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Self Managed Super Fund (SMSF) Article
Cooper review could be a sign of things to come

By Tony Negline.

This article may be out of date.

21st July 2010

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A lot of commentary about the Cooper Review's recommendations for Self Managed Super Funds has mostly concentrated on the banning of these funds from owning collectibles such as artwork.

Whilst this is an important consideration, the review had many other comments to make which are well worth looking into because they provide a helpful guide on how the sector will be regulated in future years.

The Cooper Review finds "the SMSF sector performs at least as well as the large … fund sector."  Perhaps this is an understatement given the review believes large funds need a fairly radical shake-up but SMSFs don't.

The review developed a list of ten guiding principles about Self Managed Super Funds which the review panel's members think should guide the SMSF sector and government on the operation of these funds.

Some submissions to the Cooper Review suggested that SMSFs should have their own purpose built legislation.  The Cooper Review initially agreed with this view.  However in its final document the Cooper Review has accepted that "the same tax legislation, sole purpose and preservation rules should apply across all sectors.  This suggests that many rules for SMSFs will be the same as those applicable to large APRA funds …"

This seems to imply that we'll not be having separate super laws.  However Cooper says these laws should be split up so that there are specific sections that apply to all super funds, other sections for issues which only impact non-SMSFs and also a specific area for SMSF exclusive material.  Importantly all super funds will continue to work with the same basic rules.

The Cooper Review acknowledges that the SMSF sector is widely dispersed and non-institutionalised.  As "many SMSF service providers are also fragmented and lack scale … the Panel believes that a sector that has such a large proportion of Australia's retirement savings needs an aggressive agenda aimed at pursuing excellence across all its activities."

This is indeed a worthy objective however the Panel concludes that the government may want to consider how it could "support, promote and champion the development of best practice among SMSF trustees".

As has been amply demonstrated with roof insulation and school building programs, it is often impossible for government to meaningfully and appropriately inject itself into commercial activity.

In relation to the longstanding four member limit on Self Managed Super Funds, the Cooper Review ultimately decided not to change it even though it accepted that this limit is an arbitrary number that does unfairly impact larger families.

The Cooper Review panel does not think SMSF trustees and members need formal education unless the trustees have breached the super laws.  In these cases the cost of education would be a personal cost of the trustee not a cost to the fund itself.

However in relation to financial advisers, the review panel believes that ASIC's training standards for advisers needs to contain a specialist component for Self Managed Super Funds "which would focus on increased knowledge and competency with respect to the SIS Act."

This is a good idea however in reality the specialist component needs to be much deeper than just specific super laws.  SMSFs are often buffeted by a wide range of legislative and judicial areas.  Additional knowledge is needed in the area of trust law generally and tax laws for Federal, State and Territory jurisdictions.

The Review has a lot to say about SMSF auditors.  It recommends that all SMSF auditors should be registered with ASIC which would determine the necessary qualifications as well as ongoing competency and knowledge standards.  The ATO however would police these standards.  On the condition the government accepts and implements these ideas the Cooper Review believes that "auditing firms should not be providing SMSFs with any other service and should be completely independent."

This seems a reasonable proposition.  But if it should apply to one SMSF service provider it should apply to them all.  This would mean that SMSF lawyers, administrators, actuaries, investment advisers and tax agents would have ASIC standards and operate independently of all other service providers.  Clearly this wouldn't be practical for all services providers then perhaps it isn't appropriate for any.

In its 2010/11 Compliance Report the ATO demonstrates that fraud and illegal early release issues have become one of its major ongoing projects.  With this in mind the Cooper Review says that the integrity of the processes and information around the establishment of Self Managed Super funds must be improved.

The review panel says that reliable and effective SMSF member identification when a super fund is registered with the ATO is essential.  They argue that the new SMSF's banker should pass relevant information onto the ATO which can check that the data it has been given from the bank and from the SMSF itself correlates.

The Cooper Review has suggested that this approach should be applied to existing SMSFs that wish to transfer a rollover from an APRA regulated super fund.

The Government is now reviewing the Cooper Review's work.  The timing of when we will hear what it accepts or rejects out of all the recommendations is governed by the timing of the election and whoever will be the next Minister responsible for superannuation.

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