Aaron Dunn looks at some of the changes flowing from the Stronger Super reforms and how those changes will affect SMSFs.
The new financial year will see the introduction of several changes stemming from the Stronger Super reforms to improve the operation and regulation of the self-managed super fund (SMSF) sector.
One of these changes – the proposed banning of off-market share transfers – appears set to be deferred, as no regulations have yet been provided by Treasury for consultation.
Some of the changes to take effect from 1 July 2012 include:
- The need to consider insurance as part of the fund's investment strategy;
- The inclusion as an operating standard of the requirement to have fund assets held separately from personal or employer assets; and
- Fund assets to be valued at net market value for reporting purposes.
Trustee requirement to consider insurance for SMSF members as part of their investment strategy
The proposed regulations are to insert a new paragraph into sub-regulation 4.09(2) to ensure that trustees consider whether they should hold a contract of insurance that provides insurance cover for one or more members of the fund.
With less than 13 per cent of SMSFs holding insurance for members, this recommendation aims to ensure that trustees appropriately consider the holding of insurance for fund members.
There will be a requirement for trustees to consider whether to hold insurance for their members such as life insurance when they formulate, regularly review and give effect to the fund's investment strategy.
It is expected that trustees will evidence this requirement by documenting decisions in the fund's investment strategy or minutes of trustee meetings that are held during an income year.
In addition to the consideration of insurance within a fund's investment strategy, this regulation would also amend subsection 4.09(2) to require trustees to regularly review the fund's investment strategy.
This will require trustees to evidence this review by documenting decisions in the minutes of trustee meetings that are held during the income year.
The separation of fund assets from personal or employer assets
These changes will insert into sub-regulation 4.09A a requirement that a fund trustee must keep money and other assets of the fund separate from money or assets held by the trustee personally, or by a standard employer sponsor.
Currently, this requirement forms part of a covenant (section 52(2)(d) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act)) that is deemed to be incorporated into the governing rules of the fund (ie, trust deed).
The Australian Taxation Office (ATO) is currently unable to enforce compliance with covenants and relies on voluntary compliance by trustees.
It is not uncommon within SMSFs that breaches occur within this existing covenant where investments are incorrectly held by the fund.
This may include the fund bank account or other investments that may be incorrectly recorded in a member's own name rather than in the capacity as trustee of the SMSF.
Contraventions of this existing covenant are one of the most commonly reported contraventions sent by auditors to the ATO.
With this regulation becoming a prescribed standard applicable to the operation of a SMSF, the regulator will have powers to enforce fines of up to $11,000 for a person who intentionally or recklessly contravenes the standard.
Valuing fund assets at net market value – a problem?
A SMSF is required under section 35B of the SIS Act to prepare a Statement of Financial Position and Operating Statement each income year.
From the 2012/13 financial year, all SMSFs will be required to value an asset at its net market value when preparing accounts and statements.
Sub-regulation 8.02A(2) will define net market value as the amount that could be expected to be received from the disposal of an asset – in an orderly market – after deducting costs expected to be incurred in realising the proceeds of such a disposal.
Currently, SMSFs are generally able to choose either historical cost or market valuation methods to determine the value of fund assets when preparing financial statements.
The lack of consistency in valuation methodology has not only lead to an impact on a member to not be able to ascertain the current value of their super benefits, but it also affects the reliability and usefulness of superannuation data to make accurate comparisons across the entire superannuation sector.
It has been raised, however, through consultation that using net market value will not actually meet policy intent by using this methodology – in particular, with APRA regulated superannuation funds moving to a requirement to value assets at their 'fair value'.
This inconsistency in valuations will cause further confusion when it comes to addressing issues such as valuing whether a member's account balance (over 50 years) is less than $500,000 to determine qualification for the extended concessional contribution cap from 1 July 2014.
With the SMSF sector being recognised as well-functioning, these changes look to further improve on the pedigree of this fast-growing industry.
Aaron Dunn is the managing director of The SMSF Academy.
