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Self Managed Super Fund (SMSF) Article
A little knowledge is a dangerous thing
By Tony Negline.
This article may be out of date.
2nd February 2010
Should it be made harder for people to set up Self Managed Super Funds – for example, by introducing a minimum level of financial assets and compliance knowledge?
Compliance issues often arise in Self Managed Super Funds because many of them are only reviewed once a year or often more than to 12 months after an error has occurred.
Many SMSF trustees rely on a range of professionals to help them comply with their legal obligations. The tax office has expressed concern about the quality of work it sees from some of these professionals and it has to be said that standards in the industry are either non-existent or inadequate.
No, I don’t believe it is necessary for the government to place such restrictions on SMSFs but perhaps it needs to consider how it could adequately educate, monitor and supervise all the people providing services to SMSF trustees.
This was one of the proposals floated in an issues paper published by the federal government’s Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System (often called the Cooper Review, after Jeremy Cooper who heads up this expert panel).
Before Cooper finalises his recommendations to the government, I want to explore the issues he raises and what I hope the review will ultimately recommend.
- SMSFs can value their assets using historical cost when preparing their financial accounts. Should they have to use market value accounting? There are actually three issues here. SMSFs are small entities and market value accounting does not achieve much for them but all non-SMSFs have to use market value accounting. If SMSFs are allowed to report using historical cost valuations then important comparisons between Self Managed Super Funds and all other super funds will have little accuracy. Also in some areas (for example pension and lump sum calculations) Self Managed Super Funds have to value all their assets using market values. Perhaps SMSFs can prepare their financial accounts using historical cost but must report to Tax Office using market values
- Is the trust structure appropriate for Self Managed Super Funds? Unquestionably I think it is because trustee obligations and responsibilities are significantly much higher than any other entity our legal system has developed thus far; these structures work for all super funds including those with only one member
- Is the Australian Tax Office the most appropriate regulator for Self Managed Super Funds or does it have conflicts of interest in fulfilling its role? The tax office goes to great lengths to appropriately carry out its SMSF obligations but it will always be a tax collector. I would stick with the ATO on the basis that it's doubtful any other regulator would do a better job. But all financial services consumer protection rules should be regulated by the ACCC under the Trade Practises Act. This would make financial services like nearly all other products sold in Australia
- Should the Self Managed Super Funds $150 annual regulatory fee be changed? Yes it should be much higher. Some of the additional money could be used to supervise SMSF administrators, auditors and so on. The balance could be used to deliver additional small super fund trustee education services
- The maximum number of members allowed in Self Managed Super Funds needs to be increased. The current four member limit is discriminatory against larger families
- Self Managed Super Funds have to lodge their annual regulatory returns within 11 months of financial year end. Is a shorter time frame possible or even desirable? I think a SMSF should be required to get its accounts and activities audited within 6 months of financial year-end. If the fund is owed a tax refund or has a compliance problem then it should have to lodge within the 6 months of year end. However if a fund has no compliance issues then it can delay lodging its annual regulatory return until 11 months after financial year end
- At present the ATO is not a prudential regulator of Self Managed Super Funds. Its job is simply to make sure that SMSFs comply with the law and to take action when it finds problems. Should the ATO be a prudential regulator? The current arrangements are adequate but need to be better communicated. SMSF trustees must be under no illusions that the buck stops with them and poor investment choices might lead to no super assets
- Should there be separate legislation for Self Managed Super Funds and another set of rules for all other super funds? I'm in favour of one set of rules. The legislative process would ultimately deliver different rules for various super fund types. The rules are complicated enough without introducing accidental law variations depending on the type of super fund you use
- The Tax Office can release binding rulings on how the tax laws apply to certain circumstances. It also releases rulings on the super laws but these rulings are not binding on ATO. Should the Tax Office be able to issue legally binding rulings on the operation of the super laws? At this point in time I believe this is unnecessary because the ATO already issues enough material and we don't need anymore.
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