Since theAustralian Taxation Office(ATO) took over the regulation of self-managed superannuation funds (SMSF) three years ago, the scrutiny of funds and their trustees has increased dramatically.
Colonial First Statehead of technical services Peter Hogan says under the old rules, the only time SMSFs were audited by the regulator was if they were brought to its attention for some reason.
However, the ATO kicked off an auditing program in late 2002 aimed at a number of SMSFs and shone the spotlight on some of their deficiencies.
Hogan says some of the major concerns of the ATO have been instances such as members helping themselves to loans from the funds, the payment of prescribed benefits when not permitted by law, acquiring assets from related parties and where, for example, lease arrangements have been taken out with related parties.
One area taken very seriously by the regulator is the failure to lodge returns for periods of over two years.
SMSFs that fail to lodge returns run the risk of being made non-compliant, which could result in the funds losing half their assets to tax.
As a result of the increased ATO scrutiny, SMSF members have had to spend more time on compliance and administration to ensure their funds are up to standard.
While Hogan says there are reasons why most should retain an SMSF, a lot of members are wondering if the advantages are worth the extra time and effort.
“People who have put an SMSF in place a number of years ago are suddenly having to do more, and are asking themselves why they set them up in the first place,” he says.
“In the short-term there may be people who close them down as it is too hard, and we may well see a dip in numbers, but in the longer term everyone will get used to it and just get on with it,” Hogan says.
HLB Mann Judd partner Michael Hutton, head of the group’s financial planning arm, says if the trustee acts sensibly with the SMSF, then they will not have anything to fear from the ATO.
“If they go into it with a view to having an appropriate investment vehicle with an appropriate investment portfolio, then nothing has changed,” Hutton says.
“Compliance requirements have always been there, there is just more noise being made about them.”
SMSF Professionals’ Association (SPA) chief executive Andrea Slattery applauds the ATO’s approach.
“What they have had is an educational role, assisting with an understanding in the marketplace about the obligations of trustees and what is involved in giving advice in this area,” she says.
However, Slattery says the ATO’s campaign will highlight the fact that there are more people than there should be in SMSFs — and those who should not be there will drop out.
Hogan says one of the main issues that will force people out is the time taken to administer an SMSF, which can total up to 10 hours a week depending on the volatility of their investments and how active the trustees choose to be.
During the accumulation phase, Hogan says members often only have a rental property that takes little time to administer, but once in retirement they find their financial needs change.
“People in retirement really need to diversify to pay themselves income, as they can’t pay themselves a veranda or a roof. So the question often becomes ‘Am I in retirement or am I running a fund?’”
SMSFs are not for everyone. Hogan says if the client is an ordinary employee who just wants to invest in managed funds, then an SMSF is not the way to go.
He says to make an SMSF cost-effective to run, a person should have between $150,000 and $200,000 to invest, because of the cost of annual audits, administration and brokerage, as well as account fees. These costs are all bundled up in the management fee charged to investors by managed funds.
Hutton says one of the main benefits of an SMSF is that investors have control over their investments, as well as flexibility.
Hogan agrees the element of control is an attraction. He says SMSFs have been tailor-made for people who trust their own judgment, possibly through running their own business in the past.
According to Slattery, the main downside of SMSFs are the need for substantial funds to make them cost effective and the fact that some people are simply not capable of being a trustee, possibly because of a lack of time or interest.
Despite the ATO crackdown, Hogan says SMSFs are still popular, with about 250,000 currently in operation and growing at a rate of about 1,000 a month.
He says with the increasing popularity of SMSFs and greater scrutiny from the ATO, financial planners will play an increasing role in finding ways to make it easier for trustees to run SMSFs.
“Up until now, the standard of professional advice given to trustees has been patchy, with a number of advisers claiming they can, but really have no expertise in the area,” Hogan says.
Slattery says this is because there was no standard for any adviser in any market to actually provide advice in this area.
“We basically felt there was a requirement to set standards. We are totally about raising standards of advice in this area,” she says.
Slattery sees the role of advisers in this area growing because there are enormous business opportunities for people who want more control over their retirement income streams and also because SMSFs make up a large portion of the total superannuation market.