SMSFs would pay a high price for compensation

Some trustees have called for SMSFs to be included in the compensation arrangements relating to the Trio Capital/Astarra collapse but, as Mike Taylor writes, a high price will have to be paid.

Self-managed superannuation funds (SMSFs) represent the fastest-growing segment of the Australian financial services industry, largely because they are perceived as offering their trustees a greater measure of control over their destinies than would be the case if they remained members of an industry fund or a retail master trust.

Among the attractions in establishing SMSFs is that they are allowed to operate under a number of different rules.

In addition, SMSFs are regulated by the Australian Taxation Office (ATO), whereas all other funds answer to the Australian Prudential Regulation Authority (APRA).

All Australian superannuation funds are covered in broad terms by the Superannuation Industry (Supervision) Act (SIS Act), but as this month’s Federal Government decision with respect to compensation relating to the collapse of Trio Capital has made clear, SMSFs do not enjoy the same standing as APRA-regulated funds where Part 23 of the SIS Act is concerned.

The key element separating SMSFs from conventional superannuation funds is that APRA-regulated funds are ‘equitably’ levied to pay for the compensation that will ultimately be delivered as part of the Government’s decision regarding the Trio Capital collapses.

Of the 690 direct investors in Trio Capital, 285 are understood to have been SMSFs. However, SMSFs fall outside the compensation scheme because, by their very nature, they are not subject to the annual levies imposed on conventional superannuation funds to cover the likelihood of fund collapses.

Indeed, the explanatory documentation relating to the Commonwealth legislation is quite specific. It states: “The Levy Act allows the Commonwealth to set a maximum and minimum levy amount. The minimum and maximum levy amounts were introduced to distribute the levy burden in an equitable manner, whilst ensuring that it is administratively efficient to collect.”

It goes without saying, therefore, that in the absence of SMSFs being appropriately levied, APRA-regulated funds would strongly object to the Assistant Treasurer and Minister for Finance, Bill Shorten, extending the Trio/Astarra compensation arrangements to SMSF trustees.

The likely objections of the APRA-regulated funds become more understandable when the amounts levied by the Government are understood.

According to the explanatory documentation attaching to the legislation, in the 2002-03 financial year, the Minister for Revenue and Assistant Treasurer, Helen Coonan, made 543 determinations to grant financial assistance under Part 23 of the SIS Act.

The documentation said the total amount of financial assistance granted was $22,580,281, with a further 79 determinations, granting $6,419,568 being made in the 2003-04 financial year.

It said the Superannuation (Financial Assistance Funding) Levy and Collection Regulations 2005 would recoup these amounts, as well as $3,505,549 of financial assistance granted in 2001-02 but not recouped under the Superannuation (Financial Assistance Funding) Levy Regulations 2003.

Thus, if SMSF trustees wished to be compensated in the same manner as those within affected APRA-regulated funds, it is clear that the SMSF sector would be required to embrace the imposition of a levy.

In the absence of a levy and consequent inclusion in Part 23 arrangements, SMSF trustees and their advisers were told by Shorten their best course of action would be via the Financial Ombudsman Service.

One media outlet quoted Shorten as saying: “If people wish not to operate under those SMSF regulations, they’re free to become members of the APRA funds.”

This, however, did not dissuade the Self-Managed Superannuation Professionals’ Association of Australia (SPAA) from calling for SMSFs to be accommodated.

Commenting to Money Management last week, SPAA chairman Sharyn Long acknowledged that SMSF investors had more control than those in large super funds, but argued that should not mean they were forced to “turn to a potentially protracted and expensive court process to seek redress in cases of fraud”.

Similarly, Small Independent Superannuation Funds Association (SISFA) director Andrew Cullinan said he felt disappointed by the decision to exclude SMSFs from compensation.

“The basis for exclusion seems to be because they have a direct control over their investment base,” he said.

“It’s splitting hairs. People have to invest their superannuation somewhere, whether it is a mainstream fund or a SMSF, so that’s the choice you have to make.”

He said that if the Government made a decision to compensate, it should cover all those involved, regardless of the vehicle they were investing through.

However, in the absence of SMSFs trustees agreeing to be subjected to the same levies as APRA-regulated funds, the Government seems highly unlikely to be moved by pleas for equal treatment.

Long said that the SPAA had used its submission to the Cooper Review to argue for SMSF trustees to be subject to the same industry-funded financial assistance available to APRA-regulated super funds.

The SPAA submission acknowledged that if SMSFs were going to participate in such a scheme, SMSFs would need to participate in an appropriate portion of the funding.

While neither the Cooper Review findings nor the Government have seen fit to specifically respond to the SPAA proposal, it seems that the price of accessing Part 23 compensation arrangements might add significantly to the fixed costs of running an SMSF.

The anecdotal evidence suggests that many SMSF trustees would back themselves as being smart enough to avoid the likes of Trio and Astarra.