. Where ranges are documented, the auditor must assess if the fund assets fall within the documented parameters. If they do, the trustee has given effect to their strategy regardless of how broad those ranges might be. A strategy that does not have investment ranges for each asset class does not fail the SIS requirements, the same as a strategy that does not detail the returns to be achieved does not constitute a compliance breach.

Where an SMSF has broad investment ranges, perhaps the auditor should raise the ATO’s concerns in the audit management letter to keep the conversation going and to assist in promoting a greater involvement by the fund trustee.

Auditors should be mindful of their legal exposure when signing an unqualified audit opinion if the client’s investment strategy doesn’t document what the SIS rules require or hasn’t been given effect to.

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New landscape for SMSF favourite

The compliance requirements around holding property in an SMSF have been amended. Jeff Song summarises the issues advisers and trustees now need to consider.

JEFF SONG is superannuation online services division leader at Townsends Business and Corporate Lawyers.

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Considering the average value of assets per SMSF is $1.3 million, according to ATO statistics, together with the high price tag of properties in many areas in the current market and the low interest rate environment, the survival of limited recourse borrowing arrangements (LRBA) after the federal election in 2019 was welcomed by trustees wishing to maintain flexibility with financing their SMSF property investments.

Property investment in SMSFs, however, is now subject to new rules with the introduction of laws that count the outstanding amount of LRBAs towards relevant members’ total superannuation balance (TSB) in certain circumstances. It may also be subject to a higher level of scrutiny than before given the ATO’s warning over the investment strategy of SMSFs with over 90 per cent of their funds in one asset class.

Despite the above, SMSF trustee interest in property investment remains strong and it is worth taking a look at some important compliance issues relating to property acquisition and development in SMSFs.

Prior to purchase Formulate an appropriate investment strategy Yes, SMSFs are self-managed, but there are regulatory requirements trustees must observe. One requirement is to formulate, regularly review and give effect to an appropriate investment strategy. When reviewing the investment strategy, the trustee has a duty to consider diversification of fund assets. In most circumstances, owning a property would form a significant part of an SMSF’s overall investment. Noting the ATO’s expression last year of its concerns over the lack of diversification within SMSFs, trustees with investments concentrated in property should at least consider in their review the downside of a lack of diversification and liquidity, and have a documented response to the risk. Don’t forget to take into account non-super assets in establishing the super fund’s investment strategy LRBAs and the new rules regarding TSB If trustees are considering making use of an LRBA, ensure the new TSB rules are considered before committing to the investment.

For new LRBAs (or existing LRBAs that commenced after 1 July 2018), the outstanding LRBA amount as at 30 June each year must be included in the relevant member’s TSB if either:

1. the LRBA is between the fund and an associate of the fund, or 2. the member has met a condition of release with a nil cashing condition.

If, for example, two members of an SMSF are equally participating in an investment using an LRBA in 2019/20 (that is, both members’ superannuation interests in equal shares are used towards the purchase), 50 per cent of the outstanding loan amount as at 30 June 2020 will be counted towards each member’s TSB. Once added to the members’ TSBs, it will affect their eligibility in the following financial year, 2020/21, for carry-forward concessional contributions, the non-concessional contributions cap and the bring forward of the non-concessional contributions caps, the spouse tax offset, and the segregated asset method to calculate exempt current pension income.

Authority of the trustees Trustees should seek legal advice on whether the trust deed contains sufficient trustee powers to allow them to commit to the proposed purchase and maintain the investment as they intend. If not, they should arrange for the deed to be amended so it does provide those powers.

Powers generally required for a property purchase with an LRBA include: a. the power to appoint a bare trustee/ custodian, b. the power to borrow under arrangements of the kind contemplated by section 67A of the Superannuation Industry (Supervision) (SIS) Act, c. the power to grant a security over property, d. the power to purchase real estate, and e. the power to lease property.

Related-party vendors and business real property SMSF trustees are generally prohibited from acquiring a property from related parties to the fund, but an exception applies when the property is business real property.

While the term business real property suggests a property has to be a commercial

property, this isn’t always the case. Provided the property is actually being used in a business around the time of the transfer, then residential properties and vacant land may qualify as business real property.

If a builder, for example, built 20 residential townhouses, which he now owns subject to a mortgage and works full-time managing and leasing to tenants, his use of the properties may constitute a business of property investment and may pass the business use test under section 66 of the SIS Act (that is, wholly and exclusively used in one or more businesses).

Be aware not every property investment, such as building, renting and selling property

with a profit motive, is considered a business.

The ATO has determined generally there needs to be sufficient scale of activity, repetition, continuity and system for a business.

However, remember there is no absolute rule of thumb with this question and trustees should seek advice before committing to acquire a property from a related party.

As this will be a related-party transaction, the purchase must be properly documented, including the contract for sale, deposit required, and exchange and settlement terms, and undertaken as if it was between unrelated parties, and the purchase price Continued on next page

CHECKLIST PRIOR TO PURCHASE Item Review the investment strategy in consideration of a proposed structure of the property investment.

Tips and traps •

•

Consider and allow sufficient buffer for costs of insurance, professional fees and other government charges and taxes (that is, stamp duty, land tax and rates) associated with property ownership in the relevant state.

If the property investment will result in lack of diversification, consider and have a documented response to the risk.

If using an LRBA, consider potential TSB implications in future years.

•

TSB will affect relevant members’ ability to make various types of contributions in future years.

Check authority of the trustees to enter into the transaction.

•

Amendment of trust deed may be required if current deed is missing any required authority.

If acquiring from a related party, ensure the property is ‘business real property’ as defined.

•

Keep evidence relied on to determine the property is ‘business real property’ (for example, legal advice).

Be mindful of arm’s-length requirement.

If borrowing from a related party, ensure the transaction will comply with both arm’s-length and limited recourse borrowing provisions in the SIS Act.

•

•

•

Formally document the holding trust and the loan.

Stay in ATO safe harbour when determining loan terms.

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Continued from previous page should match the current market value of the property as evidenced by an independent valuation report.

Development of property in SMSF example – knock-down and rebuild Be aware that developing a property in an SMSF is not for the faint-hearted as it will attract greater scrutiny from the auditor and the ATO. In addition, it may not just be a question of legal compliance. Trustees need to work with their financial advisers and accountants to safeguard the financial viability of the project before committing to any such investment.

Running a business and the sole purpose test Knock-down and rebuild is likely to be considered as running a business. While an SMSF is not completely prohibited from running a business, extra caution needs to be taken so that it doesn’t breach the sole purpose test.

Like any other investment, the property development must be for the sole purpose of providing retirement benefits for the members. This is not always a simple question, but at the very least means members, or anyone related to them, cannot make personal use of the property or unreasonably benefit from the development.

Avoid related tradespeople From a compliance perspective, it would be safer to engage entities that aren’t related to the fund. If, however, an associated entity is involved, the fund’s dealing with the entity must be on arm’s-length terms and appropriate documentation should be in place to support this. Ensure there is a rationale for engaging their services and their pay rate, noting the legal prohibition on the provision of financial benefits to related parties as well as the non-arm’slength income provisions in the Income Tax Assessment Act 1997, which are now stricter since the introduction of the concept of nonarm’s-length expenditure last year.

Trustees should also ensure when

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CHECKLIST FOR PROPERTY DEVELOPMENT Item

Tips and traps

Check if development is running of a business and if so whether it would satisfy the sole purpose test.

•

Expect higher scrutiny from auditor and the ATO if: − trustee employs a related party, − business is commonly carried out as a hobby, − there is any indication of private use by related parties.

Satisfy arm’s-length requirements if any related party is to be engaged.

• •

Avoid engaging related parties if possible.

Ensure there is rationale for engaging related parties and their pay rate.

Document the engagement.

Consider having an agency agreement in place if development would require purchasing of materials through related parties.

Consider limitations on development if property is subject to an existing LRBA.

•

• •

Examples of prohibited development include: − subdividing land, − building on vacant land, − knock down and rebuild, and − converting residential property to a commercial property.

property to commercial property.

Mere repair or maintenance work can be funded from the money borrowed under the LRBA, however, any improvement work must be funded by other sources such as the accumulation balance in the fund.

purchasing materials for the project that they buy directly from third parties or obtain advice about having an agency agreement in place for purchasing materials through related parties.

Also, the development must be allowed under the current trust deed and be in line with the investment strategy of the fund.

Summary

Development of property under existing LRBA In a nutshell, it is possible to renovate and/ or refurbish a property subject to an existing LRBA, but extensive work or development, such as a knock-down and rebuild, would result in a change to the fundamental nature of the property, which is prohibited.

While there is no universal rule of thumb here, examples of fundamental change provided by the ATO include subdividing land, building on vacant land, knock-down and rebuild, and converting residential

Property remains a popular investment for SMSFs and funding that property investment still remains largely unhindered by potential challenges from recent changes in laws.

While more clever transactions and strategies are being considered, it’s important to ensure transactions satisfy the compliance requirements and also pass the pub test as being commercially viable.

Compliance issues considered in this article are not exhaustive and not suited for all circumstances. Trustees should obtain formal advice before committing to any property investment in their SMSFs.

STRATEGY

The significance of fettering

Daniel Butler and Bryce Figot examine a general rule governing SMSF trustees that has significant implications for estate planning strategies.

There is a little-known rule that can have huge implications for SMSFs, particularly when it comes to reversionary pensions.

This article provides the crucial must-know details.

What is a reversionary pension?

DANIEL BUTLER (pictured) is a director and BRYCE FIGOT special counsel at DBA Lawyers.

The ATO describes a reversionary pension as follows without actually using the term ‘reversionary’ (Taxation Ruling TR 2013/5 [29]): “A superannuation income stream ceases as soon as a member in receipt of the superannuation income stream dies, unless a dependant beneficiary of the deceased member is automatically entitled, under the governing rules of the superannuation fund or the rules of the superannuation income stream, to receive an income stream on the death of the member. If a dependant beneficiary of the deceased member is automatically entitled to receive the

income stream upon the member’s death, the superannuation income stream continues.”

It also describes it as follows (Law Companion Ruling LCR 2017/3 [12]): “A reversionary death benefit income stream is a superannuation income stream that reverts to the reversionary beneficiary automatically upon the member’s death. That is, the superannuation income stream continues with the entitlement to it passing from one person (the member) to another (the dependant beneficiary).”

The income tax legislation uses the term ‘reversionary beneficiary’. Although the income tax legislation does not define the term, the explanatory memorandum that introduces this legislation does state a ‘reversionary income stream’ means: “A superannuation income stream that automatically reverts to a nominated beneficiary on the death of its current recipient.”

The common theme in all of the above definitions is the idea that the pension continues to be paid upon death automatically (that is, the SMSF trustee is instantly Continued on next page

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Continued from previous page bound and compelled to continue paying the pension).

Case study Imagine an SMSF trustee who signs a pension agreement with a member stating the trustee will start paying a pension to the member now and that later when the member dies, the pension will automatically continue to be paid, or revert, to the member’s spouse. The trustee makes resolutions confirming this.

Most would think this agreement is binding and that once the member dies the trustee is compelled to pay the pension to their spouse.

However, there is more to the picture.

If someone does want to implement an enforceable automatically reversionary pension, regard must be had to the wording of the SMSF deed, any BDBN and other related documentation.

The rule against fettering There is a general rule against trustees of trusts, including SMSF trustees, fettering their discretion.

The specifics of this rule were conveniently summarised by Justice Chesterman in Dagenmont Pty Ltd v Lugton [2007] QSC 272: According to the Law of Trusts by Underhill and Hayton 16th edition (p 690): … it is trite law that trustees cannot fetter the future exercise of powers vested in trustees ex officio … . Any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power.

Meagher and Gummow in Jacobs’ Law of Trusts in Australia (6th edition para 1616) say: Trustees must exercise powers according to circumstances as they exist at the time.

They must not anticipate the arrival of the proper period by … undertaking beforehand as to the mode in which the power will be exercised in futuro.

Professor Finn (as his Honour then was) in his work Fiduciary Obligations wrote (at para 51): Equity’s rule is that a fiduciary cannot effectively bind himself as to the manner in which he will exercise a discretion in the future. He cannot by some antecedent resolution, or by contract with … or a beneficiary — impose a ‘fetter’ on

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his discretions.

Finkelstein J summarised the position succinctly in Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2001] FCA 1628 (para 121). His Honour said: Speaking generally, a trustee is not entitled to fetter the exercise of discretionary power (for example a power of sale) in advance. If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced …

In short, if a trustee has a discretionary power and the trustee decides now how it will exercise that power in the future, such a decision will be unenforceable.

This is extremely relevant in the context of reversionary pensions.

126. A superannuation income stream automatically transfers to a dependant beneficiary on the death of a member if the governing rules of the superannuation fund, or other rules governing the superannuation income stream, specify that this will occur. The rules must specify both the person to whom the benefit will become payable and that it will be paid in the form of a superannuation income stream. The rules may also specify a class of person (for example, spouse) to whom the benefit will become payable. It is not sufficient that a superannuation income stream becomes payable to a beneficiary of a deceased member only because of a discretion (or power) granted to the trustee by the governing rules of the superannuation fund. The discretion (or power) may relate to determining either who will receive the deceased member’s benefits, or the form in which the benefits will be payable.

How this applies to pensions The vast majority of SMSF deeds provide that if upon death there is no binding death benefit nomination (BDBN), then the trustee has a discretion regarding to whom (for example, a spouse) and how (for example, as a pension) any death benefit is paid.

Accordingly, if the trustee has previously: • resolved; and/or • agreed how this discretionary power will be exercised in the future (for example, that the pension revert to a spouse), this constitutes a fetter and will not be enforceable.

When is this a problem?

Tax issues The ATO applies a strict test on when a pension ceases upon the death of a member that is a pension ceases unless it is automatically reversionary. As noted in TR 2013/5 above, a pension ceases “unless a dependant beneficiary of the deceased member is automatically entitled”. The following paragraph of TR 2013/5 is key to understanding what the ATO considers to be an automatically reversionary pension:

In a practical sense, if upon death the trustee wants to pay a pension to the person named reversionary beneficiary in the pension documents, it is unlikely to cause any practical problems. In this circumstance it was unlikely a reversionary pension was needed in the first place.

However, consider the situation where the trustee of the SMSF does not want to pay the death benefit to the surviving spouse. It could be the spouse is the member’s second

spouse and the member has children from a prior relationship who are on adverse terms.

Subject to how the member’s will, SMSF deed and related documents are drafted, it is possible the children from the prior relationship will end up as SMSF trustees after the member’s death. Assume the children from the prior relationship no longer get on with their (now former) step-parent.

Accordingly, the children might point to the rule against fettering discretion and say any pension documents are invalid and it would be wrong of them to blindly follow the reversion in those pension documents.

Accordingly, they might choose to remake the decision as to who to pay death benefits to. Somewhat unsurprisingly, in these circumstances children tend to pay the benefits to themselves; self-interest generally wins out.

Although there are some grounds on which the children’s action could be challenged by the spouse, the spouse would be facing an uphill legal battle.

Can a fetter ever be valid?

It is possible for a fetter to be valid. After all, a BDBN is really just a type of fetter.

However, in order for such a fetter to be valid, the deed must allow for it. As Lord Justice Harman stated in Muir v Inland Revenue Commissioners [1966] 1 WLR 1269, 1283: “if a power is conferred on trustees virtute officii, that is to say, if it is a trust power which the trustees have a duty to exercise, they cannot release [for example enter into a fetter] it in the absence of words in the trust deed authorising them so to do.”

Unfortunately, few SMSF deeds are written with clear enough provisions to successfully oust the prohibition on fettering.

Different types of reversionary pensions Thus, there are two main types of reversionary pensions, namely: • a discretionary reversionary pension where there is no valid fetter in the SMSF deed that ‘locks in’ the nomination of the reversionary beneficiary, and • an enforceable automatically reversionary

There is a general rule against trustees of trusts, including SMSF trustees, fettering their discretion. pension supported by an SMSF that includes a valid fetter that satisfies the ATO’s criteria in TR 2013/5.

There are numerous SMSF deeds that provide a priority to a reversionary pension nomination over a BDBN in the event of conflict, for example, if the member’s pension nominates the surviving spouse but the BDBN nominates their estate (legal personal representative), then the pension nomination wins out.

One of the risks of relying on this type of SMSF deed is that the pension documents themselves may not provide a binding pension nomination. Thus, the priority given to the pension nomination could itself be subject to challenge resulting in the BDBN taking priority.

We therefore recommend members seeking to rely on a reversionary pension nomination priority obtain confirmation their pension nominations are valid and effective if they also have made a BDBN.

Moreover, such members should also obtain confirmation their BDBNs are valid and effective as the reversionary nomination may undermine what is in their BDBN. Advisers also need to be aware when assisting clients in relation to these matters when they may overstep the line and they start to provide legal services. Advisers are best to ensure the client’s lawyer reviews and settles these documents so they are consistent with the client’s wills and estate plans.

After many years of practical experience and having assisted many clients in legal disputes and cases, DBA Lawyers generally recommends an SMSF deed should provide clear priority to the BDBN. There should also be a conflict clause that provides certainty on what wins out in the event there is a conflict between a reversionary pension nomination and a BDBN. Unfortunately, many SMSF deeds leave these matters ripe for disputes to easily arise.

Practical implications There are several practicable takeaways that advisers should note.

Firstly, pension documentation alone is unlikely to implement an enforceable reversionary pension.

Secondly, if someone does want to implement an enforceable automatically reversionary pension, regard must be had to the wording of the SMSF deed, any BDBN and other related documentation.

Thirdly, make sure the SMSF documentation used is provided by a quality supplier that has relevant experience and qualifications to ensure the documents are valid and effective such that the SMSF and pension documents facilitate an enforceable automatically reversionary pension that satisfies the criteria in TR 2013/5.

Finally it is critical to determine who will be controlling the SMSF upon death. If someone who wishes to frustrate the wishes of the deceased is controlling the SMSF, regardless of whether there is binding and effective documentation in place, the rightfully entitled recipients might face a very difficult legal battle in obtaining what is their entitlement.

QUARTER I 2020

61

SUPER EVENTS

THE INSTITUTE OF PUBLIC ACCOUNTANTS NATIONAL CONGRESS 2019

The Institute of Public Accountants (IPA) National Congress 2019 was held in Adelaide last November.

Practitioners from around the country made their way to the National Wine Centre of Australia to attend.

1

3

2

4

6

7

5

8

9

62 selfmanagedsuper

12

11 10

13

14 14

15

16

1: Petris Lapis (Petris Lapis). 2: Mark Ellem (SuperConcepts). 3: Moira Saccasan (University of Western Sydney) and Anne Hunter (Solutions Based Tax & Accounting). 4: Kevin Osborn (VUCA Trusted Advisers) and Damien Moore (IPA). 5: Stuart Wilson (Neptune). 6: Andrew Conway (IPA). 7: Will Gilbert and Jye Beckett (both IPA Books). 8: Stephen Dowling (Mental Health First Aid and Aon). 9: Matthew Burgess (View Legal). 10: Wayne Schwass (Puka Up). 11: Phil Schwenke (IPM Solutions) Peter Polkinghorne (Cultural Facilities Corporation). 12: Aaron Dunn (Smarter SMSF). 13: Andrew Conway and Damien Moore (both IPA). 14: Karen Payne (Inspector-general of taxation). 15: Sam Allert (IPA Books). 16: Michael Sukkar (Assistant Treasurer) and Andrew Conway (IPA).

QUARTER I 2020

63

LAST WORD

JULIE DOLAN ILLUSTRATES HOW THE NEW PROVISION TO ALLOW UNUSED CONCESSIONAL CONTRIBUTIONS WILL OPERATE

JULIE DOLAN is enterprise director at KPMG.

The ability for individuals to make additional concessional contributions in a financial year by using previously unused concessional contribution caps was one of the many measures that came out of the Treasury Laws Amendment (Fair & Sustainable Superannuation) Bill 2016.

The objective of this measure is to allow individuals who have had lumpy income or who have taken time out of work to catch up on any unused cap amounts from 1 July 2018. However, there are specific conditions. It only applies to a rolling five-year period and amounts carried forward that have not been used after this five-year period will expire. Also required is that the individual’s total superannuation balance (TSB) must be below $500,000 at 30 June in the financial year prior to the making of the contribution. An individual’s TSB is basically the total of their accumulation and pension accounts across all of their superannuation interests.

Therefore, the application of this measure is now in its first year and can be of significant value to individuals in not only increasing the amount contributed into superannuation, but also claiming a respective personal tax deduction.

For example, let’s assume Jane’s concessional contributions made for 2018/19 were$15,000.

She received a bonus in the current financial year of $10,000. This carry-forward rule would allow her to make an additional contribution of $10,000 to the annual cap of $25,000, amounting to a total of $35,000 in concessional contributions for 2019/20.

Contributing her bonus payment of $10,000 not only boosts her super balance, but also eliminates any tax payable on the bonus. This example would also be applicable to an individual who receives a larger-than-normal trust distribution or net capital gain. There are many potential situations where application could be advantageous.

As previously mentioned, any unused cap

amount can only be carried forward for up to five years. The application of the unused cap is required to be in order from the earliest year to the most recent year. Any unused cap after the fifth year is written off.

Let’s consider a further example. In 2018/19, Jim’s total concessional contributions (inclusive of the superannuation guarantee levy) were $10,000.

Therefore, the unused amount was $15,000.

Jim’s concessional contributions and unused cap amounts are shown in table 1.

In both 2021/22 and 2022/23, Jim makes an additional $10,000 deductible personal contribution on top of the annual cap of $25,000.

At the end of the financial year prior to the making of these additional contributions, his TSB was less than $500,000. Even though he has exceeded his cap amount of $25,000 in both years, he is able to increase the concessional contribution amounts by the $10,000 in each year. This is achieved by using the $15,000 unused concessional contribution cap from 2018/19 and $5000 from 2019/20.

In 2024/25, with a TSB of still less than $500,000 at the end of the prior financial year, Jim makes a personal deductible contribution up to the annual cap of $25,000 plus an additional $5000.

This additional $5000 is allowable via the use of the unused concessional contribution cap in 2019/20.

The remaining cumulative cap in 2019/20 would then be $10,000. However, this remaining cap cannot be carried forward as it would fall outside the five-year carry-forward period in 2025/26. This deduction is reflected in the opening cumulative balance for 2025/26.

Therefore, as illustrated the concept is not complex, however, without proper record-keeping it can easily become complicated and messy.

Appropriate tracking of the net cumulative available unused cap will be important for clients to maximise the contribution opportunities from this measure.

Table 1

2018/19

2019/20

2020/21

2021/22

2022/23

2023/24

2024/25

Concessional contributions ($)

10,000

5000

10,000

35,000

35,000

25,000

30,000

Available unused cap ($)

15,000

20,000

15,000

0

0

0

0

15,000

35,000

50,000

40,000

30,000

30,000

Carry-forward: Cumulative available unused cap ($)

*Assuming $25,000 annual cap amount applies to each financial year between 2018/19 and 2024/25.

64 selfmanagedsuper

2025/26

15,000

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