SMSF Inview - May 2010

17 May 2010

In this edition of the SMSF Inview:

• Preliminary Report released on Phase Three of the Super System Review
• The Federal Budget; and
• Meeting your minimum Pension requirements before 30 June, 2010

o preliminary report released on phase three of the super system review

On 29th April, 2010 the Phase Three - Preliminary Report was released by the Super System Review Panel (Cooper Review) which focuses on Self Managed Super Funds (SMSF). 

It is recognised that SMSFs are here to stay, but the Panel wants trustees to focus more on investing for retirement savings, rather than related party transactions, collectables and leverage.  Most SMSFs already do this so the vast majority of SMSFs will not be affected by any of the proposals within the preliminary report.

The Panel has articulated ten guiding principles that it believes should underpin the regulation of SMSFs.  These include:

1. Ultimate Responsibility – SMSF member assumed sole responsibility for the adequacy of their retirement savings
2. Freedom from Intervention – importance of self direction and self-sufficiency for SMSFs
3. …but not complete absence of intervention – using superannuation law provide some intervention to underwrite the risk of operating a SMSF
4. Service providers – ensure high standards of competency and compliance as part of the overall framework
5. Gatekeeper on establishment – develop a mechanism that allows new entrants to assess suitability and understand comparative costs to APRA regulated funds
6. Consistent treatment with APRA Regulated Funds where appropriate – All super funds should be treated the same way as much as possible
7. Recognition of special risks in an SMSF environment – some additional restrictions should be imposed on SMSF trustees (over and above those imposed on external trustees)
8. Leverage – should not be a core focus, although there is room for leverage in SMSFs
9. Compliance, rather than prudential, regulatory focus – focus on SMSF sector should be legislative compliance rather than a prudential objective
10. Pursuit of excellence - needs to be an aggressive agenda by the government aimed at pursuing excellence across the sector.

It is the Panel’s vision for SMSFs that:

• Trustees act diligently to build their retirement savings supported by highly skilled and competent service providers.
• The sector is able to be innovative, efficient and well managed, largely free of asset-based or % fees.
• SMSFs are simpler for trustees to operate and manage; continuing decline in operating costs, greater use of technology and being subject to more effective regulation and better governance
• Trustees have access to information that is relevant, reliable and comparable, enabling costs to running SMSFs be known, and being able to compare with other funds to make better decision making
• Trustees are focused on investing for their retirement and not on related party of present day benefits
• SMSFs are safer, as the risk of illegal schemes and fraud has been mitigated.

The areas covered within the Preliminary Report include Structure, Education & Competency, Regulation, Service Providers, Investments, SMSF information, Improving Integrity and other matters.

Some of the key messages to take from the Panel’s preliminary report include: 

• No changes to the maximum of 4 fund members
• No recommended minimum balance for a SMSF
• Retain choice between individual or corporate trustee (although it is recognised that a corporate trustee is the preferred option by the Panel and within the industry)
• No compulsory trustee education (voluntary only); rather focus on increasing minimum competencies of service providers in the sector
  • The Panel would like to see mandated trustee education introduced for trustees who breach their SIS obligations, which can be enforced by the Regulator
  • Education could be provided by the ATO or other service providers (to be paid by the trustees, not the SMSF)
• ATO to remain as the Regulator as SMSFs are about compliance regulation, not prudential regulation (APRA funds)
  • ATO to have a new administrative penalty framework to deal with the severity of contraventions
  • Fines to be imposed on trustees personally rather than the SMSF
  • Superannuation law to include powers for the Regulator to be able to provide directions to rectify contraventions within a specified timeframe
• Consider improving the ‘gate keeper’ mechanisms for SMSF establishment.  There are several options being considered by the Review Panel, with an online module the current preferred option.  This would require a prospective SMSF members to complete an online module on a government website which would take them through their possible suitability to participate as a trustee and member of a SMSF
• SMSFs Audits to continue to be conducted annually
• Full audit independence to be recommended where any firm or individual providing any services in connection with the SMSF or trustees to be expressly prohibited from auditing the SMSF
• No changes to the ability to borrow in super (at this stage).  Recommended to review in 2 years time to allow for appropriate measurement of government changes to the consumer protection framework and financial product changes.
• Removal of the 5% In-house asset rules for SMSFs (including transitional period to dispose of any IHA investments)
• Changes to some ‘related party’ transactions, including:
  • No longer having an ability to in-specie transfer shares, widely held trusts off market – where an underlying market exists; all acquisitions and disposals between the SMSF and related party must be conducted through that market (NB. this is a highly common SMSF strategy)
• No changes to the Business Real Property acquisition rules, however any transfer must be supported by a current independent valuation from a registered valuer
  • Transferring residential property is still prohibited
• Prohibition on collectables and personal use assets including wine, paintings, antiques, cars and racehorses.  Transitional period to 30 June 2020 to remove these from within a SMSF.
• Various improved minimum disclose items to members
• Look to remove unnecessary administrative obligations including trustee minutes where trustees and members are one and the same (similar to rules applying to small proprietary companies under the Corporations Act)
• Development on a ‘one stop shop’ online resource for SMSFs – incorporated into a dedicated government website on superannuation
• Changes to the SMSF fund registration process to include using the establishment of a bank account and 100 point identification check to improve integrity.
  • Proof of identity checks for all people joining a new or existing SMSF
  • No retrospective identification measures required for existing SMSFs wishing to organise rollovers from APRA regulated funds.
• No development of a ‘standardised’ trust deed, however superannuatlon law to be amended to reduce the need for amendments when superannuation or tax law changes

The Panel is due to release it's final recommendations by 30 June 2010.  Once the final recommendations have been released, we will look to provide an SMSF Trustee briefing on the impact of the proposed changes from these government reviews. 

Click here to read the media release

Click here to download the Preliminary Report.

o the federal budget

Further to the recommendations of the Henry Tax Review, the government has formally announced a range of superannuation initiatives in the federal budget including:

• increasing the super guarantee (SG) rate from 9% to 12% (over the next 10 years)
• providing a contribution of up to $500 for workers with incomes up to $37,000
• extend the super guarantee age to 75 years (from 70)
• allow for concessional contributions of up to $50,000 for those over 50 where their account balance is less than $500,000

Further details in respect to these 'fairer superannuation' announcements can be found on the Future Tax System government website. 

o  meeting your minimum pension requirements before 30 June 2010

As 30 June draws closer it is important for members who are drawing a pension from their SMSF meet the minimum payment requirements for the financial year.  Not taking the minimum pension will mean that the fund is not entitled to the tax exemption on income generated from assets supporting the pension.

The table below outlines the minimum payment factors based on the age of pension recipient.  Note for the 2009/10 financial year a 50% reduced percentage factor applies.

The temporary relief of the minimum payment requirements applies to the following pension types: 

• Account-Based Pensions (payable since 1/7/07);
• Allocated Pensions (pre-dating 1/7/07); and
• Market-Linked (term allocated)pensions  

It is important to note that this temporary relief provision does not apply to defined benefit pension recipients (e.g. lifetime, life expectancy or fixed term complying pensions). 

There is no change to the 10% minimum applicable to Transition to Retirement Income Streams. 

Please note the minimum pension reduction ceases as at 30 June, 2010.  From 1 July 2010 the minimum pension levels will change back to the standard percentages (e.g. 4% for an pension recipient between 55-64 years).

Should you have any further questions relating to this matter, please do not hesitate to contact your SMSF Client Manager on 1300 883 122.

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