Spotlight on strategic advice for SMSFs

While understanding the intricacies of SMSFs require specialist training and education it is well worth the effort for advisers to be able to provide comprehensive SMSF advice, Peter Burgess writes.

Much has been written over the years about the growth of the self-managed superannuation fund (SMSF) sector and how advice practitioners can and should engage with the growing number of SMSF investors.

With the sector continuing to grow strongly, it's important the industry, particularly SMSF trustees, is supported by high quality strategic advice.

For the vast majority of SMSF members there is no doubt the ability to make their own investment decisions and to choose from a wider range of investment options were absolutely the reasons why they chose to establish an SMSF.

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But it's also the reason why many advisers who only provide investment advice find it difficult to engage and retain these clients. To put it simply, in terms of their need for investment advice, that ship has already sailed for investors who in the main choose to make their own investment decisions.

That's not to say SMSF investors don't value or need professional investment advice.

Many SMSF investors require assistance accessing overseas investments and infrastructure investments.

Many SMSF investors also value the benefits of mentoring and reassurance that their investments are on track. And of course many SMSF investors also require assistance formulating and implementing an investment strategy for their fund which not only meets the requirements of the legislation but also assists investors to achieve their retirement income aspirations.

It is clear from research and surveys on this topic that investment advice alone is not enough to attract and retain SMSF investors.

When it comes to an SMSF investor's unmet needs and what they value most, "strategic SMSF advice" is a clear standout.

What is strategic SMSF advice?

In a broad sense, strategic SMSF advice can be defined as advice about the structure of an SMSF which enhances the benefits of the SMSF for the investor. This definition can mean many different things to advisers and investors.

For some advisers and investors, strategic SMSF advice may mean estate planning and ensuring appropriate death benefit nominations and trust deed clauses are in place.

For others, strategic SMSF advice may be more about the structure of the trustee or advice about the structure of fund investments on a segregated or unsegregated asset basis.

But in my view, strategic SMSF can and should be much more than that. Decisions about which assets can and should be held inside an SMSF — and recognising the asset co-ownership opportunities available to SMSF investors — is a core component of strategic SMSF advice.

Often the ability to provide this type of advice is the difference between run of the mill SMSF advice and comprehensive strategic SMSF advice.

It is clear from this that a distinguishing feature of comprehensive strategic SMSF advice is the adviser's knowledge of the related party asset rules in sections 66 and Part 8 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act).

These sections include a number of important definitions and exceptions which to the trained eye can provide a number of important strategic SMSF advice opportunities.

For example, a good understanding of these sections enables advisers to see all the opportunities available to clients when deciding on what assets owned by the client outside of superannuation could and should be transferred to their SMSF, without breaching the general prohibition on funds acquiring assets from a related party.

The exceptions to the general prohibition on acquiring assets from a related party listed in section 66 of the SIS Act go well beyond business real property and listed securities.

As long as the asset is acquired at market value, the exceptions also permit an SMSF to acquire units held by a related party in a widely held unit trust or units in a trust which complies with the requirements of regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994.

This latter exception in turn opens up opportunities for an SMSF to co-own property with a related party via a unit trust, with the SMSF eventually taking full ownership by acquiring all the units in the trust over time as the fund's cash reserve permit.

However, it is important to ensure that the property acquired by the unit trust is a property the fund could have acquired itself if it had the available funds to do so. Essentially this means the property needs to be business real property or a property that the trust does not acquire from a related party.

The exceptions in section 66(2A) of the SIS also allow an SMSF to acquire at market value an investment held by a related party in a related trust or company as long as the acquisition doesn't result in the fund breaching the five per cent limit on in-house assets.

However, the Australian Tax Office does not accept that this exception applies if an asset that is leased to a related party prior to its acquisition is acquired, and upon its acquisition the trustee of the SMSF effectively takes over as lessor.

It also does not apply to the acquisition of an asset that is immediately leased to a related party by the SMSF upon its acquisition.

Of course there may be transactions costs, such as stamp duty and capital gains tax, associated with acquiring assets from a related party which will need to be considered along with the need to ensure such a transaction is consistent with the fund's investment strategy and is allowable under the terms of the fund's trust deed.

If the asset is being acquired via an in-specie contribution, consideration will also need to be given to any contribution cap issues which may arise.

Alternatively, if the asset is being acquired by the fund using the fund's cash resources, consideration will need to be given to any liquidity or cash-flow issues which may subsequently arise.

Understanding all the intricacies of related party transactions and rules in the SIS Act and Regulations, is difficult and requires specialist training and education.

But if you believe all the research, being able to provide your clients with comprehensive strategic SMSF advice is worth the effort.

Peter Burgess is the general manager for technical services and education at SuperConcepts.