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Self Managed Super Fund (SMSF) Article
Cooper Review sheds light on changes
By Tony Negline.
This article may be out of date.
19th May 2010
Two weeks ago the Cooper Review released a preliminary report into Self Managed Super Funds, the largest superannuation sector.
Overall the Cooper Review finds Self Managed Super Funds in pretty good health but some areas need adjusting. Additionally the review noted that most people and organisations it has spoken to about SMSFs have reasonably uniform views on changes that will improve this very important part of Australia's retirement wealth assets.
The purpose of this initial report is to give interested parties a clear picture on the likely shape of final recommendations that the Cooper Review's brains trust will ultimately make to the Government.
Every aspect of Self Managed Super Funds has been examined. In all the report contains 27 draft recommendations.
It's important not to get too carried away with these proposals made by Cooper because there is a long and winding road between initial thoughts and actual legislation. This is especially the case in election years.
That said the broad thrust of the Cooper Review's thoughts seems to be quite settled so we have a reasonable future view of most future changes.
The Review reveals ten guiding principles for SMSFs that will shape the recommendations it ultimately delivers to the Government. These guiding principles are important because they give us a good basis to assess the future regulatory environment for Self Managed Super Funds.
One of the guiding principles says that some regulatory intervention is justified because the tax concessions given to super funds and if a SMSF fails, the members can fall back on the aged pension. Another principle says that leverage within SMSFs is okay but should not be the predominant feature of a super fund
The issue of regulatory rules are justified because tax concessions are given to super investments is an interesting twist on past explanations. Twenty years ago, the justification for super tax concessions was primarily to compensate investors for the long-term nature of superannuation and for agreeing not to have personal access to invested capital for many years. Most Self Managed Super Fund investors pay, or have paid, significant amounts of tax.
There are nine broad regulatory areas that the Cooper Review think need tweaking. We will examine several of them here:
- Barriers to entry – in this section the review makes six recommendations and taken as a whole it will be harder to establish a new SMSF. For example, as noted above, aspiring SMSF trustees would need to complete specific training to determine the suitability of an SMSF for them. Will this reduce the number of Self Managed Super Funds being set up? My best guess at this stage is possibly in the short-term but certainly not in the longer-term
- Access to the Super Complaints Tribunal (SCT) – the Cooper Review thinks that potential fund beneficiaries should have access to the SCT if they dispute a death benefit distribution and they are not a member of a super fund. Trustees of super funds would also be able to approach the SCT if they have problems with life insurance policy claims. Both these changes are justified and welcome but those trustees who don't plan could face considerable additional cost. Trustees of Self Managed Super Funds should think carefully about how benefits would be dealt with on a member's death. An potential doubt should be removed.
- Regulator rulings and separate legislation – some SMSF industry people have long argued that Self Managed Super Funds should have their own legislation. The Cooper Review has rejected this idea as unnecessary and potentially opening up more confusion and complexity. At present the Tax Office cannot issue binding rulings about super laws and the Cooper Review thinks this should change. Many small super fund trustees would welcome the ability to avoid regulatory problems by getting definitive information from the ATO
- Service providers – the Cooper Review believes that financial planners who provide advise to SMSF trustees need more and better training to successfully fulfil their duties; the review also believes that Self Managed Super Fund auditors need additional qualifications and should be fully independent of other service providers. Some auditors are asking why their profession is being singled out and if this rule is to apply, why shouldn't it affect all professions who supply services to super funds?
- Allowable investments – there are several investment rule proposals including that the 5% in house asset rule should be removed; those with existing in house assets should be given a transitional period to divest themselves of this holding. It will be interesting to see if business real property holdings be impacted. The Cooper Review suggests that SMSFs should not be allowed to trade listed assets (such as ASX shares) with related parties via off market processes but should have to conduct such transactions through the official market facilities. This is an unnecessary requirement because the fund's annual audit should identify any silly valuation. Additionally SMSFs should no longer be allowed to invest in collectables and artwork; current holdings should be unwound during a transitional period. Not many people are arguing against this proposal
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