Today the Cooper Review issued its Ten Guiding Principles for SMSFs as part of the Phase Three - Preliminary Report. As an aside, try Googling "Ten Guiding Principles" - as far as guiding principles are concerned, ten seems to be just about the optimum number. But I digress ...
Over the next few posts I intend to delve into the Report further. For today, my comments on the SMSF Decalogue:
- Ultimate responsibility - "... SMSF members have effectively assumed sole responsibility for the adequacy of their retirement savings." I'm not sure that 'adequacy' is the right term. There are plenty of people running SMSFs who aren't convinced of the adequacy of their savings, but are constrained by, for example, the contribution caps. Would it not have been more appropriate to talk about taking sole responsibility for the management of their retirement savings?
- Freedom from intervention - no arguments on this one. When it comes to intervention, less is preferred to more in the SMSF environment.
- ... but not complete absence of intervention - the Report points out that it is the government that ultimately underwrites the risk of SMSF failure. Whilst that might be true, it must be remembered that many of those running their own SMSFs will have other resources that would be called on long before the social security system is asked to kick the tin. Notwithstanding this, access to tax concessions warrants intervention where the rules are broken.
- Service providers - interestingly, it's not just SMSF trustees that will be affected by the recommendations. There is a clear emphasis on raising the bar for service providers. Again, something I welcome.
- Gatekeeper on establishment - it's not clear how to reconcile this with the first point. And it's not clear why the industry now needs a gatekeeper. If it ain't broke ...
- Consistent treatment with APRA-regulated funds where appropriate - the 'level playing field' approach is the appropriate starting point. After all, super is super, and there must be common elements across the board. Splitting the system in two will add to complexity, which creates uncertainty, which diminishes confidence.
- Recognition of special risks in an SMSF environment - as with 5, how is this reconciled with the first point.
- Leverage - I will say more about the specific comments on leverage in later posts. What is curious here is that the Principle says that 'the Panel believes that there is room for leverage in SMSFs' but reading the Report suggests that leverage is only appropriate to cover short term liquidity issues. Which is correct?
- Compliance, rather than prudential, regulatory focus - no real argument here. Where members are trustees and vice versa, it is reasonable to assume that prudential management should almost take care of itself.
- Pursuit of excellence - I wonder if this is going to be like herding cats. How far can a 'dispersed and non-institutionalised' sector of the super industry be cajoled into adopting best practice (whatever that means), and at what point will the push back commence. Government and regulators have learnt that many of the assumptions about the way SMSFs had operated - eg the level of fees being paid - were simply wrong. Developing best practice is going to be a significant challenge, especially if incorrect assumption continue to be made.
It's almost a month since the ATO issued Taxpayer Alert TA 2010/2. Entitled "Circumvention of Excess Contributions Tax", it warns taxpayers that the insertion of specific provisions in SMSF trust deeds which create a separate trust to hold amounts which, if treated as contributions, would cause the contributions caps to be exceeded.
The Alert questions the effectiveness of these arrangements (presumably from a legal perspective) but is very short on legal arguments against such arrangements. The Alert also appears to make adverse assumptions about the motives for including these provisions in the deed.
The reality is that these clauses are included in SMSF deeds for much the same reason as many other provisions are included in deeds - to ensure compliance with, and to prevent inadvertent breaches of, the SIS Act and Regulations.
What is most concerning about the ATO's approach on this issue is what it says in a more general sense. The Commissioner, in responding to concerns about the harsh outcomes regarding excess contributions, has consistently responded by pointing out that the legislation gives the ATO no room to move. The impression that the ATO seems to have wanted to convey is 'We'd love to help, but our hands are tied'. However, when presented with an approach that provides both a practical and technical solution, the ATO has preferred to maintain the hard line, without any technical backing. It begs the question: has the ATO been genuine in their concern about their inability to be flexible on this?
Several submissions have been made. The ATO's response will be interesting to observe.
One of the oldest rivalries in the SMSF arena was (not unexpectedly) reignited with Minister Bowen's announcement on the weekend. Already this is being reported as lessening competition by removing accountants from the SMSF establishment arena.
These comments are premature. Bowen has already indicated that there will be an alternative arrangement - albeit yet to be determined.
One suggestion might be to have a quite specific licensing regime in the SMSF area - with SPAA already offering their accreditation as a benchmark. A regime which raises the bar across the board must be good for fund members.
Minister Bowen's announcement today, although not unexpected, contains some 'interesting' elements:
- a statutory duty to be imposed on financial advisers - but what additional protection does this offer clients over and above the common law duty?
- confirmation that accountants will lose their exemption for SMSF advice, but no hint of what will replace it
- no recognition that these reforms may impact most on those who are otherwise least able to afford fee-for-service advice
On this last point, the latest announcement from the Cooper Review last week might hint at how the government proposes to address this - by running advice through the MySuper model.
