Will 2013 be the defining year for self-managed super funds? Bryan Ashenden's policy overview discusses the implications for advisers.
With many direct and indirect changes in legislation and regulation converging, 2013 looks likely to be a defining year for the self-managed super fund (SMSF) industry.
Recent statistics on the SMSF industry demonstrate that in recent years it has continued to grow at a significant rate.
For the year ended 30 June 2012, recent Australian Prudential Regulation Authority (APRA) superannuation statistical reports show that there were over 478,000 SMSFs, with the number growing at an average of close to 3,000 new funds per month.
That 12-month period was the highest year of growth since the onset of the global financial crisis. With $439 billion of assets, the SMSF sector represented over 30 per cent of the total superannuation market of $1.4 trillion.
Yet with approximately 914,000 member accounts, they represent only 3 per cent of all superannuation account balances across the industry.
There are many changes, both legislative and regulatory, that will have an impact on the SMSF industry from 2013 and will provide the opportunity for the SMSF market to establish its rightful place as part of the retirement plans of many Australians.
But for others, it may force a rethink about whether an SMSF is appropriately part of those plans, or whether they are better served elsewhere.
The impact of the FOFA reforms
For the majority of the financial services industry, 1 July 2013 will mark the commencement of the Future of Financial Advice (FOFA) reforms.
Perhaps the most important of the reforms is the commencement of the 'best interests' duty.
In a sense, get it right and conflicted remuneration concerns should not arise, nor should there be any questions raised by clients when they receive fee disclosure statements or are asked to opt-in to continue receiving on-going advice in the future.
In a SMSF context, the application of the best interests duty comes from the very beginning - is it in a client's best interests to establish one. What are they trying to achieve?
As always, if they are only intending to invest in shares, managed funds and cash, are they better off in a public fund environment, particularly as costs in that market are expected to come under increased pressure as a result of the introduction of MySuper products.
As an adviser, do you truly believe that your clients would have the time, energy and knowledge to act diligently as a trustee of their own fund?
Whilst it may be a difficult discussion, to act in the best interests of your client means you should be having these discussions.
Further, some of the commentary in ASIC's recently released Regulatory Guide RG175, which covers the application of the best interests duty, does raise the question that if you don't believe an SMSF is in the best interests of your clients, but it is what they want to have for whatever reason, then you should consider whether you are better off to decline to provide that advice.
And it's not just about the establishment of new funds. What about when an existing client comes to see you post-1 July 2013 for some further advice?
The best interests duty will apply every time you give advice to a client (existing or new).
Should you now be having discussions with some of your clients about winding up their SMSFs?
Of course, it doesn't mean that they should wind them up immediately.
There will be costs involved in doing so, including potential capital gains tax liabilities on selling assets to facilitate a roll-over to a non-SMSF environment.
Those costs may be prohibitive regarding such a move. But the question remains as to whether a change of superannuation environment is something that should be brought to the attention of your clients.
The new limited licensing regime
The Government has announced its intention to make a new limited Australian Financial Services Licence (AFSL) available from 1 July 2013, with restrictions on the level advice that can be provided, other than in the SMSF area.
Whilst often referred to as the new "accountants' licensing regime", it is not restricted to accountants, and in fact may open up the area of financial advice to other parties looking to become licensed and provide advice to clients, such as the real estate industry.
What is important however is that the introduction of this new licence will bring with it a requirement to meet all of the FOFA obligations in providing advice.
Fairly or unfairly, much of the growth in the SMSF market has been attributed to the accounting profession.
There has also been much conjecture that the average account balance of funds established by accountants has been substantially lower than those recommended by financial planners.
An industry rule of thumb has always been that you need at least $200,000 of investable funds within an SMSF for it to be a viable option - although there are certainly circumstances where lower balances warrant a need for an SMSF, or where it could be considered appropriate.
To date, accountants have enjoyed an exemption from the Corporations Law requirements in advising on the establishment of a SMSF, including the need to be licensed and to provide a Statement of Advice setting out the basis for the recommendation.
Under the new limited licensing regime, however, those exemptions will be removed.
Any accountant looking to recommend an SMSF will need to be licensed and will need to demonstrate that the establishment of an SMSF is indeed in the best interests of their clients.
It will be interesting to see if this leads to a slow-down in the growth of new SMSFs, whether because of difficulties in meeting the best interests requirements, or a decision by accountants not to proceed with obtaining a new limited AFSL.
Either way, the impacts of this change may not be felt for a number of years, as the Government has announced that the current accountants' exemption will remain in place until 30 June 2016.
If the Government was serious about ensuring clients receive the best advice in their circumstances, wouldn't it have made sense for the best interest duty to apply to the acquisition of any financial product from 1 July 2013, whether other licensing exemptions were available or not?
Whilst some of this concern may have been overcome by the introduction of APES 230 regarding financial planning services provided by members of the professional accounting bodies, that standard (which is still to be finalised) has had its implementation date recently pushed back to July 2014.
A review of gearing in super?
On 16 December 2010, in releasing its response to the Cooper Review of superannuation, the Government announced that after two years had elapsed it would review the use of leverage within superannuation and determine if it had a role to play in the retirement planning of Australians.
That two-year period has now lapsed, and whilst no formal review of gearing within super has been announced, there is a lot of speculation that such a review is just around the corner.
Consider the amount of noise that gearing within super, particularly gearing within SMSFs, has been generating of late.
A review of the last few National Tax Liaison Group (NTLG) minutes from the Australian Taxation Office (ATO) shows that a reasonable portion of those meetings is spent discussing issues associated with gearing in super.
Over the last 12 months, we have seen confirmation that Section 109 of the Superannuation Industry (Supervision) Act about arm's length dealings applies where a transaction between an SMSF and a related party is conducted on terms that are more favourable to the related party.
In terms of gearing in a super context, that says you can't have a related party loan with an interest rate higher than a market (or commercial) rate.
But that same confirmation has then led to a discussion about related party loans with interest rates less than a commercial rate.
Whilst not breaching Section 109, does it cause contribution cap concerns? How much lower than a market rate can the interest charged be?
Can you have a nil interest rate loan?
Various publication and correspondence from the ATO lead to a conclusion that provided it is a true loan (eg, with an intent to repay), then a lower than market rate is permissible, and an interest-free loan will not of itself breach superannuation law or give rise to contribution cap concerns.
Some have taken this as the green light for promoting related party loans.
But caution should be exercised, particularly when it comes to the ATO's role.
Whilst the ATO is also the regulator of the SMSF industry, it is important to remember that the ATO can only interpret the law as it stands - they do not make the law.
If the current superannuation legislation allows for nil interest loans and the ATO interprets it this way, then that is how they will and must apply it.
Even if the ATO doesn't think it is the right answer (and it hasn't made comment to date to indicate they disagree with such an interpretation), they can't override the law.
It is up to the Government to legislate to change the rules if the current environment promotes strategies or opportunities beyond what the Government had intended.
Similarly, gearing in super strategies has also highlighted the needed for insurance in SMSFs, particularly for liquidity purposes and potentially to remove outstanding debt obligations in the event of the death or permanent disablement of a member.
These considerations are beyond the insurance considerations introduced for all SMSFs via regulations in August 2012, which require trustees to consider the insurance needs for members of a fund at a member level.
The current focus is on insurance held at the fund level - to discharge debts of the fund, or provide liquidity to the fund at a time of need, rather than for the direct benefit of any particular fund member.
Issues associated with holding such insurance policies, such as the deductibility (or in truth, non-deductibility) of premiums and whether or not receipt of proceeds creates a reserve within the SMSF have also been the focus of many recent NTLG meetings.
With this increased focus by the ATO on such matters, the Government would surely be aware of a number of the issues currently associated with the SMSF environment, and would likely include them within the scope of any planned review of the SMSF sector, or the proposed review of gearing in super in particular.
Transferring assets in-specie to and from a SMSF
Finally, just before Christmas 2012 the Government released draft legislation dealing with the transfer of assets in-specie between a SMSF and related parties of the fund.
The possibility of such a legislative change had been announced in September 2011, so was not unexpected, although the timing of the release of this draft and the short timeframe for comments to be provided (mid January 2013) may mean that many SMSF advisers haven't even seen it as yet.
Many of the details on how such transfers can be accommodated in the future are still unclear, as the draft legislation refers to regulations that will be prescribed and must be met for a transfer to occur (particularly in relation to share transfers); however those regulations have not yet been released in a draft format.
It will be interesting to see what these regulations contain and how they impact on the attractiveness of SMSFs in the future in terms of ease of contribution of assets, or in-specie payment of benefits to members in retirement.
What does the future hold?
Will the historical level of growth in the SMSF market continue in the future?
With changes as a result of the FOFA reforms, through to an apparent increased focus on SMSF gearing and liquidity strategies by the ATO, 2013 may prove to be the start of a defining period for the SMSF industry.
One thing remains certain, however - the SMSF industry will survive, and with appropriate planning and strategies, SMSFs can and will continue to play an important role in the retirement plans of many Australians.
Bryan Ashenden is a senior manager of technical consulting, practice management at BT Financial Group.