(03) 9020 2905PORTFOLIO POINT: The SMSF industry is being asked to stand up against the wall as critics take aim. Which parts should be salvaged in an extreme makeover?
Jeremy Cooper has loaded his weapon for his investigation into SMSFs. And his weapon of choice appears to be a scatter-gun.
The terms of reference for “Phase Three: Structure” (it’s beginning to look and sound like a Star Wars anthology) of Cooper’s inquiry were released this week. It was published at the same time as the preliminary report for “Phase One: Governance” was released. (There’s more continually moving parts in this inquiry than a fleet of helicopters.)
While this third phase is all about the structure of Australia’s entire super industry, it is in this stage that the scalpel is going to used to carve open and poke around DIY funds. The initial focus in this week’s media was on the phase one report, the real interest for Eureka Report readers will be in exactly what aspects Cooper likes/dislikes about SMSFs.
It looks like about half, perhaps more, of this portion of the inquiry will be spent examining SMSFs. So, the “issues paper” lays down what Cooper and his board think is important.
It is too early to get a handle on whether Cooper’s report is for or against SMSFs. This could be, in part, thanks to the late inclusion of a SMSF representative, Meg Heffron, onto the inquiry’s board. But the issues paper poses dozens of questions.
His options for recommendations arebeing kept incredibly wide open. On the same page that it asks whether the ATO supervisory levy should be raised from $150 to $500 (and recall it has only in the last couple of years that it was more than tripled from $45 a year), it asks if SMSFs are disadvantaged “because they cannot adequately defray fixed costs”.
The report needs to be taken in context of the political climate. The Labor Government has launched three inquiries into the financial services sector. The Ripoll Inquiry reported in recent weeks, with a focus on the relationship between financial advisers and clients.
The Henry Review into Australia’s taxation system is increasingly expected to make recommendations on superannuation that will be negative for higher income earners. That review is still expected before the end of this year.
Despite criticism of a recent Cooper speech that suggested his review was biased against larger fund managers, the terms of reference for SMSFs looks fairly wide-ranging and doesn’t seem to have any standout biases.
So, let’s split up some of their lines of questioning into “the good”, “the bad” and “the downright stupid” for SMSF operators.
The Good:
A potentially great aid to SMSF operators would be the creation of a CHESS-like system for other SMSFassets.
Cooper points out that CHESS (the Clearing House Electronic Subregister System) has been instrumental in increased efficiencies in the listed equities markets. “A CHESS or universal platform-like solution to the ready identification of all SMSF assets could have similar outcomes ffor Australia’s SMSFs,” the report suggests.
Another interesting one is whether or not trustees should have to wear the blame for all mistakes made in a super fund.
At the moment, responsibility lies with the trustees. Ignorance of the law is no excuse. But Cooper asks that if the trustee has relied on external advisers (such as accountants, financial advisers, lawyers, actuaries or even real estate agents) and their professional experience, should they have the right for blame to be legally shifted to the adviser, if the advice was flawed?
Many might disagree with me putting this one here, but Cooper intends to look at the current lack of educational requirements to become a trustee of your own SMSF and has asked a series of questions as to whether trustees should sit exams before starting a SMSF or whether ongoing education should be mandated.
I don’t think more education is wrong. It certainly can’t hurt. I see a lot of people who have set up SMSFs because of a recommendation from their accountant (who is allowed to advise on the setup of SMSFs, but not the ongoing investments) and then get stuck with a vehicle they don’t care for, don’t understand and have no interest in learning about. Compulsory education might cut out some of these.
The Bad:
While there is a problem with the reporting of overall performances of the SMSF sector, the only real way around this would be to force SMSFs to report their results far earlier. Currently, SMSFs don’t have to hand in their tax until May the following year, which makes it difficult for the ATO to compile timely stats for the sector.
The issues paper asks if it would be appropriate to shorten the timeframe for tax reporting. And if that’s not the best way, what other ways could you force DIY trustees to report their own performance earlier than 11 months after the end of a tax year?
There’s a question of mental competence through age: “Is there an age where the trustees of an
SMSF need to be encouraged to move their retirement income arrangements out of their own hands or at least into simpler products needing less active management?”
At the same time, let’s make it mandatory that everyone who turns 65 also must hand in their driver’s licence. Hey, they’re not working anymore. They’ve retired. If they really need to get somewhere, they can take a train (unless they live in Sydney, of course). Just a bad suggestion all round.
The Downright Stupid:
Some of the lines of inquiry that Cooper is looking to investigate are not just bad, but stupid. For example …
“Should SMSFs be required to invest funds in a certain manner within a specified time period or should it be left to the judgement off the trustees?”
This is arguably the second worst question asked in the report. One of the predominant reasons people enter DIY funds is because they aren’t happy with what’s available in commercial funds, or because they want to use their SMSF for a specific purpose (another reason is cost). If investment decisions are going to be mandated, you may as well ask the last person still with a SMSF to turn out the lights.
But if that was dumb, then this is dumber. “Should SMSF investment be restricted to what might be regarded as ‘financial assets’, such as listed equities and managed funds?” The potential reason? It would make valuing, auditing and regulating SMSFs much simpler.
God help us if much credence is given to the last two.
*****
And then there’s the indifferent.
There are the usual questions about whether there should be barriers to entry for an SMSF, such s $200,000. It doesn’t matter how often this is talked about, it is unlikely to ever get up. There are legitimate reasons for people to want to set it up with less.
There is also an inordinate amount of questioning of the role of auditors in the SMSF process, removing asset custody and associated issues from SMSF trustees, and whether the September 2007 changes that allowed SMSFs to borrow to invest went too far.
Overall, what Cooper finds interesting enough to ask questions about is fascinating. But still a bit early to get a real sense of whether he wants to tear the world of SMSFs apart, or not.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.