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Self Managed Super Fund (SMSF) Article
Let's avoid over-regulating a strong and booming Self Managed Super Fund sector
By Tony Negline.
This article may be out of date.
14th July 2010
The last seven years has seen the dramatic rise in Self Managed Super Funds. These funds now represent the largest super sector.
Over the time an average of 2,500 new SMSFs were established each month. This growth rate shows no immediate sign of slowing.
One question I like to ask people who work in the SMSF sector is when will this dramatic growth begin to slow because the SMSF market share has reached saturation point?
Sharyn Long and Andrea Slattery, respectively Chairman and Chief Executive of the Self-Managed Super Fund Professionals' Association of Australia or SPAA think that there is no obvious saturation point.
They argue that SMSFs are a legitimate part super sector and satisfy all the Government's objectives of its super policy objectives. Namely, they deliver investment and benefit choice, fee for service, operational transparency and demand consumer engagement. They are also low cost based on Tax Office data.
Long and Slattery say that one of the reasons the SMSF sector is strong and sustainable is that compared with other super sectors, it thrives principally on the voluntary decisions of investors not on government regulation. How small would some sectors of the super industry be without compulsory employer contributions?
SPAA commenced in 2003 and now has over 1,700 members. Over 630 of these have been accredited by SPAA as SMSF Specialists. SPAA aims to provide its members with standards, technical information, representation to Government and regulators and a forum to collectively increase knowledge.
An example of SPAA's recent efforts to assist it members is in relation to SMSFs investing in artwork. The Cooper Review has recommended that SMSFs should be banned from investing in artwork and other collectibles.
SPAA has worked with the Australian Artists Association to draft a guideline so SMSF professionals can assist super funds that invest in these types of assets. Andrea Slatery said, "The practical reality is very few SMSFs hold artworks or other collectables and those that do normally have some expertise in relation to that particular investment class."
SPAA hopes that its guideline will be a sign to the government that regulation for regulations-sake is not often the best. Perhaps it might also be a sign that the super industry can self-regulate.
Another initial controversial recommendation of the Cooper Review was the idea that SMSF auditors needed to be independent of other professionals providing services to a SMSF.
This proposal has not been extended to other super fund types. SPAA believes there are simply not enough adequately trained professionals to deliver true independence and expertise. The major problem with the current SMSF auditing standards is that most auditors are not highly skilled. More work is required to introduce appropriate competency standards.
The Cooper Review has recommended that SMSF auditors be registered with ASIC. SPAA supports this position as long as it encourages best practise and doesn't lead to over regulation.
One significant concern for SPAA over the past few years has been excess super contributions and the associated penalty taxes.
Andrea Slattery says that in 2006/07 the ATO processed 10,000 excess contribution tax cases. In the following financial year (2007/08) it dealt with 50,000 cases. The problem is not going away and impacts all super fund types not just SMSFs.
Over the last 16 years there have been more than 50 changes to the rules that allow super contributions to be made and about the same number of changes to the tax treatment of contributions.
SPAA has collected many cases of inadvertent excess contribution breaches. It has identified that 25 per cent of the excess contribution cases presented to it have arisen because investors have been ignorant or confused about the super laws and associated tax rules. With the rate of change should this be a surprise?
The tax laws give the ATO the ability to reduce the impact of excess contributions tax. Unfortunately the Tax Office is taking a hard line on how it interprets the powers it has been given.
In the 2010 Federal Budget the Government announced a small change to these powers. From the date of the rule's commencement the ATO will be able to tell taxpayers if a prospective contribution will cause them to incur excess contributions tax.
Whilst Long and Slattery welcome this change it doesn't deal with many of the inadvertent breaches SPAA has collected from its members. Primarily SPAA would like to see the ATO soften its approach. Failing that further judicial direction or legislative change will be essential.
On another topic, SPAA believes that the intra-fund advice concessions recently proposed by the Government go too far. "Free, cheap and low cost advice has its place," says Slattery. But it is inappropriate when advice has to take into account an investor's personal circumstances. The Government needs to go back to the drawing board before someone receives poor personal advice.Finally, SPAA is happy with the ATO as a regulator of SMSFs. From a managerial perspective the ATO has the one unit looking after super tax revenue and regulatory supervision. SPAA would like to see these functions split.
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