When the clock ticked over to the first of April this year tens of thousands of small superannuation funds across the country had been forced to re-evaluate where they would sit under a new superannuation regime.
This regime was the result of changes enacted to the Superannuation Industry Supervision (SIS) Act and many were sure to have seen the irony in the choice of that day in April as the kick off date for the new system.
As a result of recommendations coming out of the Wallis Committee, small do-it-yourself (DIY) superannuation funds were required to come under the jurisdiction of either the Australian Tax Office (ATO) or the Insurance and Superannuation Council (ISC) and its successor the Australian Prudential Regulatory Authority (APRA).
According to AM Corporation private funds services national manager David Harley this splitting of regulatory authority was based on the resources and capabilities of both bodies.
“The ATO has the means and resources to oversee a large group of funds, which results in bureaucratic time and cost savings,” Harley says.
“It has also publicly stated that it has adopted an educational focus towards compliance and would work through that channel before moving to any form of forced regulation.”
Self regulation has become the key for SMSF’s, according to Harley, with the ATO ensuring this occurs.
“By tying membership to the trusteeship, funds have to be on the level with members and the regulator and it has removed that small number of players who were not up to speed,” Harley says.
Small Independent Superannuation Funds Association (SISFA) chief executive Graeme McDougal says there were some concerns about the amount of funds and their activities.
“The old ISC was suspicious about some funds and since small DIY funds made up about 98 per cent of funds, it was difficult to cover,” McDougal says.
However the main provisio for this shift to the two regulators was a redefinition of what was a DIY super fund, with two models on offer for those who still wish to manage their own superannuation.
The first model has been labelled a small APRA fund, which according to McDougal is a fund which can vary in the size of its membership but at all time maintains an external trustee to oversee the investment process.
Harley says this option still has implications for both the trustee and the members.
“The trustee takes on the responsibility for all fund actions and as such some investments may not be permitted by external trustees even though they are good, but not necessarily for the fund,” Harley says.
“Trustees have to meet certain standards and insure investments are in line with a risk strategy and so external trustees often take the middle line.”
However both McDougal and Harley point out that this approach solves the issue of compliance but there are costs associated based on a percentage of the size of the fund.
The other type of fund has been labelled a Self Managed Super Fund (SMSF) since control for the fund lies completely in the hands of the members.
But these funds also have some restrictions with the major one being a size limit of less than five. At the same time these members must all be trustees, all trustees of the fund must be members and a business or familial relationship is essential for anyone to be part of the fund.
Given these tight restrictions it is interesting to note that most DIY super funds decided to be regulated by the ATO. An APRA spokesperson says it has sent out 200,000 response forms with nearly 90 per cent letting the regulator know of the position taken since March 31.
Of the respondents 95 per cent elected to go with the tax office and the remainder with APRA.
“These figures do not take into account those funds who remained with APRA under different structures and those funds which decided to wind up and place members in public sector funds,” the spokesperson says.
“This latter figure has been about 2000 in recent months and those winding up or moving into other structures still represent a significant minority.”
Harley says the main reason for the large numbers of funds that elected to adopt the new structure under the ATO was one of control.
“The overriding reasons for choosing a SMSF is control over how funds are used. The depth of investment goes down to the individual stock level,” Harley says.
“The reason it must go to this depth is because it must, like every super fund in Australia, have an investment strategy as permitted under superannuation law.”
This is not something that can be started and left Harley says and warns investors that if they do not have the time, interest or experience then SMSF is not an option.
It is at this point that McDougal says planners and advisers can benefit from changes to small super funds, especially as they become more broad based at their own level and familiar with the structural and compliance issues which go with these funds.
“Any starting fund should seek advice and make a decision, but they must have looked at the time, effort and economics of entering into this type of venture,” McDougal says.
“An adviser can play a major role in the total business activities of those with small super funds. They will understand the total picture and can therefore give realistic advice on the nature, structure and investments of a super fund.”
