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Super System Review releases phase three preliminary report: Self Managed Super Solutions

By TechConnect

The Super System Review chaired by Jeremy Cooper released Self Managed Super Solutions. This report sets out the Panel's preliminary recommendations on self managed superannuation funds (SMSFs).

A link to a copy of the report is below:

Self-Managed Super Solutions.

The Panel has outlined ten guiding principles for SMSFs which are:

  • 1. Ultimate responsibility.
  • 2. Freedom from intervention.
  • 3. … but not complete absence of intervention.
  • 4. Service providers.
  • 5. Gatekeeper on establishment.
  • 6. Consistent treatment with APRA regulated funds where appropriate.
  • 7. Recognition of special risks in an SMSF environment.
  • 8. Leverage.
  • 9. Compliance, rather than prudential, regulatory focus.
  • 10. Pursuit of excellence.

The preliminary recommendations are:

  • Some areas should remain unchanged:
    - no changes to the membership rules (maximum of four members/trustees);
    - no minimum level of assets required; and
    - no compulsory requirement for a corporate trustee or to use a custodian for assets.
  • Compulsory education requirements for SMSF trustees will not be required (other than as a remedy for the ATO – see below).
  • The Superannuation Industry Supervision (SIS) Act to be restructured to separate and set out clearly those areas that are common for all funds and those areas that are only relevant to the individual superannuation sectors under the choice architecture model.
  • The Superannuation Complaints Tribunal (SCT) to have jurisdiction to resolve death benefit disputes between an SMSF and a beneficiary who is not a member or a person in their capacity as the legal personal representative of a deceased member, and to resolve disputes involving external insurance. It does not recommend extending the jurisdiction to disputes between trustees. The Panel further recommends that the additional resourcing required for the SCT be addressed by way of the SMSF supervisory levy.

ATO Regulation of SMSFs

  • ATO should continue to have the responsibility for SMSFs. However, the legislation should be amended so that the ATO has a wider range or penalties/remedies available to it, including the power to issue administrative penalties against SMSF trustees on a sliding scale reflective of the seriousness of the breach. The penalty should not be payable from the corpus of the fund and may be applied jointly or severally against the trustees or trustee directors.
  • The power to issue relevant persons with a direction to rectify specified contraventions within a specified reasonable time. A breach of a direction should be a strict liability offence.
  • The power to enforce mandatory education for trustees who have contravened SIS legislation. Such education should be provided by a body (which could include commercial providers) approved by the regulator and would be at the cost of the trustees and not the corpus of the fund.
  • The power to issue binding rulings in relation to SMSFs, subject to the implementation of the Panel’s previous recommendation to restructure the SIS Act.

Service providers to SMSFs

  • That ASIC, in consultation with the industry and the ‘expert advisory panel’, develop the SMSF specialist knowledge component of RG146, which would focus on increased knowledge and competency with respect to the SIS Act.
  • Approved auditors must be registered with:
    • a) registration requirements linked to minimum ongoing competency and knowledge standards;
    • b) the ‘registration body’ be given the power to:
      - determine the qualifications (including professional body memberships as appropriate) required for eligibility to be registered;
      - set competency standards;
      - develop and apply a penalty regime; and
      - have the ability to deregister approved auditors (or have one of the regulators perform those functions if the body is not a regulator); and
    • c) the ‘registration body’ (in consultation with industry) should develop the powers and standards listed.
  • Auditors must be fully independent. An individual or firm providing any service in connection with an SMSF or its individual trustees or trustee directors in any capacity is to be expressly prohibited from auditing that SMSF.
  • SMSF trustees should not be required to use service providers (other than for the annual audit). However, the Panel suggested it may be appropriate for a gatekeeper mechanism for new SMSFs and new SMSF trustees may be appropriate. The Panel suggested a number of options including requiring new SMSFs and new members to get licensed advice on establishing/joining the SMSF; or (their preferred option) requiring new trustees to complete an online training module on the ATO website.
  • Upgrading RG146 to require financial advisers to meet SMSF specialist competencies for providing advice and services to SMSFs.
  • Remove the accountant exemption for SMSFs (already announced). The Government will consult on the future licensing requirements for financial advisers and accountants providing tax advice and services to SMSFs.
  • The Panel also suggested (but did not recommend) that adviser commission on insurance premiums should be removed for ALL superannuation funds.

Investment rules

  • The 2007 relaxation of the borrowing provisions and the consumer protection measure that the Government has recently announced be reviewed in two years’ time to ensure that borrowing has not become, and does not look like becoming, a significant focus of superannuation funds.
  • The five per cent in-house asset (IHA) investment limit be removed for SMSFs so that no IHA investments would be allowed. SMSFs with existing IHA investments be provided a transitional period, up to 30 June2020, in which to dispose of their IHA investments (no new or further IHA investments are to be permissible during this transition period).
  • The SIS legislation relating to acquisitions and disposals between related parties should be amended so that either:
    • a) Where an underlying market exists, all acquisitions and disposal of assets between SMSFs and related parties must be conducted through that market; or
    • b) Where an underlying market does not exist, acquisitions or disposals of assets between related parties must be supported by a current independent valuation from a registered valuer; and
    • c) APRA regulated funds are exempt from these changes.
  • The acquisition of collectables and personal use assets by SMSF trustees be prohibited. SMSFs that own collectables or personal use assets be provided a transitional period, up to 30 June 2020, in which to dispose of those assets. SMSFs must value their assets at net market value. The ATO, in consultation with industry, publish valuation guidelines to ensure consistent and standardised valuation practices.

Integrity measures

  • Proof of identity checks be required for all people joining an SMSF, whether they are establishing a new fund or joining an existing fund. However, identification measures should not apply retrospectively except for existing SMSFs wishing to organise rollovers from an APRA regulated fund.
  • The process for this recommendation has been outlined in 10.1.1 ‘Member identification’ of the report. The Panel considers member identification could be achieved via the following process:
    • The member/trustees establish the SMSF (signs trust deed etcetera).
    • The member/trustees then open the SMSF bank account and provide the 100 points of ID for all member/trustees. It is likely that the account would be internally frozen until the bank was able to confirm that the SMSF actually exists — that is verified to Super Fund Lookup or directly with the ATO. This would enable contributions or rollovers to be deposited but would stop any withdrawals or transfers from the account.
    • The SMSF trustees would provide the bank account details to the ATO as part of the registration process.
    • The ATO verifies with the appropriate financial institution that the details provided on the SMSF registration form (both for the SMSF itself and the member/trustees) match the bank account records and confirms that 100 point ID for all members/trustees has been obtained.
  • The SMSF registration process should capture the details of the person who has provided advice in relation to the establishment of the SMSF (where applicable). This information should also be available to ASIC to assist in regulating AFSL holders and form part of the risk assessment process for both ASIC and the ATO.
  • Super Fund Lookup (or an alternative system) should provide appropriate SMSF information to APRA regulated funds (which would include member level details, confirmation that identification of members/trustees has occurred and the SMSF’s bank account number) to enable the APRA regulated fund to verify the details of SMSF membership before processing rollover requests to SMSFs. The APRA regulated fund would then immediately process the request and electronically transfer the rollover to the validated SMSF bank account.
  • The ATO should have the power to penalise and discourage illegal early release scheme promoters. Amounts illegally early released should be taxed at the superannuation non-complying tax rate; and an additional penalty, based on a sliding scale of penalties that takes into account the individual circumstances, should apply.
  • Rollovers to an SMSF be captured as a designated service under the AML/CTF Act.
  • Improvements to the SIS Act to reduce the need for amendments to SMSF trust deeds when the SIS legislation or tax laws change.

Death and disability insurance should be considered for members as part of the investment strategy operating standard.