There are a number of changes that have been made to superannuation rules which place additional requirements on SMSF trustees that Self Managed Super Fund clients should be aware of. The changes include regular reviews of investment strategies, insurance, separation of assets and asset valuations.
The first three changes have been made to operating standards under the Superannuation Industry Supervision (SIS) regulations which means that they must be complied with at all times. A breach of this kind of operating standard may result in trustee disqualification, civil penalties and loss of the fund’s complying fund status.
Regular reviews of investment strategies
Superannuation fund trustees are now required to regularly review the fund’s investment strategy. Superannuation regulations have always required trustees to formulate and give effect to an investment strategy but they must now formally review their strategy on a regular basis.
The change is designed to ensure that trustees do not simply set and forget their investment goals. They need to be reviewed regularly to ensure that they remain relevant and appropriate as circumstances change. Events that should prompt SMSF trustees to consider an additional review of their investment strategy may include the admittance of a new member, changes in a member’s personal circumstance (marriage, children), commencing a pension or significant changes in market conditions.
The requirement to regularly review applies to all superannuation funds, not just SMSFs.
The regulations require that the investment strategy considers:
• risk and return
• diversification
• liquidity
• ability to meet liabilities
• insurance for members (new for SMSFs only – see the insurance section below).
Insurance
When formulating the fund’s investment strategy, SMSF trustees are required to consider whether they should hold insurance policies for the members. There is no requirement that the fund obtains insurance cover, however the need (or otherwise) must be actively considered.
The ATO estimates that, as at 30 June 2011, SMSF assets were valued at $373.8 billion whilst the value of insurance policies held in SMSF was $186 million, less than 0.05% of fund assets. There may be many good reasons as to why clients don’t hold insurance in super, however, when coupled with the widely accepted problem of underinsurance in Australia, the Government is keen to ensure that consideration is given to the need for insurance in super.
Insurance can include life, total and permanent disablement (TPD), income protection and trauma insurance. In conducting the review, it is worth noting that the Government has previously announced its intention to ban superannuation funds from holding insurance policies that do not meet a superannuation condition of release. This is likely to limit the ability to hold ‘own occupation’ TPD policies and trauma policies within super in the future.
The requirement to consider insurance as part of the fund’s investment strategy does not apply to trustees of small APRA funds (SAFs) or to other APRA regulated funds.
Separation of assets
The regulations introduce an operating standard which requires the trustee of an SMSF to keep the assets of the fund separate from any assets that are held by trustees or standard employer sponsors and their associates.
The requirement to separate assets has always been (and continues to be) a covenant in the Superannuation Industry Supervision Act. The covenant is taken to be incorporated in the trust deed of a fund, however, breaches of the covenant only result in penalties if the SMSF members take action against the trustees for breach of trust. Given the mutuality between the SMSF members and the trustees, this is unlikely.
Despite the longstanding existing requirement to keep assets separate, breaches consistently represent over 25 per cent of the value of all audit contravention reports. The introduction of the requirement as an operating standard in the SIS regulations means that it is now easy for the ATO to apply penalties for intentional or reckless contraventions of this breach.
Asset valuations
The changes require that all assets must be valued at market value for the 2012/13 year of income, and all subsequent years. Market value must be used when preparing the fund’s accounts and member statements.
Market value is defined in the Superannuation Industry Supervision Act as the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:
• The buyer and the seller dealt with each other at arm’s length in relation to the sale.
• The sale occurred after proper marketing of the asset.
• The buyer and the seller acted knowledgeably and prudentially in relation to the sale.
Previously, assets were only required to be valued at market value if the fund had in-house assets and when a pension was commenced. If clients have assets that require valuations, they should prepare for this in plenty of time to complete 2012/13 year end work.
Breaches of this regulatory requirement also carry penalties of up to 100 penalty units. However, this is also a strict liability offence and penalties of up to 50 penalty units can be applied simply because the breach has occurred, there is no requirement for the breach to have been intentional or reckless.
As always if you need any assistance with any elements of your SMSF Strategy or advice engage with a professional, any questions please contact our office 1300 772 643.
Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.