Self Managed Super: Issue 40

FROM THE EDITOR DARIN TYSON-CHAN

INAUGURAL SMSF ASSOCIATION TRADE MEDIA JOURNALIST OF THE YEAR

Lies, damned lies and statistics

Many, many years ago, during my first year at university studying business, one of the subjects I had to enrol in was quantitative methods, where I learned about statistical analysis. It taught me about the fundamentals, such as bell curves, normality, standard deviations and the like.

One concept that was emphasised was the importance of sample size when contemplating any sort of statistical examination. Basically the number of people surveyed or data points included had to be large enough to provide an accurate and representative picture that would allow you to draw a sound conclusion about the theory or subject you were examining.

Thirty-four years later and I realise I should not have bothered with retaining the knowledge imparted on me from this subject as Assistant Treasurer and Financial Services Minister Stephen Jones effectively dispelled it in one simple speech.

At the recent AFR Super and Wealth Summit 2022 in Sydney, Jones revealed the government is looking to review the tax concessions currently embedded in the superannuation system as Canberra thinks they are too generous because the incentive has allowed some people to accumulate too much in their super funds.

Why is this considered so egregious? Because the more money that is held in super, the less government revenue is collected, especially if the individuals with these substantial retirement savings asset balances are in pension phase, which as you know is tax-free.

Granted this could be a problem for government inflows, in theory, but of course it really depends on how many superannuants Jones is looking at. By his own admission it is a matter of 32 SMSFs that have asset balances over $100 million, including one that has

accumulated benefits of over $400 million.

The ATO SMSF Quarterly Statistical Report for June 2022 indicated there were a total of 603,432 funds at that time. This means the 32 funds Jones has singled out represent just 0.005 per cent of the whole SMSF population and an even smaller proportion of the entire Australian superannuation landscape.

So are we to believe superannuation tax policy is to be reviewed and rewritten because 0.005 per cent of SMSFs have balances over $100 million? More importantly, has the member for Whitlam now rewritten the widely accepted rules of statistical analysis whereby 32 can now be considered a representative sample size?

Applying this principal, will the next census require only 32 individuals to participate in order to accurately reflect the current make-up of the Australian public? If the answer is yes, we might find people actually desperate to participate in the exercise as it would mean membership to a very elite club.

I think the folly of using these 32 funds as the basis for formulating amendments to superannuation policy is there for all to see and it lends weight to the saying that there are lies, damned lies and statistics.

Not meaning to be too much of a cynic, but there actually is a small silver lining to Jones’s message that could allay any fears changes to the superannuation tax concessions will occur in the immediate future. The Minister did say any change to the retirement savings framework will only occur after an agreed objective or purpose of superannuation is legislated. Given this notion arose out of the Financial System Inquiry finalised in December 2014 without any progression since, we may not have to worry about changes to the aforementioned tax concessions for at least another eight years.

Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au

Senior journalist Jason Spits

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

Heffron

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Quarterly Technical Webinar

1 December 2022

Accountants’ session 11.00am-12.30pm AEDT Advisers’ session 1.30pm-3.00pm AEDT

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SMSF landscape and strategies for 2023

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Transfer balance account reporting for SMSFs

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Transfer balance account reporting for SMSFs

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31 January 2023 Webinar 1.00pm-2.00pm AEDT

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

Paying a pension from an SMSF

7 February 2023 Webclass 12.30pm-2.30pm AEDT

Sequencing risk in retirement strategies

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Superannuation proceeds trusts

21 March 2023 Webinar 12.30pm-1.30pm AEDT

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Changing face of SMSF

6 December 2022 Webinar 11.00am– 12.00pm AEDT

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SMSFs in 2022 – a year in review

14 December 2022 Webinar 12.30pm-1.30pm AEDT

Tax and Super Australia

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Superannuation quarterly update

– session 4

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23-24 March 2023

Sofitel Brisbane Central 249 Turbot Street, Brisbane

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SMSF Conference 2023

NSW 24 March 2023

Parkroyal Darling Harbour Sydney 150 Day Street, Sydney

Establishments peak during same quarter annually

By Darin Tyson-Chan

CoreData research conducted earlier this year into the sector has shown SMSF establishments are more likely to take place at one particular time every year.

Specifically, the study revealed establishments have peaked during the September quarter consistently every year between 2017 and 2021.

“What you actually see is the September quarter was always high and that September quarter activity obviously was the result of people seeing their accountants or advisers

probably in June,” CoreData senior executive Grahame Evans told attendees at the selfmanagedsuper CoreData SMSF Service Provider Awards 2022 in Sydney.

Evans pointed out this finding has significance for all stakeholders in the sector.

“{Practitioners and service providers must ask themselves] are you planned, are you organised, are you managing around that because it’s an important one for providers in the room,” he suggested.

With regard to overall SMSF activity, he recognised the number of establishments has suffered a decline, but at the

same time fund wind-ups have also reduced.

“[This] is actually pointing to a fact that we are in a situation where people are not quite certain what’s actually going to happen in the world and I think we’d all be in that same boat,” he said.

Further, the study found advisers have differing views and attitudes compared with trustees with reference to issues like the direction of the economy.

“I’m going to make a big observation here and partially it’s to do with, I think, the availability of information to accountants and advisers compared to the availability of information to

trustees,” Evans noted.

“I think there’s a time lag and I think [we can] see a lag between the way [people] are thinking [about] the market and what they are actually doing.”

He also acknowledged the growth in the professional relationships between SMSF trustees and service providers.

“Being both a user and advocate for many, many years, it’s only going to go one place and that’s actually up,” he noted.

The survey was conducted online between 26 July and 5 September this year and garnered responses from 240 financial advisers and accountants, and 925 trustees.

Super system should be for one thing only

By Darin Tyson-Chan

Assistant Treasurer and Financial Services Minister Stephen Jones has confirmed the government is committed to ensuring the current superannuation system is used for the purpose of providing sufficient retirement savings for the majority of Australians and nothing else.

In making the statement, Jones stipulated the government was not against having people contribute as much as they possible can to their superannuation funds when expressing concerns over certain SMSFs with very large member balances.

“We’re not saying to people you shouldn’t put as much money away in retirement as possible. We’re not saying you should not bequest a generous amount of money for your kids or your grandkids or your favourite animal shelter or whatever it is. We’re not saying that,” he affirmed during

a speech at the recent AFR Super & Wealth Summit 2022.

“We’re just asking the question: what is the role of the superannuation system in assisting you doing it?

“If you want to leave a huge estate to your kids, great. And if you want to have an enormous balance to support you in your retirement, great. We believe in selfsupport, we believe people looking after their retirement affairs, but the question has to be asked: how much of that is the role of the superannuation system and how much should the taxation system support you in meeting those objectives?”

Jones would not specify what the government considered a sufficient superannuation asset balance before tax concessions would cease to be available and assured the audience it was not looking to be antagonistic with any review of the system.

“I actually don’t see it as picking a fight. We’re not starting from the proposition of where is a fight to be had and let’s go and

Stephen Jones

have it. We’re starting from the proposition about what is right,” he noted.

“We haven’t got a set of crosshairs, but there are some distortions in the system that just don’t look right and they’re costing the budget significant amounts of money.”

During the same session, he revealed the government is intending to reassess the current tax concessions embedded in the retirement savings system after concerns over 32 SMSFs with member balances over $100 million.

Tax concessions under fire

Assistant Treasurer and Financial Services Minister Stephen Jones has confirmed the Albanese government will be looking to reassess the superannuation tax concessions and has singled out certain SMSFs as a trigger for the review.

Speaking at the recent AFR Super and Wealth Summit 2022, Jones told delegates: “We have 32 self-managed superannuation funds with more than $100 million in assets. The largest self-managed superannuation fund has over $400 million in assets. Now if the objective of superannuation is to provide a taxpreferred means for estate planning, then you could say it’s done its job pretty well.

“Don’t get me wrong, the government celebrates success, but the concessional taxation of funds like these has a real cost to the budget.”

According to the Minister, Mercer data estimates the tax concessions on a super fund with $10 million of assets could support 3.1 full aged pensions and these figures highlight the need to address the issue.

He pointed out defining and legislating the objective of superannuation will form part of the process and the government will consult widely in an effort to do so.

LRBAs no risk to system

Limited recourse borrowing arrangements (LRBA) do not pose any significant risk to the superannuation sector or the broader financial system, but further policy changes may be necessary to reduce the risks for individuals who use them in inappropriate ways, according to a review by the Council

of Financial Regulators (CFR).

The CFR made the assertion in a report, “Leverage and Risk in the Superannuation System”, which also noted there had been no LRBA-related risks in the superannuation system since they were first permitted in 2007.

The report, commissioned by the previous government in 2019 following the release of a similar report in that year, was provided to the Treasurer in late September.

Specifically it was determined borrowing by SMSFs through LRBAs has not posed a material risk to the superannuation system or broader financial system since it was introduced in 2007.

“This is notwithstanding evidence LRBAs are used in inappropriate ways by some individuals and can be a high risk to their retirement savings and, by extension, increase the risk of higher fiscal outlays through the age pension,” the report stated.

The CFR recommended continual monitoring of LRBAs be conducted rather than another review in the future.

Resistance to super balance cap

The SMSF Association has reiterated its opposition to the potential imposition of a superannuation balance cap after Assistant Treasurer and Financial Services Minister Stephen Jones expressed concerns about a number of self-managed funds with asset holdings of over $100 million.

“We do not and have never supported a cap on superannuation balances. The small number of SMSFs with extremely large balances are a legacy issue that the 2017 changes, which placed clear limits on contributions to superannuation funds and the amounts that can be held in the tax-free retirement phase, will remedy over time,” SMSF Association chief executive John Maroney said.

“It’s also our position that if there is a decision to restrict the retention of extremely large balances in superannuation, then [that] needs to be handled carefully to ensure that any rule changes allow adequate time to manage the restructuring that would be involved, especially where large illiquid assets are involved. It also must not adversely affect the vast majority of SMSFs with moderate balances.”

He pointed out any move to implement a limit on superannuation balances would constitute a broken preelection promise by the Labor Party.

Super about retirement

A panel of senior superannuation executives has suggested the proposed legislated objective of superannuation must include the notion of retirement and should be as simple as possible.

Speaking at the recent AFR Super and Wealth Summit 2022 in Sydney, AustralianSuper chief executive Paul Schroder told delegates he was in total support of these two elements.

“The most important thing about the objective is that it’s about retirement. So that’s the single most important thing. And then the next most important thing is to have as few words as possible so we don’t end up in this circular argument about detail,” Schroder said.

Fellow panellist Aware Super chief executive Deanne Stewart concurred with the retirement income theme and wanted it to have an element of inclusion as well.

“I think it needs to have retirement income in it and it needs to have [a reference to] every working Australian and the shorter the better,” Stewart said.

Mercer Pacific region president and Australia chief executive David Bryant favoured the most simplistic definition.

“[The objective or purpose of super should be to provide a] dignified retirement,” Bryant noted.

SMSFs again in the franking credit firing line

There it was, a tiny item about off-market share buybacks tucked quietly away on page 13 of Budget Paper No 2 and in all the frenetic activity that surrounds the handing down of a federal budget, it largely went unnoticed on the Tuesday night. But when the dust settled and industry analysts took a more forensic approach to the budget papers, it soon became apparent this small item could become a major issue for the SMSF sector.

So, what did it say? Under the heading, “Improving the integrity of off-market share buybacks”, it read: “The government will improve the integrity of the tax system by aligning the tax treatment of off-market share buybacks undertaken by listed public companies with the treatment of on-market share buybacks. This measure will apply from announcement on budget night. [It] is estimated to increase receipts by $550 million over the four years from 2022/23.”

In a nutshell, what it effectively means is an end to the system whereby off-market buybacks gave SMSFs access to franking credits as the sale price was treated, in part, as a dividend. In comparison, with on-market buybacks, no part of the buyback price is treated as a dividend and, as such, is ineligible for franking credits.

The SMSF Association estimates this measure could affect the future income of a significant number of SMSFs. But despite initial fears this initiative was a precursor to the government revisiting the entire issue of franking credits, that is not the case, with Assistant Treasurer and Financial Services Minister Stephen Jones explicitly ruling that out at a speech given on 17 November to the Institute of Public Accountants.

Aside from SMSFs, the other losers in this off-market share buyback policy switch are companies. Major corporates, such as Woolworths and BHP, have gone off market to buy back their scrip from shareholders, often at a discount to the market price, for more than a decade. It involves eligible shareholders getting the opportunity via tender to sell some or all their shares back to the company.

In return for receiving a lower price for their shares, SMSFs, and other investors in low-tax environments, are compensated by having franking credits attached as a portion of the dividend and capital return, effectively allowing them to get extra franked dividends and have a lower capital gains tax

bill. For the companies, it means they can buy back their scrip at a cheaper price without disadvantaging shareholders. For example, in 2018, BHP saved $1.2 billion when it paid $27.64 a share when the market price was $32.14.

For SMSFs invested in Whitehaven Coal, the new policy could have an immediate impact as the company considers what to do in the wake of the budget announcement. Whitehaven has used the bumper prices for coal, a by-product of the tragic war in Ukraine, to buy back 10 per cent of its shares this year at a cost of nearly $600 million. It was planning to spend another $2 billion to acquire another 25 per cent of its shares off-market, but is now reconsidering its options.

From the SMSF Association’s perspective, this budget measure was a surprise announcement that will cause uncertainty in the sector. Although Jones has explicitly ruled out tampering with the franking credit system, the fact is any tinkering with the system, especially when it involves tax, remains a sensitive issue and undermines investor confidence.

It could also potentially discourage investment in Australian blue chips with SMSFs traditionally being long-term holders of their shares. ATO figures show there is around $868 billion in SMSFs or about 25 per cent of super assets, the largest component of which is Australian Securities Exchange-listed shares.

Despite the backlash from organisations representing small shareholders and self-funded retirees, the government has given no indication it will retreat. Speaking to the Financial Services Council, Jones said the move was meant as a budget “integrity measure”, adding the increase in off-market buybacks was being driven by tax minimisation. “The use of unallocated franked dividends to effectively subsidise and reduce the cost of share buybacks will be disincentivised and it would only affect a small number of shareholders,” he said.

Interestingly, when Labor announced its policy changes to franking credits before the 2019 federal election, it had a similar mantra that “it would only affect a small number of wealthy SMSFs”. The evidence suggested it was not a small number and the majority could not be classified as wealthy. In the wake of the eventual loss of that election, Labor rescinded the policy, so let’s hope it hasn’t forgotten why.

JOHN MARONEY is chief executive of the SMSF Association.

Hello inflation, it’s been a while

The Reserve Bank of Australia (RBA) board surprised financial markets in October by only pushing the cash rate up by 25 basis points, after several months of steady 50-basis-point increases. This signalled a new approach to cash rate increases: a slower rise. The shift resulted in one of the strongest weeks on the Australian Securities Exchange this year as investors responded positively to the change.

The cash rate has been progressively increasing since April, when the RBA identified there were pressures on inflation. These upwards pressures include a supply chain crunch, the war in Ukraine and strong demand globally for goods. The increase in the consumer price index in Australia from the RBA’s August Statement on Monetary Policy shows a rate of 6.1 per cent over the year – the highest year-ended rate since the early 1990s. This is likely to worsen. The central bank is forecasting inflation to be around 7.75 per cent for 2022 and not to come back down to 3 per cent until 2024.

Due to this high rate of inflation, the cash rate will possibly continue to rise in the short term. It should be noted high interest rates will persist for a little longer than inflation as the RBA has affirmed its commitment to get it down to its target band of 2 per cent to 3 per cent.

For some investors this is a foreign investment environment. Until this year, interest rates had been trending downwards since 2011. Inflation had not been higher than 5 per cent since the global financial crisis in 2008. In fact, inflation had mostly stayed below 5 per cent since 2014. The fact inflation, and as a result interest rates, are up means SMSF trustees suddenly find themselves needing to consider the impacts of each of these factors more carefully.

The impact of higher interest rates on equities markets will not have gone unnoticed by trustees.

Listed equities are, of course, still the major asset class used in SMSFs. Market movements are historically felt in equities very early due to their liquidity and exposure to credit. Other listed asset classes, such as property and infrastructure, respond similarly.

Fixed interest yields are also highly sensitive to

interest rate movements and have risen sharply this year. This sounds great until you remember it means a fixed interest portfolio is now worth less than it was.

Cash appears to be an oasis of calm amid a cycle such as this. When interest rates are on the rise, depositors can benefit directly. However, even if the bank where a fund holds its money is passing the interest rate increase on in full, it’s still unlikely to outpace inflation after tax. Further, trustees considering switching to cash at this point run the risk of locking in investment losses on other assets.

This leaves unlisted assets and it is these for which the most uncertainty arises. Property, regardless of whether it is residential, commercial or another type, is often directly held within an SMSF. This is due to the unique ability for such funds to hold these assets where public offer funds find it difficult to do so. But these assets are not immune to market movements themselves. One would expect, for example, investment values will need to be revised down in this environment, particularly where similar properties in the neighbourhood are selling for reduced values.

Other unlisted assets, such as collectables, may possibly also rely on valuations that use interest rates or inflation rates as discount factors. They could also see reducing valuations due to this.

But most importantly, the impact of inflation may have not been considered as part of trustees’ current investment strategies beyond a cursory mention. In the past this has been reasonable, since inflation has been consistently low for some time. However, there will now be a heightened need to reconsider how a fund’s investment strategy is impacted by rising inflation. Additionally, the asset mix will have been affected by movements in asset values, which may require a fund to be rebalanced. As such, close attention is required by trustees.

Finally, questions will also be raised for trustees about how sustainable their present investment strategy is. If their objective is to have a portfolio that outpaces inflation after tax, and inflation is on the rise, it becomes harder to achieve this goal. It’s time for trustees to get to work.

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

Super reform on the horizon

Despite being assured by the new federal government we were unlikely to see any major reform to superannuation, here we are again with more changes now flagged. Perhaps it was only a matter of time considering money needs to come from somewhere to repair the massive budget deficit.

For those that missed it, the government has announced it will consider restricting tax concessions on superannuation balances once it has legislated an objective for the super system.

Most people would agree the objective of superannuation is to provide retirement income, but the argument is funds with multi-million-dollar balances surely cannot claim all of that money will be required for retirement income. Rather, the view is such high account balances are well in excess of retirement needs and therefore the tax concessions within superannuation provide certain individuals with a tax-preferred means for estate planning.

It is reported there are at least 11,000 superannuation fund members with balances of over $5 million, 32 SMSFs with more than $100 million in assets and the largest SMSF has over $400 million in assets. Assistant Treasurer Stephen Jones indicated that somewhere “south of $10 million” is probably what the government is looking at. But how far “south of $10 million” is he considering?

Certain industry bodies have proposed amounts as low as $2 million to $5 million across both the accumulation and pension phase and that people with more than this amount should be required to withdraw the amounts so the money sits outside of the superannuation environment.

But could we be looking at a much lower figure? When the $1.6 million transfer balance cap (TBC) was introduced, it was set at approximately twice the level of assets at which a single homeowner currently loses entitlement to the age pension, and almost three times the comfortable standard as determined by the Association of Superannuation Funds of Australia. Assuming the proposal does pass, who’s to say the cap won’t be lowered again, just like how the contribution caps have been tinkered with over the years?

And importantly, how would the new

superannuation balance cap work with our existing retirement savings framework? Will the contribution caps, total superannuation balance limits and TBC regime all need to be revisited to make way for this new cap and resulting limit on super tax concessions?

The main reason why the aforementioned mega funds exist, and these funds are extreme exceptions rather than the norm, is due to the superannuation policies that were around in the past, rather than anything to do with current policy settings. If we take a trip down memory lane, there was no tax on contributions and earnings back in the early 1980s, individuals were able to roll over any employment termination payments to superannuation prior to 1 July 2017 and we can’t forget the extremely generous transitional non-concessional contribution (NCC) cap where individuals could contribute up to $1 million of NCCs to their super fund between 10 May 2006 and 30 June 2007. These are just some of the many liberal rules that used to exist back in the day but no longer do.

While it may be difficult to argue that a multimillion-dollar superannuation fund in a concessionally taxed environment is not excessive, the basis for change on the grounds of equity is biased when compared to other areas of the taxation system that are just as inequitable and could also do with a holistic review. For example, the main residence exemption from capital gains tax (CGT) and the 50 per cent CGT discount, only available outside of superannuation, will cost the budget $29 billion and $33.5 billion respectively in 2022/23. Also, accelerated depreciation tax breaks for businesses with a turnover of up to $5 billion cost $9.3 billion over the same period. I’m not suggesting we change the entire tax landscape, but why is superannuation always in the firing line?

If change is afoot, it will be crucial for industry to work with the government to get this right. The superannuation system is already very complex. Let’s hope once the objective of super is legislated, we don’t see the government of the day continue to turn superannuation into a political football where it keeps moving the goalposts based on the short-term policy and fiscal objectives it wishes to achieve at that moment in time at the expense of investor confidence.

NATASHA PANAGIS is head of superannuation at Tax and Super Australia.

Large balances in the crosshairs

A concerted campaign has commenced for superannuation account balances to be limited to a specific amount or face additional taxation. To this end, an amount that gets mentioned often is $5 million, which could mean anyone with more than this arbitrary amount may need to pull money out of super.

These large balances exist for three main reasons. Firstly, there is the biggest cohort – those who took advantage of past policy settings; then we have two categories that are much smaller – successful investors and those who inherited superannuation account balances, often from their deceased spouse.

Between the mid-1980s and May 2006, it was possible to contribute unlimited amounts of aftertax contributions, which were called undeducted contributions. Nothing was done until the Better Super changes brought in by then Treasurer Peter Costello in May 2006.

Many people who took advantage of these policy settings would now be over 65, if not older. When they die, their account balances will need to be paid out of the super system.

By forcing people in the large account cohort to remove money from the super system or face higher taxation, we would be making a retrospective change.

In the past it was common for most adverse changes to the superannuation system to apply prospectively. Anyone who had put in place arrangements before a new set of rules applied was effectively protected, even though grandfathering old rules made the system messy and complicated.

In the past 30 years the only major change to the superannuation system made retrospectively was the introduction of the transfer balance cap, which originally limited a pension account balance to $1.6 million. Chartered Accountants Australia and New Zealand opposed this measure due to concerns it would make, and has made, the system unnecessarily complex and would impact, and has impacted, many super investors retrospectively.

Superannuation is a long-term investment and certainty, especially with government policy settings, is essential.

To some extent it is hard to see why someone might need many millions of dollars invested in superannuation. Maybe it has been put into super because of the potential tax concessions compared to other options. Perhaps super might also have been

used for asset protection or estate planning purposes. But other than maximise the permitted opportunities, what exactly have these people done wrong?

It is easy to shroud concerns about these large account-balance holders by making this an equity argument, especially when the federal government’s budgetary position is under financial stress. But that doesn’t make these attacks right.

Chartered accountants who work in the superannuation sector will know the ATO has a wide and deep arsenal to attack misbehaving SMSFs. It is reasonable to expect the ATO has looked, and regularly looks, closely at these large funds to ensure they are not doing anything inappropriate, with any misdemeanours very likely to face penalties.

Assistant Treasurer and Financial Services Minister Stephen Jones said in a recent speech that large balances should be assessed against a superannuation objective, which the ALP government will seek to legislate.

The former government’s idea, taken from the 2014 Financial System Inquiry, was that superannuation’s job was “to provide income in retirement to substitute or supplement the age pension”.

In our view this is too narrow and too focused on government. The purpose of super should focus on the individual and their family’s needs before the government’s financial situation and therefore should be “to create a national culture of saving and selfsufficiency in retirement”.

Regardless of which policy were to take effect, one that would see account balances greater than a certain amount be prohibited or face additional taxation would make the system much more complex. For example, how would this system work in conjunction with other elements such as the transfer balance cap and total superannuation balance? Would members with a large account balance that suffer a bad investment experience be permitted to contribute more to make up for those losses?

If we are going to attack large private sector superannuation scheme member balances, then, as a matter of equity, we also need to attack defined benefit pensions, including unfunded public sector super schemes. Most likely this could only be done by changing how such benefits are taxed when they are received by a retiree or their beneficiary.

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

The long road to gender equity

Over the decades, women have fought for and gained many rights, recognition and opportunities. However, there is still a long way to go in areas such as closing the gender pay gap and overturning unconscious bias. Let’s consider some of the statistics in Australia.

Each year the Workplace Gender Equality Agency (WGEA) publishes the annual key findings from the reporting data in the WGEA Gender Equality Scorecard. It reports that the current gender pay gap is 22.8 per cent.

The scorecard includes the latest figures on the gender pay gap, industry comparisons, women’s workforce participation, women’s representation in leadership and emerging trends in employer action.

Women are underrepresented in key decisionmaking roles across almost all industries in the Australian workforce. While women make up half of the employees in the 2020/21 WGEA data set (51 per cent), they comprise only:

• 19.4 per cent of chief executives,

• 32.5 per cent of key management positions,

• 33 per cent of board members, and

• 18 per cent of board chairs.

At current rates, it will take 25 years to close the gender pay gap.

WGEA’s data set is based on mandatory reporting by non-public sector employers with 100 or more employees who must submit their gender equality metrics to WGEA annually. The report found:

• over 85 per cent of Australian employers still pay men more than women on average,

• women were earning, on average, about 77 per cent of men’s earnings last year,

• three in five employers offer paid parental leave,

• primary carer’s leave is becoming increasingly available to both men and women, but only 12 per cent of those who took it last year were men,

• men are twice as likely to be highly paid than women,

• men are twice as likely as women to be in the top earnings quartile, earning $120,000 and above, while women are 50 per cent more likely than men to be in the bottom quartile, earning $60,000 and less,

• there has been a sharp rise in the availability of paid domestic violence leave during the pandemic, and

• over half (51 per cent) of employers offer paid domestic violence leave (compared to 12 per cent in 2015/16). In five years, the availability of paid domestic violence leave has increased fourfold. Women make up 42 per cent of all employees, but only make up one-quarter of executives and only

10 per cent of chief executives for large, for-profit companies. For women of colour and people of marginalised gender, these numbers are significantly smaller. Even in female-dominated industries, women are less likely to hold leadership roles.

Closing the gender pay gap

Research shows that increasing the representation of women in executive leadership roles is associated with declining organisational gender pay gaps, specifically: • having equal representation of women on governing boards leads to a 6.3 per cent reduction in the gender pay gap for full-time managers, and • organisations with balanced representation of women in executive leadership roles have pay gaps half the size of those with the least representation of women in leadership.

Based on the observations of leading practice made for the report, the following 10-step recipe for getting more women into leadership was designed by WGEA:

1. Build a strong case for change.

2. Role-model a commitment to diversity, including with business partners.

3. Redesign roles and work to enable flexible work and normalise uptake across levels and genders.

4. Actively sponsor rising women.

5. Set a clear diversity aspiration, backed up by accountability.

6. Support talent through life transitions.

7. Ensure the infrastructure is in place to support a more inclusive and flexible workplace.

8. Challenge traditional views of merit in recruitment and evaluation.

9. Invest in frontline leader capabilities to drive cultural change.

10. Develop rising women and ensure experience in key roles.

It is a perennial policy of governments to try and boost workforce participation by making it more attractive for women to return to work. Given the current chronic skills shortage, these policies received more attention in the October budget, which promised $4.7 billion in childcare support to be spent over four years from 2022/23. Government modelling indicates it will assist more than 1.2 million eligible families and add the equivalent of 37,000 extra full-time workers. Hopefully, we’ll be able to find those workers. Ensuring pay equity and recognising women leaders would also go a long way to achieving greater female participation in the workforce and reaping the benefits it brings.

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

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 www.agedcaresteps.com.au

LRBAs not putting super at risk

The Council of Financial Regulators issued its second report to government, titled “Leverage and Risk in the Superannuation System”, in September.

The report evaluates the risks relating to limited recourse borrowing arrangements (LRBA) in the superannuation system.

The 2022 report, in conjunction with the initial 2019 report, provides a baseline for monitoring risks related to LRBAs. The findings of both reports were that borrowing by SMSFs has not posed a material risk to the superannuation system despite the high risk it creates for some SMSF members.

The report recommends ongoing monitoring and reporting to government to ensure appropriate oversight.

Director IDs

Draft legislative instrument – ABRS 2022/D1

A draft legislative instrument issued by the ATO will provide exemptions to clients who do not hold any director roles at 30 November 2022.

Clients who resigned from all director roles, including any alternative director roles, in the period 4 April 2021 to 30 November 2022 will no longer be required to apply for a director identification number. These individuals will, however, require a director identification number before resuming any director roles.

The instrument is still in draft form, but will be applied retrospectively.

Bankruptcy impact

Macalister [2021] FCA 1455

In the Macalister case, the husband and wife were declared bankrupt due to proceedings arising from a breach of warranties following the sale of a business.

A bankrupt person is not eligible to be an individual trustee or director of a trustee company for an SMSF. But after a successful application under section 206G of the Corporations Act, the Macalisters were able to continue as directors of the single-purpose corporate trustee of their SMSF.

This may open up opportunities for other clients who become bankrupt through no sinister or illegal actions of their own. It would need to be considered and applied on a case-by-case basis

as it does not change the legislation disallowing a bankrupt person from being a trustee of an SMSF.

Trustee reporting requirements

Treasury Laws Amendment (2022 Measures No 1) Bill 2022

Administrative amendments have been passed to ensure SMSF trustees remain exempt from public reporting requirements.

Commutation of legacy pensions

Treasury Laws Amendment (2022 Measures No 1) Bill 2022

Legacy pensions that are partially commuted to comply with the transfer balance cap will not lose the asset test exemption for social security assets testing.

This applies to lifetime, life expectancy and market-linked income streams that met the rules to be classified as a complying income stream under the Social Security Act. This change has been passed as legislation and will commence retrospectively from 5 April 2022, when the regulations commenced.

Downsizer contribution age

Treasury Laws Amendment (2022 Measures No 2) Bill 2022

Legislation has been introduced into parliament to further reduce the downsizer contribution age to 55. If passed, it will apply from the first day of the quarter after royal assent is granted and apply to contributions made after that date.

Federal mini-budget

No major policy changes were announced in the October budget in relation to superannuation, but relevant implications include:

• confirmation the government will not proceed with changes to annual audit requirements that would have seen audits only required every three years for SMSFs that met certain criteria,

• relaxing of the residency requirements has been deferred until after any legislation is passed, and

• the penalty unit rate will be increased by $53 to $275 on 1 January 2023. The three yearly indexation cycle will still apply on 1 July 2023.

SMSF AWARDS – A 10TH ANNIVERSARY

Ongoing change and development is a significant characteristic of the SMSF sector with advisers and accountants relying on third parties to provide the investment products, documentation, administration and software services required to meet the needs of a large part of the Australian superannuation demographic. The selfmanagedsuper CoreData SMSF Service Provider Awards, the inaugural event recognising excellence in the sector, this year celebrated its 10th anniversary with its continued acknowledgement of the premier industry stakeholders. Jason Spits reviews those firms advisers considered to be the leading providers for 2022.

In a year featuring two federal budgets, but limited superannuation changes, SMSF service providers have been able to concentrate on building out their offerings in the context of rising inflation and interest rates, and a change of government.

While no news may be good news, it has also meant SMSF advisers were able to concentrate on their work with clients and central to that has been their choice of service providers. For a decade, selfmanagedsuper and CoreData have been tracking those choices and awarding the leaders in their annual SMSF Service Provider Awards.

Now in their tenth year, after being first presented in 2013, the awards detailed in the following pages highlight the leading providers in 16 categories, with some previous winners being recognised again alongside first-time winners.

AUSIEX won the Australian shares category for the second consecutive year, but its track record goes back four years to when the firm was previously part of CommSec before stepping out on its own in early 2021.

SMSF administrator Heffron also continues its long run of success, having been named as the leading administrator for five consecutive years, a feat also accomplished by Accurium in the actuarial certificate provider category.

Other repeat winners from 2021 include Macquarie (fixed income, cash and term deposits), La Trobe Financial (residential property loans), BGL (SMSF accounting software), Cleardocs (trust deed supplier) and ClearBridge Investments (infrastructure) – a winner in 2017 under its previous name of RARE Infrastructure.

First-time winners include Hub24 (investment platforms) and Unison SMSF Audit (audit functions).

These names represent the leading providers in 2022, but a host of names sit behind them over the past decade.

While Vanguard tasted victory this year in the international shares and the exchangetraded funds (ETF) categories, Macquarie and Magellan have also appeared frequently as global equities winners, while BetaShares and iShares have been named as past ETF manager winners.

Further Goodman, Charter Hall, AMP Capital and Cromwell have in the past been

recognised for their commercial property offerings, while TAL and Zurich have been winners in the insurance category in previous years.

All of this is evidence the SMSF sector is comprised of, and supported by, leading organisations in the financial services sector and has been for many years, a fact which SMSF practitioners have continued to recognise.

The awards are based on a survey conducted by CoreData of advisers and accountants with SMSF clients, and the responses were based on a voting sample, meaning frequency of use and satisfaction determined the winners.

Suzanne Hemsworth, head of client partnerships for real estate credit with longterm awards sponsor La Trobe Financial, says the firm was proud to support the awards.

“These awards recognise the best in the industry, including best in practice and best in class, with the judging undertaken by advisers, so they are very much democratic and representative of the market’s voice. This is simple, but a critical difference from a lot of other awards which are pretty much selfpromotion,” Hemsworth notes.

As co-hosts, selfmanagedsuper and CoreData congratulate this year’s winners, as well as those over the past decade.

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Consistent focus on the best experience

Accurium: Actuarial certificate provider winner

When it comes to a standout repeat performance, Accurium can claim to have found the sweet spot after being recognised as the winner in the actuarial certificate provider category of the selfmanagedsuper CoreData SMSF Service Provider Awards for the fifth consecutive time.

Accurium managing director Doug

McBirnie attributes this to the firm having a consistent focus on giving its clients the best possible experience when ordering an actuarial certificate.

“We have got the most intuitive and feature-rich software that makes the process of ordering quick and easy. We have a strong team of professionals supporting that process – qualified actuaries and accountants, real SMSF experts that provide technical support and our clients know if they have a question they can reach out to us and we’re going to do everything we can to help solve it,” McBirnie notes.

“Clients also benefit from our SMSF education offering with a package of accredited professional training.

“Together, those things keep us winning this award and clients keep using us for their actuarial certificates.”

He identifies the firm’s focus on the changes to exempt current pension income (ECPI) choice rules, as contributing significantly to providing the best possible experience for clients. “This necessitated some significant changes to our systems and to the processes around ordering actuarial certificates and we worked hard to give practitioners an intuitive user experience,” he recalls.

“We use charts and visuals to explain to clients the options that are available and are the only provider which gives practitioners the option to experiment with different scenarios, live in the system, to ensure their client gets the best tax outcome.

“The legislation for the changes came into effect this financial year and we released the amendments in June with an extensive education program. We ended up with more than 3700 attendees across the education series.”

While this move was externally driven, he says Accurium also focused on expanding its professional development offering in terms of the quality, quantity and breadth of content being provided. Alongside its content in the SMSF technical space, the firm has added materials related to business tax and practice management to help practitioners service their clients and meet continuing professional development requirements.

“We have a client base of over 4000 accounting firms and want to be do more to support them. We are well known in the actuarial certificate space and have been building our presence in the SMSF education space and it made sense to see what other services we could take to clients,” he reveals.

“We feel there is a lot we can do in the education and professional development space and an issue most practices are facing is resourcing and getting enough people with the expertise to do the work. We are exploring where we can help with that and how we can provide more technical support for our accounting clients, so expect to see something in the new year on that.”

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Familiarity with safety and efficiency

Macquarie: Cash and term deposit winner

Macquarie: Fixed income winner

As one of Australia’s oldest names in financial services and products, Macquarie has a long-standing connection with the SMSF sector and is regularly named as a leading service provider in the cash and term deposits, and fixed income categories.

Macquarie Banking and Financial Services Group head of payments and deposits Olivia McArdle acknowledges this relationship stretches back to 1980 when the Macquarie Cash Management Trust, now the Macquarie Cash Management Account (CMA), was first launched, but keeping the product up to date has been key in retaining the connection to the SMSF sector.

“Throughout this time, we’ve continued to develop our CMA to ensure it is purpose

built for advisers and their clients with awardwinning functionality to enable connectivity, control and transparency,” McArdle says.

“As a digitally led bank, our focus is on investing in the best technologies to deliver greater efficiencies for advisers and their clients.

“Connectivity is fundamental when it comes to a client’s cash hub as part of an SMSF, which is why we’ve developed the Macquarie CMA to integrate with more than 55 software programs, with data available in real-time, allowing advisers and their clients to make informed decisions and take up opportunities as they arise.

“Customers using Macquarie term deposits as part of their SMSF strategy are able to link their term deposit account directly to their Macquarie CMA, which gives greater visibility of investments, as well as increased flexibility and control over overall cash flow.

“By linking their term deposit to Macquarie’s other cash solutions, they are able to simplify a variety of SMSF processes, such as accounting and end-of-financial-year reporting, by utilising the Macquarie CMA’s data feeds and connectivity features.”

According to McArdle, this level of integration is part of a long history in the SMSF sector from which the banking group has been able to develop a strong understanding of the needs of advisers and their clients via feedback on what is most important to them.

“We know that visibility and transparency of portfolio data is instrumental in developing trust between advisers and their clients, so our CMA acts as a hub offering visibility of a client’s complete financial situation,” she notes.

“Functionality such as adviser-initiated payments, where a client can authorise on a transaction-by-transaction basis, gives clients control and visibility over the investment processes and decisions within their SMSF portfolio, while creating efficiencies for advisers, all in a secure way.”

Connectivity and transparency remain a core focus for Macquarie, which will leverage off the digital banking and investment enhancements made across the group to evolve its cash offering, she confirms.

“We’re also investing in security functionality for advisers and clients to give them peace of mind that their accounts and personal

information are secure. An example of this is Macquarie Authenticator, a verification app we developed which enables users to authorise or deny account activity, such as transactions or personal information changes, in real-time through push notifications,” she says.

This type of focus on security, in investment returns and information, was also a key issue for advisers who named Macquarie as the leader in the fixed income category.

Macquarie Asset Management chief investment officer and global head of fixed income Brett Lewthwaite says the firm takes the responsibility for generating income for SMSF clients seriously given rising inflation and interest rates. “The recent period has been one of the most challenging periods we have seen for fixed income managers for many years with a confluence of factors that led to higher interest rates and significant market volatility,” Lewthwaite observes.

“During this time we have been able to utilise our investment experience and follow our investment philosophy to help protect capital and minimise drawdowns for our clients. As we navigate through this challenging environment, the outlook for fixed income is increasingly attractive with much more value on offer.

“We recognise we are responsible for managing the defensive portion of our SMSF investors’ portfolios and, as such, our focus on delivering consistent income, preserving capital and minimising drawdowns is crucial.

“Going forward, we aim to continue to enhance our investment processes to deliver these outcomes and explore potential new investment solutions for our clients.”

including the digitisation of processes and documents within the Unison SMSF Audit business of which she is a partner.

However, it has been helping clients navigate those changes that has built her profile and resulted in Unison being named as the winner in the audit category of this year’s selfmanagedsuper CoreData SMSF Service Provider Awards.

“We won the award because we have good relationships with advisers and accountants and it is not just what you know, but how you make people feel. We make people feel we are there for them and will help them move forward with their audits,” Olivotto says.

“We have a history and a large knowledge base in the SMSF audits field which we carried across to Findex and into the Cloudoffis system.

“I worked for the ATO for 14 years and did auditing for them before I moved across to SMSF Audits in 2014, so I have been in this space for a long time. Our compliance support is good because it is pragmatic and consistent and basically we’ve seen everything.”

She also sees the shift from a database arrangement to cloud-sbased auditing in the past year as a key improvement in the firm’s service proposition to clients. That shift saw Unison, formerly known as SMSF Audits, adopt a new name when it was folded into Findex in September 2021.

“The move to cloud-based auditing, and the fact that Cloudoffis integrates with BGL and Class, meant coming on board with Findex resulted in everything becoming more streamlined. It has become far easier for clients to upload data and for us to get audits done or send queries to them quickly,” she reveals.

Having seen a raft of changes, Unison and Olivotto are also turning their collective experience into a series of education pieces for advisers and accountants and releasing them to practitioners and the public via its website.

“We are doing a topic every month. At present we have one on cryptocurrency and another on limited recourse borrowing arrangements and will be adding articles on property valuations, as well as collectables. This is part of ramping up our communication and telling clients what those issues are and what documents they should be keeping,” she explains.

“Property valuations will always be an issue as will related-party transactions because the arrangements with those around property are still not being done correctly.

“Looking ahead, Bitcoin and cryptocurrency will raise new issues especially with crypto crashing recently. There will be losses for younger investors with SMSFs who want to use their super money to invest in these high-risk assets.

“What we will be doing is letting them know what cryptocurrency is, what they need to be aware of and what kind of documentation to keep and we will continue to do that audit compliance work with each of the nasty topics SMSFs come across.” - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Data drives barriers down and engagement up

Hub24: Investment platform winner

While Hub24 is no stranger to the SMSF sector, its presence has been magnified by the acquisition of Class earlier this year, which came two years after the latter acquired SMSF documentation provider NowInfinity. That convergence of three businesses under the Hub24 banner has allowed the investment platform to engage with a market that is self-directed, which is an area of natural fit, according to Hub24 group strategy executive Greg Hansen.

“The nature of SMSFs and why people choose them is all about control and personalisation and in Hub24’s managed accounts that is also a consistent theme where people are able to manage portfolios, including tax outcomes, at a highly personalised level,” Hansen recognises.

“The ability to tailor to individual circumstances is one of the key drivers to our success in this market,” he adds, as it would appear to be also in the selfmanagedsuper CoreData SMSF Service Provider Awards in which Hub24 was named the leading provider

in the investment platform category.

He acknowledges the uplift the Class business has provided to Hub24 and sees their joint resources as providing a starting point for further developments inside and outside the SMSF market. “One of the reasons we acquired Class was because of its data capabilities and the combination of Hub24’s investing expertise and Class’ data infrastructure is very powerful,” he explains.

“We want to generate a single view of wealth for advisers and their clients, which is one of the things platforms promised to do from day one, but instead, with custodial and non-custodial assets, bank accounts, property and so on, that single view has become complicated.

“The natural home for an engaged investor is an SMSF because of the control and flexibility available and we want to support that sentiment so we are very bullish on the future of SMSFs. They will grow, particularly as the millennial generation comes through, which is why we pitched our new offer at that market.”

This new offer, SMSF Access, is currently in pilot phase with two licensees and seeks to capture the natural growth in the SMSF market, as well as the pending intergenerational wealth transfer of the next 20 years, by reducing the main barrier to entry – fund balances – to under $250,000.

“We are looking at ways to incubate the next generation of SMSF investors by giving them access to a packaged product where the experience is akin to a retail fund but is a simplified way to get into an SMSF structure sooner,” Hansen notes.

“We have packaged up SMSF establishment, administration and investment administration and between Class, NowInfinity and Hub24 we have constructed all of those pieces.

“It is a genuine SMSF but the investment menu is restricted to our investor-directed portfolio service menu and we package the tax and the audit into one price. When the time comes and the fund members want the full flexibility of their SMSF, we make the transition to a traditional provider of SMSFs.”

According to Hansen, SMSF Access, when it launches early next year, will be wholly

excellent service and are supporting them to service the sometimes complex needs of SMSF customers,” Tremethick says.

“As a life insurer we have a dream to make Australia the healthiest and best-protected nation in the world.

“In addition to our suite of life insurance products, we have a comprehensive health and well-being framework called AIA Embrace. This framework allows advisers to ensure their clients’ physical and mental wellbeing needs are met, irrespective of where they are in life’s journey.”

As part of this framework, the insurer also provides the AIA Vitality program, which helps advisers engage with clients to make healthy choices and who in turn can see the rewards and value they receive from their life insurance.

“Through our AIA Embrace framework, we provide personalised health and well-being offerings for our customers so we can help them stay well. We also provide a broad range of support services if they are experiencing injury or illness,” Tremethick says.

According to Tremethick, AIA Australia has also taken steps to improve the underlying insurance products it provides with improvements to its income protection (IP) and lump sum products.

“In late 2020, AIA Australia took an industry-leading approach to meet regulatory and Australian Prudential Regulation Authority requirements for income protection product sustainability,” he reveals.

“Our IP Core product was released six months ahead of industry timeframes and this allowed advisers time to develop an understanding about the product and learn how it could meet their clients’ needs.”

Since then, AIA Australia has continued to enhance the IP Core offering to include a flat 70 per cent income replacement option, updated income tiering and a five-year premium guarantee for the IP Core two and five-year benefit period.

“We have also reviewed and enhanced our lump sum products and as a result have made changes which include adding accommodation and counselling benefits, premium and cover pause for customers who have difficulty paying for premiums and expanding the Embrace framework to all customers,” Tremethick says.

Other key initiatives, he notes, include improved technology capabilities to allow advisers to place insurance cover with AIA Australia.

“By integrating all the major platform partners, we have made the process simpler, faster and more transparent and are pleased this will provide advisers with more flexibility when writing new business,” he says.

“When considering SMSF investment options, it’s important to keep life insurance front of mind as it allows our customers to protect themselves and their loved ones if something unexpected were to occur.”

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Creating a different

kind of dividend

Future Generation Investment Fund: Listed investment company winner

Listed investment companies (LIC), of which there are about 100 on the Australian Securities Exchange, tend to have a single underlying investment manager, but the Future Generation Investment Fund has ramped that number up considerably.

First listed in September 2014, the fund, which carries the stock code FGX, has 18 managers operating behind the scenes generating income for investors.

FGX investment committee member Martyn McCathie feels this makes the fund, which was named as leading service provider in the LIC category in the selfmanagedsuper CoreData SMSF Service Provider Awards, unique in a number of ways. “Advisers have taken notice of us because of the diversification we bring within a single investment vehicle and in FGX you have access to 18 boutique fund managers and 21 different investment strategies,” McCathie says.

“The fund’s structure is also economical because being listed there is no management fee, but we do charge 1 per cent for social investment. However, the board, investment committee, all the service providers work on a pro-bono basis.

“It is a very economical way to get a very

diversified portfolio which resonates well with SMSFs and if advisers were to replicate our portfolio, their clients would be paying more than the 1 per cent charged by FGX after including manager performance fees.”

He says as income-generating vehicles, LICs performed well during the COVID-19 pandemic markets and the latest rounds of volatility, providing dividend yields and franking credits to investors and SMSFs.

“What FGX has been able to do in the last round of dividends was increase its dividend again and we now have a pattern of continuously increasing the stream of fully franked dividends,” he explains.

“The last dividend was an 8.3 per cent increase on the prior period and we are now providing shareholders with a 5.6 per cent fully franked dividend yield.”

While this may be attractive to SMSFs, particularly those in retirement phase, FGX, as an LIC, is also able to build in a profit reserve mechanism.

“That reserve allows us to facilitate the payment of dividends and our current reserve means we can pay the next four years’ worth of dividends without making a profit,” he reveals.

While that may be important for the LIC’s shareholders, it’s also crucial for those who benefit from the 1 per cent social investment fee – Australian not-for-profit organisations focused on children and youth at risk.

“FGX was the brainchild of [Wilson Asset Management chief investment officer] Jeff Wilson who was in the UK and saw a listed trust for a cancer foundation where the managers acted on a pro-bono basis, allowing the trust to donate some of its assets in lieu of management and performance fees,” McCathie acknowledges.

“Jeff thought he could recreate that model back in Australia and that’s what we did back in 2014 with the dual objective of providing shareholders with investment from managers we’ve selected and a social investment from the company’s ability to donate 1 per cent of its assets and legal fees to not-for-profit organisations we’ve picked.

“It is a unique model, but you have to sacrifice investment returns to have a social impact and we are focused on those

AWARDS

investment returns that allow us to do social good.”

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Steady hands a source of trust

LaTrobe Financial: Residential property loan winner

In a year when many SMSF service providers have strived to demonstrate their value, La Trobe Financial senior vice president and chief lending officer Cory Bannister says the non-bank lender has not done too much in terms of its loan products, apart from keeping things steady.

“In terms of credit, we have done very little, which ordinarily is something that people would raise an eyebrow at as something strange, but over the last 12 months we are told that’s a good thing,” Bannister explains.

“What advisers, brokers and borrowers have liked was there was very little variance in our product settings, process and price over that period of time.”

According to Bannister, this consistency of delivery is something the SMSF market respects and that is reflected in the fact La Trobe Financial has won the residential property loan category of the selfmanagedsuper CoreData SMSF Service Awards for two consecutive years.

“What we have seen in the SMSF space is that a number of lenders have pulled out due to the complexity of these loans and their shift towards a simplified, automated structure, whereas SMSF lending does require manual assessment and intervention,” he notes.

“We are left with an environment with a few lenders currently offering SMSF loans. We are one of the longest operators in the space with products available since 2012 and our consistency over that time has built trust in the market and shows we are committed to the space.”

He says La Trobe Financial has been able to maintain this consistency and presence because it has 70 years’ experience in lending

against property and also operates on both sides of the loan book by raising its own funding, which has become a key differentiator for it against other bank and non-bank lenders.

“Apart from the bank warehouses and capital markets, which the other non-banks have access to, we operate our own credit fund, which now has $500 million of assets under management, including investments made by SMSFs, so we understand the space on both sides of the balance sheet,” he indicates.

“Additionally, SMSF loans, as a cohort, perform incredibly well and credit performance of these loans is exceptional. In fact, they generally outperform most other standard residential loan products.

“Clients in this space are also advised so we know there is a lot of work that goes into recommending these structures for clients and often they are sophisticated investors who love and understand property.”

He adds the SMSF lending sector is likely to remain strong, driven by the current economic circumstances, which are well suited to investors in the sector.

“With house prices softening that translates to value coming back in the market combined with prices coming off, but rents are increasing due to a lack of supply,” he suggests.

“SMSF investors are paying less for property that is likely to earn more rent while being immune from inflationary pressures that face personal investors.

“These factors have been driving the increased level of demand from SMSFs and probably for the next 12 to 18 months it’s going to be pretty fertile ground for investors generally.”

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artwork, holding on to old trust deed documents is not something they should do and Cleardocs believes it is well placed to help create and update the key documents that underpin a fund.

For a second year in a row, SMSF advisers have named the firm as the leading company in the trust deed supplier category in the selfmanagedsuper CoreData SMSF Service Provider Awards and Cleardocs proposition manager Richard Puffe attributes this to the expertise behind every document on offer.

“Cleardocs is actually unique in this space as it is part of the Thomson Reuters business and what it does exceptionally well is provide knowledge content to accountants and to the legal profession,” Puffe says.

“Our editors and writers are constantly looking at common law cases and what legislation has been introduced to see what may come up, but we also work with Maddocks Legal who are on the lookout for what changes are going to be applicable.”

According to Puffe, the relationship with Maddocks goes beyond the legal firm providing input into the content of SMSF documents and it is instrumental in the creation of documents available from Cleardocs.

“Maddocks have been a long-standing partner and they provide peace of mind for our clients. They have created nearly all the documents in the Cleardocs suite and maintain them throughout the year,” he reveals.

“That is a big deal for our clients who know their documents are going to be correct today and if there is a change, they are going to be updated and correct for tomorrow.”

This year has already seen some superannuation changes, and he anticipates the change of government will mean more. To this end, Cleardocs will soon be releasing updated documentation that factors in the High Court decision in the case of Hill v Zuda, which addressed the operation of binding death benefit nominations.

Puffe hopes the case, and the resulting changes to trust deed documents, will spur a wave of document renewals.

“That case has received a lot of attention within the industry and I hope more SMSF advisers update their deeds as a result,” he says.

“We can see in our records a good percentage of clients have not updated their

deeds for several years. With the next update advisers can take action to protect themselves because there is a high potential for litigation if something goes wrong down the track.”

Getting these documents into the hands of SMSF advisers and clients has also been a central part of Cleardocs’ work in 2022, during which time it improved its integrations with third parties after looking into new software vendors used by SMSF practitioners, he says.

“We updated our integration to BGL CAS 360 and we are working on our integration with BGL’s Simple Fund 360 and hope to release that early next year,” he says.

“We are looking at other vendors as well and feedback from clients is they love the ease of use and efficiencies they are getting but want us to integrate into more providers, which is something we will be doing in 2023.

“We don’t mind who we work with and will be guided by what our clients want. Some of the larger SMSF providers have requested integration so we will be looking at doing that.”

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At the forefront of support

service provider by advisers in these awards for five consecutive years and she says the ongoing recognition in 2022 comes from a combination of services provided by informed experts aimed at building the SMSF sector. “The way we describe our services is that we teach, support and do. Our administration service is an example of us ‘doing’ the work, but the fact that we also teach and support is critical,” she says.

“It means we have to be at the forefront of SMSF rules and strategies because we are a leader in teaching other professionals. It makes our administration service far stronger – our team have to understand the things we’re teaching and advisers using Heffron have access to a wealth of education to support their own SMSF advice.”

As part of these moves, Heffron has expanded its Education Bites service, which provides online micro courses on specific superannuation and SMSF issues, and will soon release its new Super Foundations course, while also evolving its online encyclopaedia of superannuation, the Heffron Super Companion.

Working closely with SMSF advisers and accountants, the organisation is well aware of the time pressures they face and Heffron says the firm will continue to build out the services and information it provides to them and to other financial advice professionals.

“One of the influences Heffron hopes to have on the industry is to support firms much smaller than us to continue to do as much or as little as they want to when it comes to providing SMSF services,” she explains.

“The outcome we’re hoping for is that the ongoing change in technology actually makes it easier for smaller firms to compete, not harder, and I want Heffron to be one of the firms that helps them do that.”

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Downside protection outside market cycles

ClearBridge: Infrastructure winner

While they live and interact with it every day, many investors may be unaware the key infrastructure they rely on is an investable asset that is also much more tangible than the equities many favour.

However, ClearBridge Investments head of Australian intermediary sales Nathan Ahboo says infrastructure is fast becoming known as an asset class in its own right due to the stability of its cash flows as well as its returns.

Advisers choosing a service provider want to be sure they have made the right choice and when choosing Heffron as an SMSF administrator they know they can feel safe and confident when it comes to their clients’ funds, according to the firm’s managing director, Meg Heffron.

“SMSFs can be very simple with the right specialist expertise on tap and advisers know we have that expertise,” Heffron notes, adding there is a strong focus on completing compliance work in a timely fashion, but also having capable people who care about client service.

“It’s a very personal service supported by great technology, rather than a technologydriven service where it’s hard to find the people.”

Heffron has been recognised as a leading

“We are expanding the technical content we produce to include short ‘Reader’s Digest’ versions of some of our technical work that is also supported by a longer version for those who need details,” she reveals.

“We see our Super Foundations course as a great way for new accountants and advisers to get up to speed with superannuation generally and SMSFs in particular. We aim to expand that to include versions that are suitable for trustees, office staff and one that is more specific to advisers.

“We use a host of tools to implement the things we teach about and want to make those available to other accountants or even advisers who engage other accountants to do the administration for some of their funds.”

Looking ahead, she sees technology as a key area of change for SMSFs, but the firm, with close to 5000 funds, has the scale to play its part in navigating that change.

“A current theme that is playing out is market volatility and if we go into a global recession, income will be highly sought after. One of the key characteristics of infrastructure is its ability to produce stable, reliable income over a period of time as the underlying assets are not exposed to the business cycle,” Ahboo explains.

As a specialist investment firm in this field, ClearBridge invests in regulated utilities, such as electricity, gas, water and renewable energy, as well as transportation assets such as airports, roads, rail and ports, and is attracting the attention of advisers.

Previously known as RARE Infrastructure, ClearBridge was named as the leading service provider in the infrastructure category at this year’s selfmanagedsuper CoreData SMSF Service Provider Awards, which Ahboo

Heffron: Administration winner

attributes to the quality of investment offerings available to SMSF investors.

“For the award, we have to give much credit to our investment team who have ensured our strong relative and peer performance in the asset class,” he says.

“Also popular with advisers is our expanded suite of solutions for SMSFs and our value and income strategy have a hedged and unhedged option available.

“We have also built out a developed market infrastructure income model, which is like a separately managed account where the client is the owner of the end company in the portfolio.”

According to Ahboo, these three products also offer strong downside beta capture, which has been equally popular with advisers and their clients and fits in well with the diversification infrastructure provides.

“The average SMSF adviser or client are heavily skewed towards Australian equities, which is where global infrastructure exposure can come in as a real diversifier away from both Australian and international equities,” he says.

“We have a global focus so when an Australian company gets into the portfolio it does so on its own merits.”

He adds global exposure has also reinforced the need to consider environmental, social and governance (ESG) factors and the move to decarbonisation, which has become an important issue when investing in infrastructure assets.

“Responsible investing has become a big part of the investment philosophy of many SMSF investors and there is no asset class more at the forefront of decarbonisation than infrastructure,” he confirms.

“Over the years infrastructure may have been considered a dirty asset class, but now every company in the infrastructure universe is investing capital to become cleaner, greener and more efficient.

“Our view is ESG eventually won’t exist as it will be an integral part of the way investors and advisers analyse companies in the future and companies with good ESG practices in place are more likely to provide better long-term performance for SMSFs.”

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Insight teamed with innovation

AUSIEX: Australian shares winner

An examination of the annual data for the sector released by the ATO shows Australian equities are the single largest asset class into which SMSFs invest and AUSIEX head of product, trading, marketing and customer experience Brett Grant says being recognised as the leading provider in this category goes back to a strong history of supporting SMSF investors.

AUSIEX’s skill in this area has been recognised previously and this year’s win is the fourth in a row, which Grant attributes to advisers recognising what the equities trader does for them and for their SMSF clients.

“We believe advisers named AUSIEX as the leader in this category because of the ongoing innovation and evolution of our platform to adviser specifications and our depth of understanding of the advised market, as well as our track record and ability to connect efficiently to markets,” Grant notes.

He adds AUSIEX provides a holder identification number-based method of managing a customer’s SMSF portfolio, which is backed by the resources of Nomura Research Institute and “advisers know that the platform will continue to be optimised and built on world-class technology”.

As part of its support to SMSF advisers and their clients, he says AUSIEX has considered the call for more information related to environmental, social and governance (ESG) issues and incorporated those into its investment tools.

“AUSIEX has a strong history of supporting SMSF advisers with feature-rich platforms to efficiently manage portfolios. We continually keep pace with developments in the marketplace and portfolio construction with new tools and features,” he explains.

“Most recently, we have released an ESG

Risk Ratings tool to allow SMSF advisers and self-directed investors to gain visibility into potential ESG risk attached to specific securities.”

He shares the fact AUSIEX continues to produce market insights for advisers, including an SMSFs Under Advice research paper, which analyses trends in advised and self-directed SMSFs.

“There has been a pivot back to SMSF advisers from a spike in self-directed SMSFs during the pandemic,” he says.

“We believe this reflects investors are seeing the adviser proposition more favourably given cost and time of compliance and SMSF administration, plus the need for professional investment advice given general volatility and more bearish conditions.

“In addition, the growth in SMSF trading and account numbers for younger generations, that is generation Z, Y and millennials, will grow as investors seek greater control over their super balances.”

Looking ahead, he expects that while allocations to exchange-traded funds will grow, the strong preference for direct equities within SMSFs will create more demand for the services of trading platforms such as AUSIEX.

“We are aiming to continue investing in our platforms to make administering SMSFs even more efficient for advisers and delivering the toolsets needed to maximise returns and remain compliant,” he says.

“We’re continuing to build out our library of educational content and training and support such as webinars and guides and on ensuring we deliver the best possible onboarding experience to advisers and their clients.” -

Where the current opportunities lie

The Australian economy is experiencing a downturn that may see it experience recession in the coming 12 months. Paul Taylor points out opportunities for investors exist even in troubled times and identifies the companies toward which investors should turn their attention.

Since May, the Reserve Bank of Australia (RBA) has increased interest rates seven times, taking them from 0.1 per cent to 2.85 per cent. The United States Federal Reserve (Fed) has been more aggressive, with US official interest rates now sitting between 3 per cent and 3.25 per cent.

These initial interest rate moves have not yet had any significant impacts for either economy, with low unemployment and consumer confidence still riding high. But monetary policy is notoriously slow and it could be 12 months before the full effect is achieved.

The Fed seems determined not to repeat the policy mistakes of the 1970s and 1980s when it was criticised for being slow to act in the belief inflation was transitory. It now seems to be erring on the side of overaction.

The RBA, after receiving criticism for predictions it would not be increasing rates until 2024, does not want to be getting its monetary policy decisions wrong either.

With interest rates expected to keep rising, the likelihood the US and Europe will enter a recession in early 2023 is increasing, but it’s less certain if Australia will follow suit.

Australia is fortunate in that high energy costs, along with better conditions for commodities, should cushion the blow to the Australian economy, but future rate rises could do some damage. An official interest rate of 4 per cent has the potential to push mortgage rates to above 6 per cent, putting considerable pressure on a highly leveraged Australian consumer.

One of the best pieces of news out of the October

PAUL TAYLOR is head of investments at Fidelity International.

federal budget was the forecast for growth to slow to 1.5 per cent in 2023/24 from a forecast of 3.25 per cent for this financial year.

That’s a big fall, however the government is not yet forecasting a detraction in growth and if Australia is able to avoid negative growth and a recession, that would be the best possible outcome.

But there is no denying times are about to get quite a bit tougher. While we can all tighten our belts personally and potentially cut back on our discretionary spending, there are also actions we are taking, and have already taken, when it comes to our investment portfolio to best position it for potential opportunities.

Essentials

It is currently a very noisy market and speculation of a global recession has intensified. This may not happen in Australia for the reasons outlined above, but even if it does, there will still be sectors and companies in those sectors that outperform.

We saw this in the initial panic of COVID-19 when essential businesses such as supermarkets did extremely well. They had to pivot and employ more delivery drivers and obviously had issues with supply (we all remember the toilet paper rush of 2020), but overall sales increased.

This is a good example of history demonstrating businesses that provide essential goods and services perform well through inflationary periods, recessions and other crises. By their nature they are essential and people continue to buy and consume these products and services regardless of market, economic or environmental conditions.

These types of businesses are also in a much better position to pass on higher input costs to consumers because they are indispensable. Inflation actually helps them grow.

Examples of essential businesses include supermarkets, consumer staples, healthcare, telecommunications and utilities. In this category, the Fidelity Australian Equities Fund has overweight positions in Coles, Ramsay Healthcare and Telstra.

Ramsay Healthcare in particular looks interesting. Private hospitals were negatively impacted by the coronavirus as elective surgeries were postponed and delayed and private hospitals focused on helping the public system through the pandemic. Elective surgeries can be delayed, but eventually need to happen so we should see strong pent-up demand for private hospitals. Ramsay is probably one of the highest-quality private hospital operators in Australia and with earnings currently depressed we think it is a great opportunity to invest in a quality asset with good long-term structural growth opportunities.

Cheap sectors

Economic and market uncertainty will invariably make some sectors, and companies in those sectors, cheaper. Essentially these are still good companies,

they are just being undervalued by the market at this point in time.

Sectors with attractive valuations currently include energy, materials and insurance. The commodity sectors have very strong balance sheets and cash flows. In fact, it’s the performance of our commodity sectors that have managed to keep the Australian economy afloat and may prevent us heading into a recession.

These sectors are negatively impacted by recessions, but they also have the prospect of an improving China. The Chinese economy has been adversely impacted by its zeroCOVID government policy. But we believe this could turn in 2023 and unlike most of the rest of the world, China is now easing monetary policy.

It is playing catch-up when it comes to using fiscal stimulus to boost the economy post COVID, and the worse the fallout from its zero-COVID policy, the bigger this stimulus may be. These better prospects from China, combined with cheap valuations, start to move the odds in favour of the commodities sector.

In addition, we believe the process of decarbonisation is at an extremely metalintensive phase of development, as much of the infrastructure involved in the electrification of energy requires rare earth metals.

Solar panels, wind turbines, batteries and electric vehicles all require significant amounts of not just lithium, nickel, cobalt and copper, but other metals such as steel and aluminium. Decarbonisation will be impossible without the growth in production of most of these commodities.

So those companies with exposure to transition metals and energy sources such as nickel, natural gas, copper and lithium will be best positioned within the commodity sectors.

Clean energy-focused miner IGO is a good example of a mining organisation outperforming because of this exposure.

Economic and market uncertainty will invariably make some sectors, and companies in those sectors, cheaper. Essentially these are still good companies, they are just being undervalued by the market at this point in time.

Continued from previous page We also believe 2023

It recently reported positive results as it benefited from increasing lithium prices and its results were led by a double-digit increase in revenue compared to the previous quarter.

IGO’s lithium joint venture with Tianqi Lithium Corporation, which it incorporated in 2021, is really paying off for the company. This joint venture contributed $177 million of net profit and $71 million of dividends to IGO in the first year of its ownership.

“We remain committed to further growth to continue to deliver a globally relevant diversified portfolio of clean energy metal products and to do this with a combination of exploration and disciplined mergers and acquisitions,” IGO chief executive Peter Bradford said when delivering the company’s financial results in August.

Speculation regarding Mineral Resources’ listing of its lithium business also buoyed investor sentiment in this sector.

The insurance sector is similarly extremely cheap and with premiums on the rise, we believe the general insurance sector is well positioned for growth. The Fidelity Australian Equities Fund has significant overweight positions in IGO, Santos and Suncorp.

Self-help

The third bucket of sectors and companies we think can outperform in a recession or rocky economic environment is what we like to call ‘self-help’. Perhaps a better explanation might be ‘help-self’ – companies that have made concerted efforts to change or improve their businesses to better adapt to existing conditions.

Suncorp, while an insurance company and cheap, is a good example of a stock that also falls within the self-help bucket. Suncorp has been simplifying its business and with the sale of the bank will become a very focused general insurance business.

When announcing the sale to Australia and New Zealand Banking Group in July, Suncorp said it positioned both the

insurance and banking businesses for ongoing growth and success.

“Both businesses will benefit from a singular focus on their growth strategies and investment requirements,” Suncorp chair Christine McLoughlin said.

The market response at the time may have been mixed, but we believe this greater business focus should bring considerably improved valuation metrics for Suncorp.

The banking sector should also benefit in the shorter term from higher interest rates and a steepening yield curve, however, this will only be up to a point. Of course, higher interest rates will likely bring higher loan loss provisions and a decrease in borrowing.

While we are underweight banks in general, we have a significant overweight position in Commonwealth Bank of Australia (CBA) due to its strong balance sheet and superior technology platform. CBA also benefits the most from rising interest rates, steepening yield curve and improved net interest margins given its very significant deposit base.

Structural growth at cheaper valuations

We also believe 2023 may be the time to get on the front foot with Australian equities and some long-term good structural growth companies. The past year has seen many of these growth companies devalued due to rising interest rates. With now much cheaper valuations but still structural growth opportunities, 2023 may represent a good opportunity to get set in these quality businesses. In this bucket we would include companies like Seek, Domino’s, Siteminder, Domain and Macquarie.

Shutting out the noise

It is obvious we are entering a new phase in the economic environment. I don’t have a crystal ball, but as hopeful as I am we don’t enter a recession, it cannot be ruled out and we are preparing the portfolio for that possible eventuality.

To that end, I’m adopting a barbell strategy with the portfolio. This is where higher-risk assets at one end and low-risk assets or sectors at the other end balance out risk. In our portfolio we have commodities (higher risk) at one end and at the other end are companies selling the essentials and that have pricing power (lower risk).

The companies in the self-help category above are at various points in the middle of the barbell.

Our combined decades of investment experience at Fidelity helps us shut out the noise of markets, which can be hard to ignore in periods of volatility. This involves focusing on the long term, looking at facts and not being swept up by emotions (hard to do when markets fall repeatedly), and knowing what is important versus unimportant.

Personally, I find talking to companies and getting a 360-degree view of their operating environment much better for portfolio construction than being stuck at a desk watching the market go up and down.

may be the time to get on the front foot with Australian equities and some long-term good structural growth companies. The past year has seen many of these growth companies devalued due to rising interest rates.

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Expanding the property horizon

Allocations to property can be very beneficial even during periods of high inflation and rising interest rates. Justin Blaess puts forward the case for SMSF members to look to global real estate to truly take advantage of this return characteristic associated with this asset class.

In recent months, something has happened many believed almost impossible – house prices in Australia, most notably in the hot property markets of Sydney and Melbourne have, on average, come down.

It’s been a very long time since we’ve seen this in Australia. Many homeowners will never have experienced or anticipated the value of their home going backwards.

While this downturn is still a long way off any kind of crash, such as that experienced in the United States during the global financial crisis (GFC), it’s a timely reminder residential property as an asset isn’t always guaranteed to deliver.

It’s also a reminder it can be worthwhile considering other types of property investment as part of a diversified portfolio. And while SMSF investors can access specific benefits by investing directly in property through their fund, investing via equity markets is worth considering.

Real estate is possibly the oldest form of investment around. Over decades, and indeed centuries, owning land has proven to be a spectacular way to build and preserve wealth.

One of the big advantages of real estate as an investment is that it’s based on real assets and as long as any leverage used is managed, real assets rarely lose all of their value. Even under a worstcase scenario, the rate of obsolescence for quality property is low.

As a result, real estate, encompassing a range of property sub-sectors, such as office, industrial, retail and technology, has been one of the better performers across asset classes and across time.

This may surprise some investors, especially in the current environment of rising interest rates when conventional wisdom says real estate should

struggle.

Looking back to the years leading up to the GFC and the US housing crash, there are a number of striking similarities that may concern investors today, particularly regarding inflation and interest rates. For example, US house prices before the GFC were on a sustained upward trajectory, annualised US inflation had risen from a low of around 1 per cent in June 2002 to over 4 per cent by September 2005 and the US Federal Reserve, in response to this high inflation, was increasing rates. But by 2008, mortgage delinquencies had spiked and US house prices had crashed.

Today, we’re in a situation that seems to be mirroring many of these trends. House price growth post-pandemic has been historic in both magnitude and speed. Inflation is high and appears stubborn. Central banks are expected to continue lifting interest rates aggressively.

Reassuringly, however, these superficial similarities mask some significant differences, not least the change in the regulatory environment in the US. This has resulted in the disappearance of NINJA (no income, no job or assets) loans and other highrisk mortgage loans, a better-informed borrower and less risky lending for housing.

It’s also a mistake to think a higher interest rate environment is automatically a bad one for real estate.

Indeed, we believe inflation and high interest rates provide an environment for real estate to show its worth. From a valuation perspective, current high levels of inflation and high interest rates can be a positive for medium to long-term real estate investors.

This is because long-run pricing of real estate is anchored around replacement cost. Market

JUSTIN BLAESS is principal and portfolio manager at Quay Global Investors.

sentiment moves asset prices above or below replacement cost over an economic cycle, but eventually prices gravitate back to replacement cost. When prices are

below replacement cost, developing new property tends to become loss-making. Real estate supply will be constrained, with no incentive to develop new assets.

As time goes on, the constraint to supply in the face of growing demand will eventually drive up rents and ultimately values. At some point the development becomes profitable again where prices are above replacement cost.

This cycle is illustrated in Chart A.

It’s a relatively predictable cycle, but the one unknown is time, that is, how long until there is enough demand-supply imbalance to justify new construction or how long until supply will overwhelm demand.

In the current cycle, many sectors were and remain priced above replacement cost. Supply has been responding, whether it be industrial construction, residential or niche asset classes such as data centres. Rising construction costs as well as rate hikes from central banks will and are expected to have an impact. In the face of rising costs and potentially falling values, developers and builders will be discouraged from supplying markets that are arguably already undersupplied.

These factors should contribute to improved pricing power for existing owners of real estate in the medium to long term.

Another factor supporting the health of real estate is the fact good-quality, well-located land is a finite resource, thus minimising the risk of obsolescence. At the same time, building costs and hence replacement cost usually increase in line with inflation, meaning rental yields need to rise to recover such costs to justify supply. In this way, real estate, and by default listed real estate, can act as an inflation hedge for investors, as shown in Chart B.

This is borne out by history. Looking back at returns from listed real estate over the past 50 years, it’s clear that relative to general equities, listed real estate is an excellent hedge for inflation and has historically delivered strong positive returns (both nominal and real) in higher inflationary

It also offers a better relative return when compared to general equities as seen in Chart C.

Between 2000 and 2021, global real estate outperformed Australian equities, international equities, infrastructure, bonds and even gold. Even though during that period the world experienced the GFC and the COVID pandemic, which were

bad for real estate, this asset class still outperformed.

Notably, during periods of moderate inflation, in the 3 per cent to 6 per cent range, listed real estate has historically generated more than double the real return relative to equities. And at times of very high inflation, over 6 per cent, listed real estate continues to outperform equities, albeit at a lower relative level than in a moderate inflation scenario.

One of the benefits of real estate is that it includes a range of sub-sectors, which means it’s a massively diverse asset class. Data storage facilities, self-storage facilities, life sciences and manufactured housing all fall under this asset class, none of which correlate with traditional residential real estate.

But in order to access and benefit from some of the most important and powerful demographic and economic themes in today’s world, investors must look beyond the Australian property market to the global environment.

While Australian listed real estate is significant in size, it provides very limited access to the sectors expected to benefit from some of the strongest real estate themes. For example, listed real estate entities investing in the health, aged-care, student housing and apartment (rental) sectors are limited or non-existent in Australia.

Finally, investors shouldn’t fear inflation. In fact, when investing in real estate, inflation can be your friend. Higher inflation will protect your investment from supply issues (and therefore competition for tenants) and will drive up the replacement cost and residual value of improvements. But it’s worthwhile looking beyond the local residential property market to unlock the true potential of real estate investments.

Sources: Quay, Robert Shiller, NAREIT, US Bureau of Labour Statistics. http://www.econ.yale.edu/~shiller/data. https://www.reit.com/data-research/reit-indexes/monthly-index-values-return.

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To document or not to document

The importance of SMSF documentation has been emphasised in the past couple of years. Philip La Greca outlines how trustees can determine the items that require an official record.

“If a tree falls in a forest and nobody hears it, did it really fall?” or in an SMSF context, “If a trustee makes a decision and doesn’t write it down, did it really happen?”

One of the things we get asked about quite consistently is when a trustee should document a decision. This usually arises when a trustee wants to do something and is not sure if or how they need to record their actions. As usual, with most things SMSF, the answer to this question is that it depends.

We have recently had two Administrative Appeals

Tribunal cases that focused on trustee documentation and record-keeping. Prescott v Commissioner of Taxation focused on whether payments were lump sums or pensions and what records of instructions existed to determine the appropriate treatment.

Goulopoulos and Commissioner of Taxation covered trustee proof of advice on Superannuation Industry (Supervision) (SIS) Act compliance matters relating to a withdrawal from the SMSF meeting either the preservation or investment standards.

PHILIP LA GRECA is SMSF technical and strategic services executive manager at SuperConcepts.

In both cases, the trustees did not have adequate documentation of their actions. This makes it a good time to discuss what processes are involved for the trustees of an SMSF in terms of recording decisions and actions.

There are two issues here, firstly, how do I document a decision and secondly, what decisions do I need to document? Let’s take a look at both matters.

When determining how a decision is documented, we initially need to look at what type of trustee structure exists as this will tell us what documents will govern the rules of decision-making.

If there is a corporate trustee, then the starting point will be the company’s constitution. This document will outline a range of steps necessary to make and document any decision. This may occur either at a meeting of the directors or by the passing of a circular resolution.

If the fund has individual trustees, then the guiding document will be the SMSF trust deed. Again, this document will provide instruction on whether decisions are dealt with at a meeting of trustees only or can be affirmed by passing a trustee circular resolution.

There are some key differences between these two potential methods and we will look at these factors for these different methods.

Let us start with meetings of trustees and meetings of trustee directors. The proof of these meetings is, of course, the minutes of the meeting, so what does a minute of a meeting mean? The minute of a meeting acts as a record of an event that occurred and document of the relevant issues of that event. This includes facts and items such as who was at the meeting, when it occurred, what was decided at that meeting and finally a formal sign-off by the chair of the meeting declaring the information in the document is true and correct.

So how do we hold a meeting? These are the procedures outlined in either the trustee company’s constitution or the SMSF

trust deed. For example:

• some meetings, such as annual general meetings, require advance notice periods before they are held, but that doesn’t mean meetings cannot be called without notice,

• you need to determine who attended the meeting versus who was eligible to attend,

• were there sufficient people at the meeting to allow a decision to be made, that is, were there enough people to form a required quorum. If there are insufficient people at the meeting to form a quorum, then the meeting cannot make any decisions, and

• the final element is what items were raised, discussed and decisions made. All of this will be documented within the minutes.

The alternative is the use of a resolution, sometimes referred to as a circular resolution. The key difference with this is there is no requirement for a gathering of the relevant parties to occur. Instead,

a document defining the recommended decision/s, or resolution, is to be circulated to all the trustees or trustee directors for approval. Some significant details to take into account are:

• each party does not need to sign the one document, but can sign separate versions of the same document, meaning they do not need to be all together at the same time,

• the effective date of the resolution is the latest date that one of the required parties signed the resolution, and

• all the signed resolutions from all the relevant parties are required to be kept.

So, the most significant difference is minutes require a meeting to occur, and at least a certain number of people must attend, whereas circular resolutions do not require a gathering but generally need all parties to agree and confirm the decision.

This brings us to the second part of the question: when do trustees need to document decisions by either method? The answer to this really hinges on the quality of other documents and procedures the trustee uses to operate the SMSF.

If we can tally up the major activities and the extent to which they need to be documented, we would be looking at the acceptance of contributions, payment of benefits and investment decisions. So, what are the documentation considerations for each of these types of actions?

For contributions there are two areas to consider – one is the receipt rules, particularly in respect of the work test, and the other is the classification of contribution types, for example, concessional versus non-concessional.

From a work test point of view, the main issue is verification the person met the work test before the trustees accepted the amount. Thankfully since 1 July 2022, this responsibility generally no longer rest with the trustees.

When determining how a decision is documented, we initially need to look at what type of trustee structure exists as this will tell us what documents will govern the rules of decision-making.

The classification of contributions question can generally be traced to information sources that come with the payment. If the contribution is made via SuperStream, then data is provided that will mean the trustees have a source of classification. If the contributions are personal contributions, the trustees can generally rely on the use of an ATO notice of intent to claim a tax deduction form to determine whether a personal contribution is a concessional contribution or not.

This means the principal action where additional information may be sought by the trustees will be spouse contributions. This is because there is no standard mechanism for informing the trustee the contribution is one of this type.

Other non-concessional contributions, such as downsizer and those involving small business capital gains tax and personal injury amounts, have specific ATO forms that are required to accompany them. This means the trustee does not need to request any additional information about these contributions.

Contribution reserving is another area that needs to be taken into account. Because this strategy requires the trustee to make a decision not to allocate a contribution on the date it is received, and as such is generally different from the treatment of all other contributions, there will need to be documentation showing the trustee made this change to their normal procedure. Not only will there need to be a documented trustee decision to reserve the contribution on the receipt, but a documented decision on the allocation of the contribution to the member from the reserve will also be required.

For benefit payments, the key issue is their infrequency and because the SIS rules require certain events to occur prior to a condition of release being met and an amount paid from an SMSF, the

trustees need to collect that information from the members asking for a benefit to be paid. The trustees then need to make a determination the evidence they have received is accurate and meets the SIS requirements, allowing them to pay the benefit. Hence this becomes a decision that should be documented.

For pensions, of course, this is a little bit more complicated because we are generally not talking about a single payment. Here there needs to be supporting material that allows the trustee to make the initial pension payment and determines whether any subsequent payments to the member are in a pension or lump sum form.

The final element we need to talk about is investment decisions. One of the questions here is whether every purchase and sale of the investment requires documenting. The answer will be determined by other SMSF paperwork, namely the fund’s investment strategy. The more quantifiable the investment strategy content is, the easier it will be to rely on that document for future investment decisions.

Nevertheless, there are some investment decisions that are still probably worth documenting separately. These include:

• acquisition of direct property, particularly as there may need to be other documents signed on behalf of the trustees, such as rental agreements, agent appointments and service providers selected to handle repairs and maintenance,

• implementation of any limited recourse borrowing arrangement, as there would be investment strategy considerations as well as additional documents to be executed, such as custodian trust deeds and loan agreements,

• any collectable or personal-use asset that may need to have documentation relating to insurance, storage and possible leasing,

• loans by the SMSF to non-related parties, which would require a written

loan agreement specifying terms and conditions applicable to the loan,

• any in-specie contribution or acquisition from a member of the SMSF or a related party as this would need to be tested against the SIS acquisition rules and possibly the 5 per cent in-house asset limit,

• any non-public asset investment to confirm it is not an acquisition from a related party or is within the permitted SIS related-party acquisition and in-house asset rules, and

• any in-house asset acquisition as compliance with the 5 per cent limit will need to be verified at the time of acquisition and how the continued monitoring of this limit will be conducted needs to be officially outlined.

So the easiest way to summarise when trustees should document decisions comes down to whether the trustee needs to let someone else know what the basis of a certain decision was or whether they can rely on other records that already exist.

If we can tally up the major activities and the extent to which they need to be documented, we would be looking at the acceptance of contributions, payment of benefits and investment decisions.

STRATEGY

When two worlds collide

The bill facilitating the reduction of the downsizer eligibility age from 60 to 55 is in parliament awaiting final approval. Tim Miller outlines the impact this proposed legislation will have on an individual’s ability to access certain social security services.

In the recent federal budget, the government reconfirmed a number of measures previously announced and with associated bills introduced to parliament to encourage retirees or those transitioning to retirement to downsize their property.

The Treasury Laws Amendment (2022 Measures No 2) Bill 2022 seeks to decrease the eligibility age for individuals to make downsizer contributions to a superannuation fund from 60 to 55. The Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Bill 2022 provides an incentive for those in receipt of the income support to downsize by extending the asset test exemption on the proceeds from the sale of an individual’s house from 12 months to 24 months, and ensures the proceeds will be isolated from other assets and deemed at the lower applicable rate, resulting in a lower income test outcome.

While these two bills have a common goal to

encourage people to downsize their abode, they have the potential to create very different outcomes for some retirees as one will be asset test exempt and the other will be asset tested, which could impact age pension entitlements almost immediately. For clients contemplating selling their home, it’s important to look at how these measures may benefit or disadvantage them.

Decreasing the downsizer age to 55

Initially introduced as a last-minute federal election measure by the former coalition government, and subsequently matched by the then Labor opposition, this measure does nothing more than expand the age eligibility for those looking to add to their superannuation balance. Given the window for contributing to super was opened to age 75 from 1 July 2022, there are some obvious drawbacks to using the downsizer contribution at age 55 or indeed

TIM MILLER is education manager at SuperGuardian.

at any time prior to age 75.

Specifically, any contribution made at 55 is going to be preserved, and with preservation age fast approaching 60, individuals need to appreciate that, unlike the original downsizer contributions introduced from age 65, it may very well be that the benefits are inaccessible with

the exception of a transition-to-retirement income stream prior to age 65.

Further, given downsizer contributions are not subjected to total superannuation balance restrictions, there is a train of thought that suggests it is more appropriate to exhaust all non-concessional contribution strategies prior to age 75 and then contemplate using the downsizer contribution. That’s not to suggest those selling a house between age 55 and 60 shouldn’t contemplate contributing to super, but rather that an individual, or couple, who sells their house at age 55 will requalify for downsizer eligibility at or around retirement age so could conceivably have two bites of the contribution cherry if they are someway inclined to consider downsizing again. This would almost certainly be more attractive to those who are close to exhausting the general transfer balance cap with their current total superannuation balance as they could make contribution one as a non-concessional, measurable against their balance, and contribution two as a downsizer in 10 years or more time without reference to their balance.

The obvious disadvantage to this strategy would be legislative change, where the capacity to make a downsizer contribution is withdrawn, meaning all contributions would be once again subject to the member’s age and total superannuation balance.

It should be noted all other aspects of downsizer contributions remain the same. The decrease in age will take effect from the first day of the quarter immediately following royal assent. For example, if royal assent is received prior to 31 December 2022, then from 1 January 2023 some over the age of 55 can use the measure.

As contributions must be made within 90 days of settlement, anyone aged 55 and over who settles prior to the bill receiving royal assent will still be eligible if the first day of the quarter following royal assent is within that 90-day period and the contribution is made between the first day of the quarter and the expiry of the 90-day time period. While the regulator can allow an extension of the 90-day timeframe, waiting for the law to apply would not be considered a genuine reason to apply for an extension.

Example

Tina, aged 56, sold her property on 1 October 2022, with a 60-day settlement. Assuming settlement occurs on 1 December 2022 and the relevant bill received royal assent on 30 November 2022 (illustrative purposes only), then the law will come into effect from 1 January 2023 and Tina will have until 28 February 2023 to make the contribution.

Asset test exemption for proceeds from sale of a house

As is currently the case, the principal place of residence is exempt from the asset test for age pension and other income support purposes. Homeowners have a lower asset threshold before their age pension is impacted comparative to non-homeowners. As a guide, for a single person to get the full pension, their assets must be below the following thresholds:

• Homeowner $280,000

• Non-homeowner $504,500

When an age pension recipient sells their principal home, the proceeds from that sale earmarked to be used to buy or build a new

STRATEGY

Continued from previous page

home are exempt from the asset test for a period of 12 months. A further 12-month extension can be provided upon application subject to approval by Services Australia.

While the asset test exemption provides some relief, the proceeds are still pooled with other investments and deemed for income test purposes based on the existing thresholds. The current deeming rates are as in Table 1.

In a positive measure, the government has frozen the deeming rates until 1 July 2024.

Example

Kerry, 77 and single, sold her principal home for $800,000 in July 2022 and intends to use $650,000 towards the purchase of a new home. Kerry’s assets prior to the sale of her home were $100,000 combined and she hasn’t any other income apart from the age pension.

Following the sale, Kerry notifies Services Australia she intends to use $650,000 to purchase a new home. Immediately her assets subject to testing jump from $100,000 to $250,000 to incorporate the difference between the proceeds and the amount nominated to purchase the new home. This amount is still under the single homeowner low threshold so in itself will not impact her pension entitlement. However, the full $800,000 will now be deemed for income test purposes.

Based on Table 1, the first $56,400 will be deemed at 0.25 per cent and the balance at 2.25 per cent. Kerry’s total deemed annual income is $16,872, resulting in a fortnightly amount of $649. The fortnightly income threshold to receive a full pension is currently $190 and the cut-off income level is $2243. An income of $649 will result in Kerry’s pension entitlement reducing, however, had the proceeds been counted entirely then Kerry would have lost her pension as the maximum asset test was $622,250 for a homeowner and $846,750 for a nonhomeowner.

Unless Kerry applies for and is granted an extension, then in July 2023 her entire proceeds will count towards the asset test. Therefore, it is time sensitive for Kerry to purchase or build a new home.

The proposed legislative change, extending the asset test exemption from 12 to 24 months, would give Kerry a further 12 months’ asset test exemption. The catch is that Kerry, because she sold prior to the legislation taking effect, will not be entitled to an additional 12-month exemption.

The second part of the proposed change is to isolate the proceeds intended to be used for the purchase of a new home and have them deemed exclusively against the lower deeming rate. This would have a significant impact. If we again look at Kerry’s position, but assume she sells the house following the introduction of the new law, her income would be deemed as follows.

Deeming example

Kerry would have $150,000 subject to the standard deeming provisions. That would result in an annual deemed income of $2247. The $650,000 set aside to purchase a new house would be deemed at the lower rate of 0.25 per cent, which would result in an annual income of $1625. Her total income would be $3872. That would result in a fortnightly amount of $149 which is below the $190 low threshold, meaning Kerry would still be entitled to the full age pension for the full two years. That’s quite a difference.

Age pension age considerations

Where these two measures are conflicted is where someone who is at or above age pension age sells their principal place of residence.

If we assume Kerry, from the above example, is given advice that she is entitled to make a downsizer contribution to superannuation and contributes the full $300,000, then that $300,000 will be counted against the asset test immediately, that is, no 24-month asset test exemption will apply. Further, the $300,000 would be

deemed as per to the standard deeming provisions.

It is conceivable Kerry nominates $500,000 as going towards the future purchase of a house, but from a pure income test position her deemed income would increase to $480 per fortnight, resulting in a drop in her age pension.

While this is not the end of the world, as she would still receive her pension benefits, there is a need to weigh up the desire to contribute money to super versus the desire to keep the age pension. So while these measures are complementary with regard to providing opportunities for those who are considering downsizing, they are not necessarily complementary with one another.

Similarly while the ability to take advantage of the downsizer provisions will be further enhanced, it doesn’t necessarily mean that will be the right thing to do as the action may inhibit future contribution strategies.

In all instances it is imperative people, especially those entitled to the age pension and those who are close to exhausting the general transfer balance cap, take great care and consideration prior to undertaking any strategy and refrain from doing so simply because it is the popular thing to do.

While the ability to take advantage of the downsizer provisions will be further enhanced, it doesn’t necessarily mean that will be the right thing to do as the action may inhibit future contribution strategies.

The final years of troublesome pensions

The term of many market-linked pensions held within SMSFs will be coming to an end soon. Mark Ellem details the factors requiring consideration when preparing for the final payments of these income streams.

Considering market-linked pensions (MLP) came into being from 20 September 2004 and could only be commenced from a member’s accumulation interest up until 20 September 2007, many of these pensions are coming to the end of their term. In this technical article we explain the rules governing payments in the final year of the MLP, which are not as straightforward as you might think.

Background MLPs first became available on 20 September 2004. From this date until 20 September 2007, any retiree could commence an MLP in an SMSF.

However, changes introduced by the Simplified Superannuation legislation in 2007 meant that after 20 September 2007 any new pension interest commenced in an SMSF was required to be an account-based pension as defined under Superannuation Industry (Supervision) regulation 1.06(9A). This means a member can no longer commence a new MLP with their accumulation interest in an SMSF. A member may, however, commence a new MLP in an SMSF using the balance rolled over from the commutation of an existing

MARK ELLEM is head of education at Accurium.

Continued from previous page

complying pension, for example, a defined benefit pension or another MLP.

Another significant change introduced by the Simplified Superannuation reforms was that MLPs commenced after 20 September 2007 must also satisfy the minimum pension standards for account-based pensions, under schedule 7 to the SIS Regulations, in addition to the market-linked income payment rules, under schedule 8 to the regulations.

Annual MLP payment

MLPs are payable for a fixed term, which is specified at commencement and included in the details of the pension documentation. The member must select a term for the new MLP that is between their minimum and maximum allowable term, the length of which depends on when the pension commenced, the age of the member at that time and whether there is a reversionary beneficiary. Essentially, the term will determine the level of pension payments the member must withdraw each year. The payment factors are designed so that the pension assets are drawn down over the term of the pension.

The amount of the annual pension payment to be paid each year is based on two factors:

• the balance of the MLP at the start of the financial year, and

• the payment factor set out in column 3 of the table in schedule 6 (payments for market-linked income streams) to the SIS Regulations.

In relation to the payment factor, this represents the remaining term of the MLP, as at the start of the financial year, expressed in whole years. Many MLPs, like other pensions, would have a start date of 1 July, meaning the remaining term each year will be a whole number. However, for an MLP that started other than on 1 July, the remaining term is rounded as follows:

• if the commencement day of the MLP is

on or after 1 January in a financial year –rounded up to the nearest whole year, or • if the commencement day of the MLP is on or before 31 December in a financial year – rounded down to the nearest whole year.

The following example illustrates this methodology. Harry commenced an MLP on 1 September 2007. At the time he was aged 66 and the term allowable ranges from a minimum of 17 years to a maximum of 34 years. Harry chose the minimum term of 17 years, meaning the MLP will end on 31 August 2024.

For the 2023 financial year, the required pension payment is based on the remaining term, calculated on 1 July 2022. The remaining term at 1 July 2022 is two years and two months and as the MLP commenced before 31 December, the remaining term is rounded down to the nearest whole year, two years. The relevant payment factor from schedule 6 is 1.90.

The other relevant factor is the balance of Harry’s MLP at 1 July 2022, which was $285,650, providing an annual pension payment amount of $150,340 (rounded to the nearest $10 as per Schedule 6 to the SIS Regulations) for the 2022 financial year. The MLP provisions allow for Harry to take an annual pension amount up to 110 per cent of the calculated amount, being $165,374 or as low as $67,653, 45 per cent of the calculated annual pension amount. Harry decides to take an annual pension amount of $105,000 for 2021/22, keeping him below the defined benefit income cap of $106,250. This amount is paid to him as one lump sum on 30 June 2023.

Let’s now move to the 2024 financial year where the balance of Harry’s MLP at 30 June 2023 is $189,220. At that date the remaining term is one year two months, again rounded down to one year. The relevant payment factor from column 3 in schedule 6 is 1, meaning the annual pension payment for 2023/24 is $189,220, with a range from $170,298 to $208,142.

Even though Harry has a range to select his annual payment from, it will be subject to the available account balance, which will be dependent upon the timing of pension payments and the net earnings allocated to his MLP. That is, he could not request an annual pension payment of the maximum $208,142 if there is a lesser amount standing to the balance of his MLP.

Harry takes the minimum pension amount of $170,298 to minimise the amount he will need to include as assessable income in his personal tax return. As with previous years, he takes the amount as a lump sum on 30 June 2024.

Final-year MLP payment

Harry’s MLP is set to end on 31 August 2024 and requires him and his accountant/ administrator to be aware of what rules need to be complied with in this final period of the pension. Harry will need to be paid the final amount of his pension within 28 days after

Given many MLPs may be coming towards the end of their term, accountants, administrators and advisers need to be monitoring their SMSF client base for members with these pensions to ensure the MLP pension standards are complied with.

the end of the term of the MLP, that is, by no later than 28 September 2024. This will require Harry and his SMSF’s accountant/ administrator to be aware of the balance of his MLP at 1 July 2024 and be able to keep track of pension payments and earnings to ensure the MLP is fully paid by 28 September 2024.

The accountant for Harry’s SMSF calculates the balance of his MLP at 30 June 2024 to be $85,166 on 25 August 2024. The SMSF trustees resolve to declare an interim annual earning rate of 3 per cent for the period 1 July 2024 to 25 August 2024 to be applied to Harry’s MLP. An amount of $85,553 is paid to Harry on 26 August 2024 as his final pension payment in respect of his MLP.

The effect of when the MLP term ends Let’s consider that Harry commenced his MLP on 1 April 2007, was still aged 66 at the time and chose the minimum term of 17 years. This means his MLP will end on 1 April 2024.

For the 2023 financial year, the remaining term is one year and nine months. As the pension commenced on or after 1 January in a financial year, this is rounded up to two whole years for the purpose of identifying the relevant payment factor from column 3 of the table in Schedule 6 to the SIS Regulations. The payment factor is 1.90, which using a balance of the MLP at 30 June 2022 of $285,650, provides an MLP payment range for 2022/23 of $67,653 to $165,374.

Again, Harry takes an annual pension payment of $105,000 as a single lump sum payment on 30 June 2023. The balance of his MLP on 30 June 2023 is $189,220.

The 2024 income year is the final year for Harry’s MLP as the term ends on 31 March 2024. It would be expected the MLP would need to be fully extinguished by 28 April 2024, being within 28 days after the end of the term of the MLP. However, the rules allow for an alternative period to be chosen where on 1 July of the current financial year: • the payment factor that applies is 1.00, and • the payment factor that applied for the

previous financial year was not 1.00. Where the above applies and the choice is made, payments made in respect of the current financial year and the period after, if any, are in accordance with the payment requirement if they comply with the following conditions:

a. Payment of the account balance over one of the following periods: i. if the remaining term of the MLP is greater than 12 months – that period, ii. 12 months,

b. the fund has no further obligation to make any other payment that, but for this alternative, would have been determined on 1 July in the subsequent financial year. Applying this to Harry’s MLP: • the payment factor relevant for the current 2024 financial year is 1.00, • the payment factor relevant for the prior 2023 financial year was not 1.00, it was 1.90, • the remaining term of the MLP on 1 July 2023 is not greater than 12 months. Consequently, the relevant period is 12 months.

Therefore, in the final 2024 financial year of Harry’s MLP, which ends on 1 April 2024, the balance of his MLP must be paid: • within 28 days after the end of the term of the MLP, that is, 28 April 2024, or • if chosen to apply the alternative period, by 30 June 2024.

Again, Harry and his SMSF’s accountant/ administrator will need to be aware of the ending of his MLP to ensure the balance can be monitored to guarantee the relevant rules are complied with in the final year of the pension.

Let’s finally consider if Harry’s MLP was commenced, like many, at the start of a financial year, on 1 July 2007. The term selected by Harry was 17 years and consequently it ends on 30 June 2024.

For the 2023 financial year the relevant payment factor is 1.90 as there are two years remaining. For the 2024 financial year the relevant payment factor is 1.00, as there is

one year remaining. Applying the rules for payment in the final year of the MLP, the balance of Harry’s MLP in the 2024 final year must be paid by no later than 28 July 2024, being 28 days after the end of the MLP. While the alternative period could be chosen, it would have an earlier payment deadline of 30 June 2024.

Considering the MLP payment rules, the following general rule can be applied: • for an MLP that commenced from 1 July to 31 December or in the month of June, the balance of the MLP must be paid out within 28 days of the end of the MLP, and • for an MLP that commenced from 1 January to 30 May, the balance of the MLP must be paid out by 30 June of the financial year in which the MLP ends.

Again, given many MLPs may be coming towards the end of their term, accountants, administrators and advisers need to be monitoring their SMSF client base for members with these pensions to ensure the MLP pension standards are complied with. Of course, the member, in this case Harry, would have the option to fully commute his MLP and start a new MLP with a term that effectively extends it beyond the original end date, but that’s a subject for a different discussion.

MLPs are payable for a fixed term, which is specified at commencement and included in the details of the pension documentation.

STRATEGY

The CGT concession bonus

Many business owners are unaware of the tax concessions they can take advantage of when restructuring a business, but with careful planning it could be a major boost to super balances come retirement, Peter Bembrick writes.

The economic climate is reinforcing the need for business owners to evaluate their current business structure and determine whether it’s appropriate for their circumstances and future exit plans.

There are many factors that will cause a business owner to review their structure, including the current uncertainty around business conditions, which could, depending on the industry, include inflation,

supply chain disruption, labour shortages, energy and fuel prices and the higher cost of finance. Other key considerations include the stage of the business life cycle, the age of the business owner and the likely options for exit, such as family succession, employee buyout or external sale.

As there is no single best business structure that suits every situation, it is usually a case of the

PETER BEMBRICK is tax partner at HLB Mann Judd Sydney.

business structure being appropriate at the time the business is established, but this may cease to be the case as the business itself grows, the needs of the business owner change or the environment it operates in changes. Therefore, it is important to evaluate the business structure every few years or when any significant developments are identified.

When a decision is made to restructure, many business owners are potentially missing out on valuable capital gains tax (CGT) concessions, which can be used to top up superannuation balances.

As there are several key conditions that must be met in order to apply the CGT concessions, it is first necessary to review the existing structure, the restructure transaction and the proposed new structure to ensure all the right boxes have been ticked.

The age of the business owner, or owners, is important. For two concessions, the retirement concession and the 15-year exemption, when an individual is aged under 55, the full tax benefits are gained only by making a contribution to super. For those aged 55 or over, the situation is more flexible. While they still have the ability to contribute to super, they can also choose to take the money and run.

It is reasonably common for older small to medium-sized enterprise (SME) owners who have built up a certain level of super to have also set up an SMSF. By contrast, younger SME owners tend to be no more interested in SMSFs than their peers who are not running a business.

Importantly, payments arising from applying CGT concessions can be made into any complying super fund, such as a retail or industry fund account, and are not restricted purely to SMSFs.

When the retirement concession is applied, an amount equal to the exempt capital gain can be contributed to super, as long as it does not cause the lifetime

cap for this concession of $500,000 per individual to be exceeded.

This contribution is on top of the standard non-concessional super contribution cap of $110,000 for a single year or $330,000 for a three-year period, and is not restricted by any of the other normal super balance limits. This allows a greater super balance to be accumulated than would otherwise be the case, which can be extremely tax-effective as the years go on with tax concessions including a 15 per cent rate on earnings derived in the fund.

Even greater benefits arise where the 15year exemption is available. This provision is considered by many to be the holy grail

of concessions for small business owners. The concession applies to businesses that have continuously owned an ‘active’ asset for 15 years and the business owner is aged 55 or over and is retiring or permanently incapacitated.

Not only does this concession provide a complete tax exemption, it also allows a business owner to exit and contribute more into superannuation on top of the standard contribution limits, remembering super is a very tax-effective place to have your money.

Across all small business CGT concessions, generally the most critical step in terms of eligibility is meeting the maximum net asset value test. This is the total net asset value of the business owner and connected entities, and is currently capped at $6 million, with two notable carve-outs being the family home and existing super balances.

Ultimately, if business owners, particularly those nearing retirement, are aware of available tax concessions, they can plan accordingly and take advantage of them. In some instances, concessions can be used to ensure a restructure is tax-free, although it is of course important to remember there are a wide range of financial and commercial reasons for undertaking a restructure and the basis of the decision to do so should not be purely tax driven.

Undertaking a restructure while the value of the business is below necessary limits can be quite tax-effective, but it is a case of use it or lose it. Business owners shouldn’t wait until the final sale of a business to seek out available concessions as the value of the business may have already exceeded the threshold.

The decision to restructure a business can be overwhelming and stressful for many. However, the fact that tax concession savings can be redirected into super should be of comfort to business owners as they enter a new phase of life and business.

When a decision is made to restructure, many business owners are potentially missing out on valuable capital gains tax concessions, which can be used to top up superannuation balances.

Transferring from the dark side – part three

There are several options available to individuals wanting to repatriate overseas pension scheme payments back to Australia. In part three of this multiple-part feature, Jemma Sanderson details some of the strategies available to make this happen.

Following on from part one regarding some of the issues when transferring United Kingdom pensions and part two regarding pension transfer mythbusting, parts three and four will outline some of the potential strategies available to transfer UK benefits to Australia, depending on the relevant circumstances.

As outlined in part one, where any benefits are transferred from the UK, or even where they were previous UK benefits and now in another offshore jurisdiction, to superannuation in Australia, the domestic fund must be a recognised overseas pension scheme (ROPS). There are two options available in this regard, being an SMSF that obtains ROPS status with His Majesty’s Revenue and Customs (HMRC) or using the currently only public offer ROPS available, which is the Australian Expatriate Superannuation Fund (AESF).

As per part one, the overall outcome/intention is that the increase in value since the individual first became a resident, that is, the applicable fund earnings (AFE), is taxed in the superannuation fund at 15 per cent, rather than at marginal tax rates. Thus, a transfer to a ROPS is often the strategy implemented. In order for the 15 per cent tax rate to apply, there needs to be a nil balance in the source scheme from where the funds have been transferred.

AFE doesn’t count towards either the concessional contributions cap or the nonconcessional contributions (NCC) cap. The challenge arises as the non-AFE component is treated as NCC, and therefore the standard NCC cap provisions for the individual and how they interact with the UK rules need to be considered.

Strategies are dependent on the individual’s circumstances with reference to: 1. the AFE in the account and the subsequent nonAFE amount,

2. whether the non-AFE amount is greater than the individual’s NCC cap, 3. the value of non-ROPS superannuation in Australia, including whether it is greater than the relevant total super balance (TSB) thresholds for NCCs,

4. whether the individual is over their UK lifetime allowance (LTA),

5. whether the benefits have already been crystallised in the UK, and

6. whether the benefits are in a UK pension scheme in the UK, or were previously in a UK scheme but were transferred to another offshore jurisdiction, and therefore the transfer is occurring from that jurisdiction.

The strategies below are the same for an SMSF or an AESF – the decision regarding which fund to use is up to the individual.

Strategy one – full transfer to super, under NCC

Where the non-AFE component is less than the NCC cap, the direct transfer of the amount to the ROPS can be achieved with a single transfer as shown in Table 1. Luke, 56, has a UK benefit worth £375,000. When he came to Australia 18 years ago his account was worth £175,000. He has $755,000 of superannuation in Australia. His UK benefit components are outlined in Table 1.

With a 100 per cent transfer to a ROPS in Australia, Luke will be eligible to elect to have up to the AFE amount of $350,000 included in the assessable income of the fund, taxed at 15 per cent, rather than at his marginal rate. The amount that isn’t included in the assessable income is treated as NCC, and is within Luke’s NCC cap, and therefore there are no excess implications where he elects for the full $350,000 to be included in the fund’s income.

JEMMA SANDERSON is a director and head of SMSF and succession at Cooper Partners.

Strategy two – full transfer to super, over NCC

What if Luke has only been in Australia for eight years, and the value of his UK benefit at that time was £250,000. If this was the case, then the breakdown would be per Table 2. With a 100 per cent transfer to enable a 15 per cent tax rate on the AFE, there would be an NCC of $437,500, which is obviously in excess of Luke’s NCC cap by $107,500. His other superannuation balance in Australia is $475,000 in this scenario.

Given this situation, what are Luke’s options?

In Australia when an excess NCC arises:

1. The amount is retained in superannuation and is subject to excess NCC tax at 47 per cent. This is very rarely the option undertaken. Further, where the tax is paid by the super fund, this is reportable to HMRC as an unauthorised payment and subject to tax in the UK at between 40 per cent and 55 per cent.

2. The amount is refunded from superannuation in Australia via the ATO to the individual once the regulator has issued the election and release authority – usually six to nine months after the end of the financial year of the contribution. This excess is then subject to associated earnings (AE), with the ATO general interest charge rate applicable, for the period from 1 July of the year of the contribution until the tax commissioner issues the excess determination.

`The AE is included in the individual’s assessable income and taxed at their marginal tax rate, less a 15 per cent tax offset. As this is usually more than a year, if not closer to 18 months, this AE amount is 10 per cent to 12 per cent of the excess amount. That would be about $12,000 for Luke.

The excess amount ($107,500) plus 85 per cent of the AE ($10,200), being a total of $117,700 for Luke, would need to be refunded from superannuation in Australia via the ATO upon issuance of a release authority.

If Luke refunds this amount from

the ROPS, it may be a reportable unauthorised payment and subject to tax in the UK at between 40 per cent and 55 per cent. If Luke refunds this amount from his non-ROPS Australian superannuation, then such an issue won’t arise.

Accordingly, where Luke is comfortable with the incurrence of the tax on the AE, at worst tax of $3840 at the highest marginal rate less a 15 per cent offset, then this strategy could be implemented. The net amount refunded from superannuation to Luke’s name would be $113,860.

Outcome: Luke’s UK account is transferred to Australia in one transfer, with a refund from other superannuation 12 and 18 months later depending on the time of the year the UK transfer occurred.

Important elements:

1. The excess refund must only occur once the ATO has issued the release authority to the relevant fund.

2. The excess notice will only be issued after the end of the relevant financial year once the individual’s TSB and contributions for the year have been reported to the ATO by their relevant funds, plus potentially once they have lodged their personal income tax return.

3. The individual will need to monitor their

Where the non-AFE component is less than the NCC cap, the direct transfer of the amount to the ROPS can be achieved with a single transfer.

personal tax profile with the ATO closely after year end for the issuance of the election form. This is issued either via their personal tax agent and/or will be on myGov.

The individual has 60 days from the date on the election form to make the election regarding the refunding option and the super fund they wish to receive the refund amount from. If they do not respond within the 60 days by lodging the election form to the ATO, an automatic election occurs, with the refund from the superannuation fund with the highest balance.

In Luke’s case, his other Australian super account is $475,000, and post the UK transfer the net amount in his ROPS is around $623,440. If he doesn’t actively elect that his non-ROPS super fund refunds the account, the release authority will automatically be issued to the ROPS, which is obligated to refund the amount pursuant to the release authority. As above, if this occurs, such a refund from the ROPS could be a reportable unauthorised payment to HMRC and taxed at between 40 per cent and 55 per cent, which is not ideal.

This strategy is feasible for Luke, given the total tax of $36,652.50 ($32,812.50 on the AFE, and the tax of $3840 on the AE), or 5.6 per cent on the gross transfer. However, it will be imperative all the steps are followed/ implemented correctly to ensure no inadvertent issues arise.

Strategy three – multiple tranche transfer to super

What if Luke had been in Australia for only two years, and the breakdown of his benefits are as per Table 3. As Luke has only been in Australia for two years, his Australian super balance is $65,000.

Where he wanted to undertake a 100 per cent transfer of the above, he would have an excess NCC of $195,000, and insufficient

non-ROPS super to refund the excess. Therefore, strategy two is not appropriate.

One alternative is a multi-tranche transfer, where the UK benefit is split in the UK and transferred to Australia either across multiple years or a combination of a transfer to super in Australia and payment to him directly.

As the AFE is the first component of any transfer that is made, this amount, £75,000, plus an amount up to Luke’s NCC, say £175,000 to provide for a foreign exchange buffer, could be transferred in the UK to a separate, new UK pension account. This amount of £250,000 would then be transferred to the ROPS in Australia, where there would be a nil balance remaining in the UK scheme and the AFE would be eligible for the 15 per cent tax rate in the fund.

There would be £125,000, about $218,750, remaining in the UK.

To transfer the balance, Luke would need to wait until the three-year NCC bringforward period had reset, then seek to transfer that balance across, subject to the NCC rules at that time. There may be some further AFE over that period, which may not be an issue if the transfer is 100 per cent to the ROPS. It would be taxed at 15 per cent and the balance of the £125,000 would be NCC and within his cap. This would occur in year four.

Luke could undertake the first transfer as £75,000 AFE plus say £60,000 NCC to fall within his single-year NCC, where this is transferred to the second UK scheme

to transfer to the ROPS in Australia. In the following financial year, £175,000 could be transferred to the ROPS to use his bringforward NCC. That would still leave £65,000 remaining in the UK, which would need to stay there until year five when the bring forward would reset.

The main consideration with this strategy is the timing of the transfers as it could be up to five years before all the monies are in Australia. Further, it is the author’s experience that setting up the second UK pension account can take between three and six months, given the compliance requirements in the UK. However, this strategy, or strategy four to be outlined in part four, is generally the only option available where the individual will be in excess of their NCC cap with a transfer and they don’t have the non-ROPS superannuation in Australia to refund the excess.

More strategies in part four

The above strategies are available where an individual is within their UK LTA, or where they haven’t already crystallised their benefits in the UK. Part four will explore an alternative to strategy three where benefits have an excess NCC and where the individual is over their LTA or has crystallised components.

What is most important in any of these strategies is that they are implemented correctly. If this does not occur, there will be some potentially adverse tax implications both in Australia and the UK.

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Indexation round two

The current situation in the domestic economy means a double application of indexation is highly likely to occur on 1 July 2023. Bryan Ashenden examines how this may impact SMSF members.

With just over six months to the end of the financial year, is it still too early to start planning around endof-financial-year issues and opportunities?

The simple answer to this question would of course be no, as it is never too early to start planning for 30 June. In fact, when it comes to financial planning, arguably there should never be a focus on end-of-year financial planning as it should be scoped, planned for and potentially addressed throughout the course of the year.

How many times do you hear the cries for help and the tales of woe when actions have been left too late? One story that may be familiar is a contribution being made close to 30 June, but the super fund not receiving the contribution until 1 July or after, and therefore the contribution ends up being counted as part of the next financial year’s superannuation caps. Another is a notice of intent to claim a deduction failing to meet the legislative requirements because a client has become too diligent and lodges a personal

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

income tax return early (perhaps in the belief of being entitled to a refund) before the notice requirements for the deductibility of a contribution have been completed.

Of course, when it comes to superannuation, there is a natural inclination among many, both clients and advisers, to leave some aspects of super planning until year end. With money contributed to super being preserved until a condition of release is satisfied at some point in the future, many clients want to delay making contributions until just about the last possible moment. There is a natural desire to hold onto the money in case another need or use for it arises. This is despite the concessional tax treatment that would apply to earnings on those funds if invested in the superannuation environment.

There are some very important reasons why planning shouldn’t be left until close to 30 June. However, this financial year, there are potentially strong arguments in favour of delaying superannuation contributions and other related actions because of the expected indexation of certain super thresholds or caps. This should be taken into account when considering the best time to execute certain superannuation-related strategies.

Indexation of the transfer balance cap

Indexation of the transfer balance cap (TBC) is determined by reference to movements in the consumer price index (CPI), but only increases in increments of $100,000. This means if the movements in CPI don’t get the overall increase to more than $100,000, then no indexation occurs. When originally introduced with effect from 1 July 2017, the general TBC was initially set at a level of $1.6 million. It took four years for indexation to take effect, with the general TBC indexing by $100,000 to $1.7 million from 1 July 2021.

However, less than 18 months later, it is certain we will see another indexation of the general TBC from 1 July 2023. Further,

because of the rapid increase we have seen in the CPI level during 2022, it is almost certain we will actually see a double indexation, or double increase, in the general TBC.

Indexation of the cap is based on the relative change in the rates of CPI based on the all groups CPI – the weighted average across the eight capital cities. The base rate used for the TBC indexation is the December 2016 quarter, which was 110.0. In December 2020, the index number was 117.2. If you apply this to the original TBC, the result is 117.2/110 x $1,600,000 = $1,704,727. As this was just over a $100,000 increase from the base number, the indexation of the TBC, which only rises in $100,000 increments, took effect from 1 July 2021.

As we approach 1 July 2023, it will be important to see what the CPI outcome for the December quarter 2022 is, which won’t be published until January 2023. However, we know the relevant outcome for the September quarter 2022 was 128.4. Again, using the indexation formula, this would currently index the base amount from $1,600,000 to $1,867,636, that is 128.4/110.0 x $1,600,000. Based on this, we know the TBC will at least index to $1.8 million from 1 July 2023.

However, if the index factor for the December quarter results in a factor of 130.625 or above, the result will be a TBC from 1 July 2023 of $1.9 million. How likely is this? To achieve this outcome, we would need to see a December quarter inflationary increase of 1.8 per cent, which is the same increase seen for the September quarter. With many economists forecasting the CPI will actually peak in the December quarter, this increase is highly likely.

What would a double indexation of the TBC mean?

An increase in the TBC means it is possible for more superannuation savings to be

converted into super income streams. However, the benefit of the $200,000 indexation depends on each individual’s personal TBC.

A person only has a TBC triggered when they first have a pension commenced or would have been triggered if they had a pension as at 1 July 2017. When you have already triggered a TBC assessment and there is a subsequent indexation of the cap, you only gain a proportional benefit of the indexation which is equivalent to the amount of your highest-ever transfer balance account (TBA) to determine what was unused at 30 June.

For example, if a client had used 75 per cent, or $1.2 million, of their TBC when the general cap was $1.6 million, the 2021 indexation of the cap would have benefited them to the amount of $25,000 as only 25 per cent of their cap remained unused. Their personal TBC would have increased to $1.625 million.

Come 1 July 2023, what will their TBC look like? Well, if no further amounts had been assessed to their TBC, the unused amount of their TBC remains at 25 per cent as it is still determined at the time of the superannuant’s highest-ever TBA balance and the applicable general TBC at that time. This would be an additional $25,000 if the general TBC only indexes by $100,000, or will be a $50,000 increase in their personal TBC, resulting in a new total of $1.675 million, if the increase is $200,000 as expected.

Of course, all of these calculations are quite complex. But the good news is the ATO will calculate a person’s individual TBC and publish it on their myGov account. However, there are a few important rules to bear in mind when trying to anticipate what a client’s personal TBC looks like, such as: • indexation is based on the highest balance a person ever had in their TBA. If a pension was started and subsequently

commuted in full, an amount would have been assessed,

• if the TBA for a person reaches the TBC, they would never benefit from any indexation of the general TBC,

• If a person has not yet had an amount assessed to their TBA, they would benefit from full indexation, and • indexation of the TBC is only relevant if a person has sufficient funds in the system which would result in them exceeding their personal TBC.

Given the benefits of indexation will be maximised when the balance in a TBA is kept low, if you have clients who are considering commencing a retirement income stream before 30 June 2023, it is worth pausing to reflect if this is the best outcome for them. For example, would they be better off delaying the commencement of the income stream until after 1 July 2023 to gain the maximum indexation benefits? If the client has sufficient superannuation savings, this may allow them to place more into a tax-effective income stream. Of course, the potential for this to be the case may have increased during this financial year with the removal of the work test until age 75, allowing more Australians to contribute more to their superannuation fund.

If the client needs some of their super to live on before 30 June 2023, they could consider withdrawing lump sum amounts as these do not impact their TBA. Naturally, consideration would have to be given to the need to access income via lump sums versus the tax-effectiveness of starting a retirement income stream, and the answer may differ from one client to the next. But with pending indexation, it is an assessment that must be had.

One further reason for potentially delaying the commencement of the income stream for a client who is not even close to reaching the TBC is the potential

future impact of a death benefit pension. When a client passes and their super is paid to their spouse in the form of a death benefit pension, it will be assessed to the surviving spouse’s TBA, with the timing of that assessment dependent on whether the income stream was reversionary. The combination of a client’s own retirement savings, plus the potential size of a future death benefit pension, which may also include insurance proceeds, could cause a client to breach their personal TBC. As a result, strategies to maximise their potential TBC should be considered.

Indexation of the total super balance threshold

Related to the TBC is the total superannuation balance (TSB) threshold. The TSB is used to determine the level of non-concessional contributions that can be made by a client into super in a particular income year. The TSB threshold is an amount equal to the general TBC. As a result, it is currently $1.7 million but will increase to either $1.8 million or, more likely, $1.9 million from 1 July 2023.

As the amount of non-concessional contributions a client can make is determined by comparing their TSB at the previous 30 June to the threshold amount for the year of contribution, managing contributions in the current year may open up opportunities next year.

For example, if a client were considering using the bring-forward rules this financial year, the increase in the threshold from 1 July 2023 could mean the client would be better off only making an annual contribution this financial year and triggering the bring forward next financial year.

It will also be important to re-engage with those clients who thought their days of contributing to super were over.

Even though a client may have been prevented in one year from making any nonconcessional contributions because their

personal TSB exceeded the TSB threshold, an increase to this threshold may make them re-eligible to contribute to super again. This would happen if their TSB at 30 June 2023 is below the indexed threshold that takes effect on 1 July 2023.

Again, when coupled with the removal of the work test for those aged up to 75 for non-concessional contributions, there may be many clients able to avail themselves of that opportunity.

Final comments

Despite the high levels of CPI and the resultant increases in the TBC and TSB that are likely to take effect from 1 July 2023, we don’t expect to see an increase in the contribution caps at the same time, as these are measured by changes in the Australian Bureau of Statistics’ average weekly ordinary time earnings data. Wages growth has not kept pace with inflation in recent years and so it’s expected there will be a divergence in the indexation timeframes for different superannuation thresholds.

However, any increase in the TBC and the TSB will create opportunities for some clients to be able to contribute more to their super and have more savings placed into tax-effective income streams.

How many times do you hear the cries for help and the tales of woe when actions have been left too late?

Penalty unit management

The federal government announced an increase in the fine associated with administration penalties when it handed down its October budget. Daniel Butler and Bryce Figot take a look at the implications for SMSFs and how trustees can minimise the impact of the change.

With the penalty unit dollar amount increasing from $222 to $275 from 1 July 2023, representing a 24 per cent rise, the typical administrative penalty imposed on SMSFs under section 166 of the Superannuation Industry (Supervision) (SIS) Act 1993 of 60 penalty units increases to $16,500. As such, SMSFs need to be very cautious.

Corporate trustee cost saving

It is definitely a good time to move away from individual trustees and move to a corporate trustee before the penalties increase. SMSFs with individual trustees are overlooking very hefty penalties;

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

such penalties multiply as the number of trustees increase. Table 1 shows the substantial savings that come with having a company act as the SMSF trustee given the number of individual trustees that can be involved, noting some jurisdictions impose a maximum of four individual trustees.

It is interesting to note the federal administrative penalty introduced in mid2017 increased by 23 per cent over the three-year period to 1 July 2020. From 1 July 2020 the dollar amount assigned to a penalty unit was automatically set to

increase with inflation movements every three years and will increase by over 50 per cent on 1 July 2023. Table 2 highlights the substantial increases in the dollar amount linked to an administrative penalty unit.

The difficulty is contraventions do not typically happen in isolation, but generally occur as part of a series of events. For example, a person who borrows or accesses money from their SMSF may access several withdrawals rather than making just one drawdown.

Indeed, ATO SMSF risk and strategy

assistant commissioner Justin Micale confirmed recently there were around three auditor contravention reports on average for each of the 13,558 SMSFs that required this type of compliance procedure. This totals 39,997 contraventions for the 2022 financial year, that is, around 2.95 per SMSF. Thus, assuming there were three separate 60 penalty unit administrative penalties applied to the same SMSF, the amount saved with a corporate trustee would look as in Table 3.

For many SMSFs it is not a matter of avoiding an administrative penalty but instead understanding human error may one day give rise to one. While the ATO has some discretion, the sector has seen substantial administrative penalties issued to some funds. At times the penalty has appeared out of line with the contravention or ‘crime’ involved. A better approach for these penalties should be formulated as many trustees cannot afford to pay such significant fines. Research has also

It is definitely a good time to move away from individual trustees and move to a corporate trustee before the penalties increase.

higher penalties may also not necessarily change people’s behaviour.

The increase in the penalty unit fine and a stricter enforcement approach by the ATO is, in certain respects, the nail in the coffin for individual trustees. Table 3 shows the substantial savings that may eventuate from having a company act as an SMSF trustee and, given advisers may also be potentially liable, practitioners need to be proactive to assist their clients make the move. Advisers should be educating and providing information to their clients about the increased risks associated with having individual trustees. This need is more important now as some SMSFs have increased their membership given the maximum number of members allowable jumped from four to six in mid-2021. However, as noted above, the maximum number of individual trustees is four in certain jurisdictions.

Administrative penalties

Under section 166 of the SIS Act, the ATO can impose administrative penalties in respect of certain rules, including the following:

• section 65(1): generally no lending to members or relatives: 60 penalty units,

• section 67(1): generally no borrowing: 60 penalty units,

• section 84(1): must comply with in-house asset rules: 60 penalty units,

• section 103(1): must keep minutes: 10 penalty units, and

• section 104(1): must keep records of

changes of trustee: 10 penalty units.

Conclusion

SMSF trustees must therefore play by the rules or suffer the consequences. Trustees should obtain advice before implementing any strategy, embarking on any significant transaction or where there is any doubt. Where there is a contravention, timely action should be taken to minimise any adverse consequences. Administrative penalties can result in substantial penalties and considerable work is involved in responding to these matters and seeking remission.

It is prudent practice for SMSFs and trustees to seek expert legal assistance in relation to their communications with the ATO covering processes such as preparing objections, seeking reviews by the Administrative Appeals Tribunal (AAT) and appealing to the Federal Court. When an SMSF trustee lodges a formal objection, they must cover each relevant ground of objection in appropriate detail.

If the objection is unsuccessful, the trustee may wish to seek a review of the objection by the AAT or, if it involves a question of law, appeal to the Federal Court.

STRATEGY

A brief history of the sector

SMSFs started as ‘excluded superannuation funds’ on 1 July 1994. They were excluded from the prospectus requirements for a super fund and had some quirky laws. For instance, excluded superannuation funds were the only retirement savings vehicles that could accept business real property from a member provided it did not exceed 40 per cent of the market value of the assets of the fund. Weird, but a law is a law.

On 1 July 1994, 70,000 superannuation funds made the choice to become excluded funds. Then

the race was on. Even before the beginning of the race submissions were being made to Treasury on the Superannuation Industry (Supervision) (SIS) Bill 1993.

The 1990s – the cowboy days

The rules in the early days of SMSFs were reasonably loose and the regulator, the Insurance and Superannuation Commission, which was superseded by the Australian Prudential Regulation Authority, was nowhere to be seen. In those first few years I saw

GRANT ABBOTT is a director and founder of LightYear Docs.

Grant Abbott provides a history of the SMSF sector in anticipation of any changes that might be introduced by the new Labor government.

some very interesting things, including:

• an SMSF trustee investing in bull semen, • ostriches were all the rage, • racehorses were a popular investment, • business licences, such as abalone, fishing and even brothel licences, were acquired by SMSF trustees, and • investing in 100 per cent-owned unit trusts that could borrow.

But there were limitations. Only allocated pensions were available, there was no such thing as limited recourse borrowing arrangements and we had reasonable benefit limits.

A new sheriff in town

On 1 July 1999, the ATO took over as the regulator of SMSFs. I remember there was a big uproar with many SMSF commentators saying it was like a “sledgehammer smashing a walnut”. I was of a different view because the ATO had a long history of providing rulings, determinations and guidelines in the taxation space – something sorely needed for SMSFs. At the same time excluded super funds were binned and SMSFs were introduced into the SIS Act 1993 in section 17A. Although all members had to, prima facie, be trustees or directors of a corporate trustee of an SMSF, Treasury left open the option of a member not being a trustee or director if their enduring power of attorney (EPOA) stood in for them. Still to this day I am surprised where an SMSF has mum and dad members who hold each other’s EPOA why they are both trustees or directors.

In the first decade of running SMSFs the ATO took an education approach to SMSFs and they grew heartily. There were so many great rulings, determinations and guidelines allowing practitioners to apply exactly what the regulator dictated.

SMSFs grew quickly

Within a decade the number of SMSFs had grown more than 400 per cent while assets under management had grown 1500 per cent. They were great days for SMSFs, but

in 2002 the world changed.

Licensing for SMSFs

The Financial Services Reform Act 2001 introduced Part 7 into the Corporations Act 2001. Part 7 was designed to provide consumer protection in respect of financial products. Any person recommending a financial product to a person was required to have an Australian financial services licence or act as an authorised representative of a licensee unless they were exempt.

Superannuation was specifically designated as a financial product. In that regard, section 764(1)(g) of the Corporations Act 2001 included a superannuation interest as a financial product. But the term superannuation interest was not defined under the Corporations Act 2001, but instead by reference to section 10(1) of the SIS Act, which refers to a beneficial interest in a superannuation fund. As this was a blanket provision with no carve-out, SMSF interests were included as financial products. This meant advising on the following required a licence, unless exempt:

• making a contribution to an SMSF,

• rolling over from a retail or industry super fund to an SMSF – this was two financial products, one dealing with a superannuation interest in a retail or industry super fund and one acquiring an interest in an SMSF,

• commencing a pension in an SMSF, and

• becoming a member of an SMSF.

Note all of these deal with a member’s superannuation interest in an SMSF and not the trustee’s. So, what SMSF trustee advice was caught then? Only specific investment advice and never an investment strategy. This was confirmed in 2018 by the Australian Securities and Investments Commission (ASIC), the regulator of the Corporations Act 2001, a guidance note for accountants seeking an exemption to allow them to provide SMSF advice.

Accountant, lawyer and tax agent exemptions

The ASIC advice summarises the original accountants’ exemption, the limited licensing regime and the current 2022 exemption, which are largely unknown: “One former exemption, which allowed recognised accountants (that is certain accountants who are members of CPA Australia, Chartered Accountants Australia and New Zealand or the Institute of Public Accountants) to give financial product advice about acquiring or disposing of an interest in an SMSF, was repealed on 1 July 2016.”

There is no doubt the meteoric rise of SMSFs was courtesy of the accountants’ exemption. From 1 July 2016 a restricted licensing regime was introduced for accountants, but was always going to fail. Particularly if you look at the generous

The world looked bright but then Treasurer Scott Morrison let the team down in his May 2016 budget where he decided to dip into the super coffers to increase super taxation by $2.9 billion over a four-year period.

STRATEGY

licensing exemptions in section 766B of the Corporations Act, which states: (5) The following advice is not financial product advice: a. advice given by a lawyer in his or her professional capacity, about matters of law, legal interpretation or the application of the law to any facts, b. except as may be prescribed by the regulations – any other advice given by a lawyer in the ordinary course of activities as a lawyer, that is reasonably regarded as a necessary part of those activities, c. except as may be prescribed by the regulations – advice given by a tax agent registered under Part VIIA of the Income Tax Assessment Act 1936, that is given in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities. So effectively a tax agent can provide the following advice.

Contributions into an SMSF

Under the exemption, a registered tax agent may provide advice on any tax implications of contributions into an SMSF, or other superannuation fund, such as a client’s eligibility to make concessional and non-concessional contributions and the tax treatment of those contributions. For instance, a tax agent can use a client’s total superannuation balance to advise the client on their eligibility for:

• the unused concessional contributions cap carry-forward,

• the non-concessional contributions cap and the two-year or three-year bringforward period.

However, they cannot recommend a client make a particular level of contributions, although they can advise on the maximum level of contributions a client can make. This is because the decision to make a particular level of contributions involves considerations other than tax.

I suggest all accountants read the ASIC info guide and the broad exemptions provided by ASIC to accountants and tax agents as it turns the game on its head. Moreover, it contradicts much of the advice provided by the accounting bodies to their members.

Never advise without meeting competency standards

If you advise on SMSFs and do not meet the relevant competency standards, you will be found out. The competency standards for the SMSF industry were formulated in 2004 and they still stand to this day. In a previous article (Issue 038: “Required competencies”) I reviewed these standards.

Simpler Super starts a new wave

The golden age of SMSFs began with then treasurer Peter Costello’s May 2006 budget where there was a radical makeover of superannuation from 1 July 2007. The changes were revolutionary at the time and included:

• tax-free super post age 60,

• an ability to contribute $1million of nonconcessional contributions by the start date of the Simpler Super reforms, which saw an increase in SMSF assets of $50 billion in 14 months,

• abolition of reasonable benefit limits,

• the introduction of a simplified accountbased pension,

• no mandatory conversion of super benefits to a pension at age 65. This meant an accumulation account could be maintained until death, which became popular with the introduction of the pension transfer limits in 2016, and

• limited recourse borrowing arrangements legislated, enabling an SMSF to borrow.

All of these changes saw a big spike in the number of SMSFs and assets in those funds. However, on the bad side contribution limits were introduced with heavy financial penalties for any member contributing in excess of their nonconcessional and concessional contribution limits. Prior to 30 June 2007 there was an age-based concessional contribution limit for members over the age of 50 in excess of $100,000.

But SMSFs grew in number and their balances grew even more rapidly post the global financial crisis. The world looked bright but then Treasurer Scott Morrison let the team down in his May 2016 budget where he decided to dip into the super coffers to increase super taxation by $2.9 billion over a four-year period. The worm had turned and the glory days of SMSFs were over.

In my next article I will be looking at the future of SMSFs under a Labor government financially supported by industry super funds and the unions, what may happen and more importantly how to prepare for any anticipated changes. If Morrison did not care about retrospectivity with the pension transfer balance cap, can we expect the current government to do any different?

The golden age of SMSFs began with then Treasurer Peter Costello’s May 2006 budget where there was a radical makeover of superannuation from 1 July 2007. The changes were revolutionary at the time.

Market-linked pension mire

The presence of a market-linked pension makes the process of winding up an SMSF difficult. Michael Hallinan lays out the options available to trustees when faced with this situation.

There is often a point in time when an SMSF trustee feels running their own super fund is no longer viable. However, if the fund is supporting a market-linked pension (MLP), winding up the SMSF is not a simple process and there are several courses of action the trustee must consider to achieve their objective. The following example illustrates the difficulty associated with the process and the options available to the trustee in these situations.

Tarquin is the sole member of an SMSF. While the SMSF has been an effective vehicle for his superannuation for the past 30 years, he has

decided this type of retirement savings vehicle is no longer appropriate for him. The fund has only one superannuation interest, which supports an MLP with a current balance of $50,000 and a remaining term of 12 years. Tarquin wishes to wind up the SMSF as the cost to keep running the fund is disproportionate given the sole pension interest. Clearly the continuance of the SMSF is not in his best interest.

Tarquin commenced the MLP on 1 July 2005 when he retired at age 60 in order to target the pension reasonable benefit limit. The term selected was 29 years. Tarquin’s then super balance excluded him

MICHAEL HALLINAN is self-managed superannuation executive consultant at SuperCentral.

from the age pension. His MLP did not and still does not qualify as an assets test exempt pension. Unfortunately, only two years later, the reasonable benefit regime was replaced by the contributions cap regime introduced by then Treasurer Peter Costello’s super changes of 2007. Doubly unfortunately, these amendments did not permit MLPs to be restructured as account-based pensions. So what can be done?

It all began on 11 May 2004

On this date, the government announced SMSFs and small Australian Prudential Regulation Authority funds could no longer issue new defined benefit income streams. This change was subject to a grandfathered grace period in which new defined benefit pensions could be commenced subject to certain conditions, which in this case do not apply to Tarquin. This grace period ceased on 31 December 2005.

To fill the gap created by the 11 May 2004 changes, a new form of pension was introduced with effect from 20 September 2004. This new form of pension was structured as an account-based pension that was not a defined benefit pension and was not supported by reserves, yet permitted the targeting of the pension reasonable benefit limit, which was twice the size of the lump sum reasonable benefit limit. This new kind of pension was payable for a specified term and could not be cashed out. This new kind of pension was called a marketlinked pension and was introduced by the Superannuation Industry (Supervision) (SIS) Amendment Regulations 2004 (No 4) F2005B00167.

Budget 2021

The May 2021 federal budget, unexpectedly, contained a proposal to allow legacy pensions, including MLPs, to be commuted at the pension recipient’s option and have the commutation amount either cashed out, again at the pension recipient’s option, or used to commence replacement accountbased pensions subject to transfer balance

cap space. Additionally, the adverse social security treatment that would normally arise on the commutation of an assets-test-exempt pension was to be removed. However, any replacement account-based pension would not be assets-test exempt and would not qualify for the grandfathered return of capital method of incomes test assessment for age pension and Commonwealth Seniors Health Card entitlement.

The implementation of this proposal would have required amendments to various acts and regulations, but principally the Income Tax Assessment Act 1997 (ITAA), Social Security Act 1991 and the SIS Regulations. Unfortunately, the coalition government at the time could not enact the necessary enabling legislation before the May 2022 election. Now the current status of this proposal under the new government is unknown. Curiously, in the October 2022 budget, the government listed various previously announced but unacted upon proposals and whether they were to proceed or be dropped. The legacy pension proposal was neither on the proceed list nor the dropped list. Consequently, the current status of the legacy pension proposal is unknown.

What could have been

The simple solution to taking advantage of the budget proposal, when enacted, by cashing out the MLP through commutation of the pension and paying the resulting lump sum as a superannuation member benefit seems to have disappeared.

Applying this development to Tarquin’s situation it means he must go back to the drawing board. So what can be done?

Tarquin is thinking of four options:

• option 1 – restructure the term of the of the MLP,

• option 2 – roll over his superannuation benefits into a large fund and recommence an MLP,

• option 3 – simply commute the MLP and cash it out, or

• option 4 – seek a modification of the SIS

rules preventing the implementation of option 4.

After some thought, Tarquin dismisses options 1 and 2. Option 3 permits him to wind up the SMSF and is therefore effective. Option 4 enables him to wind up the SMSF and get the cash so is better than options 1, 2 and 3, but does come with some downsides.

Assessing each option

Option

1 – restructure pension

This option is the restructure of the MLP into one with a shorter term. Tarquin will be 77 on 1 July 2022. While MLPs cannot generally be commuted, one exception to the general rule is where the lump sum resulting from the commutation is immediately applied in the purchase of another MLP. The SMSF is also able to issue an MLP after 1 July 2007 if the purchase price of the pension arises entirely from the commutation of a previously existing MLP. Additionally, since the new MLP will be issued after 1 July 2007, it must also comply with the account-based pension drawdown rules. Unfortunately, the

If the fund is supporting a market-linked pension, winding up the SMSF is not a simple process and there are several courses of action the trustee must consider to achieve their objective.

minimum term of any new MLP for Tarquin is 12 years, meaning this course of action offers no improvement. So option 1 is out.

Option 2 – rollover to another fund

This option involves commuting the current MLP, rolling over the commutation lump sum to another superannuation fund and the immediate issue by that fund of a new replacement MLP. Essentially, this option is the same as option 1 with the difference being the replacement MLP will be issued by the trustee of another super fund. The commutation proceeds will be treated as a rollover superannuation benefit, which contains no untaxed element, and not included in the assessable income of the receiving fund. The rollover superannuation benefit will be treated as forming part of the contributions segment and so will form part of the tax-free component.

As the original MLP commenced before 1 July 2017, it will, for transfer balance cap purposes, be treated as a capped defined benefit income stream and so the credit to Tarquin’s transfer balance account will be the special value of the MLP as at 1 July 2017. Commuting the pension as at 1 July 2022 will generate a transfer balance account debit equal to the original credit value less the total pension payments made since 1 July 2017, as per section 294-145 of the ITAA. The new credit to the transfer balance account arising by reason of the issue of the replacement MLP will be the value of the rollover superannuation benefit and not a special value as the new replacement MLP will not be a capped defined benefit income stream as it commenced after 1 July 2017.

While there is a mix of special values and actual pension balances in determining the transfer balance account, as a general statement, the special value at 1 July 2017 will be in excess of the actual pension account balance at that date. As such, the debit will be the 1 July 2017 special value reduced by the aggregate of pension payments since 1 July 2017 and before the commutation and the credit arising upon the issue of the replacement pension will be

the actual balance as at 1 July 2017 reduced by the aggregate pension payments plus or minus any associated earnings since 1 July 2017. To be otherwise would require the pension account earnings since 1 July 2017 being greater than the total of the pension withdrawals and the excess of the special value as at 1 July 2017 over the actual pension account balance at that date.

The fundamental problem with option 2 is to find a retail or industry fund willing to issue an MLP. They are under no legal obligation to issue such products and the relatively small account balance involved may discourage them from doing so.

Option 3 – simply commute the MLP

This option involves the member requesting, and the trustee acceding to the request, to simply commute the pension and cash out the account balance.

The commutation of the pension would constitute a breach of SIS regulation 6.17C. This breach would clearly be an intentional breach of an operational standard and therefore the trustee, or each director of the corporate trustee, would be subject to a fine not exceeding 100 penalty units, currently $222 per unit but proposed to increase to $275 per unit. As the contravention is an intentional one, it would empower the ATO to review the compliance status of the fund and, if thought fit, revoke the compliance status of the fund.

If the pro-rata minimum pension has not been paid prior to the commutation, there would also be an intentional breach of SIS regulation 1.07C, again with a chance for a second fine of up to 100 penalty units and another ground warranting the ATO to review the compliance status of the fund. Also there would be an intentional breach of SIS regulation 6.17 – benefit cashing standards.

Additionally, the pension would be taken to have ceased to be in retirement phase from the start of the financial year in which the commutation arose. Given the other consequences and the small balance, this is not significant.

If the ATO revokes the compliance status of the SMSF, the fund will be taxed at 45

per cent on its assessable income for the financial year in which the commutation occurred and the total value of the SMSF immediately before the start of that financial year, less the contributions segment, will be included in assessable income of the fund.

The commutation payment will taxed under Division 304 of the ITAA at marginal rates subject to the discretion of the ATO to exclude all or part of the payment.

Given these adverse financial consequences, option 3 is not viable and not recommended.

Option 4 – request exercise of modification powers

This option is to request the ATO, as the regulator of SMSFs, to exercise its statutory power of modification of the SIS provisions, which preclude the cashing-out option.

Part 29 of the SIS Act (sections 326 to 336) confers power on the ATO to “grant exemptions from, and make modifications of, certain provisions of this act and the regulations”. In particular, part 29 confers power on the ATO to modify any regulation made for the purposes of part 3, which includes section 31, which is the authority for the making of operating standards.

Significantly, the ATO has no statutory power to modify the SIS Regulations, which do not constitute operating standards.

The cashing-out option is currently precluded by SIS regulation 1.06(8) and SIS regulation 6.17C. There are flow-on consequences under section 42A of the SIS Act and the ITAA. The key issue is whether both SIS regulations 1.06(8) and 6.17C constitute operating standards. Unfortunately this is unclear. SIS regulation 1.06(8) is simply a definition of a certain kind of pension. SIS regulation 6.17C is simply a probation on the trustee paying or commuting a pension in a manner not consistent with the mandatory pension terms.

While SIS regulation 6.17 is expressed to be made for the purposes of section 31(1) of the SIS Act, a modification of that regulation may not be sufficient to protect a trustee from the consequences arsing breaching or intentionally breaching SIS regulation 6.17C.

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For the first time in two years trustees attended the SMSF Trustee Empowerment Day hosted by smstrusteenews in Sydney to witness presentations covering compliance, strategy and investment issues.

1: Lauren Ryan (Thinktank). 2: James Holt (Perpetual). 3: Marina Cardillo, Michael Barrett and Hannah Schwartz (all Australian Investors Association). 4: Julie Dolan (KPMG). 5: Rachel Waterhouse and Jade Ellul (both Australian Shareholders’ Association). 6: Tim Miller (SuperGuardian). 7: Andrew Thomson (CFMG Capital). 8: Boyd Peters (ECP). 9: Robert Porte (Wealthporte Financial Group), Mailene Wheeler (Vincents) and Julie Dolan (KPMG). 10: Kellie Grant (ATO). 11: Nadia Cassidy (Assured Support), Andrew Thomson (CFMG Capital) and Alistair Shields (SMSF Association). 12: Lauren Ryan (Thinktank). 13: Charlie Silvester (Perpetual). 14: Raymond Hempstead, Nitin Soni, Suzy Michael, Gabrielle Davies and Mansour Shukoor (all One Contract Property). 15: Wayne Strandquist (Association of Independent Retirees). 16: Raymond Hempstead (One Contract Property).

The SMSF Service Provider Awards, co-hosted by selfmanagedsuper and CoreData and sponsored by La Trobe Financial, celebrated its 10th anniversary in 2022. A variety of industry stakeholders made their way to the Australian National Maritime Museum in Sydney to recognise the finalists and winners.

1: Suzanne Hemsworth (La Trobe Financial). 2: John Maroney (SMSF Association). 3: Michael Ly and Ashley Parker (both Ausiex).

Kate Sheringham (Heffron SMSF). 5: Suzanne Hemsworth (La Trobe Financial). 6: Elly McNee and Netia Dillon (both Future Generation).

Robert Michal (Hub24). 8: Terry Braithwaite and Megan Kaponas (both Accurium). 9: Andrea Roberts and Nathan Ahboo (both ClearBridge). 10: Grahame Evans (CoreData). 11: Karli Boss and Aditi Graver (both Vanguard). 12: Morris Addamo and Ben Lancaster (both ANZ). 13: Sharona Ghaemmaghami and Samrat Acharya (both CoreData) and Vivian Bai (Access Super Audit). 14: Carolyn Hero (BT Financial Group), Kate Sheringham (Heffron SMSF) and John Maroney (SMSF Association). 15: Erryn Lloyd-Jones and Victor Gugger (both FIIG). 16: Grahame Evans (CoreData) and Vinnie Wadhera (BetaShares).

JULIE DOLAN REVEALS WHAT THE PROPOSED CHANGES TO SHARE BUYBACKS WILL MEAN FOR

One of the proposed measures of the recent federal budget was that all off-market share buybacks by listed companies will be given the same tax treatment as on-market share buybacks. The government stated this was to “improve the integrity of the tax system between the two types of share buybacks”. Targeted towards superannuation funds and other tax concessional investors, this measure will effectively remove access to refundable franking credits on these transactions.

Division 16K, subdivision C of the Income Tax Assessment Act 1936 (ITAA) currently outlines the tax treatment of off-market share buybacks. In summary, the current tax treatment is that the proceeds from the off-market share buyback is split into two components – a capital and a dividend component. The favourable consequences for the shareholder stem from this dissection.

In relation to an on-market share buyback, the shareholder incurs a taxable capital gain or loss based on the buyback price in a similar way as an ordinary disposal of a share and hence is subject to the normal capital gains tax (CGT) provisions. For the listed company undertaking the buyback, a franking debit arises in respect of the purchase price of the buyback based on the company’s benchmark franking percentage for that franking period.

Under an off-market buyback, the proceeds or purchase price is split into a dividend and capital component. In relation to the CGT provisions, this has the immediate effect of reducing the resulting capital proceeds, hence producing a reduced capital gain, converting a capital gain into a capital loss or even further increasing a capital loss position. The dividend component of the proceeds is regarded as a dividend and qualifies as a frankable dividend. As such, the shareholder receives franking credits from this component. The rationale on how the different components are calculated is contained under section 159GZZZP of the ITAA. The calculation is often based on the composition of the retained earnings and paid-up share capital of the company. The ATO’s Practice Statement Law Administration 2007/9 also deals with further intricacies on the buyback, such as

discount to prevailing market value and antiavoidance rules.

As a result of this proposed measure by the government, no part of an off-market share buyback will have a franked dividend component and hence low-tax investors will not benefit from any refundable franking credits.

How does this measure affect SMSF shareholders?

SMSF members benefit from concessional tax rates, especially when members of the fund are in pension phase, and as such on receipt of fully franked dividends the fund not only receives significant tax benefits, but also the potential for refundable franking credits. Therefore, SMSF trustees may have a preference to participate in an off-market share buyback even if the sale proceeds were to be at a discount. As previously stated, depending on the composition of the retained earnings position and paid-up capital of the listed company, the franked dividend component of the proceeds can be significant. As such, the resultant tax benefits to the fund can be substantial. Where the buyback price is largely made up of the dividend component, the current rules also allow taxpayers to recognise a capital loss or reduced capital gain due to the lower capital proceeds for CGT purposes.

As mentioned, under the proposed measure, the tax treatment of off-market buybacks by listed companies will align with on-market buybacks. In other words, no part of the consideration for the off-market share buyback will be taken to be a dividend and the company will be required to debit its franking account.

Reducing the impact of franking credits to concessionally taxed shareholders has to date been a very politically sensitive matter and this proposed measure seems contrary to the election promise of the Labor Party that it would not pursue the removal of refundable franking credits derived by superannuation funds.

This measure will apply from announcement on budget night, that is 7:30pm AEDT, 25 October 2022, and is estimated to increase tax receipts by $550 million over the four years from 2022/23.

JULIE DOLAN is a partner and head of SMSFs and estate planning at KPMG Enterprise.

I NEVER THOUGHT I’D BE HOMELESS.”

Like many of us, Megan* never thought it would happen to her – she never imagined she would need to escape a violent relationship; she never imagined her own family would turn their backs on her; she never imagined she and her daughter would become homeless and have to live out of their car.

Right now, there are thousands of Australians like Megan* experiencing homelessness but going unnoticed. Couch surfing, living out of cars, staying in refuges or transitional housing and sleeping rough – they are often not represented in official statistics. In fact, for every person experiencing homelessness you can see, there are 13 more that you can’t see. Together we can help stop the rise in homelessness.