The Cooper Review and Self managed superannuation funds What does it all mean

Kathleen Conroy, Partner, Brisbane
 
The Cooper Review on Australia 's superannuation sector (Review) was released on 5 July 2010.
 
The Review is yet to be considered by the Government and it remains to be seen which if any of the recommendations are finally adopted.
The Review contains a number of recommendations for the self managed superannuation fund (SMSF) sector. The principal recommendations and their significance for SMSF trustees are set out below.
 
The SMSF sector received good press in the Review. The Review puts SMSFs at the ‘top of tree' for people what want maximum choice with their superannuation moneys, and who are also prepared to bear the responsibility for their superannuation assets. The Review sees this sector as “largely successful and well-functioning”. There are, though, a number of recommendations in the Review which the SMSF trustee should consider. Key recommendations for this sector include:
 
1. Penalties for contravention
 

It is recommended that the Australian Taxation Office (ATO) be empowered with a more flexible penalty regime to apply against trustees who do not properly perform their obligations as fund trustees. A sliding scale of penalties to reflect the seriousness of the trustee's breach is contemplated with the aim being to cure the present situation where trustees avoid sanction on the basis that the existing penalties are largely out of proportion to the nature of the trustee's breach.

 

If this recommendation is adopted, it is reasonable to expect that trustees will face penalties for many of the largely administrative breaches which presently go unpunished. It is further recommended that trustees be prohibited from accessing the fund to pay any penalties, and that the penalties be applied “jointly or severally” against the trustees of a fund (or the directors of a fund's corporate trustee).
   
2. Directions to rectify & mandatory education
  It is recommended that the ATO be empowered to issue notices to relevant persons to rectify contraventions in the administration of funds within a specified time. It is further recommended that trustees be required to undertake mandatory education in respect of their trustee obligations in response to non-compliance with the superannuation legislation. This is seen as a particularly suitable option for “low-level” non-compliance.
   
3. Borrowing
 
Changes to the superannuation legislation in 2007 introduced a borrowing framework that has been exploited by the SMSF sector, largely, for the purpose of acquiring real property assets. Changes to the legislation were introduced in May this year. In light of the relatively recent advent of the borrowing regime and the yet to be implemented May changes, the Review introduces no changes to the borrowing framework. The borrowing provisions are, however, to be monitored and reviewed in two years time. It is, perhaps, a timely reminder that borrowing in an SMSF must be part of a sound investment strategy that recognises and properly responds to the proper purpose of all SMSFs – broadly, “the provision of retirement savings”.
   
4. In-house assets
 
In-house assets are:
  (a) loans to or investments in any related party of the fund;
  (b) investments in any related trust of the fund;
  (c) fund assets subject to lease arrangements between fund trustees and a related party of the fund.
 
Presently, a fund can hold up to 5% of its assets as in-house assets. It is recommended that this limit be reduced to Nil% with SMSFs to be given 5 years to divest themselves of their in-house assets (or convert to a small APRA fund). Notably, while there are some added safeguards recommended in the Review for the acquiring of business real property, it is recommended that the business real property exemption remain in place when considering in-house holdings.
   
5.

Collectibles and personal use assets

 
Based on the view that they are not “investments that build retirement savings”, it is recommended that SMSF trustees be prohibited from acquiring collectible and personal use assets for their funds. As with the recommendations for in-house assets, it is further recommended that SMSFs be given 5 years to divest themselves of their collectible and personal use assets.
Collectible and personal use assets include such items as paintings, jewellery, antiques, wine, exotic cars, race horses and boats.
   
6. Valuations
  It is recommended that SMSFs be required to value their assets at net market value. The Review notes that this will have an impact on the returns for members, and that there may be some difficulty with the valuation of certain assets, e.g., units in unlisted unit trusts.
   
7. Proof of identity checks for new SMSF members
  To improve and uphold the integrity of the SMSF sector, it is recommended that any new SMSF member be required to undergo a proof of identity check. This would entail a 100 point ID check for all members; it is envisaged that this would take place when the fund opens its bank account with the ID details also being provided to the ATO for verification. Registration of the fund would not be finalised until all ID checks are satisfactorily completed. There is no recommendation for these identity checks to apply retrospectively, other than “for existing SMSFs wishing to organise rollovers from a large APRA fund”.
   
8. Trust Deeds
  Fund trustees are obliged to review and keep current the fund's trust deed. In light of this obligation, it is recommended that the superannuation legislation be amended so that where something is permitted under the superannuation legislation (specifically, the Superannuation Industry (Supervision) Act 1993) or a tax act, it will automatically be permitted by the trust deed for an SMSF.
   
9.

Insurance

 
All SMSFs are required to formulate and implement an investment strategy, and review that strategy regularly. Broadly, and without limitation, the investment strategy must properly consider:
  (a) investment risk;
  (b) diversity of holdings;
  (c) the ability of the fund to pay benefits as required; and
  (d) the needs of the fund's members.
  It is recommended that the investment strategy for an SMSF must also include consideration of life and TPD insurance for its members.
 
These are not all the recommendations in the Review relating to the SMSF sector, and certain other general recommendations will be relevant to the SMSF trustee.
 
For queries on this article or more information on the conduct of an SMSF, contact Kathleen Conroy.
 
This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.
Yes

 


This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.