self managed super: Issue 30

QUARTER II 2020 | ISSUE 030 | THE PREMIER SELF-MANAGED SUPER MAGAZINE

THE PANDEMIC EFFECT Business (x) COVID-19

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FEATURE

STRATEGY

COMPLIANCE

STRATEGY

COVID-19 Business implications

Estate challenges SMSFs in danger

Death benefit pensions How TBC matters

Coronavirus review An SMSF checklist

SMSF

Professionals Day

Brisbane

2020

Melbourne Sydney Adelaide EVENT POSTPONED

Webcast

02 Junmonths 28 May in coming 02 Jun 26to May 21 May New dates be announced

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PRE-REGISTRATION BEFORE 29 MARCH

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COLUMNS Investing | 22

The best pandemic-driven opportunities.

Investing | 26

How the virus has affected listed and unlisted property.

Compliance | 30

What the TBC means for death benefit pensions.

Strategy | 33

Business COVID-19(x)

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The machinations of super splitting schemes when relationships end.

Compliance | 36

The SMSF impact of the COVID-19 rent relief measures.

Strategy | 40

A coronavirus SMSF checklist.

Compliance | 44

Dealing with in-house asset issues through significant market volatility.

Strategy | 47

The dilution of SMSF deceased estate strength.

Compliance | 50

New income protection insurance rules to consider.

Strategy | 54

Coronavirus triggers a time to restructure legacy pensions.

THE POST-PANDEMIC BUSINESS MODEL Cover story | 14

REGULARS What’s on | 3 News | 4 News in brief | 5 SMSFA | 8 CPA | 9

FEATURE Numbers ill-used | 18

The issue of having SMSF auditor numbers misused.

SISFA | 10 IPA | 11 CAANZ | 12 Regulation round-up | 13 Super events | 58 Last word | 60 QUARTER II 2020

1

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

Key characteristics come to the fore The coronavirus pandemic has caused a lot of physical and financial pain, with the federal government doing its best to aid Australians on both fronts.

Perhaps one of the most discussed and most significant economic relief measures Canberra has introduced to help people deal with COVID-19 is allowing individuals early access to a portion of their superannuation benefits – $10,000 this financial year and $10,000 next financial year.

Assistant Minister for Superannuation, Financial Services and Financial Technology Jane Hume has predicted anywhere between 1.6 million and 1.7 million people will take advantage of this instrument.

There are two sets of procedures individuals have to follow to gain early access to their superannuation – one for Australian Prudential Regulation Authority (APRA) funds and another for SMSFs. All super fund members have to apply for the relief measure to the ATO through the MyGov platform. For APRA-regulated funds, if the application is approved, the ATO will communicate this to fund trustees who will then release the payment to the member.

Conversely for SMSFs, the ATO will contact the member directly with the determination and they will then have to pass this information on to the trustee. Given SMSF members are trustees, it makes this process a lot simpler.

Having to deal with an extra layer of administration can make people nervous about how quickly the process will take to complete and the speed with which they can receive the money to which they are entitled.

This is one element that has highlighted the power of SMSFs and why people set them up, that is, for greater control over their retirement savings. This has been pointed out time and time again, but detractors of the sector

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continue to make efficiency and effectiveness comparisons based purely on the costs involved compared to other superannuation vehicles.

When the virus has eventually effectively been dealt with, perhaps some research can be performed to establish more first-hand evidence to reinforce this point to allow the relevant authorities to better understand the sector.

One of the other issues that has surfaced from this relief measure is the liquidity levels of the public offer funds. Basically there have been concerns APRA-regulated funds will have to sell off assets at a low point in the markets to fund these COVID-19 payments.

Perhaps this too may dull one of the constant criticisms levelled at SMSFs over their asset allocations. SMSFs have long been derided for holding too much cash in their portfolios.

From a return perspective, holding excess amounts of cash is not necessarily the most efficient practice. However, I don’t think there would be one trustee in Australia, SMSF or otherwise, who would be complaining about holding more than enough cash to cover COVID-19 payments right now.

Again this may prompt a better analysis of SMSF members’ asset holdings, both inside and outside super, to properly assess whether their funds have an appropriately structured investment portfolio in a post-coronavirus world.

The pandemic has been a terrible thing for Australian society, and society worldwide, but perhaps one resulting positive can be a better and deeper understanding of the strengths of SMSFs and what motivates their trustees.

With any luck this in turn can lead to improved interaction with the sector from government and its associated agencies.

Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au Senior journalist Jason Spits j.spits@bmarkmedia.com.au Journalist Tharshini Ashokan t.ashokan@bmarkmedia.com.au 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

WHAT’S ON

DBA Lawyers Inquiries: www.dbanetwork.com.au

SMSF Online Updates 5 June 2020 24 July 2020 4 September 2020

Institute of Public Accountants

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

SMSF Market Value Issues from COVID-19

Changing Face of SMSF

Zoom webinar

18 June 2020

22 May 2020

12.00pm–1.00pm

11.00am–12.00pm

Super Unpacked Investment Strategy Requirements and Issues Post COVID-19

Webinar 21 August 2020 11.00am–12.00pm

Zoom webinar 22 May 2020

Inquiries: Liz Vella (07) 3034 0903 or email qlddivn@publicaccountants.org.au

Webinar

Accurium

1.00pm–2.00pm

SuperConcepts SMSF Specialist Course

Inquiries: 1800 203 123 or email enquiries@accurium.com.au

SMSFs Regulator Q&A with Dana Fleming and Shirley Schaefer

NSW

Zoom webinar

SuperConcepts

GoTo webinar

15 May 2020

Level 17, 2 Chifley Square, Sydney

21 May 2020

12.00pm–1.00pm

SMSF Audit COVID-19 Workshops Zoom webinar 21-22 May 2020

18-20 August 2020

VIC 25-27 August 2020 SuperConcepts Level 3, 530 Collins Street, Melbourne

SA

11.00am–2.00pm

8-10 September 2020

COVID-19 Implications on Superannuation Benefit Payments

Level 1, 100 Pirie Street, Adelaide

Zoom webinar

Inquiries: www.smartersmsf.com/event/

21 May 2020

SuperConcepts

Smarter SMSF

11.00am–12.00pm

ATO Relief for Related Party Transactions – COVID-19 Issues

Practical insights with ECPI Webinar 22 May 2020

Zoom webinar

12.00pm–1.00pm

Practical Insights with ECPI

8.00am-9.00pm

Heffron Quarterly Technical Webinar Webinar 21 May 2020 Accountant-focused session 11.00am–12.30pm Adviser-focused session 1.30pm–3.30pm

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

Postponed due to COVID-19.

New dates to be announced soon.

21 May 2020 1.00pm–2.00pm

QUARTER II 2020

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NEWS

COVID-19 advice ROA measure has licensee element

By Darin Tyson-Chan

Practitioners looking to provide advice regarding early access to superannuation under the relaxed compliance rules recently announced by the Australian Securities and Investments Commission (ASIC) still need to consider separate obligations their licensee may impose on them in relation to this course of action, an SMSF Association board member has said.

Superology director Tracey Scotchbrook’s warning came with a view to the regulator’s amended compliance approach allowing advice to be provided about an individual’s legitimate early access to retirement savings, under the COVID-19 financial

relief measures, with an accompanying record of advice (ROA) as opposed to a full statement of advice (SOA), which is usually required.

“I know for my licensee they’re encouraging advisers to [prepare] a full statement of advice wherever possible,” Scocthbrook said while participating as a panellist during a recent SMSF Association COVID-19 webinar.

“My licensee has not said we can’t [use the ROA instrument], but what they are pointing out is they’ve got concerns about some of the risks [involved].

“So that could be a scoped statement of advice as appropriate to the client’s circumstances.

“What they’ve highlighted to the adviser group is that it’s really only in those extreme and extenuating circumstances that the ROA [course of action]

Advisers encouraged to provide full statement. should be considered.

“I think advisers really need to have a look at what are the policies and procedures that their AFSL (Australian financial services licence) [holders] are requiring of them.”

To this end, she suggested practitioners access their licensee support materials, such as advice hubs and technical teams, to assist them in establishing greater clarity

regarding this situation.

She added advisers needed to recognise the purpose of this relief measure when looking to use it.

“This [instrument] has been put in place to simplify the advice process and [facilitate] expediency. I think that’s a key component to remember and there is nothing prohibiting you from [preparing] that full statement of advice.”

Advocacy affects auditor independence

By Darin Tyson-Chan

A leading specialist auditor has warned practitioners about the dangers of advocating on behalf of clients due to the effect this could have on establishing a professional level of independence, given it is an issue the Australian Securities and Investments Commission (ASIC) has highlighted.

“ASIC drew attention to the advocacy threat, which I found really fascinating when the competency standards were released because I don’t advocate on behalf of my clients, but clearly ASIC thinks auditors may have that risk,” Super Sphere director Belinda Aisbett told delegates during her firm’s recent

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seminar series.

Aisbett defined advocating on behalf of a client as situations where an auditor is in constant communication with the regulator asking for compliance enforcement leniency.

“So you’re demanding the ATO let the particular client off easy because they had this whole sob story as to why they took money out of their super fund. [In this situation] how is your independence looking?” she said.

Aisbett pointed out the tone of the correspondence with the regulator was most important in these circumstances.

“Just be really careful about how you word any correspondence if you are communicating with the ATO about a client matter,” she advised.

“Even if it’s on a no-name basis, you

don’t want to be telling the ATO we think you should do the following because of this scenario.”

Aisbett suggested simply putting the client’s circumstances forward as a question might allow auditors to avoid advocacy risk.

“Ask what would the ATO like to see in this scenario. Put the question to the ATO, but don’t dictate what you think the ATO should say,” she said.

“Then you’d be avoiding straying into that advocacy situation.”

With regard to the wider concept of auditor independence, Aisbett noted ASIC has said consideration needs to be given to this issue throughout an audit. “[So] not just at the start and not just as a fleeting thought at the very end,” she said.

NEWS IN BRIEF

Early super system infiltrated The ATO and Australian Federal Police (AFP) have revealed up to 150 cases of fraudulent activity related to the early access to superannuation scheme have taken place involving $120,000 of superannuation money.

The regulator gave notice via its website the fraudulent activity was related to the unlawful use of personal details in an effort to defraud the program and had been undertaken by a small number of people.

At a hearing of the Senate Select Committee on COVID-19, ATO commissioner Chris Jordan said the regulator’s systems had not been hacked or compromised in any way, but there were intermediaries who also had access to ATO systems and were involved in the taxation affairs of individuals.

Speaking at the same hearing, ATO commissioner Reece Kershaw said: “We have our cyberteam on this and there has been an intrusion by a third party so we are looking into that and how that system was intruded and the actions taken from there.”

Kershaw revealed the activity was sophisticated in nature and may have been the work of organised crime or offshore parties.

Burgess back at SMSF Association SuperConcepts technical education services general manager Peter Burgess will be vacating his current position later this month, having been appointed to a new role as deputy chief executive and director of policy and education with the SMSF Association.

Burgess will fill the new position on 1 June, with his planned departure from SuperConcepts scheduled for 22 May.

The appointment ends a seven-year stint with SuperConcepts and marks a return to the SMSF Association, with Burgess having previously been the industry body’s technical director for three years between 2010 and 2013 and also a board member from 2007 to 2009.

“Peter has built up a well-deserved reputation across SMSF policy and technical issues over many years, so to have him back in the association fold will be a boost for our members and for the SMSF sector in general,” SMSF Association chief executive John Maroney said.

Burgess said he was excited to be rejoining the industry body at such a critical time for the sector as it continues to manage the economic effects of the COVID-19 pandemic and other disruptive matters, such as the Financial Adviser Standards and Ethics Authority education and code of conduct requirements.

Retaining rent levels not NALI A leading sector auditor believes a situation where an SMSF does not grant a rent reduction for a property it holds, under the COVID-19 economic relief measure, will not cause the fund to be considered to have breached the non-arm’s-length income (NALI) rules.

ASF Audits head of technical Shelley Banton said: “There are no issues [with this course of action] because [the granting of rent relief] needs to be an agreement between the tenant and the landlord.

“So if there is no agreement, and the rent just continues as it is, there is no requirement that you have to provide rent relief and that rent relief has to be sought.”

Heffron head of SMSF technical and education services Lyn Formica said there potentially would not be a NALI issue if there was strong evidence for the SMSF landlord’s decision to keep the rental expense for the tenant unchanged.

Newsletters not considered coercion The common financial planning practice of sending general newsletters to clients, including recommendations to seek assistance with issues creating uncertainty, such as the COVID-19 relief instruments, is unlikely to constitute a breach of the anti-hawking provisions regarding early super release advice, an industry discussion panel has said.

SMSF Association chief executive John Maroney acknowledged concerns about this topic are valid given this is what most client newsletters aim to do – provide information and then encourage people to contact the advisory firm if more detail is required.

“I would think if you’re not bending the rules of sending unsolicited emails and people have agreed to receive it, then you should be on fairly safe ground,” Maroney said.

Smarter SMSF chief executive Aaron Dunn agreed with Maroney’s assessment.

Aaron Dunn “If you’re providing a broad base of information to your clients generally about regulatory changes, JobKeeper, or whatever the case may be, and you also include information around [the early release of super], I couldn’t see how [this activity] could extend right out to the fact that you’re trying to solicit work there,” Dunn said.

“I think that would be a very long bow [to draw] and I wouldn’t think that would be what the intent of the hawking rules [are about].”

QUARTER II 2020

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NEWS IN BRIEF

ATO gives auditors relief The ATO has updated its auditor/ actuary contravention report (ACR) instructions for the 2020 financial year, confirming SMSF auditors will not be required to report a number of breaches that might occur as a result of COVID-19 relief measures.

The regulator stated contraventions of superannuation laws, such as the sole purpose test and in-house provisions, that might arise from rental relief being offered to a related party would not need to be reported by SMSF auditors in their ACRs for the current financial year.

“To make it easier for auditors, we are currently updating the ACR instructions for the 2020 income year to state you will not need to report these breaches in the ACR,” it said in an update on its website.

“The SMSF independent auditor’s report should nevertheless still be modified for material contraventions in accordance with the auditing standards.”

Auditors of funds with rental relief arrangements in place should use their professional judgment to decide whether the relief looks reasonable and if the trustee has shown evidence the relief was documented and offered as a result of the impact of the coronavirus pandemic, it added.

No change for early super access The SMSF Association has downplayed the possibility of any legislative amendments that would allow a greater number of taxpayers to access their superannuation early as a COVID-19 financial relief measure.

Currently the eligibility for the relief measure is based upon a reduction in the working hours of individuals as opposed to a reduction in pay, and

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SMSF Association chief executive John Maroney said people should not have an expectation this stipulation will change.

“I think it’s unlikely that there will be legislative change, which then comes down to whether the tax commissioner has discretion in this area and my understanding is he doesn’t,” Maroney said.

Concerns have been raised as a result of situations where employees are working the same hours but are being paid less due to a reduction in their remuneration.

Maroney’s suggestion was for these situations to be negotiated between employers and employees to arrive at a more acceptable outcome.

Digital signatures okay The ATO has confirmed trustees can use digital signatures to sign their SMSF’s financial statements if they are unable to sign their documents in person due to COVID-19 restrictions.

Signing options now available.

In an update on its website, the regulator stated the use of a digital signature was an option for SMSF trustees unable to sign their fund’s financial statements in person because of social distancing requirements as a result of the coronavirus pandemic.

“Alternative options available for signing the financial statements consist of returning a signed scanned copy to your

tax agent or accountant by email or using an electronic signature such as a digital signature,” the ATO noted.

“Digital signatures should be provided using a secure system, typically through an established third-party provider, in a way that clearly identifies the trustee signing and indicates the approval you are providing.”

Trustees were also reminded they can sign and return their financial statements to their accountant or tax agent by post.

However, the signature requirement for SMSF financial statements would not be met if the trustee only acknowledged the documents by email or over the phone.

Adviser permanently banned The Australian Securities and Investments Commission (ASIC) has permanently banned an Australian Capital Territory-based financial planner from providing financial services after it found she was providing clients advice regarding the establishment of an SMSF that was not in their best interests.

The corporate regulator banned Jane Myers following its investigation of her time as an authorised representative of Spectrum Wealth Advisers Pty Ltd between October 2013 and March 2017.

ASIC stated Myers had failed to identify her clients’ relevant circumstances and investigate whether the SMSF would achieve the clients’ financial objectives beyond their desire to purchase property. Further she was found to have not reasonably informed her clients of all associated costs of holding a property within an SMSF and provide them with statements of advice.

It noted she had, on one occasion, advised a client to roll over their existing life insurance to a newly established SMSF, which resulted in the client losing their life insurance cover. Subsequently, the client’s spouse had not received the insurance payout.

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SMSFA

Troubled times call for specialist advice

JOHN MARONEY is chief executive of the SMSF Association.

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On 20 February, the bellwether ASX 200 Index closed at 7162 – a record high. Last year had been a stellar one for investors, with the index climbing more than 1000 points to close the year at 6684, and early 2020 brought more of the same with the index passing the 7000-point mark in mid-January. For many SMSF trustees it meant their nest egg was looking healthier by the day.

Since then the index has fallen sharply as the economic impact of COVID-19, globally and locally, spooks markets. Factors being cited to justify the bull market sentiment – especially the cooling of tensions in the United States-China trade war – have paled into insignificance as the economic consequences of a global pandemic become all too apparent. Even the ‘D’ word, depression, is being uttered.

For the SMSF Association it highlights, yet again, the need for many trustees to get specialist SMSF advice. It is exactly when investment markets are turbulent that trustees most need to have a trusted relationship with their adviser to ensure they are best positioned to make the correct decisions about their portfolios.

In the current investment climate, those SMSF trustees most at risk are either nearing or have just entered retirement. To see investment portfolios incur double-digit losses since in a little over two months is a stark reminder of the impact of sequencing risk – an investment term that received much attention post the global financial crisis but has largely slipped off the radar.

Obviously no investor is immune to market fluctuations. But experienced advisers who have intimate knowledge of their clients, not just their investment portfolios but also their propensity for risk, family commitments and health among other things, can adjust client portfolios accordingly.

They appreciate just how difficult it can be for an SMSF trustee, once retired, to recover from poor investment returns occurring near retirement.

There is no perfect solution to sequencing risk.

However, there are steps advisers, in consultation with clients, can take to mitigate the risk. In other words, as retirement approaches, de-risk the portfolio. But that’s not as easy as it sounds. When does an SMSF trustee begin the process? Start too late and trustees can be caught up in a COVID-19-

induced market sell-off. Begin too soon, and they risk ending up with insufficient retirement income.

Part of a de-risking strategy typically involves more diversification in an investment portfolio. But remember this is not foolproof; poor performance still can occur. At times of market stress, assets often considered to be uncorrelated can follow each other down. On that note the ATO is now taking a tougher line on asset diversification, recently reminding trustees that an SMSF’s investment strategy should be “your plan for making, holding and realising assets consistent with your investment objectives and retirement goals”.

Adjusting a portfolio’s asset allocation over a trustee’s working life is critical. For example, in the accumulation phase a higher exposure to growth assets such as property and equities, and even using call options and gearing to increase that exposure, can be appropriate, but switching to less volatile assets such as bonds and cash would be prudent as retirement nears.

Another option for trustees is to keep sufficient assets, between one to two years of expenditure, in a liquid fund. This allows trustees to be able to avoid selling investments after a significant market fall at depressed prices, as well as giving portfolios time to benefit as markets recover.

Although market volatility has a great impact on trustees nearing or just after retirement, younger trustees who are in the accumulation phase can still benefit from sage advice in these times. It’s not unusual for people to retreat from growth assets after a market sell-off, unnerved by the sudden capital loss.

They need reminding time is their friend and that in the past 10 years the share market has appreciated by about 50 per cent, and that excludes any dividend income. In these taxing times, advisers can caution against any rash decisions that can have a long-term detrimental effect on their superannuation.

Market crashes are a fact of investment life.

Although it’s fair to assume SMSF trustees would appreciate this reality, knowing how best to prepare for and negotiate through such a tumultuous event is completely different. Having a trusted adviser they can turn to could make just the difference in helping to minimise any potential loss and maximising the future upside.

CPA

The COVID new world

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

Actions announced by the federal government have attracted a short-term media focus, but are there traps for SMSF trustees and their advisers in the longer term?

The arrival of a deadly global pandemic has focused the world in ways people might not have expected. While we have had scares in the past with SARS and swine flu, the arrival of COVID-19 no doubt caught a lot of people by surprise. What has been most surprising is the extent to which life has ground to a halt.

The government was quick to move in relation to superannuation, announcing two measures.

And while the measure to allow funds paying pensions to halve the drawdown rate temporarily has attracted little in the way of comment, there has been substantial interest in the other measure to make up to $20,000 available to superannuation fund members by way of compassionate grounds releases between now and September.

In the world of Australian Prudential Regulation Authority (APRA)-regulated funds, attention has been focused on the ability, or potential lack thereof, for funds with high levels of unlisted assets to be able to pay benefits to all members who apply for these. However, very little attention has focused on SMSFs, possibly due to the perception that members are also required to be trustees and therefore more likely to know about any practical limitations affecting their funds, such as liquidity.

Also to blame may be the idea that SMSFs are mostly used by retirees even though ATO statistics show one-third of SMSF members are in the 35-44 age group alone.

Another perception is that SMSFs are really only affected by problems at lodgement time. Since the lodgement cycle for SMSFs can have a substantial lag on them –2018/19 annual returns for SMSFs have had their due dates extended to the end of June 2020 – anything going wrong now might not be picked up by trustees, their accountants or their advisers until this time next year.

It is also possible SMSFs are faced with different issues to those affecting APRA-regulated funds and

these may be providing their own challenges. The ATO notes in its frequently asked questions facility a number of issues presently keeping trustees awake.

A considerable number of these relate to some very specific circumstances only likely to affect SMSFs. For example, funds that lease business property to a related party are probably asking what actually is the current market rate of rent if a fund is leasing a business property to a related party and other landlords in the area are granting rent relief. Funds may also be asking how a fund avoids breaching the arm’s-length income test.

Another area where trustees need to maintain focus is in relation to investment values, particularly considering recent volatility. Have trustees considered how this might affect the fund’s compliance with its investment strategy?

The ATO has indicated some areas where it is willing to grant relief, such as the rent relief example above, where it has indicated it will not take action during the 2020 or 2021 financial years. The ATO has also indicated short-term variations would not be considered by them to be a departure from the fund’s stated investment intentions. However, given the breadth of difference between one fund and another, it is unlikely the ATO can announce assistance for all matters.

Ensuring a fund’s records are up to date is a duty trustees have and it is of paramount importance at this time. Trustees may need to retain not only proper fund records, but also copies of ATO guidance and documented decisions made to ensure their auditors are satisfied with the actions they have taken.

This may also be an excellent opportunity for accountants and advisers to get in touch with their clients to ensure everything is okay in relation to their documentation. It may be, for example, time to re-examine a fund’s investment strategy if the trustees are struggling with their current one.

But with a health scare causing all this, it may just simply be an opportunity for an accountant or an adviser to check that their client is okay. And that might be all they need.

QUARTER II 2020

9

SISFA

COVID-19 pandemic could be reform opportunity

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

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Since I penned my last column in this magazine in January, the world could not have changed more. Just a few short weeks ago we were recovering from a tumultuous summer and looking forward to brighter times for those affected by the bushfires and the economy in general.

In the SMSF sector, submissions to the Retirement Income Review were all in and being considered by the federal government as markets continued their bullish run to new highs. The coronavirus had been detected, but it was in a far-off place called Wuhan in China and few of us thought much of it until Chinese New Year and the virus’s spread to Hong Kong, Japan and South Korea.

Roll forward to May and our economy is all but suspended and businesses of all sizes are struggling to survive. My family runs a travel agency so I know first-hand the impact this pandemic has had on small business. Thankfully the government, with good advice, saw the pandemic coming and took decisive action, throwing a financial lifeline involving a number of initiatives to many affected individuals and businesses. One of the more controversial initiatives is allowing some people to access their super benefits in this financial year and next. This measure has spurred some debate on whether this is in the best interests of superannuants, but has shown the government, during this pandemic, can make quick decisions.

The realisation has dawned over the past few weeks there will not be any quick return to the normality we were enjoying this time last year. But there is an opportunity and indeed perhaps even a necessity, while considering how we gradually resume our way of living, that we examine any potential changes to the government’s approach to SMSF regulation and oversight.

Directly from their respective websites, Treasury and the ATO describe themselves as “joint stewards of Australia’s tax system and aspects of Australia’s superannuation system. The ATO’s role is to effectively manage and shape the tax and superannuation systems to support and fund services for Australians”. In this role, they administer the tax law and key elements of the superannuation law and provide advice to Treasury to support the development of tax legislative measures.

Treasury is responsible for the design of the tax system and its components, and retirement income policy, in relation to economic efficiency, equity, income distribution, budgetary requirements and economic feasibility.

Yet we have seen in recent times the ATO, in the view of many commentators, overreach its position into pseudo prudential matters when it sent letters to SMSF trustees with regard to fund investment diversification. Is administering key laws the same as providing commentary on appropriate investment diversification – or is that a matter for the trustees to give effect to an investment strategy that considers all relevant issues for the fund as noted in section 52 of the Superannuation Industry (Supervision) Act? The investment strategy provisions do not actually impose any conditions or diversification guidelines as such – rather requiring the trustee to consider the various factors and elements when establishing an appropriate strategy.

We have commented in this column in the past that the three pillars of the existing retirement income system, being the age pension, compulsory superannuation and voluntary savings, need regulatory oversight bodies, such as the Australian Prudential Regulation Authority and the ATO, to be well coordinated. In the same vein of business lobby groups advocating the current environment being ideal for productivity reforms, so too is it opportunity for reform of the regulation of the SMSF sector.

To this end, the Self-managed Independent Superannuation Funds Association (SISFA) would welcome an industry discussion on the role of investment strategies and raising SMSF trustees’ engagement with them. However, achieving meaningful strategies is not met by imposing penalties, but rather by raising the standard of trustee engagement through positive incentives.

Finally, I’d like to take the opportunity to briefly mention another opportunity referenced in more detail elsewhere in this edition of the magazine.

SISFA is offering subscribers of selfmanagedsuper and its sister publication, smstrusteenews, membership to our association at half the normal price. This membership will also soon include access to additional benefits from a range of providers of services to the SMSF sector.

IPA

Bouncing back

VICKI STYLIANOU is advocacy and technical group executive at the Institute of Public Accountants.

Winston Churchill was famous as a leader who inspired his people to persevere during wartime. His words ring true during the current COVID-19 crisis: “There is no time for ease and comfort. It is time to dare and endure.”

As we look to flattening the curve even more (or for some of us lockdown has meant fattening the curve), we are also looking ahead to what recovery and the new normal will look like.

The economy When the federal government has just spent, so far, around $320 billion, or 16.4 per cent of annual gross domestic product (GDP), on three stimulus packages, then obviously things won’t be the same when the pandemic is over. While this means a surplus is highly unlikely for a very long time (it took us about 12 years to recover from the global financial crisis), at least we can take comfort from the fact Australia’s position heading into this crisis was stronger than many, with both the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) forecasting this country’s economy would grow faster than comparable economies, including the United Kingdom, Canada, Japan, Germany and France.

The IMF and OECD indicate Australia is one of the advanced economies best placed to provide fiscal support without endangering debt sustainability.

Debt While our new debt level may be sustainable, it still needs to be repaid. However, it does not necessarily mean increased taxes or some kind of austerity program. According to some economists, Australia could take its time in repaying the debt, which would still be relatively low at a forecast 26 per cent of GDP, compared to the latest OECD figures of an average 110 per cent of GDP for gross debt (these figures are not strictly comparable but make the point). If we overcome our national obsession with surpluses, we could afford the debt for a little longer while investing in renewed productive capacity, as we did after World War II when debt levels soared to 120 per cent of GDP. We need a similar kind of boost or boom after we come out of this crisis and start reviving the economy from its hibernation.

Unwinding and recovery There has been speculation about whether the recovery will be V, U or L shaped. Some economists

are predicting (or hoping) for a V-shaped recovery, which would see a sharp rebound in economic activity, starting in the second half of the year. Others are saying it will definitely not be V shaped. Most agree the economic recovery can only follow from a recovery in the health crisis – as Churchill said: “Healthy citizens are the greatest asset any country can have.” Many economists will be watching the number of new COVID-19 cases being reported, as well as other health metrics. Then the economic indicators being watched include those relating to labour, such as employment rates (which often lag) and hours worked, plus retail sales of both essential and discretionary spending.

All of these metrics will be important for businesses planning their pivot from response to recovery. They will also be critical for the government, which will have to consider how and when to unwind all of the temporary measures it has put in place, and what will be the longer-term structural and budgetary implications. There has already been speculation around keeping higher levels of Newstart and revised funding of the childcare sector, to name only two.

Working from home There are many more questions being asked, including what does the new normal look like for all those workers who commute every day to a fixed place of employment. The crisis has shown that for many, working from home is a viable option. It has forced businesses and workers to wholeheartedly embrace the digital age. What does this mean for workplace laws, workplace health and safety, urban planning, transport, management and so on.

Importantly, there might be some lessons to help boost Australia’s falling rate of productivity, especially around the use of technology.

Supply chains The new normal will also depend on the reaction to globalisation and integrated supply chains. For Australia, which has the most concentrated trade profile in the world, this crisis has glaringly exposed the vulnerabilities of our supply chains. There is now widespread speculation about re-industrialisation and becoming more self-sufficient in the crucial medical supplies that matter in a pandemic.

In our quest to prepare for the new normal, the words of Churchill again ring true: “Do not let spacious plans for a new world divert your energies from saving what is left of the old.”

QUARTER II 2020 11

CAANZ

The cost of early super release

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

Ideally you would think that accurately working out the real cost of taking up to $20,000 out of super before retirement under the federal government’s coronavirus early release policy would not be controversial.

After all, this is a highly subjective exercise and depends on a large number of variables, such as what a person intends to do with the money (some want to use it to purchase a home, pay down debt and the like), the number of years before retirement, whether catch-up contributions will be made, likely future investment returns, taxes, fees and many other potential variables.

Sadly, this has become a greatly contentious topic and in many cases the arguments are based around who has generated a more accurate single result.

The problem with these single number results is that they depend on many variables, nearly all of which are nothing more than guesswork.

Let’s talk about the many investment assumptions for a moment, for example, average rate of return on investments, likely average fees, tax rates and average inflation rate.

In my experience, actuaries spend a long time building an investment model to work out what average returns should be. Financial planners also typically like using average returns. For many years I have thought the use of averages is a second-best approach. Averages are just that. An expected return.

Let’s take the ASX 200 as an example. Between March 1982 and March 2020 (a 38-year period), the average return (share price only) was 7.9 per cent a year without taking into account fees, taxes or inflation. How often did the ASX actually deliver this result over any one single year? Never. The only time it is accurate is the precise time between commencement and end dates. Pick one month on either side and you have a different result.

Surely a better approach would be to make assumptions about future returns based on past volatility and offer a range of potential results based on random variability for each year. Sometimes this is called Monte Carlo simulation. Admittedly, even this method isn’t perfect and depends on how well you have built your data model.

Nominal v real returns Nominal returns are simply what an investment is expected to produce without taking into account inflation. Real returns take inflation into account.

12 selfmanagedsuper

For example, if I take the ASX 200 nominal average return above of 7.9 per cent, and assume inflation over that period was 3 per cent, then my real return is 4.9 per cent.

Does the average consumer understand these differences? Almost everyone knows from their own life experiences that prices increase (in fact, many seem to erroneously think that prices increase faster than wages increase). But what the impact of inflation is over the medium to long term and how we use relatively simple mathematics to take future dollars and convert them into today’s money are often seen as simply deep, dark, impenetrable mysteries.

What is more accurate: nominal or real returns?

Indeed, is there a right or wrong answer? In my view, most definitely not. The key issue is: Do I want to look at my investment results using future dollars or using today’s dollars? What’s required, however, is a full description of what has been calculated, including the assumptions.

The rule of 72 A handy actuarial formula is the rule of 72. No doubt this is not a new fact for most people reading this article. If you want to know how long it will take for money to double in value, based on an average return, divide the rate of return by 72. For example, if we assume a 7 per cent return, then it will take about 10 years for the money to double in value.

The net results Assume for the sake of simplicity that $20,000 is withdrawn from super in one lump sum (not correct in that you have to take out two withdrawals of $10,000 each over roughly a six-month period).

What reduction in super benefits might this lead to?

Example 1: assume net of fees and taxes the average return is 7 per cent a year and annual inflation is 2.5 per cent – then over 20 years the nominal return would be $152,000 and the real return $75,000.

Example 2: assume net of fees and taxes the average return is 5 per cent a year and annual inflation is 2 per cent – then over 20 years the nominal return would be $86,500 and the real return $48,500.

Which is more likely to be accurate? None of us knows. It’s all a bit confusing that some would want to loudly argue over the use of single numbers in these cases. All we know yet again is that compound interest is a powerful beast.

REGULATION ROUND-UP COVID-19 early access to super Coronavirus Economic Response Package Omnibus Bill 2020 ASIC Corporations (COVID-19 – Advice-related Relief) Instrument 2020/355

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

Limited early access to super can be claimed by eligible people affected by the COVID-19 crisis who: • are unemployed, or • are eligible to receive the JobSeeker payment (including the youth allowance), parenting payment, special benefit or farm household allowance, or • since 1 January 2020 have been made redundant or had working hours reduced by at least 20 per cent or are sole traders whose business has been suspended or experienced a 20 per cent or more turnover reduction.

Eligible citizens and permanent residents of Australia and New Zealand will be able to apply to withdraw up to $10,000 in 2019/20 and another $10,000 in 2020/21. Eligible temporary residents can only make a withdrawal in 2019/20.

Financial planners who give advice on this measure will not need to provide a statement of advice, but a record of advice needs to be kept on file and a copy given to the client. Accountants who do not operate under an Australian financial services licence will be able to give advice to existing clients. In both cases, for the exemptions to apply, the fee charged for advice cannot exceed $300. No unsolicited spruiking of this service is allowed. AUSTRAC has introduced measures so super funds do not need to carry out their customer identification procedures when making these payments.

COVID-19 rent relief and other matters National cabinet rent relief code

This code imposes principles where a tenant of a commercial property is an eligible small to medium-sized enterprise that qualifies for the JobKeeper program.

Under the code, landlords will not be allowed to terminate leases due to non-payment for a relevant period of time. Landlords will also need to negotiate proportionate reductions in rent payable as waivers or deferrals of rent. The ATO announced if SMSFs that rent commercial properties to nonrelated parties offer rent relief or reductions under these provisions during 2019/20 and 2020/21, compliance action will not be taken. Industry experts are recommending against abusing this concession and best practice should ensure similar provisions to arm’s-length arrangements are implemented. No relief has been extended for meeting in-house asset ratios or investment strategy requirements. Trustees should check

they meet obligations before 30 June, particularly taking into consideration the impact of share market downturns.

COVID-19 deferral of tax return lodgement dates To assist with managing workloads during the COVID-19 crisis, the ATO has announced extensions to the deadlines for submitting 2019/20 tax returns.

The deadline for lodging the 2019/20 SMSF annual return has been extended to 30 June. The deadline for companies has moved to 5 June.

Other entity types can also defer lodgement until 5 June, provided they pay any liabilities by that date.

The lodgement and payment dates for 2019/20 fringe benefit tax returns has been deferred to 25 June.

Changes to 2020 SMSF annual return The SMSF annual return form is expected to be available at the end of May. Several changes have been made, including: • label H – a property count label is included to report the number of real properties held that are under a limited recourse borrowing arrangement, • anti-detriment label – this deduction can no longer be claimed so the label has been removed, and • auditor qualification question – changes have been made to this label around reporting issues.

Property development investments SMSF Regulator’s Bulletin SMSFRB 2020/1

The ATO has expressed concerns about the use of ungeared related companies/unit trusts to invest in property developments due to an increase in these strategies. The warning was made that the required conditions need to be met at the time of acquisition, as well as the entire time the investment is held.

The bulletin lists a number of concerns raised by the ATO and provides guidance for trustees and advisers to set up these strategies appropriately.

Over-65 contributions to super Treasury Laws Amendment (Measures 4 for a later sitting) Bill 2020: Improving Flexibility for Older Australians

Exposure draft legislation was released to seek feedback on the measures to allow people aged 65 and 66 to make personal contributions without meeting the work test and increasing eligibility for spouse contributions to age 74. The consultation period has closed and legislation needs to be introduced into parliament.

QUARTER II 2019

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FEATURE

THE POST-PANDEMIC

BUSINESS MODEL Online service providers and those using offshore operations have been essential for advisers and accountants for many years, but in a shutdown, logged-in world they have become the indispensable tools for maintaining advice relationships.

Yet, as Jason Spits writes, while advisers can do more with these services, they should also be checking where the data trail starts and ends.

Business (x) COVID-19 14 selfmanagedsuper

=?

FEATURE POST-PANDEMIC

At the start of 2020, working from home was a task some advice practitioners undertook on occasion, but by the beginning of March it had become the ‘new normal’, as well as an abbreviation, WFH, to describe how people would be working for the next few months due to the COVID-19 shutdown.

For advisers, and their practices, it also meant having to quickly assess what online resources they had on hand to replace what the coronavirus and subsequent government response had taken away – face-to-face interaction with clients and office-based teams.

This rapid shift to working online, and providing advice to clients in the same way, is not a new development for advice practitioners. Most have been using online and outsourced services for some time, but they are now considering how to use them in better ways and what impact they will have on the provision of advice after the shutdown is lifted.

Safe as houses One of the issues that may have been overlooked in the flight out of corporate offices and into the home office has been security of online systems, both onshore and offshore, and what service providers and advice practitioners should be doing to maintain that protection.

Smarter SMSF chief executive Aaron Dunn notes the coronavirus pandemic has exposed some concerns about the issue of infrastructure that online service providers require to operate, regardless of whether they are located in Australia or overseas.

“Anyone who uses an outsourced service at the moment will find that prior to the lockdown the staff of those organisations had infrastructure around them and could manage security risks, but this may have changed as the world entered shutdown, which in some locations was more severe than in others,” Dunn says.

“How do businesses in those situations continue and support clients?

In Australia, we have transitioned to a WFH model, but that may be harder to do overseas while maintaining the same level of privacy and security.”

This is an issue Odyssey Accountants has been addressing since establishing itself in Vietnam in the late 1990s to provide outsourced services to accountants in general practice, as well as in the SMSF advisory space.

David Carter, Odyssey Accountants chief executive, says his approach has been able to meet all the relevant and expected standards as if he was operating in Australia. As such, his business has a tax licence, professional indemnity insurance and meets Australian privacy standards.

“Looking at security from a technical perspective, we also use virtual private networks, security tokens and two-factor authentication. Unfortunately, we find that some advisers and accountants are less interested in these parts of our business and are merely shopping for a service provider based on cost,” Carter notes.

“We also see advice practitioners taking large risks with their security despite our best efforts. Systems can be well designed, but people are sloppy and will send unsecured emails, or use the same passwords, and we can deploy whatever is necessary at our end, but we can’t stop advisers and accountants doing dumb things.”

Lightyear Group director Michael Jeffries, who is also involved in the provision of online services with Lightyear Docs and I Love Accounting, says the COVID-19 lockdown has highlighted an issue he has seen many times over the past decade, and that is the lack of business continuity processes (BCP) in advice practices.

Jeffries points out there is a need to carefully choose a service provider, but advisers and accountants have not built their own infrastructure around preparing for disruptions like the current situation presents.

“Systems can be well designed, but people are sloppy and will send unsecured emails, or use the same passwords, and we can deploy whatever is necessary at our end, but we can’t stop advisers and accountants doing dumb things.”

David Carter, Odyssey Accountants

“We see technology that can’t handle the task, such as phone systems that lose calls or slow internet speeds that restrict the speed of users, and there are some sectors, such as legal and accounting firms, we see as being more restricted than others,” he says.

Continued on next page

QUARTER II 2020

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FEATURE

“Clients are only interested in advice, not the service providers at the back end or how that advice is delivered, and the advisory sector should not let a crisis like this to go to waste.”

Julian Plummer, Midwinter Financial Services

Continued from previous page

Midwinter Financial Services head of strategy Julian Plummer, a key figure in the launch of one of the first financial planning software providers to operate solely online using cloud storage, says advisers need to keep up to date with their own systems while also being vigilant about their outsourcing arrangements.

Plummer adds the responsibility to ensure an adviser’s systems are up to date and capable of handling large amounts of client data sits with their licensee, according to Australian Securities and Investments Commission regulations, but advisers should still remain proactive.

“No one plans for a black swan event, but they are out there. For instance, there are groups of hackers in Ukraine that have targeted SMSFs in the Sydney and Melbourne area. As an adviser, are your systems better than their systems?” he says.

“Some advisers do not take this seriously enough. They should as a matter of urgency research and understand the laws. There should be an incident response plan in place for any breach event and IT policies and procedures must be up to date and staff thoroughly versed in them.

“The policies and procedures should not be filed away, instead the business should be run in accordance with them.

Advisers are responsible for the advice

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and have a duty of care to their clients when they safeguard their digital and information assets.”

Signing on the electronic line Having got their house in order, what should financial advisers and accountants consider when looking at online service providers?

This is an issue many practitioners would have been reminded of in the rapid shift to WFH and when it came to choosing an online meeting platform.

Names like Zoom, Microsoft Teams, Google Meet, GoToMeeting and Webex have moved to the fore in recent weeks, along with the decision as to which one will work best in an advice practice environment.

Any considerations used in this decision should also be worked through, but in much more detail, when choosing a service provider who will handle thousands of pieces of client data and information each week.

Carter says there are a number of quantitative issues advisers and accountants should consider, and these range from the practical, such as where the provider is based, what security is in use and how much the service will cost, to the qualitative issues of the standard of services provided and turnaround time.

To this Heffron executive director Martin Heffron adds the need to be able

to demonstrate experience, consistency and a reputation for quality that has been consistently enhanced over time.

“In the same way that consumers have to trust an adviser before committing to them, the same applies with service providers, so we need to be consistent over time and demonstrate we can deal with the complexities of advice for our clients,” Heffron explains.

“Complex work also creates its own barriers to entry and being able to perform that work reinforces the brand and reputation of a good provider.”

These factors, however, should not create the impression that an online or outsourced service provider is a set-andforget proposition, according to Jeffries.

He suggests advice practitioners need to allocate time and resources to work with the service provider to ensure what they offer fits into their business correctly and is not used as a stop-gap measure.

“We are asked about the cost of our services, but we would prefer people instead asked us about how they should be allocating resources and how we fit into that discussion as a business partner,” he says.

“The cost savings are to be found at the end of the process, not the start, and outsourcing may not always be the solution that is needed because the problems may still be within the adviser or accountant’s office.”

FEATURE POST-PANDEMIC

In the event an adviser or accountant does choose a service provider, they have a mandatory obligation to disclose that decision to clients, but should not be overly concerned clients will be bothered by that fact, according to Dunn.

He says most people would be aware a single practitioner, or practice, would not have all the resources to provide the services and advice they might need and would use third-party providers, but it is how this is managed, particularly when failures occur, that matters most to clients.

“It is important to ensure service standards are maintained, but when they are not, such as a breach of privacy, it will be up to advisers to manage how that is handled and their front-end relationship will be more important to the client than the back-end systems and processes of the adviser,” Dunn points out.

“Security and compliance are tasks that have to be done well and clients understand this, and as long as they are not put at risk, they will trust their adviser or accountant to choose whatever systems or services they consider necessary.”

Returning to the ‘new normal’ While the advice sector has adapted to the WFH trend, people will be keen to return to their old routines after the shutdown ends and questions remain as to what the ‘new normal’ will look like for financial advice.

Carter sees the uptake of outsourced services continuing to grow among younger advisers, while those at the end of their careers will be more likely to return to pre-coronavirus approaches.

“Younger people who are used to working remotely and without office infrastructure will continue to use online service providers and some may even question whether they need to operate from a single location,” he predicts.

“Those closer to the end of their working lives have shown a reluctance to adopt more technology or outsourced services because they see it as being

“The reality will not be perfect to start with, but this is the first time the profession will be able to dictate what advice should look like going into the future, instead of having that done by regulators.”

Aaron Dunn, Smarter SMSF

simpler to sell their book with active clients using the systems they already have.”

As a service provider in the SMSF sector, Heffron sees the ongoing adoption of technology and outsourced services as speculative, given financial advisers and accountants have considered face-to-face contact as an essential part of their process for so long.

He observes most of the tools advice practitioners have called upon in recent weeks have been around for some time, but many are learning to use them better

or in some cases learning to use them for the first time.

“As practitioners use these tools more often they will become more capable and the tools will become more useful than they were at the outset, but advisers’ preferences will ultimately dictate their use,” he says.

For Plummer, the pre-shutdown use of digital tools and services was a default position from which the advice sector can leap forward and scale-up the provision of advice to many more people in one instance.

“Technology works by exploiting the single provider to many recipients model, which is why these companies have high valuations, and advice needs to go from one-to-one to one-to-many, and not go backwards,” he says.

“Clients are only interested in advice, not the service providers at the back end or how that advice is delivered, and the advisory sector should not let a crisis like this to go to waste.”

Dunn expects the return of faceto-face advice, but with modifications taken from the shutdown period, and says advisers should leap at any change directed for their own and their clients’ benefit.

“We will still see face-to-face advice, but it will be with enhanced communications using videos, webinars, social media groups and so on because advisers would be foolish to take a step back at a time their clients have taken a step forward into this reality,” he forecasts.

“There is a huge opportunity to reconsider the advice value proposition and the touchpoints with clients and what can change in terms of adding services or making them more accessible to more people than in the past.

“The reality will not be perfect to start with, but this is the first time the profession will be able to dictate what advice should look like going into the future, instead of having that done by regulators.”

QUARTER II 2020

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FEATURE

NUMB3R

ILL-USE The practice of misusing SMSF auditor numbers surfaced fairly soon after the requirement for practitioners to have one was introduced. Tharshini Ashokan examines the nature of the incidents and the attempts being made to eradicate the problem.

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FEATURE SAN MISUSE

The system requiring SMSF auditors to register with the Australian Securities and Investments Commission (ASIC) and be assigned an SMSF auditor number (SAN) was introduced in 2013. The framework dictates this type of practitioner must have a SAN to perform an audit of an SMSF. Since that time the ATO has found certain service providers in the industry have been misusing these numbers, causing concern among auditors intent on maintaining the integrity of the SMSF audit system and their profession as a whole.

In 2019, as part of its effort to counteract SAN misuse, the regulator began mailing auditors a list of their SMSF annual returns (SAR), which included their SAN as proof an audit had been performed. In March and April of that year, SMSF auditors received their list of annual returns for the 2017 income year and were asked to inform the ATO of any funds they did not have a record of auditing.

The regulator followed the same process in September and October 2019 for the 2018 income year and intends to repeat the process this year, in August and September, for 2018/19 SMSF annual returns. According to ATO director Kellie Grant, the lists have been a useful tool in helping to uncover instances of SAN misuse among practitioners.

“The strategy has been effective and has allowed us to estimate the extent of SAN misuse with the cooperation of auditors responding to our mail-out campaigns,” Grant says.

“For the 2017 income year, 50 per cent of auditors responded to our mail-out. In effect, 420 auditors confirmed 1445 instances of SAN misuse connected to 1695 funds and 626 tax agents. All these tax agents have now been contacted and all but 74 of them, representing 106 funds, have responded.

These tax agents have been referred to the Tax Practitioners Board (TPB) for further action.”

Of the auditors who responded, the regulator found 1000 funds had

“I think with the lists that come out now it’s just easy to pick where someone’s taken your number. I think that’s a really good, proactive approach the AT O has taken.”

Katrina Fletcher, Elite Super

accidentally reported an incorrect SAN, she adds. The ATO found many of these incidents to be a result of SAR software rolling over a previous auditor’s details and the tax agent lodging the return without checking to ensure the correct current year auditor was reported.

“There were 154 funds that deliberately misreported a SAN. As a

result we’ve referred 15 tax agents to the TPB during the 2019/20 financial year.

We are still investigating around 500 instances of SAN misuse,” Grant says.

Further, for the 2018 financial year, 40 per cent of auditors responded to the ATO’s mail-out, with 137 practitioners confirming 832 instances of SAN misuse connected to 832 funds and 230 tax agents. These occurrences are currently being investigated by the regulator.

“We have not seen any cases where an auditor has falsely used another auditor’s SAN. What we most commonly see is the tax agent responsible for preparing the fund’s return falsely reports the audit as having been completed prior to lodgement of the return,” Grant reveals.

“The auditor reported by the tax agent is usually one that has legitimately undertaken an audit on the fund in a previous financial year, however, has not been re-engaged to perform an audit in the year the SAN misuse occurs.”

Auditors with long-held concerns over the likelihood of their SAN being fraudulently used believe the lists are an effective strategy in helping them prevent both accidental and deliberate misuse of their auditor numbers, and most agree it is a step in the right direction in terms of preserving the integrity of their profession.

For Elite Super managing director Katrina Fletcher, whose SAN was wrongfully used by other service providers, the lists are crucial to ensuring other auditors do not find themselves in a similar predicament to hers.

Fletcher, who discovered the most recent instance of her SAN’s misuse when reviewing the ATO’s list of funds that had used her audit number, urges auditors to make use of the lists being sent to them by the ATO. “Check your lists, check them twice, and get back to the tax office [if there is a fund on the list for which you haven’t performed an audit] because they could Continued on next page

QUARTER II 2020

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FEATURE

Continued from previous page

be [more than just] innocent mistakes,” she suggests.

Before the lists were implemented by the ATO, it had been difficult for auditors to identify whether their number was being wrongfully used by others, she adds.

She cites her own experience of previously discovering another operator’s misuse of her SAN only after an SMSF trustee claimed she was holding up the audit of his fund. The fund in question turned out to be one Fletcher was not servicing.

“I think with the lists that come out now it’s just easy to pick where someone’s taken your number. I think that’s a really good, proactive approach the ATO has taken,” Fletcher says.

ASF Audits technical services executive manager Shelley Banton also sees the lists as a useful method for uncovering SAN misuse and providing some reassurance in terms of how prevalent the intentional misuse of auditor numbers might be.

“The lists have been very effective because they have allowed auditors to actually ensure that every single fund they’ve signed off on has been correctly lodged with the ATO and any anomalies have been followed through,” Banton explains.

“We are seeing, certainly, some tax agents misuse auditor numbers, but it isn’t necessarily as widespread as what we originally thought.”

Super Sphere director Belinda Aisbett agrees the lists are a positive initiative, but highlights the disappointing drop in the response rate to the ATO’s mail-out for the 2018 income year as a symptom of the main limitation of the approach.

“The ATO are limited in the fact that they need the auditor that has been sent the list to actually check the list and reply back,” Aisbett observes.

20 selfmanagedsuper

“Nobody wants to see trustees taken in by fraudulent activities in this way. It doesn’t do anything for the integrity of our industry.”

Shelley Banton, ASF Audits

“The drop in the response rate may mean that auditors have checked the list and said: ‘I’ve got nothing to report so I don’t need to tell the ATO.’ But without the actual response to confirm that, the ATO doesn’t really know whether there are embedded issues there or not.

“In terms of effectiveness, the process really relies on the auditor. I’ve certainly been encouraging auditors to check the list and get back to the ATO, whether it’s a negative or a positive response. If we could have the full picture, I think that

would be good for the ATO and for the industry generally.”

Some auditors believe it is SMSF trustees who, by believing an audit has been performed on their fund when it really has not, are the real victims of SAN misuse.

“They’ve paid for a service that they never received and then they’re going to be out of pocket to actually pay for the real audit,” Banton says.

“Nobody wants to see trustees taken in by fraudulent activities in this way. It doesn’t do anything for the integrity of our industry.”

Fletcher agrees. “It’s not fair on them when you have a professional doing the wrong thing and the trustees having to pay. They have to pay twice,” she says.

The ATO requires trustees to declare in their SMSF annual return they have received a copy of their audit report prior to lodging the return. As such, the regulator expects trustees to ensure they receive and review the signed audit report prior to signing and dating their SMSF annual return.

“If a trustee is being asked to sign an annual return without having looked at the audit report and confirmed it has been completed, they should refrain from doing so. Otherwise they could be making a false and misleading declaration to the ATO that could lead to the imposition of penalties,” Grant points out.

“If a trustee suspects that the audit report provided to them by their tax agent is false, they should contact the auditor directly to confirm whether they conducted the audit. If the auditor confirms they did not complete the audit, they should report the tax agent to the ATO.” While Aisbett is sympathetic to trustees potentially being held responsible for SAN misuse by their tax agent or accountant, she highlights how important it is for trustees to take more ownership of the reporting process for

FEATURE SAN MISUSE

“The AT O are limited in the fact that they need the auditor that has been sent the list to actually check the list and reply back.”

Belinda Aisbett, Super Sphere

their fund in order to prevent themselves from being exposed to fraudulent or negligent behaviour.

“If you’ve got a trustee that doesn’t recall receiving any engagement letter or other information from their auditor, you really have to question whether that trustee is familiar with the audit process and whether they are completely across what is required for the audit,” she adds.

“Trustees that are quite removed from the process and aren’t overly engaged in the process, they’re the ones that, if the tax agent is filling in the forms wrong, are going to have potential consequences.”

Fletcher believes one way to protect trustees and the integrity of the SMSF audit system is for accountants to review their referral processes and the administration providers they use.

Citing one instance in particular, she explains: “We had a long-standing client, an accountant, check the prior auditor’s details on a fund they were just taking over. I think there were some issues with the financial statements and they wanted to discuss these with the auditor directly.

“The auditor revealed to them he had never audited the fund at all and the accountants had to break the bad news to the trustees that they had to have a lot of prior years’ audits done again.”

Banton agrees there is potential for a review system by accountants to have a positive impact on curtailing SAN misuse,

but doubts how realistic it would be for all accountants to have the resources to be able to implement such a system.

“Obviously, when they’ve got however many clients – there can be dozens or hundreds of SMSFs that they’re dealing with – it can be hard to keep up to date with auditor information,” she says.

“There are ways in which they can do it, but it comes down to time as well.”

According to Aisbett, the impact of a potential review of accountant referral approaches on preventing SAN misuse is not likely to be significant, particularly in cases where the accountant or tax agent is deliberately misleading their client.

“It’s the accountant’s own internal processes and their own internal temperament in terms of how they approach their responsibilities that would dictate whether they are going down the wrong path,” she says.

She believes one change in the process that might be more effective in combating SAN misuse is to make the ATO’s electronic superannuation audit tool (eSAT) compulsory for all SMSF audits.

“Until the eSAT is mandatory you’ll have some tax agents lodging tax returns saying the audit has been done when it hasn’t. At a very high level, this might equate to SAN misuse because the audit has not been done at that point,” she explains.

In the meantime, the ATO’s mail-out of audit lists looks like the industry’s best hope of identifying the fraudulent use of SANs and, according to the regulator, has already helped it make considerable headway towards resolving the issue.

“Following our mail-out campaigns to auditors for the 2017 and 2018 income years, the numbers of tax agents being reported for misusing a SAN has significantly dropped,” Grant says.

“The ATO takes deliberate SAN misuse very seriously and will take appropriate action against any trustees or tax agents we find involved in this behaviour.”

Highlighting her own experience of SAN misuse, Fletcher is supportive of the action the ATO has taken so far.

“It has taken the most serious instances of SAN misuse to prosecution, so the ATO should be commended for doing a great job,” she notes.

In addition, she believes auditors would benefit from following their instincts and should report suspicious behaviour without waiting to receive their audit list from the ATO before flagging their concerns.

“I recommend if an auditor has a feeling that something might be suspicious about a firm that has recently left them, they should contact the ATO to start an investigation. It would save waiting until the annual list comes out,” she says.

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INVESTING

Pandemic effects and opportunities

Lessons can be learnt from all crises that affect investment markets. Paul Taylor looks at the changes to society black swan events have caused and the investment opportunities that may arise from the coronavirus pandemic.

PAUL TAYLOR is the portfolio manager of the Fidelity Australian Equities Fund.

22 selfmanagedsuper

As an investor, this is my ninth investment crisis in my 23 years at Fidelity. During my career I have seen markets impacted by the Asian financial crisis, Russian bond default, collapse of Long-Term Capital Management , September 11, tech bust, global financial crisis, sovereign debt crisis, SARS and now COVID-19. Although it if fair to say this crisis is different from each of the previous ones, there are definitely lessons to be learnt from all of them.

One of these lessons is how we approach a crisis such as the one we are facing today. Donald Rumsfeld, United States secretary of defence from 2001 to 2006, during the war on terror, separated risks into known unknowns and unknown unknowns. Rumsfeld was ridiculed at the time, but

we can now see the point he was making. He was suggesting there are regular risks we can plan and manage for, and there are some risks that are off the charts and very diďŹƒcult to prepare for before the event. Some people also call this second group black swan events, after the Nassim Taleb book of the same name. The COVID-19 pandemic fits in this second group.

The diďŹƒcult issue in dealing with black swan events is that you are dealing with little and imperfect data. At the start we have very little data and need to exercise a huge amount of judgment. As time goes by, we get more and more data and analysis and judgment is required less.

Andrew Likierman from London Business School

represented this relationship graphically (see Figure 1).

In periods when data is scarce and huge amounts of judgment are required, people tend to use heuristics or rules of thumb.

These heuristics represent our knowledge of history and what tends to work best in these situations.

A key market heuristic in periods of crisis is to watch the second derivative.

The second derivative is simply the rate of change or the acceleration or deceleration of whatever is causing the crisis. I think the market focuses on the point when the second derivative changes from acceleration to flattening or deceleration as it often represents the point of maximum pain and destruction.

In the case of COVID-19, that change in the second derivative may represent a heightened point of community concern and also the point of most aggressive government action. It is important to remember that markets are forward looking and typically bottom nine months to a year before the economy bottoms.

As the second derivative changes and governments increasingly talk about a sixmonth period, markets can now start to see the light at the end of the tunnel.

The second derivative is now changing in most parts of the world. We are seeing a deceleration of new infections in Australia as well as most of Europe, parts of the US and the majority of Asia. On cue, markets are responding to this change in the second derivative and are now starting to improve. This does not mean market volatility will end, but rather we can see the light at the end of the tunnel and some relief is entering markets.

Governments in recent weeks have used analogies of bridge building and hibernation. They have viewed this crisis as a giant ravine we need to build a bridge over, or a sudden frozen snap where we need to go into hibernation to survive and emerge on the other side. I do agree this crisis is fundamentally one-off in nature and it is all about surviving until we get to the other side. While I believe it is a one-off

Figure 1 Time

Data

Judgment

Source: Andrew Likieman, London Business School

event, it is important to note life will be different on the other side of the COVID-19 crisis. There have been major disruptions throughout human history and while things get back on track eventually after that disruption, there can be many business, educational and community practices that change forever.

For each major disruption we effectively go through a huge social experiment.

Under this social experiment we try new things; some work, some don’t. The experiments that work we adopt forever.

Take World War II as an example. As men went off to war, women entered the workforce to perform their jobs. At the end of the war as life resumed and men returned to their jobs, the workforce and its structure had been changed forever.

WWII was the catalyst for women to enter the workforce and this increase in the participation rate has been one of the largest contributors to gross domestic product growth globally for the past 80 years. A change occurred during this disruption – women never looked back and our economy and community had been changed forever.

There are other examples, such as

Once we’re over the worst of COVID-19, I expect to see market leadership coming from sectors like technology, resources and travel. We would also see strong momentum in sectors like consumer staples, healthcare and real estate continuing postCOVID-19. the birth and acceleration of the Indian information technology industry post the Y2K bug, which demonstrate changes Continued on next page

QUARTER II 2020

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INVESTING

Continued from previous page

that occur during major disruptions can alter business, education and community practices forever.

Vijay Govindarajan and Arup Srivastava, writing in the Harvard Business Review, have used these historical examples to show why they think higher education will change forever post the COVID-19 crisis.

Thinking through these sorts of changes following this crisis is where I am spending most of my time at the moment.

Winners Once we’re over the worst of COVID-19, I expect to see market leadership coming from sectors like technology, resources and travel. We would also see strong momentum in sectors like consumer staples, healthcare and real estate continuing post-COVID-19.

Resources are likely to have one of the quickest rebounds post-COVID-19.

Resources is currently the cheapest sector – balance sheets are strong, cash flows are still reasonable and the sector has been significantly negatively impacted leading into COVID-19. Once we see a plateauing of new cases, I think we’ll see money re-enter the sector very quickly, given its value, and especially if China undertakes fiscal stimulus.

Technology, which has also performed poorly over the past month or so, could lead the market following COVID-19, given the sector now has much better valuations, long-term fundamentals and structural growth. While travel should improve post COVID-19, it’s likely to remain more volatile for longer as recovery will be more prolonged.

While these three sectors should rebound strongly given their poor performance, it’s also important to highlight sectors like consumer staples, healthcare and real estate will likely continue their strong momentum postCOVID-19. Consumer staples, in particular supermarkets, currently have strong

24 selfmanagedsuper

If there is a company you’ve always wanted to own, but it has always looked too expensive, this could be your opportunity to buy a high-quality company with strong long-term fundamentals at much more attractive valuation levels.

fundamentals and, given Kaufland’s decision not to enter the Australian market and the potential food inflation the move may have prompted, we believe these strong fundamentals will likely continue, even after the pandemic.

Similarly, healthcare is very well positioned for the long term, as is real estate, given the likely continuation of very low interest and capitalisation rates.

I am looking for those sectors that will recover the quickest, for example, private hospitals, which will benefit from the restart of elective surgeries.

These sorts of crisis periods can present excellent opportunities to upgrade portfolios. Typically, at the start of a crisis, the markets sell off indiscriminately – shooting first and asking questions later, so to speak. So if there is a company you’ve always wanted to own, but it has always looked too expensive, this could be your opportunity to buy a high-quality company with strong long-term fundamentals at much more attractive valuation levels.

As an investor in Australian equities, I am comfortable holding a portfolio of predominately high-quality, blue-chip, large stocks, including a strong cash position. As events unfold over the next few months, we are ready to deploy the cash, upgrade the portfolio and invest in great companies at attractive valuations for the long term.

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INVESTING

The coronavirus and the property market

Most asset classes have experienced COVID-19 disruption. Grant Atchison looks at how the domestic property sector has fared during these trying times.

GRANT ATCHISON is managing director of Freehold Investment Management.

While the primary impacts of coronavirus are currently being felt by individuals and communities around the world, the duration and severity of its effect still remain largely unknown.

Here’s what we have seen to date.

A first order impact relates to our health and the ability to continue with our daily lives. Then, the secondary impact – the global reaction to coronavirus, which is a combination of a flight to safety in the investment markets and a restriction on global trade, both within and between countries.

This restriction has had an impact on the movement of goods, currency, people and ultimately gross domestic product (GDP).

Listed versus unlisted property securities – different impacts Depending on the duration of COVID-19, the experience of investors in listed and unlisted

26 selfmanagedsuper

property securities may be quite different.

Listed property securities, or Australian real estate investment trusts (AREIT), are exchange traded and valued second to second by the market.

This results in an immediate valuation adjustment for any news or investor sentiment. We have seen the impact of this over the past few weeks, with high levels of daily and intra-day volatility.

On the other hand, unlisted property securities are unit priced periodically, monthly, quarterly or annually, on an appraised valuation basis. The trustees of unlisted property securities have a set valuation policy that determines when each asset in the portfolio is valued. Often 25 per cent of the security is valued each quarter, resulting in 100 per cent being valued over the full year. This generally prevents an over or underreaction from any individual news event and delivers a less volatile experience for investors.

While AREITs are subject to daily market valuations, the assets held within each listed security are still valued on the same principle noted above for unlisted securities. Because of this, we have seen large gaps emerge between the implied value, based on the price of the listed security, and the net tangible asset (NTA) values that lag.

As a result, in recent weeks several large unlisted managers have moved to revalue their real estate and infrastructure portfolios down by amounts of between 2 per cent to 11 per cent. The harder hit retail sector is generally at the top end of that range and most other sectors are at the lower end of the range.

COVID-19 was the catalyst for the extreme market sell-off late in the March quarter, with AREITs falling more than equities. Whereas previously the AREIT sector had been trading at a premium to NTA, it is now trading at a significant discount. For example, Dexus Property Group (ASX: DXS), has gone from a 15 per cent premium to NTA to a 5 per cent discount, and GPT Group (ASX: GPT) from a 3 per cent premium to its current 19 per cent discount.

Our view is AREITs will be the first to respond on any positive news with respect to coronavirus and we have already seen some of this.

The extreme sell-off has thrown up some attractive buying opportunities. We are currently in the process of attempting to rotate out of a few unlisted positions, in particular some of the wholesale unlisted funds where there is generally some level of liquidity. While these investments have performed well for us, we are of the view their unit prices may be at, or near, their peak and better opportunities are now appearing within the listed sector.

Our view is AREITs will be the first to respond on any positive news with respect to coronavirus and we have already seen some of this.

have a portfolio of existing core assets that are generally higher quality, with strong tenant covenants and conservatively geared balance sheets. These securities represent a purer exposure to property assets.

As you move further up the risk curve, there are listed property securities that introduce equity-like risk from more active revenue streams, such as funds management, development projects or operational risk. During periods of strong growth these types of AREITs tend to outperform simply because they carry a higher level of risk.

When the market moves to ‘risk off”, as it has done recently, the defensive characteristics of the pure property securities provide some downside protection and a more sustainable level of income for investors. Despite this, with the extreme market reaction to coronavirus, AREITs across the sector are withdrawing their guidance provided during the reporting season less than two months ago, and looking ahead we expect to see some cut their dividends.

being embroiled in the market downturn, has been connected to assets that host large groups of people incorporating a floating population, such as shopping centres and hotels. Foot traffic at major shopping centres is well down and in hotels occupancy is low and cancellations are up.

For the retail sector, these impacts come on top of the structural changes that have been taking place within the sector. The significant growth in online ’shop at home’ practices, now representing close to 10 per cent of annual retail sales, has led to the

Different sectors, different impacts The most immediate impact of coronavirus within the real estate sector, other than

Continued on next page

Figure 1 80% 60% 40% 20% 0% -20%

Not all AREITs are the same It is important to assess the different risk profiles within the AREIT sector because they are not all the same.

At the lower end of the risk spectrum are the passive rent collectors. These AREITs

A – S&P ASX 300 Real Estate (Industry Group) TR in AU [5.97%] B – ASX Equities – Scentre Group Stapled (3Ut 1 Ord) ATR in Au [-27.25%] C – ASX Equities – Vicinity Limited Stapled 1 Ut 1 Ord ATR in AU [-39.42%]

-40% -60% Nov ’15

Nov ’16

Nov ’17

Source: 21/04/2015-21/04/2020 Data from FE fundinfo2020

Nov ’18

Nov ’19

INVESTING

Continued from previous page

balance of power shifting from landlords to tenants and resulted in substantial pressure on retail centre earnings.

This has driven an aggressive sell-off of retail landlords (as shown in Figure 1) – especially those with a high exposure to discretionary spending such as Scentre Group and Vicinity – given they constitute a significant weight in the listed property benchmark.

In our view, we are witnessing an accelerated and permanent structural change in retail from the combined effects of change of use, online sales growth and now, the coronavirus pandemic.

We have been concerned about the structural changes occurring in the discretionary retail landscape for some time. Our significant underweight towards these stocks was a material contributor to our recent outperformance.

The second group of assets, which also host large groups of people albeit with a more permanent population, include office buildings and social infrastructure, such as aged care, childcare, schools and even prisons. The ability to compartmentalise and control these types of assets is far greater than the first group. Only now are we starting to see the real COVID-19 impact, with companies who occupy these properties implementing business continuity plans with flexible working policies and quarantining taking place.

The final group of assets is more affected from the supply side. This group includes tenants of industrial buildings with logistics operations that are being affected by the restrictions on the movement of goods. Equally, in the residential property sector, the construction industry requires materials to complete properties and then purchasers to acquire completed stock – many, particularly offshore buyers, have left.

Beyond those asset groups are some unique AREIT stories. Viva Energy REIT (ASX: VVR) is one such entity.

Viva Energy owns a portfolio of 469 service stations or convenience retail

28 selfmanagedsuper

properties underpinned by 2.2 million square metres of land. It has a highly predictable income stream underpinned by a 100 per cent occupancy rate, average lease expiry of greater than 11 years and fixed annual reviews of circa 3 per cent.

The security of this income is enhanced by the quality of the majority of the tenant covenant, with Viva Energy possessing the sole right to use the Shell brand in Australia for the sale of fuel. Conservatively geared at 30 per cent and with the tenant responsible for all additional expenses to the properties, the stock provides a high-quality defensive and predictable dividend yield in the current environment, which, on current prices and guidance, is around 6.5 per cent.

In our view, Viva Energy will be one of the few stocks in the AREIT sector not impacted by the current COVID-19 crisis, given its tenants are well capitalised, continuing to trade and make money in the current environment, while being secured by long-term leases. It is a simple story, but one that should provide investors with stable and secure dividends going forward and steady growth, which is rare given the

current macroeconomic backdrop.

What are we doing during this period?

In times like this, it is important to be clear on your long-term investment thesis and interrogate your assumptions as to what, if anything, has changed.

The coronavirus situation has played havoc with the stock market, resulting in some dramatic price declines among stocks. Over this period, the Freehold AREIT and Listed Property Fund significantly outperformed both its benchmark and the broader AREIT universe, reinforcing the offering’s underlying investment principles of investing in high-quality stocks with highly predictable earnings streams supported by either long-term contracts or leases.

Despite the sector possessing strong balance sheets and debt metrics before the impact of coronavirus was unleashed, the devastation to the broader economy has placed enormous uncertainty on the potential income streams of many AREITs. This has also led to massive uncertainty over underlying asset values, causing transaction markets to freeze.

SO WHERE TO FROM HERE There remains significant uncertainty as to how long we will be facing the current economic climate. In this context, there are very few companies that can provide any real certainty as to where their earnings will land when they next report results.

While balance sheets were broadly in pretty good shape entering this period, we would not discount the potential for capital raisings to occur as corporates look to make their balance sheets bulletproof and not be reliant on debt markets for capital going forward. We also expect some asset values to ‘rebase’ from here, with investors putting a premium on the counterparty with significant evaluation regarding the long-term viability of some tenants.

In summary, we remain in uncharted waters. While we believe the initial sell-off has thrown up some excellent investment opportunities, we also remain relatively cautious on the short to medium-term outlook and will continue to have a bias in the portfolio towards quality.

In the near term, while monitoring our portfolios, we’re largely letting them do what they were designed to do. However, we are ready for when opportunities present themselves to add value to investor portfolios.

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COMPLIANCE

Death benefit restrictions

The introduction of the transfer balance cap has increased the complexity of death benefit pensions. John Maroney examines some of the boundaries that now need to be observed upon the death of a member in pension phase.

JOHN MARONEY is chief executive of the SMSF Association.

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The introduction of the transfer balance cap (TBC) regime on 1 July 2017 ushered in a raft of super changes affecting SMSFs paying pensions, particularly impacting on a fund’s ability to claim exempt current pension income (ECPI), with one of the most significant changes being the limits it places on death benefits being paid as an income stream. Let me explain.

Where an SMSF trustee can cash the deceased member’s benefits as a death benefit pension (DBP), the cashing requirement is continually met so long as the retirement pension income stream (RPIS) continues to be paid. This can be until such time as the pension is exhausted or the beneficiary commutes the income stream and the resulting lump sum is paid out of the super system. This means a DBP: • cannot be rolled back to accumulation, and • cannot be mixed with the beneficiary’s other

superannuation interest(s) at any time.

With respect to death benefits, an exception applies from 1 July 2017 to allow the cashing rules to continue to be met where a member opts to roll over a death benefit, including a pension, to a new fund. Provided the death benefit rolled over is not left in the accumulation phase in the new fund and instead is used to fund a death benefit income stream or is cashed out as a lump sum as soon as practicable, the cashing requirements will be met.

Failing pension standards Where a superannuation death benefit is paid as a pension, the ATO view is that the cashing requirement is continually met so long as the retirement-phase pension continues to be paid, as was stated in Law Companion Ruling (LCR) 2017/3: Superannuation death benefits and the transfer balance cap. In accordance with Taxation Ruling

Where an SMSF doesn’t pay the required minimum pension payment requirements, the death benefit pension will be taken to have ceased at the start of the financial year.

(TR) 2013/5, for a pension to continue, the trustee must ensure the minimum pension standards are constantly met.

TR 2013/5 equally applies to DBPs and a common circumstance where a pension may be taken to have ceased is where the minimum pension payment in a financial year is not paid to a member. Notably, the minimum pension drawdown requirements in the year of the primary pensioner’s death differ depending on whether the pension was reversionary: • where an account-based pension was non reversionary, the pension ‘ceases’ on the member’s death and there is no need to pay any pension payments post death. Should a new death benefit pension commence, fresh minimum drawdowns will be calculated based on the eligible recipient’s age and the value of those assets at the start of the pension, and • where an account-based pension is reversionary, the trustee continues to have an obligation to pay the annual minimum pension drawdown, as determined on 1 July, in the year of death. This is because the pension does not cease on the death of the primary pensioner.

Where an SMSF doesn’t pay the required minimum pension payment requirements, the death benefit pension will be taken to have ceased at the start of the financial year (TR 2013/5). This means from the start of that financial year, the member’s superannuation interest will no longer be supporting a pension.

Instead, any payments made during the financial year will be treated as superannuation lump sums for both income tax and superannuation purposes. From 1 July 2017, every single superannuation benefit arising from the death of a member will always be a superannuation death benefit. Therefore, multiple lump sum payments that exceed the two lump sum cashing restriction will be a breach of the compulsory cashing requirements. This is not a breach a trustee can fix.

Where the pension underpayment is small, or the result of an error, the trustee may be able to self-assess to apply the ATO’s general powers of administration to treat the fund as having continuously paid the pension, despite the underpayment.

Where a trustee does not meet the required conditions to self-assess access to this exception, they need to apply in writing to the commissioner of taxation.

If the exception can be applied, the DBP will not be taken to have ceased and there will be no breach of the Superannuation Industry (Supervision) (SIS) Regulations.

Can the SMSF trustee resolve the breach?

Although it is not possible to fix the breach resulting from the fund’s failure to meet the compulsory cashing requirements, the ATO accepts trustees can prevent future contraventions by acting swiftly after becoming aware of the breach.

The ATO also accepts an SMSF trustee can meet the ‘as soon as practicable’ requirement on a go-forward basis in the limited circumstance where they fail to meet the minimum pension requirements and the DBP has stopped.

The regulator accepts the

superannuation death benefit could still be considered cashed ‘as soon as practicable’ by cashing the benefit: • as a new death benefit pension in retirement phase, or • as a lump sum (limited by the maximum two payments), or • by rolling over to a complying fund for immediate cashing as a new death benefit pension.

Where a DBP is unable to be paid or no longer preferred, then the compulsory cashing requirement could only be met by the payment of a lump sum death benefit.

Where the resulting final lump sum death benefit would breach the maximum two lump sum limit, recent discussions with the ATO have confirmed the regulator would not apply compliance resources on the application of 6.21(2)(a) of the SIS Regulations, provided the event was carried out in good faith.

Where the trustee commences to pay a new DBP immediately and then continues to make the payments for that pension under its rules, the ATO accepts the requirement of cashing ‘as soon as practicable’ will have been met because each one of those payments will come out as soon as they practically should under the pension’s rules.

From a practical perspective it is important to ensure the following apply with respect to the new DBP: • ECPI is denied in relation to the now deceased pension interest from the start of the relevant financial year until such time as the new death benefit pension is commenced, • the separate interest supporting the death pension now ceased will need to be maintained to ensure the death benefits do not mix with the beneficiary’s other superannuation benefits, • the tax components of the new pension interest will be reset at commencement of the new DBP, Continued on next page

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COMPLIANCE

Continued from previous page

• the TBC debit for a failure to comply with the pension standards in the SIS Regulations only arises at the end of the year of the underpayment (that is, from the time it is possible for the trustee to determine the fund had failed those standards, which would be 30 June), and • it is possible to commence the new DBP within the same SMSF or a member can roll over to cash immediately as a new DBP in an alternative fund.

Life interest pensions Let’s look now at life interest pensions (LIP). These pensions are not a new concept, with the primary uptake being from members of blended families. The main purpose behind these pensions is to provide a retirement income stream to a spouse, typically the second spouse of the deceased, for their lifetime, with any remaining pension capital thereafter going to the deceased’s children, including those from their first marriage.

Traditionally, the sector has trod cautiously when considering the suitability of an LIP given the uncertainty around whether the cashing rules in the SIS Regulations were satisfied. SIS regulation 6.22 limits the cashing of a super death benefit to a member’s legal personal representative (LPR) and/or one or more of the member’s dependants.

An LIP raises the key question that upon the death of the DBP recipient, do the terms ‘member’s benefits’, ‘member’s legal personal representative’ and the ‘member’s dependants’ only refer to the beneficiary or can they also refer to the initial deceased member?

The conservative view to date has been that upon the payment of a DBP to a beneficiary, the benefits belong to the new pensioner, so upon their death the benefits can only be paid to their dependants or LPR. However, reference to Practical Compliance Guideline (PCG) 2017/6: Commutations of a death benefit income

32 selfmanagedsuper

stream before 1 July 2017 confirms that despite the length of time a beneficiary is in receipt of a DBP, they are unable to treat any residual amount on commutation as their own superannuation interest.

In essence, the ATO view is once a death benefit, always a death benefit. This clarity has shifted many to a reasonably arguable conclusion that reference to a ‘member’ for the purposes of the SIS cashing regulations could include the original deceased member.

A further question raised by an LIP relates to when the death benefit is taken to be ‘cashed’ and whether there is a breach to the ‘as soon as practicable’ requirements of SIS regulation 6.21. Reference to LCR 2017/3 provides some clarity on the ATO’s view on the operation of the compulsory cashing requirements, confirming the ‘as soon as practicable’ requirement is not breached for as long as a death benefit income stream is payable. It also confirms, in order to satisfy the cashing rules, unless the capital of the pension is exhausted, any remaining benefits will always be treated as a death benefit of the original deceased member.

Besides the technical issues discussed, there are practical issues that need to be considered and effectively managed.

These issues primarily relate to the ability of the beneficiary to access the capital of an LIP before their death. This could be done in several ways, including: • by commuting the pension and taking the capital as a lump sum,

Where a superannuation death benefit is paid as a pension, the AT O view is that the cashing requirement is continually met so long as the retirement-phase pension continues to be paid.

• calling for 100 per cent of an accountbased pension to be paid in a particular year, • amending the deed and pension documents to remove the requirement to pay the remaining capital to the initial member’s dependant or LPR, and • rolling over the LIP into another fund to commence a new pension without such restrictions.

Please note the above view has not been tested with the ATO. This is a very complex area and it is strongly recommended trustees seek appropriate legal advice to ensure they have properly executed documentation in place to ensure the death benefit can effectively be paid in two parts.

STRATEGY

The super splitting scheme’s many dimensions

When the superannuation splitting scheme is invoked upon a couple’s break-up, the interaction of several pieces of legislation is necessary for its proper execution, writes Jeff Song.

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

Superannuation represents a considerable portion of Australians’ wealth with around $3 trillion of assets held in the retirement savings system as at December 2019. Since the introduction of superannuation splitting schemes, super funds have also been an important factor in determining a just and equitable property settlement between a separated couple.

Quite naturally super splitting involves the Family Law Act operating in conjunction with

superannuation laws to achieve effective division of retirement savings assets between separating couples.

A common mistake SMSF trustees make is to obtain advice and complete all steps under the Family Law Act, but fail to consider the steps under superannuation law that are so important to ensure the ongoing compliance of the fund while at the Continued on next page

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STRATEGY

Continued from previous page

same time giving effect to the couple’s property settlement.

Why is this important?

A simple example is a separated couple who have their super in the same SMSF and who would have to continue to run their fund together as trustees (or directors of the corporate trustee) despite the relationship breakdown until they respectively meet a condition of release.

The decision-making of the fund trustee(s) during this period is likely to be adversely affected in the circumstances. Clearly a much better outcome is the payment of their respective super interests in accordance with a Family Court order and or binding financial agreement allowing a clean break between the parties.

Family Court orders and financial agreement flaws Under the Family Law Act superannuation is treated as property for the purpose of property settlements and the family law courts in Australia are given the power to deal with the superannuation interests of separated couples in property settlements.

On the other hand, most superannuation is, in general, in the form of preserved or restricted non-preserved benefits under the superannuation legislation and regulation, as defined in the Superannuation Industry (Supervision) (SIS) Act, and any transfer or payments of superannuation are governed by the superannuation laws. In light of this, the Family Court’s power is limited to splitting actual ‘payments’ of retirement-phase interests (that is, when superannuation interests are no longer preserved or restricted).

With so-called binding financial agreements, including superannuation agreements as defined in the legislation, dealing with superannuation where a court order is not involved, the logic is not so different. Individuals can come to a binding agreement under family law to deal with their super following a relationship

34 selfmanagedsuper

Super splitting involves the Family Law Act operating in conjunction with superannuation laws to achieve effective division of retirement savings assets between separating couples.

breakdown, however, their superannuation interest remains subject to the restrictions and preservations under the SIS Act and SIS Regulations.

This limitation is demonstrated in the following hypothetical order, which uses the typical language of a percentage splitting order by a Family Court: “Whenever a splittable payment becomes payable in respect of the superannuation interest of the husband (Bruce) in the Bruce SMSF, the wife (Linda) shall be entitled to be paid an amount being 100 per cent of the husband’s entitlements in the Bruce SMSF and there be a corresponding reduction in the entitlement the husband would have had in the Bruce SMSF but for this order.”

In short, a Family Court order or the financial agreement under family law may alter the parties’ entitlements in relation to their super, but will not by itself actually split their superannuation interest. That split occurs under Part 7A of the SIS Regulations (that is, by creation of a new superannuation interest in the name of the beneficiary who is commonly referred to as the non-member spouse). It is important

to understand while this actual split or ‘clean break’ under the SIS Regulations is possible, it is not automatically achieved by obtaining an order or having a financial agreement under family law.

Overview of a clean break and its implications In order to achieve a clean break between the parties in respect of their superannuation interest, it is necessary to convert the beneficiary spouse’s entitlement under the court order (or financial agreement) into a superannuation interest for the beneficiary spouse in accordance with superannuation laws.

With reference to the example above of the Bruce SMSF and the hypothetical court order, this will mean Bruce’s super interest in the SMSF is formally converted to and recognised as Linda’s super interest under superannuation law. The requirements and processes of the conversion are specified in Part 7A.2 of the SIS Regulations and it is important the members properly implement and document the conversion with the help of their professional advisers, both financial and legal.

The superannuation interest created by the conversion (now in the name of the beneficiary spouse) will consist of preserved and unpreserved components in the same proportion as applied to the superannuation interest immediately before the conversion.

Also, from a tax perspective, the amount of the new superannuation interest: a. does not constitute a concessional contribution in respect of the beneficiary and so will not give rise to excess concessional contributions for the beneficiary, b. does not constitute a non-concessional contribution in respect of the beneficiary and so will not trigger the application of the bring-forward provisions for non-concessional contributions or give rise to excess non-concessional contributions, c. constitutes part of the total

superannuation balance of the beneficiary, and d. consists of a tax-exempt component in the same proportion as applied to the affected interest immediately before the conversion.

The Income Tax Assessment Act dictates the creation of a superannuation interest by the conversion of the entitlements arising under a payment split and the extinguishment of rights under the payment split will have no capital gains tax consequences for either party as any capital gain or loss is disregarded.

Post-conversion of entitlements under splitting authority Once the entitlement becomes the superannuation interest of the beneficiary, it can be either: a. transferred to another fund of which the beneficiary is a member (rollover), or b. where the beneficiary has satisfied a relevant condition of release, paid to the beneficiary (cash out).

It is also an option for the beneficiary to retain their new superannuation interest after the conversion in the same fund, but this option is generally not advisable if this would require the separated couple to continue acting as trustees, or directors of the corporate trustee, of the fund.

Of course, in the Bruce SMSF example, Bruce’s whole interest was transferred to Linda and so he ceased to be a member of the fund, permitting Linda to continue to operate the fund alone.

Most likely the post-conversion options above will involve change in membership of the fund, whether it be by reason of the beneficiary member rolling over/cashing out their interest or by exhaustion of the other ex-spouse’s interest in the fund after all their interest is converted into the interest of the beneficiary. In the context of an SMSF, under section 17A of the SIS Act, this will require a change in trustees or directors of the corporate trustee. If the fund had individual trustees, all assets of the fund will need to be in the name of the

new trustees. If a property is an asset of the fund, this would require conveyancing in the relevant state or territory to transfer the property to the new trustee with an application for stamp duty concession. Of course, the process will be much smoother and efficient if the fund had a corporate trustee structure and the fund assets remain in the name of that corporate trustee. This is yet another example of why an SMSF should have a corporate trustee.

Use of in-specie transfers It is not uncommon for an SMSF to lack liquidity and have most of its investments in direct property or other illiquid investments. To this end, it is possible to effect a rollover of the beneficiary member’s interest to another SMSF by transferring assets in-specie, however, a number of conditions must be met.

Firstly, the trust deed and the governing rules of both transferring and receiving SMSFs should allow this. The trust deed and governing rules can be reviewed and if required amended to permit the in-specie transfer.

Further, the transfer must not breach the general prohibition of acquisition from related parties specified in section 66(1) of the SIS Act. From the receiving fund’s perspective, the trustee of the transferring fund is caught under the broad definition

of the term related party under section 66 (2B) of the SIS Act, meaning acquisition of any assets from this related party is prohibited unless an exception applies.

An exception is, however, provided where the asset is acquired as a rollover “because of reasons directly connected with the breakdown of the relationship between the spouses or former spouses”. This exception applies to all asset types and unlike the business real property exception, can apply to a residential property or units in private unit trusts.

Capital gains tax (CGT) rollover relief is available for such in-specie transfers because of marriage or relationship breakdown provided certain conditions are met, as per the Income Tax Assessment Act, including: a. the parties are members of an SMSF, b. an interest in the SMSF is subject to payment split under the Family Law Act, c. the trustee of the SMSF transfers a CGT asset to the trustee of another complying fund for the benefit of the leaving party, and d. as a result of the transfer, the leaving party will have no entitlement in the SMSF. Please note the above list of conditions is not exhaustive and tax advice is advisable to confirm the proposed transfer is eligible for the relief.

IN SUMMARY Superannuation is a key part of Australians’

wealth and retirement planning and since the introduction of the superannuation splitting scheme, achieving a fair and equitable division of assets following a relationship breakdown requires its consideration.

A Family Court order is a powerful document and it might offer a false sense of comfort that the process is over. If splitting of superannuation is involved, the process should be carefully completed right to the end with appropriate advice in relation to applicable family law, superannuation law and tax law, and use of quality documentation to provide a paper trail that evidences clearly the fund’s compliance with the law. The superannuation compliance requirements and issues discussed in this article are not exhaustive or suited to all circumstances.

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COMPLIANCE

Rental relief implications

Daniel Butler and Bryce Figot detail some of the issues SMSF landlords must consider when granting rental relief to tenants as part of the COVID-19 financial assistance measures.

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

36 selfmanagedsuper

SMSFs that own property are facing the prospect of tenants falling behind in their rent payments and their other obligations under the lease due to the economic stress arising from COVID-19.

Australian states and territories will put a sixmonth moratorium on evictions for both residential and commercial tenants during the coronavirus pandemic, Prime Minister Scott Morrison announced on 29 March 2020. “Now there is a lot more work to be done here and my message to tenants, particularly commercial tenants and commercial landlords, is a very straightforward one: we need you to sit down, talk to each other and work this out,� Morrison said.

At the time of this article, the states and territories were still to provide detail on any arrangements that were proposed to assist landlords and tenants.

The ATO has provided a non-binding practical approach of broadly not applying resources to this issue for financial years 2020 and 2021. However, this announcement, while positive, should not be relied upon, given the considerable downside risks.

From a legal perspective, if these matters are not carefully managed and documented, SMSFs and their trustees/directors could potentially face the risk of significant penalties under the Superannuation Industry (Supervision) (SIS) Act 1993 and the SIS Regulations 1994.

This article examines the position of an SMSF leasing business real property to an arm’s-length tenant and to a related-party tenant and provides recommendations for those that wish to ensure they minimise downside risk and can position themselves with sound legal backing.

SMSF and arm’s-length tenants If the tenant has no direct or indirect relationship with the SMSF trustee (who is the landlord), then the SMSF trustee may be in a position to grant rent relief without contravening the SIS Act. Under this scenario, the parties probably would be dealing at arm’s length and, as outlined below, there may be various factors supporting a rent reduction in whole or in part as being in the best interests of fund members. For example, the following reasons could support rent relief: • The tenant may have a better chance of successfully trading out of its current predicament; especially as many other landlords are being requested to grant relief due to the economic stress arising from COVID-19.

• The tenant may also be in a position to continue to cover holding costs, such as council rates, land tax, regular maintenance of equipment and insurance, subject to any applicable law (for example, the Retail Leases Act 2003 (Victoria) may preclude a landlord from recovering land tax). Note, a property that has been vacant for some time may not be covered by insurance and having a tenant occupy premises, by itself, can be a significant advantage to a landlord who is otherwise at risk without insurance.

• There may be further risks of having a vacant property, such as break-ins and fires and other damage arising while a property remains vacant and not maintained.

• There may also be little prospect of obtaining another tenant in the near future until the economy recovers after the pandemic, which some predict may take years.

The states’ and territories’ arrangements may provide some detail on what changes, if any, are required to be made to a lease agreement as the states and territories have the power to override any lease agreement with a direction or order when a state of emergency is declared. Subject to further developments, a lawyer should

An SMSF trustee will need to demonstrate that granting any concession is consistent with what arm’slength parties would agree to do and is in the best interests of the fund and its members.

be consulted in relation to the terms and conditions in each lease agreement as some may include a ‘force majeure’ clause that allows a party to suspend or terminate the performance of its obligations if certain events occur, such as an act of god. Note that since a lease confers a form of proprietary interest in relation to the land, the usual contractual law rules, such as ‘frustration’ of a contract, may not necessarily apply. This area of law is being well researched and commented on by many property law experts.

SMSF and related-party tenants If the tenant is a related party of the SMSF trustee, it is very easy to contravene the SIS Act provisions and extreme care is required in these situations.

Where an SMSF wants to grant any concession under a lease to a relatedparty tenant, they should, after taking appropriate accounting and legal advice, be careful to follow the appropriate steps and gather relevant evidence.

Some of the key issues an SMSF dealing with a related-party tenant will need to deal with include: • The sole purpose test – section 62 of the SIS Act. Is the SMSF trustee merely

reacting to assist a related party rather than acting in accordance with what an arm’s-length landlord would do? As noted above, an arm’s-length landlord may decide to grant a concession to an unrelated tenant where it is in the landlord’s best interests.

• The in-house asset test – part 8 of the SIS Act. Non-payment of rent is likely to give rise to a loan by the SMSF to the related party and if that loan exceeds 5 per cent of the fund’s total assets, an in-house asset contravention may arise. Note also that the terms of the lease may apply a penalty interest rate to the amount owed.

• The prohibition against lending or providing financial assistance to a member or relative – section 65 of the SIS Act. If the SMSF is leasing to a member or relative of an SMSF, there is a potential contravention of section 65 if the arrangement is not on arm’s-length commercial terms.

• The arm’s-length test – section 109 of the SIS Act. Broadly, all investments and transactions involving an SMSF must be made and maintained on an ongoing basis and on arm’s-length terms.

As you can appreciate from the above, an SMSF trustee will need to demonstrate that granting any concession is consistent with what arm’s-length parties would agree to do and is in the best interests of the fund and its members.

They should also examine all available options and obtain advice from an experienced real estate agent with regard to the prevailing market conditions for that particular lease in that location, and determine factors such as whether another tenant can be obtained and when this might happen.

Additionally, the SMSF trustee should gather any evidence that supports the course of action proposed to be taken and make sure to consider other alternatives, assuming the tenant was an arm’s-length tenant, rather than a related-party tenant, in Continued on next page

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COMPLIANCE

Continued from previous page

those particular circumstances.

A detailed review of the lease documentation should be undertaken as soon as practicable and advice taken on what variations may be needed to be made to the lease to reflect any concession that may be granted. Naturally any variation to the lease agreement should be prepared by an experienced and qualified lawyer.

Note, even though the SMSF trustee may gather evidence that the outcome of the concession granted to a related-party tenant under the lease reflects arm’s-length terms, it may not necessarily protect them from contraventions of the SIS Act occurring if, for instance, there is a loan or financial assistance that invokes sections 65 or 109 of the legislation.

ATO practical approach The ATO’s website (at QC 61775) on 27 March 2020 was updated to state under the heading ‘Temporarily reducing rent’ with the following information: “Question: My SMSF owns real property and wants to give my tenant, who is a related party, a reduction in rent because of the financial impacts of the COVID-19.

Charging a related party a price that is less than market value is usually a contravention.

Given the impacts of the COVID-19, will the ATO take action if I do this?

Answer: Some landlords are giving their tenants a reduction in or waiver of rent because of the financial impacts of the COVID-19 and we understand that you may wish to do so as well. Our compliance approach for the 2019/20 and 2020/21 financial years is that we will not take action where an SMSF gives a tenant, who is also a related party, a temporary rent reduction during this period.”

Broadly, the ATO will not actively seek out cases where an SMSF gives a related party tenant a temporary rent reduction during the remainder of the 2020 financial year or the 2021 financial year. However, the usual position for such practical approaches

38 selfmanagedsuper

If the tenant is a related party of the SMSF trustee, it is very easy to contravene the SIS Act provisions and extreme care is required in these situations.

previously issued by the ATO is if the regulator does come across contraventions from other sources, for example via its usual data detections, reviews or auditor contravention reports (ACR), it will usually apply the legislation in the normal manner.

While the ATO should be congratulated on the practical approach reflected above, SMSF trustees should not rely on this nonbinding guidance, given the substantial downside consequences, especially given these situations may be legitimately resolved with appropriate action as outlined below.

We do understand some SMSF trustees and/or businesses may not have the time or resources to obtain proper advice with regard to related-party tenants, and may choose to simply rely on the ATO practical approach at their own risk. However, given the consequences, landlords should take every measure available to them to place themselves in as sound position as possible to minimise future risk.

Furthermore, the ATO website does not provide any express relief for an SMSF that owns property via an interposed unit trust, such as a non-geared unit trust (NGUT). If a contravention of one of the criteria relating to an NGUT is triggered under regulation 13.22D of the SIS Regulations, the trust is forever tainted and the SMSF must dispose of its units in that unit trust to comply with the regulations. In particular, if the lease is not legally enforceable or if rent owing by a related-party tenant accrues and constitutes

a loan under the lease, the unit trust will cease to comply with the criteria in division 13.3A of the regulations.

SMSFs with LRBAs – further implications If an SMSF has borrowed money under a limited recourse borrowing arrangement (LRBA) to finance the acquisition of a property, whether residential or business real property, a range of other implications may arise, including: • Similar issues to the potential SIS Act contraventions raised above also may apply if a related-party lender does not act at arm’s length in relation to collecting all money owing under the LRBA as an arm’s-length lender would apply to a third-party lender. However, a related-party lender would typically not consider taking any such action against the SMSF trustee given they are related. Again, appropriate arm’slength evidence must be gathered and accounting and legal advice obtained to position against the significant penalties that may otherwise be applied.

• If there is a related-party lender, unless the safe harbour terms and conditions of the borrowing are consistent with the ATO’s criteria in Practical Compliance Guideline (PCG) 2016/5 that are continuously complied with (for example, regular monthly principal and interest repayments), the ATO has advised it will typically consider applying non-arm’s-length income (NALI) rules under the Income Tax Assessment Act 1997. The following is a helpful extract from this PCG: “The trustees will need to be able to otherwise demonstrate that the arrangement was entered into and maintained on terms consistent with an arm’s-length dealing. One example of how a trustee may demonstrate this is by maintaining evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances.”

Indeed, if the tenant reduces or stops paying rent, the SMSF’s ability to make repayments under the LRBA can easily fall into arrears and into default (with the default interest rate typically at least 2 per cent higher than normal) under the loan agreement, giving rise to a range of further ramifications. If the related-party lender provides any relief to the SMSF trustee that is not benchmarked to arm’s-length terms (that can be justified in these difficult times), based on recent ATO materials (including Law Companion Ruling 2019/D3), the ATO position is that NALI may then apply to any net income and net capital gain, if any, derived from that property for the entire future period of ownership.

Possible consequences of SIS Act contraventions Despite the ATO’s non-binding practical approach outlined above, a range of other contraventions may also occur, either now or in the near future, in these difficult and stressful economic times if, for example, money is withdrawn without a valid condition of release or existing SMSF assets are used as security for a borrowing by a related party. When added to non-compliance by an SMSF trustee or connected unit trust renting property to a related-party tenant, for example an NGUT, then SMSF trustees may be widely exposed to a number of penalties and costly disputation.

There are a range of potential penalties the ATO may apply unless these matters are appropriately and properly managed, including: • In extreme cases the fund could be rendered non-complying with 45 per cent tax imposed on the value of its opening account balance in the year it is rendered non-complying.

• Contravention of a civil penalty such as section 62, section 65, part 8 and section 109 of the SIS Act can result in a monetary penalty to a maximum amount of $504,000 (that is 2400 penalty units x $210).

• An administrative penalty, typically of

$12,600 per contravention for section 65 and part 8, and the ATO’s stated policy is to automatically impose an administrative penalty for each and every occasion. An SMSF trustee can seek remission of any penalty; the success of which depends on whether the ATO considers any remission is appropriate in the circumstances.

This type of situation highlights the need for making sure SMSF trustees act in compliance with the law and do not make rash or hasty decisions they may later regret, especially if the actions were designed to assist a related party without any evidence documenting the actions were consistent with an arm’s-length dealing and/or without following and taking the appropriate steps to implement a lease variation.

This is where a written opinion from an SMSF lawyer, which is subject to legal professional privilege, outlining the law in view of the particular facts is a prudent first step. A written opinion that is supported with the right evidence and is implemented correctly can save on costs that may otherwise arise from needing to respond to the likely auditor or ATO queries and any ACR that may be lodged, which may give rise to unnecessary inquiries by the ATO.

Sole purpose SMSF corporate trustee If an SMSF trustee grants a concession to a related-party tenant, the administrative penalties on their own can, in these types of circumstances, give rise to hundreds of thousands of dollars as the ATO might argue each monthly payment of rent not made is subject to an additional penalty.

If the SMSF has, say, two individual trustees, then the administrative penalties will be double the amount that would be imposed on two directors of an SMSF corporate trustee as each individual trustee is subject to the same amount of administrative penalties. For example, if the SMSF has two members who are individual trustees, then the typical $12,600 for a single administrative penalty is double, or $25,200. If the SMSF had a corporate

trustee with the two members as directors of the corporate trustee, the administrative penalty is $12,600.

As such, we strongly recommend each SMSF has a sole purpose SMSF corporate trustee to minimise legal risk given the current economic conditions. Many SMSFs still have individual trustees who remain personally liable for a fund’s liabilities and the administrative penalty system is a big incentive to move to a corporate trustee in these testing times.

The recommendation for an SMSF to have a sole purpose corporate trustee is also very important in these difficult economic times, given many trading companies that double up as an SMSF trustee may be facing insolvency with the appointment of an administrator, liquidator, receiver or some other form of external management.

These entities could take over control of that company and make the management of the SMSF assets very difficult until the company’s external controller is convinced the SMSF assets are not capable of being applied towards the creditors. This fight alone may prove difficult and costly.

CONCLUSION Naturally, the above matters should be taken very seriously and it is important SMSF trustees obtain sound expert accounting, financial, valuation, legal and other advice to prevent hasty actions designed to preserve a related-party tenant’s cash flow to assist their business from backfiring.

SMSF landlords should obtain professional advice regarding their options, including how the trustee can minimise the risk to the fund from contravening any applicable SIS Act and/or Income Tax Assessment Act 1997 provisions.

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STRATEGY

A COVID-19 SMSF checklist

The current coronavirus-driven economic conditions should prompt a review of SMSF structures and procedures. Bryan Ashenden identifies some critical aspects requiring re-examination.

BRYAN ASHENDEN is head of financial literacy and advocacy at BT Financial Group.

40 selfmanagedsuper

There can be no doubt COVID-19 has had an impact on everyone. Whether it be catching the virus itself, changes in employment, the impact on savings or simply spending more time at home, the ongoing impact of the coronavirus has been widespread.

It is no different for the trustees of SMSFs when it comes to the operation of their fund. Rather than focusing on the negatives, however, this is, in fact, an opportune time for advisers to work with their SMSF trustee clients to ensure problems – both real and potential – are addressed to help protect the

fund and member balances from significant impacts from the current environment.

Is the SMSF still viable?

The starting point should always be a consideration of whether the SMSF remains viable to continue to operate. There are many factors to take into account in assessing this question, but the focus is often on the account balance of the SMSF and that of its members, and the running costs of the fund.

In assessing this, it is important to consider what is in the best interests of each member of the

The real key to how successful SMSFs and their trustees are throughout the duration of the COVID-19 pandemic will be communication on a range of different levels.

SMSF. While the combined balances of all members may give the SMSF a significant asset base that makes the overall fund a viable proposition, the merits of being a member of an SMSF must always be considered on a member-by-member basis.

These considerations should focus not only on the asset balance of a member, but also their ability to meet and discharge their obligations as a trustee. It is here many SMSFs, particularly those with older members, should be reconsidered. This doesn’t mean they should be wound up, rather it is an ideal time to confirm the members still have the capacity and desire to act as trustees.

While we know there are cases of SMSFs where one person largely takes on the trustee responsibilities, we can’t ignore the fact all trustees have equal obligations, and all trustees are responsible and liable for actions taken in the name of the SMSF. Standard 5 of the Financial Adviser Standards and Ethics Authority Code of Ethics requiring advisers to be comfortable their clients understand the benefits, risks and costs of the advice they receive, now necessitates a greater focus on this. If your clients had set up a two-member SMSF, and the member that had taken the lead in the operation of the fund was no longer able to perform their duties as a trustee, how ready

is the second member to step up and run the fund appropriately?

Safeguarding the operation of the fund One option that should always be considered to help the SMSF to continue to operate is having replacement trustees lined up through the use of power-ofattorney arrangements. While this doesn’t solve the problem that arises when one trustee of a two-member SMSF passes away, it can help where one member becomes incapacitated.

This issue is one that is worth advisers revisiting with their SMSF clients during the COVID-19 pandemic. While naturally we would never want it to occur, if a trustee of an SMSF did contract the coronavirus to the extent that they required hospitalisation, the question needs to be asked whether the SMSF can continue to run. While many businesses have been wound back and, in some cases, closed during this pandemic, this is not something that happens to an SMSF as they are not businesses; they don’t rely on customers or other end users. As an investment vehicle they will continue to operate and important decisions will still need to be made and it’s possible some of these decisions will be among the most crucial SMSF trustees have ever had to make as they look to protect the value of future and current retirement balances.

Having a stand-by trustee, appointed under a duly executed power of attorney, will assist in these times of need to ensure the SMSF can still operate. Choosing the individual to act under a power of attorney is important as the existing members will want to ensure the right decisions will continue to be made for their benefit. While the appointed power of attorney does have an obligation to act in the best interest of the person they have been appointed to act for, there is still a risk competing interests may come into play. Superannuation law provides for some level of protection of the members’ interests and can restrict how the SMSF’s funds are invested, but an illappointed attorney can be problematic for

all concerned.

For this reason, the choice of a family member to act under a power of attorney should always be carefully considered. If it is a child of an existing trustee, do they have confidence the child will not make decisions that benefit the child (whether now or in the future) rather than the trustee/ member? While we all would like to think that would never happen, unfortunately there have been instances in the past where children have taken undue advantage of their parents’ situation.

The bottom is not the right time to sell Advisers know the bottom of the market is not the right time to sell investments. We also know that you never know when the bottom has been reached until after the fact. An element of panic among investors during this time of COVID-19 should not be unexpected and our response needs to be more than simply telling them not to sell as clients should naturally ask: “Why not?”

Beyond the clear rationale where a client has sought investment advice from an adviser, their investments have been chosen based on comprehensive research as to the long-term strength of the investment and, to an extent, their propensity to recover from any losses suffered during adverse economic conditions. In the current economic climate, the first question needing to be considered is whether there has been any change to the risk tolerance of the trustees and members.

It is natural for many investors to become more cautious at a time like this, but a sense of hesitancy doesn’t mean a change in risk tolerance. It may just mean trustees are taking longer to arrive at a decision than they would have in the past. And if there has ultimately been no lowering in risk tolerance, then the reasons to sell are not as strong.

What is more important though is for a review of the SMSF’s investment strategy to be undertaken. While the ATO notes the investment strategy should be reviewed at least annually, it also acknowledges

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STRATEGY

other assets increase to adjust the ratio is not enough.

Communication will be the key

Continued from previous page

certain other events should trigger a review of the investment strategy, such as a market correction. More important than the question of underlying investments, trustees should be using this time to review the liquidity of their investments.

Unfortunately, not all expenses stop during times like this, particularly the need to continue to pay pensions to members who have commenced retirement income streams from an SMSF. While recent federal government announcements, such as the halving of minimum pension payments for 2019/20 and 2020/21, may assist, this will only be the case where the members only need the reduced minimum payments.

For SMSFs with outstanding limited recourse borrowing arrangements in place, many financial institutions are also offering SMSFs the ability to defer repayments for a period of time, in the same way those offers have been made to individuals and businesses. And if there is a concern for an SMSF in receiving rent from a tenant of a property owned by the SMSF, these loan deferral arrangements may be of considerable benefit.

Are there in-house assets?

The other investment-related aspect for SMSFs that may need to be reviewed at this time is the investment in any in-

42 selfmanagedsuper

An element of panic among investors during this time of COVID-19 should not be unexpected and our response needs to be more than simply telling them not to sell as clients should naturally ask: “Why not?”

house assets. Comprising investment in related parties, loans to related parties, or assets leased to related parties, other than business real property, the value of these investments is at all times limited to a maximum of 5 per cent of the fund’s total assets. With assets such as shares, and possibly property, falling in price, it’s possible the value of any in-house assets of an SMSF may exceed the allowance limit.

In such cases, the SMSF trustees need to formulate a plan to bring the SMSF back into compliance with the 5 per cent limit.

Waiting and hoping the market value of

The real key to how successful SMSFs and their trustees are throughout the duration of the COVID-19 pandemic will be communication on a range of different levels.

Initially, trustees should review their administration arrangements to ensure they are adequate and continue to operate throughout periods where many administrators may themselves be operating differently. It needs to be determined if the administration of the fund is still being conducted on a regular basis so there is no delay in reporting requirements. Are administration systems online, enabling paperwork to still be processed even though the administrators themselves may be working from home?

Are the trustees easily able to get a picture of the health of their fund in terms of realtime asset values, as far as possible, so decisions can be made, and action taken, at the appropriate time?

Where the SMSF’s administration is currently conducted through manual, paper-based processes, it may be more difficult for the records of the fund to be kept up to date as ideally sought. Having online access to investment accounts, as an example, will make it easier for assets to be purchased and sold quickly and at the most appropriate time, particularly if investment opportunities start to open once the pandemic starts to subside.

Finally, it is incumbent on advisers to maintain contact with their SMSF clients throughout this period. SMSF members, like most superannuation members more broadly, are likely to be concerned about the impact on their retirement savings caused by the economic environment that surrounds us currently due to COVID-19. The ability to distil the plethora of information and opinions that exist into manageable chunks for clients will be the key to their success and for cementing the value of advice during these difficult times.

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COMPLIANCE

Related-party investments in times of financial stress

Investments involving related parties can be problematic at the best of times for an SMSF and even more challenging when a financial crisis hits, writes Tim Miller.

TIM MILLER is education manager at SuperGuardian.

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As it is well known, an SMSF may invest in a wide range of investments. The manner in which an SMSF invests is determined by the fund’s investment strategy, its trust deed and, of course, the Superannuation Industry (Supervision) (SIS) Act and accompanying SIS Regulations.

Sometimes a fund can seemingly be doing everything in accordance with its investment strategy, its deed and the act, but due to an unforeseen life event the value of the assets held is thrown into turmoil. COVID-19 is that event and Part 8 investments, otherwise known as in-house assets, are the investments potentially in turmoil.

That’s not to suggest other fund investments aren’t suffering due to the financial impact of

the coronavirus, because truth be told most other investments are being affected far more than most funds’ in-house assets from a purely financial perspective. However, from a compliance standpoint, it is always in-house assets that create the heat for SMSFs because by nature their valuations often are not as fluid as other investments and that can be problematic when all else around is falling.

Investment restrictions As it stands, the SIS Act imposes on SMSF trustees a number of duties and restrictions that affect the fund’s investment activities. A fund failing to comply with these investment obligations may, in the worstcase scenario, lose its complying fund status and lose its entitlement to tax concessions. More likely a fund will be asked to fix its issues and, in some instances, penalties may be imposed on anyone involved in breaches of the investment rules.

So what does compliance look like when a

financial tsunami hits? Are funds provided any leniency or is it just a matter of ‘your choices, your responsibilities’? I will come back to that, but first let’s look at the complexity of compliance.

Related parties – an irresistible SMSF force For an SMSF, the term ‘related party’ is relevant for the purposes of defining whether an investment constitutes an investment in an in-house asset or an asset subject to an in-house asset exemption.

More broadly, it is one of the strategic reasons why people set up SMSFs – so they can undertake related-party investments, regardless of their restrictive nature. These can include in-house assets or more significant transactions such as investing and leasing business real property (an exemption).

Whatever the reasons, there is inherent risk when investing with links to related parties because not only do you have to satisfy all of your normal trustee obligations, you must also be aware of the following issues: • in-house asset rules, • arm’s-length rules, and • financial assistance rules.

An in-house asset refresher For all investments made in an SMSF post 11 August 1999, an in-house asset is: • a loan to, or an investment in, a related party of the fund, • an investment in a related trust, or • an asset of the fund that is subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund.

Key related-party exclusions to these rules are: • business real property leased to a related party of the fund, • property owned by the SMSF and a related party as tenants in common, other than property leased to a related party of the fund, and • an asset included in a class of assets prescribed by the SIS Regulations not

to be an in-house asset of any fund or a class of funds to which the fund belongs.

Asset prescribed by the regulations The SIS Regulations prescribe that funds with fewer than five members are permitted to buy units in a trust (or shares in a company) that invests only in business real property or other approved assets, so long as certain conditions, outlined in SIS Regulation 13.22c, are met for all post-28 June 2000 investments. For the purposes of explanation, I will reference trusts, but the rules are applicable to companies as well. Satisfy the rules and an in-house asset exemption awaits.

As a summary, the concessions mean an SMSF may invest solely or with other parties, whether related or not, in a unit trust that owns real property. That real property, if used for business purposes, may be leased to members and/or other related parties. Non-business real property must be leased to non-related parties to satisfy the in-house asset exemption. There can be no gearing, no investing in other entities, no conducting businesses and all transactions must be on an arm’s-length basis.

The in-house asset exemption ceases to apply to a fund’s investment in a trust if an event listed under regulation 13.22D(1) occurs. If the exemption is lost, the investment will be treated as an in-house asset and, on the likely assumption that the asset exceeds 5 per cent of the fund’s total assets, the trustees will need to take action as outlined below.

As the regulations apply to funds with fewer than five members, if fund membership increases to five or more, the exemption is lost. The exemption can also be lost if the trust: • acquires an interest in another entity (that is, shares or units), • makes a loan to another entity (a deposit with an authorised deposit-taking institution is excluded), • allows a charge over a trust asset, • borrows money,

Sometimes a fund can seemingly be doing everything in accordance with its investment strategy, its deed and the act, but due to an unforeseen life event the value of the assets held is thrown into turmoil.

• conducts a business, • becomes a party to a lease involving a related party of the fund that does not involve business real property, • conducts a transaction other than on an arm’s-length basis, or • acquires an asset other than business real property from a related party of the fund.

Three regulation 13.22D events spring immediately to mind when related parties experience financial hardship. They are the trust may use its assets as security, the trust may borrow or the trust may conduct transactions other than on an arm’s-length basis. But more on that later.

In-house asset rules The in-house asset rules impose a maximum limit on in-house assets of 5 per cent of total fund assets based on market value. Further, these rules: • prohibit the acquisition of new in-house assets if the market value ratio of the fund’s in-house assets exceeds 5 per cent, and • prohibit a fund from entering into any scheme that would avoid the Continued on next page

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application of the in-house asset rules.

Exceeding the limit A fund that exceeds the 5 per cent in-house asset limit as at the end of the financial year is required to prepare a written plan that outlines the size of the excess and the steps the trustees will take to reduce the market value ratio below 5 per cent by way of disposal. This must be done by the end of the following financial year.

For the purposes of determining the market value ratio of an SMSF’s in-house assets, the trustees must value all of the fund’s assets.

As a result of these rules, in-house assets that hold their valuation can become problematic when all other assets are falling and it may not take much to exceed the 5 per cent.

Example

At 1 July 2019, the Jones Superannuation Fund has $1 million in total fund assets.

One asset is a $45,000 investment in Jones Pty Ltd, a building company owned and operated by Bill and Jessie Jones, who are the two members of the fund. This is an inhouse asset and represents 4.5 per cent of the fund’s assets. As at 30 April 2020, the fund’s portfolio has dropped significantly and the total asset pool is $800,000.

If this continued, the in-house assets at 30 June would represent 5.63 per cent of the total assets. Bill and Jessie would need to prepare a written plan to ensure their holding in Jones Pty Ltd was reduced below 5 per cent by 30 June 2021.

Arm’s-length rules The trustee of an SMSF must ensure all investments are made on an arm’s-length basis. That is, the investment must be on commercial and businesslike terms.

For compliance purposes, when dealing with a related party the SMSF must ensure the dealings are no more favourable

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SMSF trustees must not lend money of the fund or give any financial assistance to a member of the fund or their relatives.

• delaying recovery action for a debt owed to the SMSF ( such as unpaid rent).

Ultimately, a fund may have compliance issues if the SMSF is exposed to a credit risk, transacts on a non-arm’s-length basis more favourable to the member or there is a diminution of the fund assets immediately or over time.

This just highlights care must be taken to avoid related-party issues.

What does all this mean and is there any help available? to the related party than they would be if the parties weren’t related.

Further, from a pure taxation point of view if the parties enter into a scheme where the parties are not dealing with each other on an arm’s-length basis, then the income associated with the scheme can be taxed at 45 per cent.

It is imperative all related-party transactions are undertaken on an arm’s-length basis, especially when contemplating relief measures.

Financial assistance SMSF trustees must not lend money of the fund or give any financial assistance to a member of the fund or their relatives.

The ATO has identified a number of arrangements it would consider as providing financial assistance to a member or their relatives. The complete list can be found in SMSF Ruling 2008/1. The following would most certainly create problems in the current environment: • purchasing an asset for greater than its market value from a member or relative, • acquiring their services in excess of what the SMSF requires or paying an inflated price for such services (services other than in their capacity as trustee, that is, a related-party builder), • forgiving a debt owed to the SMSF or releasing a member or relative from a financial obligation owed to the SMSF, including where the amount is not yet due and payable (rent relief), and

Firstly, there is no prohibition on an SMSF assisting related parties as a result of COVID-19. Rent relief for commercial properties is available as long as the relief is consistent with the governmentissued guidelines. The key is to make sure everything is done at arm’s length. This is especially critical for non-geared trusts as the fund doesn’t want the double whammy of the asset becoming an in-house asset, which would inevitably require it to be sold, regardless of future recovery, but also the income from the trust being treated as non-arm’s-length income because that is disastrous.

With reference to in-house assets there is also some relief, albeit not a removal of responsibility. For a fund that finds itself in a position of exceeding the 5 per cent limit at 30 June, the trustees will still need to prepare a plan to dispose of the assets next financial year. If, however, the markets still haven’t recovered by 30 June 2021 or alternatively they have recovered, and the in-house assets are no longer in excess of 5 per cent, then the plan does not need to be executed.

In the example above, as long as Bill and Jessie have prepared the plan, then there will be no need to execute it in the event the fund assets increased above $900,000.

For any clients close to the 5 per cent limit last year, chances are the fund will exceed the threshold this year, so the best thing is to be prepared.

STRATEGY

Guarding SMSF wealth – part one

Recent legal events in New South Wales have challenged the ability to ring fence SMSF assets in the event of a member’s death. Grant Abbott assesses these significant developments.

GRANT ABBOTT is director of I Love SMSF.

It takes a long time, good management, great ideas, insights, careful budgeting, great advisers and skills to build family wealth. For many with good advisers, wealth is housed in trusts for asset protection, as well as the taxation advantages of streaming taxable income across a family or into a bucket company. SMSFs have also done very well with more than $700 billion in assets growing from only $11 billion 25 years ago. The advantages of an SMSF are, like a trust, asset protection and a slew of taxation benefits.

Yet family wealth is so vulnerable and open to attack by viruses, lawyers, agencies, regulators and government. Look no further than the Supreme Court of Western Australia case Miller v Taylor [2018] WASC 75. Here the second spouse of the deceased, Andre Taylor, contested his will under

the Family Provision Act (WA) 1972, which had provided a split of $600,000 for the two children from his first marriage. The case was commenced in 2013 and heard before Justice Jeremy Curthoys in the WA Supreme Court in 2018.

Surprised to see six lawyers present at the lawyer tables, Justice Curthoys tore into them, courtesy of the $500,000 in legal fees that had been racked up decimating the estate proceeds for the benefit of the second spouse, Angela Taylor, and the two children. In the end it should come as no surprise the only winners were the lawyers. A lawyer made a will for the deceased 10 years prior to his death and then other lawyers attacked it under the Family Provision Act, “ravaging the estate”, according to Continued on next page

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Curthoys.

The estate in this case was a simple family home, but it could easily have been a binding death benefit nomination (BDBN) paid by the trustee of an SMSF to the legal estate of a deceased member, or the commutation of a reversionary pension where a BDBN overrides the reversionary pension and inserts the lump sum into the estate. Anything close to a deceased’s legal estate can be challenged under family provisions claims in all states by ‘eligible persons’. Lawyers who operate on a no-win, no-fee basis love these clients, particularly with super and SMSFs playing a big part now, and a huge part into the future.

SMSFs are not immune In the next 20 years, more than $300 billion will be distributed by deceased SMSF members, mostly to the surviving spouse and then to their estate. Now Miller’s case is not a one-off – we have all seen, been involved with or heard of estate cases breaking apart families and costing the legal earth. And it is no surprise, as any family provisions challenge starts in the relevant state Supreme Court, that it is a very expensive proposition.

And SMSFs are right in the thick of things. Look at Katz v Grossman [2005] NSWSC 934, a fight for SMSF death benefits between a brother and sister, or Donovan v Donovan [2009] QSC 26, where the de facto spouses’ SMSF death benefit payment was challenged by the daughter from the deceased’s first marriage. And more recently you may have seen the Victorian Court of Appeal case Wareham v Marsella [2020] VSCA 92, where the trial judge booted out a surviving SMSF trustee, and her daughter, who sought to pay all the deceased member’s death benefits to herself and not the estate, seemingly in conflict with the NSW case of Katz v Grossman. Different states and different decisions. SMSFs are

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not immune, in fact they are the perfect hosts for estate planning litigation and I can guarantee litigation will increase and at some point there will be a constitutional challenge of state versus federal laws. And I say bring it on, but, until then, we need to navigate the waters and protect our clients and their family wealth. One thing we can learn from Marsella is the court castigated the trustee and their lawyers for not seeking specialist advice, which is a bonus.

Note the Court of Appeal upheld the decision to remove the trustees of the SMSF in order to determine which dependants, including the deceased’s husband of 32 years (her executor), who should share in the deceased’s death benefits. But I ask the question: If the trustees were removed, who should take their place and ensure the fund remained an SMSF pursuant to section 17A of the Superannuation Industry (Supervision) (SIS) Act 1993? The only person entitled, as there was no member of the fund because the deceased was the sole member, is the executor husband. In an acrimonious case such as this, isn’t that pouring fuel onto the fire and extending legal proceedings?

A direct attack on SMSFs The Marsella case was a game-changing decision and will give the lawyers a huge leg up, because it can be interpreted any discretionary decision by an SMSF trustee can now be challenged if they act arbitrarily. This includes the payment of death benefits, but would extend to making an investment strategy without considering each member’s retirement objectives as required under the tax commissioner’s February 2020 guidelines.

And a challenge is not cheap. If you look at the Marsella case, it went through the Supreme Court then to the Victorian Court of Appeal, which means in excess of $100,000 in legal fees. All for a $490,000 superannuation death benefit.

SMSF advisers and trustees should potentially expect this sort of challenge as a matter of course if there is no BDBN,

SMSF will or auto-reversionary pension with no BDBN override. Be very careful with BDBNs because if they fail due to no or improper witnessing of the member’s directive, then the Marsella case decision is let out of the cage.

SMSFs and family provisions claims Each state has its own family provisions laws, enabling eligible people to make a claim against a deceased’s estate, which includes any superannuation benefits paid into the estate. Looking at NSW, for instance, Part 3.2 of the Succession (NSW) Act 2006 (SA 2006) provides for a family provisions claim.

In short, a family provisions claim under the SA 2006 can be made within 12 months of the death of the deceased if the person making the claim: • is an ‘eligible person’, and • has been left out of a will, or • did not receive what they believed they were entitled to receive.

Section 57 of the SA 2006 provides an ‘eligible person’ includes the following claimants: • 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, and • a person with whom the deceased was living in a close personal relationship at the time of the deceased person’s death.

Make no mistake, this is a very wide net and one the lawyers love. In Kelly v Deluchi [2012] NSWSC 841, the lawyers scoured far and wide for claimants. To show you how far, the deceased, Roy Edward Kelly,

married Filipino Loretto Pasion in January 1982. There were no children from their union, although Pasion had two daughters who lived in the same household with the deceased. About a year after they moved in, Pasion and her children left, and were not seen again. The marriage was annulled in February 1984, as Loretto had remained married to her husband in the Philippines.

But the lawyers did look and search for her and came up empty handed, resulting in the trial judge dismissing her ability to claim.

But the Kelly case isn’t famous for eligible persons, but for being the first ever case where a direct attack was mounted on SMSFs with a family provisions claim.

This arose from the Supreme Court taking the view an SMSF was a ‘notional estate’ of the deceased, so Part 3.3 of the SA 2006 applies.

So what is a notional estate and how could NSW laws intervene in commonwealth laws?

Notional estates and SMSFs Under the SA 2006, a notional estate is for the sole purpose of bringing money and property outside of the estate into the estate for a family provision claim.

The first step pursuant to section 75 of

I can guarantee litigation will increase and at some point there will be a constitutional challenge of state versus federal laws.

the act is for the Supreme Court to find a ‘relevant property transaction’. A relevant property transaction is where property is divested prior to the deceased’s death for the purpose of beating a family provision claim. But, and this is a big but, it can include money held on trust which is dealt with at the time of death and for which no adequate compensation has been paid.

In the Kelly case, Justice Hallen looked at whether the payment of a death benefit from an SMSF to the deceased’s spouse was a relevant property transaction. To that regard, Hallen 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.”

So making the decision to pay a death benefit created a notional estate. The end result was that the children of the deceased, who were not members of the fund, 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. All of this went to reduce the death benefit to be paid to Mary Kelly, the wife of the deceased member of the SMSF. At this time it is only NSW that has the concept of a notional estate, but this, combined with the Marsella case decision operating potentially across other states, means a brave new world for SMSFs. They were once protected, but are now open to litigation and destruction.

Some words of wisdom So here are some conclusions I have made. The first is if there is a family estate, the greater the estate, the more likely the challenge. The second is SMSFs are no longer protected and won’t be until the High Court decides where trustee law and notional estates invade the SIS Act 1993.

The third is if there is a challenge to an estate under family provisions or trust law, the legal fees are expected to be at least 20 per cent of the estate and more if you come across some bad actors as in Miller v Taylor.

So we are left with a predicament. If an estate, SMSF and discretionary trust are all open for challenge by the Family Court, Family Provisions Act, regulators, creditors and people seeking to rile up a legal challenge to get fees, what can the client do? Also, would you want to be the adviser that can deliver a real solution to protect the client’s family wealth?

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The income protection pivot

The structure and procedures regarding income protection cover underwent significant change from 1 April 2020. Rob Lavery details the rule amendments and their implications.

ROB LAVERY is senior technical manager with knowIt Group.

Change comes at trustees and their advisers from a number of different angles, particularly in these uncertain times. In April, one major change hit the insurance industry and SMSFs from a surprising source and greatly alters one strategic option available to SMSF members.

The Australian Prudential Regulation Authority’s (APRA) instruction to insurers to abandon agreedvalue income protection policies, as well as the subsequent changes with planned implementation on July 1 of next year, warrant a closer look to determine what they mean for SMSF members.

Direct and indirect effects While not all SMSFs hold income protection cover for their members, all funds are required to have

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an investment strategy that considers members’ insurance needs, both inside and outside super.

This means any amendment to the insurance market has an effect on all SMSFs, even those that don’t hold cover.

Letters and numbers Last December, APRA wrote to all life insurers requiring they make major changes to new income protection policies from 31 March 2020. While a surprising and somewhat unprecedented move, APRA’s concern over insurers wearing major losses on this type of insurance should not come as a shock.

In May 2019, the prudential regulator wrote to insurers requesting they proactively move

to prevent the large losses they had experienced on their income protection products. At the time, the regulator had identified $2.5 billion in losses on such policies industry-wide in the preceding five years. The lack of insurer response to this first letter gave rise to December’s more prescriptive missive.

While it may seem counterintuitive for a regulator to be concerned about insurers losing money on insurance (or, to look at it another way, consumers making money from insurance), the logic is sound.

APRA has expressed concern these losses will result in consumers receiving nasty shocks when premiums are reviewed and potentially dramatically increased. On the more extreme end of the scale, the prospect of an insurer being unable to pay claims under the weight of income protection losses would be disastrous for consumers and the industry overall.

So what has APRA requested insurers do?

Agreed value dismissed APRA has stated it expects insurers to no longer offer agreed-value income protection policies from 31 March 2020.

Any income protection claim on a new policy from that date will rely on income not older than 12 months before the date of claim.

What does this mean?

The days of a fund or policyholder proving the insured’s income at the time of underwriting and not having any burden of proof come claim time are over (for new policies at the least). Some insurers accepted applications for agreed-value policies right up to the cut-off date. Some even accepted paper applications after that date, provided they were dated and signed prior to April.

Members and SMSFs with agreed-value income protection policies in place, or applied for, before April can maintain such policies, subject to contract provisions and insurer policies. Strategically the change means grandfathered agreed-value policies may become more valuable.

Those SMSFs with an agreed-value income protection policy, or whose members directly hold such a policy, will have difficult decisions to make about whether to retain the policy.

That said, such policyholders may find their premiums rise more steeply than expected. Insurers will have little incentive to keep the premiums competitive when the policyholder can no longer purchase a comparable product. Furthermore, if insurers are making the level of losses identified by APRA in its correspondence, they will need to lift its premiums on agreed-value policies to shore up their bottom lines.

Tough decisions needed Those SMSFs with an agreed-value income protection policy, or whose members directly hold such a policy, will have difficult decisions to make about whether to retain the policy. This situation will only be made more challenging where the insured’s health situation has changed since the policy was purchased. Is it worth paying potentially rapidly increasing insurance premiums in order to keep greater cover than would be available in the marketplace?

A simplified marketplace The question of whether a currently uninsured fund member would be better suited to an agreed-value or indemnity income protection policy is gone. Issues around agreed-value policies in SMSFs and whether they fully meet the temporary

incapacity condition of release (and whether the premiums are fully deductible) will also slowly disappear as grandfathered policies end and indemnity policies predominate.

An unintended consequence The 12-month income verification period may cause some unintended consequences for the insured. For those with irregular income, a major bonus or income spike may come after the date of claim, and hence be excluded from the income verification period. This issue may capture a wide range of people, from farmers who have income spikes depending on seasons and markets to members of a sales force who typically have the potential to receive large bonuses at set points in the year.

Members who have irregular incomes need to understand the limitations of new income protection policies when it comes to fully replacing their income.

The 75 per cent ceiling APRA has also stated it expects insurers to limit income protection benefit amounts from 1 July 2021. New policies written from that date will not be permitted to pay more than 100 per cent of earnings for the first six months of the claim, and 75 per cent of earnings thereafter (up to a maximum of $30,000 a month).

What does this mean?

The limit for the first six months will likely not have a great impact. Few insurers would offer such a high percentage of income as a benefit – commonly insurers have kept benefit amounts below 100 per cent to provide an incentive to the insured to go back to work. The 100 per cent limit also aligns with restrictions imposed by the temporary incapacity condition of release.

The 75 per cent limit thereafter would cause most insurers to reduce the insured amounts they offer on their income protection policies. Benefits of over 80 Continued on next page

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per cent are available in the marketplace currently.

The wording of the APRA letter uses the term ‘earnings’ rather than ‘income’, which could be interpreted as including things like employer superannuation benefits and non-cash payments.

Many insurers offer add-on benefits, such as a superannuation guarantee benefit that pays an additional 9.5 per cent on top of the standard percentage. If limited to 75 per cent of earnings, such a benefit would need to be reduced or restructured.

Example

Beryl earns $100,000, plus $10,000 in superannuation guarantee contributions from her employer, in 2021/22. If her earnings including super are $110,000 (and APRA interprets them to be that amount), the maximum 75 per cent income protection benefit would be $82,500 a year.

It is important to note not all add-on benefits to income protection policies align with the temporary incapacity condition of release.

Similarly, automatic benefit indexation during a claim could result in the 75 per cent rule being breached shortly after a claim commences. Insurers may need to remove such indexation from their terms on new policies unless APRA specifically allows it.

Example

Carl earns $100,000 in the 12 months up to his temporary disablement. The income protection policy in his SMSF pays 75 per cent of his pre-disability income, with an annual indexation of benefit payments.

For the first year of payment, Carl’s income protection benefits will not exceed APRA’s 75 per cent limit. On the first anniversary of his claim, his benefit will increase by the consumer price index. This will result in the benefit payment exceeding APRA’s limit of 75 per cent of pre-disability earnings.

Under the new rules, APRA would

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not allow his income protection benefit amount to be indexed.

No guarantee of renewal APRA will require insurers to limit contract terms on income protection policies from 1 July 2021 as well. Initial contract terms will be limited to five years, with those insured able to renew the contract for a period not exceeding a further five years on updated terms offered by the insurer.

Maximum contract terms will require policy owners, including SMSFs, to reassess the contract critically at least every five years.

What does this mean?

Currently, most insurers offer income protection policies with terms allowing the insurer to amend the premium each year while also allowing the insured to accept the premium on the same contractual terms as the previous year. This can be a good or a bad thing for both the insured and the insurer, depending on whether the updated terms used by the insurer are broader or more narrow (or a combination of both).

By removing this guaranteed renewability, APRA is making sure insurers don’t insure people on a wide range of contracts. Every five years (at the maximum) the insured’s contract will be brought into line with the insurer’s most recent set of terms.

Maximum contract terms will require policy owners, including SMSFs, to reassess the contract critically at least every five years. SMSF members, as led by their advisers, should be doing so anyway to ensure their policy remains a suitable one for them given the alternative market offerings.

Limit on long benefit periods While less prescriptive, APRA also states in its letter an expectation that insurers put in place controls to limit long benefit periods on income protection policies from 1 July 2021.

What does this mean?

This is harder to determine. The obvious target of this request are policies with benefit periods up to an age (be it 60,

65, 70 or beyond). How insurers interpret the request, and practically apply it to the policies they offer, is unknown. APRA seems to want insurers to employ definitions of disability that grow harder to meet the longer the insured is on a claim, thus encouraging the claimant to return to work.

It is quite possible insurers will implement this request as it could serve to limit their claim liabilities. That said, no insurer will want to be the first with a tougher disability definition. Based on prior experience of APRA asking for action in a non-specific fashion, it would come as no surprise if insurers did little until asked to do so in a more prescriptive manner that is enforceable industry-wide.

Knowledge of insurers’ terms critical The only way to manage these reforms is for advisers to stay up to date with insurers’ changing contract terms. Planners need to refamiliarise themselves with insurers’ contract terms if they haven’t done so since 31 March 2020. Similarly, they will need to go through this process again on 31 July next year.

One of the difficulties in managing this change is that APRA’s letter is not legislation, nor is it currently in the form of a regulator policy, and detailed issues will need to be addressed by the regulator itself. How APRA communicates its opinion on these detailed issues will be key to informing members and advisers about the changes.

SMSF TRUSTEE EMPOWERMENT DAY

2020 SYDNEY 8 SEPTEMBER

MELBOURNE 10 SEPTEMBER

BRISBANE 15 SEPTEMBER

FEEDBACK FROM OUR 2019 EVENT

It was a well-balanced event with up-todate information, regulatory presence and opportunities for investment. I was very pleased I attended and hope future events incorporate this mix as well.

As every year, the event content and the quality of presenters has been first rate. Highly informative regarding trends and compliance, and provides a wealth of information on new products available for SMSF Trustees to consider.

More information at www.smstrusteenews.com.au/events

COMPLIANCE

A pandemic plus for legacy pensions

The coronavirus has resulted in plenty of disastrous outcomes, but Mark Ellem says the pandemic might be a positive for legacy pensions.

MARK ELLEM is SMSF services executive manager at SuperConcepts.

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With the significant drop in markets over the past few months and a possible continuing downturn, now may be the time to consider the restructure of old legacy pensions within an SMSF. Restructuring these types of pensions can solve a number of issues, such as dealing with the death of a member and solvency requirements. But remember, before embarking on any restructure of these types of pensions, any applicable Centrelink ramifications must be considered.

The transfer balance cap (TBC) can also be an

issue, but again, this may be resolved where values have dropped.

The three common types of old legacy pensions you’re likely to find in an SMSF are: • Lifetime complying pension – this is a pension that is paid for the life of the member and if reversionary, the life of the reversionary beneficiary. It is a defined benefit pension, that is, the benefit (pension amount) is set, but may be increased, for example, by the consumer price index;

• Life expectancy pensions (also known as a fixed-term pension) – these pensions are for a fixed term, normally based on the member’s life expectancy at the time of commencement. It’s also a defined benefit pension; • Market-linked pension (also known as a term allocated pension) – these pensions run for a set term, being generally a range from the life expectancy of the member at the time of commencement up to and when the member turns 100. The amount of the annual pension paid to the member is primarily determined by the balance of the pension at the start of the financial year and the remaining term. These pensions are not defined benefit pensions and consequently can be dealt with for estate planning purposes in a similar manner to an account-based pension.

Defined benefit pensions – the problems The first two types of old legacy pensions present a number of challenges, including: • dealing with any residual capital after the death of the member or having the term of the pension end. There can be difficulties with paying out any residual capital after the death of a member and potentially significant tax consequences, and • compliance with the solvency requirements, which can present a problem where markets have had a significant downturn, for example, the global financial crisis and the current COVID-19 effect on asset values.

The estate planning solution – defined benefit pensions One solution to deal with any residual capital of a defined benefit pension is to restructure the defined benefit pension to a market-linked pension prior to the member’s death or if it’s a life expectancy pension, before the end of the term or

Before embarking on any restructure of these types of pensions, any applicable Centrelink ramifications must be considered.

member’s death, whichever occurs first.

Subject to any trust deed restrictions, this is permitted and is executed by the member requesting a full commutation of their defined benefit pension with the commuted amount to be used to immediately commence a market-linked pension.

Sounds straightforward, but there are some issues to consider:

whether the defined benefit pension is either a lifetime complying pension or a life expectancy pension.

For a lifetime complying pension, it is generally accepted the commuted amount can be a value ranging from an actuarially determined amount up to all of the capital supporting the lifetime complying pension. Generally, the total capital funding the lifetime complying pension is used as the commuted amount and used to commence the market-linked pension as this means there is no residual capital left in a reserve.

For a life expectancy pension, there are rules in relation to the commuted amount. Unfortunately, there are two sets of commutation rules and it is not totally clear which one applies. Consequently, it would be prudent to engage an actuary to provide advice as to the commuted amount. However, generally, there will be an amount left in the reserve after the full commutation of the life expectancy pension and the calculated commuted amount is used to commence a market-

Issue 1 – The commuted amount

The commuted amount depends on

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linked pension.

Issue 2 – Concessional cap

Capital set aside by a superannuation fund to meet defined benefit pension liabilities is a reserve for taxation purposes.

Consequently, when an amount is paid from the pension reserve, it is an allocation from the reserve and will be assessed against the member’s concessional cap, unless one of the exceptions applies.

Defined benefit pension payments, from a pension reserve, are one of the exceptions. The other exception is if the defined benefit pension is fully commuted and the commuted amount is used to commence another ‘complying pension’.

Such pensions, from an SMSF perspective, include a market-linked pension. Without going into details, reference should be made to an ATO interpretative decision (ATO ID 2015/22) in relation to the concessional cap consequences of the commutation of a lifetime complying pension and commencement of a marketlinked pension.

Issue 3 – TBC

Pension commutations and commencements are both transfer balance account (TBA) events and are reportable by the relevant superannuation fund. All old legacy defined benefit pensions in an SMSF are classified as ‘capped defined benefit income streams (CDBIS)’, as well as pre-1 July 2017 market-linked pensions.

Where the defined benefit pension is a lifetime complying pension and is fully commuted, effectively a TBA debit will arise equal to the previous TBA credit for the defined benefit pension. For a life expectancy pension, or a pre-1 July 2017 market-linked pension, there remains the issue of how the debit is calculated, noting that a bill proposing a new way to calculate a TBA debit for these pensions has passed the lower house and currently

56 selfmanagedsuper

sits in the Senate.

There is also an unresolved TBC issue where a post-30 June 2017 marketlinked pension is commenced and the commencement value is more than $1.6 million. The post-30 June 2017 market-linked pension is not a CDBIS and consequently the special TBA rule for these types of income streams does not apply. So, if the TBA balance exceeds the member’s TBC, there will be an excess that the member will be required to commute.

However, while the post-30 June 2017 market-linked pension is not a CDBIS, it is still a non-commutable pension. Further, without going into detail, the commutable amount for excess TBA purposes for a noncommutable pension is actually zero.

This means any excess TBA determination issued by the ATO will include an amount to commute of zero,

For a lifetime complying pension, it is generally accepted the commuted amount can be a value ranging from an actuarially determined amount up to all of the capital supporting the lifetime complying pension.

with which the SMSF can easily comply.

This still leaves the member with TBA in excess. What happens next? Will there be excess TBA notional earnings assessed for which the member has to be taxed? If so, would the tax rate applicable to notional earnings increase from 15 per cent to 30 per cent in year two? We simply don’t know.

This issue has remained unresolved since 1 July 2017 and is the main reason why members with these old legacy pensions, with large capital amounts backing them, have not restructured to a post-30 June 2017 market-linked pension.

Basically we have no certainty of the personal tax outcome for the member.

This also presents an ongoing estate planning issue for members with these pensions. In short, from an estate planning and tax perspective, if you have a defined benefit pension in an SMSF, it seems the worst thing you can do (for you and your family) is to die.

Drop in market values may resolve TBC problem With the significant drop in market values across asset classes, particularly shares and property, the numbers may simply work with a restructure of an old lifetime complying pension to a market-linked pension.

For a lifetime complying pension, where it is the only retirement-phase pension the member has, the full commutation of the income stream will result in the member’s TBA being reduced back to zero. Provided the capital backing that lifetime complying pension is no more than $1.6 million, which it may be now, due to the drop in asset values the unresolved TBC issue for post-30 June 2017 market-linked pensions will not arise.

This could also be the case for the restructure of a pre-1 July 2017 marketlinked pension, which is a CDBIS, to a post-30 June 2017 market-linked pension, which is not a CDBIS. However, as

previously noted, we are still awaiting the passage of the revised special debit rule, so care needs to be taken here.

Restructure before death As morbid as it sounds, an effective strategy, from a personal tax perspective, with regard to a person’s estate plan is to arrange to have a defined benefit pension with asset backing that exceeds the member’s TBC restructured to a marketlinked pension just prior to death.

Say a member has a lifetime complying pension and they restructure to a marketlinked pension, but the commencement value of the market-linked pension is greater than their TBC, resulting in an excess TBA balance. What happens then if the member dies while the ATO is determining how to deal with the excess?

Under the rules, when a member dies, their TBA is extinguished – problem solved! The variable, though, is knowing when the member will die.

IS IT TIME FOR AN AMNESTY?

Unfortunately, the major changes to the superannuation law in 2007, known as Simple Super or Better Super, and the recent 2017 super reforms simply do not cater for the old legacy pensions, particularly the defined benefit pensions.

Given the current economic circumstances and the unresolved TBC issues that exist, is it time now to allow these old legacy pensions to be restructured to a modern day account- based pension? Yes, some of the more complex issues will need to be addressed, like the Centrelink consequences, but surely dealing with them now is better than simply playing the waiting game and hoping they’ll just go away.

To this end, the Institute of Actuaries recently made a submission to Treasury outlining the legislative and regulatory issues with these old legacy pensions and calling for a consideration of reforms, including allowing affected pension recipients to restructure their retirement savings into a simpler, modern income stream. In a similar vein, the SMSF Association and the Tax Institute have also called on the government to reform these pensions.

QUARTER II 2020

57

SUPER EVENTS

SMSF ASSOCIATION 2020 NATIONAL CONFERENCE

The SMSF Association hosted its 2020 National Conference on the Gold Coast for the first time. Around 1300 delegates travelled to the city’s Convention and Exhibition Centre to attend the event in February.

1

3

4

6

7

2

5

8

9

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12

11 10

13

14 14

15

16

1: Dana Fleming (ATO). 2: Michael McQueen (Speaker, trend forecaster and author). 3: Jane Hume (Assistant Minister for Superannuation, Financial Services and Financial Technology). 4: Aaron Dunn (Smarter SMSF) and Peter Estcourt (Accounting and Adviser Services). 5: Daniel Butler (DBA Lawyers). 16: Bryce Figot (DBA Lawyers). 6: Michael Blomfield (Investment Trends). 7: Stephen Jones (Opposition financial services spokesman). 8: Michael Rice (Rice Warner). 9: Melinda Howes (BT Financial Group). 10: John Maroney (SMSF Association). 11: Louise Biti (Strategy Steps). 12: John Maroney (SMSF Association), Michael Blomfield (Investment Trends), Jeremy Cooper (Challenger) and Michael Rice (Rice Warner). 13: Belinda Aisbett (Super Sphere), Kellie Grant (ATO) and Katrina Fletcher (Elite Super). 14: Jeremy Cooper (Challenger).

15: Jemma Sanderson (Cooper Partners).

QUARTER II 2020

59

LAST WORD

JULIE DOLAN EXPLORES SOME OF THE COMPLEXITY INVOLVED WITH THE REDUCTION OF MINIMUM PENSION PAYMENTS INTRODUCED AS A COVID-19 ECONOMIC RELIEF MEASURE.

JULIE DOLAN is enterprise director at KPMG.

60 selfmanagedsuper

A reduction in the minimum drawdown rates is one of the measures released as part of the Coronavirus Economic Response Package Omnibus Bill 2020. This bill represents part of the federal government’s economic plan to cushion the economic impact of the coronavirus.

Much like the measure taken during the global financial crisis, the government has allowed for a 50 per cent reduction in the minimum drawdown rates that apply to account-based pensions and other relevant income stream products for both 2019/20 and 2020/21. The intention of this measure is to benefit retirees by providing them with more flexibility as to how they manage their superannuation assets and cash flow through these times of market volatility.

Schedule 1A and 1AAB of the Superannuation Industry (Supervision) Regulations set out the formula for calculating the minimum payment limits for account-based pensions, while Schedule 6 contains the formula for the minimum payment amount for market-linked pensions. This reduction measure does not apply to lifetime or life expectancy pensions or annuities.

Some of the finer details of this measure are: 1. If the pensioner has already taken their minimum under the standard drawdown percentages, they cannot look to place the excess back into the fund, unless the pensioner satisfies the contribution rules and cap amounts.

2. If the pensioner has already taken up to their reduced minimum amount, they are not required to take any further amounts out of the fund prior to 30 June 2020. Depending on the trust deed of the fund and whether a lump sum election has previously been put in place, any excess up to 30 June could be treated as either a partial lump sum commutation payment or alternatively as a lump sum payment from an accumulation account the pensioner may have. Note the transfer balance account report requirements should the partial lump sum commutation payment option be selected. Depending on what the value of the pension account is at 1 July 2020 will then allow the pensioner to put in place strategic planning around minimum payments and what to do with any surplus cash-flow requirements.

Following on from point two, timing is important in relation to this measure for the current financial

year. It would be common to see pension members having in place the relevant documentation to treat any excess over the minimum drawdowns as lump sum payments from their accumulation account.

So what would happen if the pension member had already taken the minimum pension payments prior to the reduction change and would like to go back and treat any excess over the reduced minimum as lump sum payments? Based on interpretation of the law, it would be prudent to treat the application of the payments according to the law at the time the payment was made. Let’s look at an example.

As at 30 June 2019, Bill had an account-based pension in his SMSF with a value of $1.4 million. He also had an accumulation account of $600,000.

Prior to 1 July 2019, Bill instructed the trustees of his fund to pay the minimum pension only from his account-based pension with any excess to be paid from his accumulation account. His minimum pension for 2019/20 based on the standard percentages was $56,000 (that is 4 per cent of $1.4 million). He took payments of a total of $60,000 prior to when the rules changed on 25 March 2020. His reduced minimum is now $28,000. How should the $56,000 be treated?

Due to the fact the payments totalling $60,000 occurred prior to the rule changes, only the excess of $4000 can be treated as a lump sum payment from his accumulation account. The excess cannot be based on the reduced minimum amount. However, the above would be different if, say, Bill had only taken pension payments of $25,000 prior to the rule change. If he then decided to take an additional amount of $35,000 on 1 May 2020, that is, after the rule changes, $3000 of this amount would be required to be treated as a pension payment to take it to the new reduced minimum. The balance of $32,000 could then be treated as a lump sum payment. Therefore, payments taken on or after 25 March 2020 are treated in accordance with the new laws, the result being a greater amount can be preserved in the tax-exempt pension phase.

In relation to market-linked pensions, the reduction applies to the minimum calculation only.

The effect is reducing by 50 per cent the 90 per cent that is normally used to calculate the minimum.

As you can see, the minimum pension reduction seemed simple at face value. However, based on prior experience, any change to super rules is not without its complexities.

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