The Self Managed Superannuation Trustee's Handbook

Peter Bishell

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118319475
• Edition: 1
• Topic: Développement personnel
• Subtopic: Finances personnelles

There are more than 700, 000 self managed superannuation trustees in 360, 000 Australian funds with in excess of $300 billion under management. The Self Managed Superannuation Trustee's Handbook will assist trustees to understand their role and comply with their legal obligations. Covering topics such as fund compliance, trustee duties and powers, fund administration, contributions and benefits, investment of funds and the sole purpose test, The Self Managed Superannuation Trustee's Handbook is an essential education tool for both active and passive trustees.

Self managed superannuation fund trustees are consistently being informed by the regulator (the ATO) that they must gain a proper understanding of their roles and responsibilities as trustees. When the ATO ran nationwide courses covering the basics they could not cope with the demand.

Most SMSF trustees want to comply with the law and are willing to educate themselves to ensure that they do. Their problem has been that there are only a very limited number of professional advisers who understand all the relevant issues and accessing their services can be very expensive. Furthermore, trustees of SMSFs get frustrated by the continual contradictions in reports concerning their obligations contained in the financial press. As operators of SMSFs, they are large consumers of self-help materials regarding superannuation and related topics. SMSF trustees need one informed, authoritative book that sets out their roles and responsibilities in terms of the law, their relationship with the regulator and helps them to assess the truth or otherwise of statements they hear from other sources. The Self Managed Superannuation Trustee's Handbook provides all the information trustees require.

CHAPTER 1

INTRODUCTION TO AUSTRALIA’S SUPERANNUATION SYSTEM

Self managed superannuation funds — a sector at the crossroads

If you operate a self managed superannuation fund (SMSF) you have a problem. The problem is not — in most cases — of your own making. It is one that arises as much from success as it does from failure. The solution to the problem is likely to be hoisted on you through further regulation of the SMSF sector. The intrusiveness of any new legislation will in a small part be dependent on your response to the problem. Overwhelmingly, it will depend on the ‘corporate’ response of Australia’s 715 000-plus citizens who act as SMSF trustees. This book is written with a view to being part of the solution and keeping the need for a legislated solution to a minimum.

The success and the problem

The SMSF sector of the superannuation industry is the success story arising from various amendments to superannuation legislation, commencing from the introduction of the Superannuation Industry (Supervision) Act 1993. The growth in the number of SMSFs has averaged around 15 per cent per annum since 1993. The growth in the assets held within SMSFs has been higher still. Investments in SMSFs were over $300 billion as at the end of 2007. This represented more than one-quarter of all assets held in superannuation at that time, and the projections are that this figure will climb ever higher.

There are many points of view as to whether the growth in the SMSF sector ought to be labelled a success or otherwise. One thing that cannot be disputed is that more than 715 000 Australians have chosen to manage their own superannuation assets, and these numbers alone mean that the SMSF sector is here to stay. Or is it?

The growth of the SMSF sector has come at a rate far beyond anyone’s most optimistic predictions. As with anything that is growing quickly, there is a danger that the sector is growing too fast. The problems identified in the SMSF sector are partly anecdotal, partly the result of a lack of knowledge among sector participants and critics of the sector, and the recalcitrant behaviour of some in the sector who abuse the SMSF structure.

The editorial comment headed ‘Super if DIY sector did its own house cleaning’ in the Australian Financial Review of 8–9 March 2008 represents an excellent summary of the perceived problems associated with the SMSF sector. Among the problems identified are:

• 30 per cent of SMSF trustees cannot explain the sole purpose test (see chapter 3)
• 15 per cent do not have an investment strategy (see chapter 5)
• 50 per cent of trustees do not make the necessary changes when an auditor says their fund has contravened the law (see chapters 2 and 8)
• as many as 25 per cent of SMSFs do not have their investments correctly identified as belonging to the fund (see chapter 8)
• SMSFs historically have a higher weighting towards ‘cash’ investments that are said (by some) to be inappropriate long-term investments.

Two other problems include:

• more than 40 per cent of investors in the failed Westpoint investments were SMSF funds
• just under 10 per cent of SMSF trustees responding to an Australian Taxation Office (ATO) survey didn’t even know they were trustees.

For SMSF trustees, the worst response to these problems is to react emotionally or defensively. Such responses will neither persuade the government and the regulator that the problems don’t exist, nor stop criticisms being targeted at the SMSF sector based on anecdotal or inaccurate facts. Rather, as stated in the Australian Financial Review article referred to above, ‘[SMSF trustees] should direct their energies to ensuring that all involved in the sector are up to speed with their obligations’.

Towards a solution

When looked at in isolation, each of the problems within the SMSF sector could be readily addressed through (1) the enforcement of existing legislation or (2) some simple black-letter law amendments to that legislation stating ‘trustees shall’ or ‘trustees shall not’ in relation to the relevant issues. However, if the general thrust of the criticisms of the SMSF sector were bundled into one overarching, common problem, it might be summarised as follows: ‘SMSF trustees don’t know what they are doing!’

This could be in respect to meeting their legislative obligations under superannuation law, managing the investments of the fund, complying with the requirements of trust law, or any one of a range of issues involved in running an SMSF. Any long-term meaningful solution will need to address this basic perception of governments and regulators (especially), and other participants in the superannuation industry. Any suggestion that a significant and growing sector is placing the integrity of the entire industry in doubt is not just an issue for the SMSF sector, and it will be dealt with by the government and the industry regardless of the actions (or inactions) of SMSF trustees.

The ATO, the regulator of SMSFs, has already had one attempt at overcoming the ‘trustee knowledge’ concern. On 1 July 2007 the ATO introduced the ‘trustee declaration’ (‘the declaration’). All persons taking on the role of trustee of an SMSF, either as an individual or as a director of a company acting as trustee, from that date must sign the declaration. Any person who signs the declaration and understands all of its contents should certainly know what they are doing in relation to compliance with superannuation law.

Two problems arise in relation to the declaration. First, the group of people who didn’t know about the sole purpose test were all persons who had signed the declaration. They therefore signed the declaration without understanding all of its contents (see chapter 3). Unfortunately, this is (anecdotally) prevalent among many who sign the declaration. It can also be readily ascribed to virtually all of its contents. Second, even resolving the issues addressed (or attempting to be addressed) by the declaration will not deflect all of the criticism levelled at the SMSF sector. There is more to running an SMSF than simply complying with superannuation law.

The requirement for trustees to sign a trustee declaration is therefore unlikely to be the final word on the knowledge requirements for SMSF trustees. This book has been written to provide an understanding of the contents of the trustee declaration on the basis that the declaration tells us what the regulator requires trustees of SMSFs to know. If the universe of SMSF trustees can show that they have taken on board the regulator’s (and the government’s) concerns about SMSF governance issues by investing the time to understand the contents of the trustee declaration, they will be doing a great service to all concerned. My observation is that none of these interested parties really want additional and tougher legislation to be put in place for SMSFs. They simply want SMSF trustees to have a general understanding of their roles and responsibilities.

If you’re an existing SMSF trustee or are considering becoming one, you may have purchased this book hoping for a list of ‘dos and don’ts’ to help you in this role. The objectives of the Association and of this author are broader than this, because rote learning of the things you can and can’t do will not help you understand the role of an SMSF trustee and the reasons for the rules applying to SMSFs. By reading this book your knowledge of the laws will improve through an enhanced understanding of what the laws are trying to achieve.

So, let’s start with a very basic question:

What is superannuation?

Ask a cross-section of Australians to define superannuation and you are likely to receive a variety of responses. Some will describe the superannuation investment account they have with a bank or financial institution; some will describe an expense of their business where they have to make payments on behalf of their employees; or a public servant might talk of the pension they receive for life from a government superannuation fund. Most people make a connection between superannuation and retirement, and for some the connection is more personal because they operate their own self managed superannuation fund.

Superannuation in Australia is best described as a system designed for individuals to accumulate wealth during their working life to provide for them financially when they retire. The system exists for a number of legislative and social reasons, encompassing policy areas of taxation and welfare, and impacts directly on economic growth and overall levels of prosperity.

In effect, the superannuation system partitions a portion of an individual’s wealth into a trust fund that is managed on their behalf. Assets are held on trust for the member until they reach retirement age. Superannuation trusts receive concessional taxation treatment on investment income if the assets are genuinely held to support members financially in retirement. Contributions to superannuation are generally compulsory, so most employed Australians are members of superannuation trusts (funds). Additional contributions (subject to certain limits) are encouraged through taxation concessions.

Australia’s superannuation system has undergone considerable change over the last 25 years, in particular the ‘simpler super’ changes as a result of the 2006 federal budget. Staying on top of the changes, understanding the system, and being able to utilise the benefits the system provides has become a significant challenge, not only for individuals who hold superannuation funds (that is, the majority of working Australians), but for superannuation professionals as well.

A short history of superannuation in Australia

The concept of superannuation has existed in Australia for over 100 years. However, until the 1980s, membership of superannuation funds was limited to the executives and senior management of large employers (including public servants), a handful of smaller corporate superannuation funds, and a very modest number (in comparison with current levels) of personal superannuation accounts. Reflecting the role of superannuation prior to the introduction of compulsory superannuation contributions, the average balance of persons reaching age 65 in 1986 was less than $3000 per retiree.

In 1984–85 the federal Labor government conducted a review of Australia’s retirement incomes policy. Of particular concern was the changing demographic of Australian society with the post–World War II baby boomers moving towards the mid-to-latter stages of their working lives. Preparing the nation for the financial burden of supporting this population bubble when it retired needed to move away from the culturally ingrained dependence on the federally funded age pension.

The result of the review was the introduction of a compulsory contribution to superannuation made by all employers on behalf of their employees. The ‘productivity superannuation component’ included in the National Wage Case Decision of September 1985 involved a compromise between increasing workers’ remuneration and the inflationary impacts that might result from direct wage increases. (It is interesting to note that a similar suggestion was being made early in 2008 for the implementation of tax cuts promised by the Howard gove...