Stronger Super – setting a path for future reform of the Australian Superannuation Industry

The Federal Government's line on the new package of Stronger Super Reforms is that they focus on simplicity, transparency and heightened duties for trustees.  This article looks at how the reforms seek to achieve this. Kate Hocking

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On 16 December 2010, the Government released a package of "Stronger Super" reforms in response to the recommendations of the Cooper Super System Review [i] .  The Government has expressed support for 139 of the 177 recommendations in the Cooper Review.

What are the key changes for Self-Managed Superannuation Funds (SMSF) reforms?

Competency

1. Greater competency required for advisors - The Government has supported an increase in the competency required to advise on SMSFs.  Financial advisors and auditors will need to have obtained, and must continue to maintain, a core level of competency to advise on SMSFs.
2. Registration for approved auditors - The Government agreed that the Australian Securities and Investments Commission (ASIC) should be appointed as the registration body for approved auditors.  Auditors will no longer be able to rely on their professional status for registration.  There will be minimum ongoing competency requirements in addition to their standard auditor qualifications.

Maddocks comment:   The Government's policy is in part to encourage compliance by better educating advisors and auditors.  This 'top-down' approach is long term regulation, and monitoring of compliance with these obligations could be costly to Government.  These are complemented however, by more immediate 'bottom – up' deterrence.

Deterrence

3. Administrative penalties - The Australian Tax Office (ATO) will have new powers to issue administrative penalties against SMSF trustees on a sliding scale consistent with the seriousness of the breach.  Penalties will have to be paid by the trustee personally and cannot be paid for out of the assets of the SMSF. 
4. Education for trustees - Trustees will not be required to undertake mandatory education to operate an SMSF, unless the ATO requires it after a breach of the SMSF's compliance obligations.  In those instances, the trustee's education costs will have to be paid by the trustee personally and cannot be paid for out of the assets of the SMSF. 

Maddocks comment: Deterrence helps achieve the Government's more short-term compliance objectives.  A more nimble and tailored administrative penalties process, and the threat of sending retirees back to school at their own cost, gives the ATO some useful flexibility.

SMSF administration

5. SMSF registration - To decrease the amount of money being illegally released from SMSFs, proof of identity checks will be mandatory for all people joining an SMSF.  This applies whether they are establishing a new SMSF or joining an existing SMSF.  Identification measures will not apply retrospectively, except for existing SMSFs wishing to organise rollovers from an Australian Prudential Regulation Authority (APRA) regulated fund. [ii]

Maddocks comment: SMSF trustees should hopefully see that, if they make this change for the purpose of accepting rollovers, then APRA funds will be more comfortable (and expedient) at getting those rollovers done. 

What are the key rejected changes that might have happened for SMSFs?

The Government rejected the following changes proposed by the Cooper review:

6. Maintained ability to invest in lifestyle assets - The Government rejected the recommendations to prohibit in-house assets and to ban SMSFs from investing in collectables and personal use assets. Accordingly, an SMSF will still be able to hold up to 5% of its assets as in-house assets. 
7. Prohibition on ATO rulings remains - The Government has rejected the recommendation to give the ATO the power to issue binding rulings for SMSFs.  It will still be able to issue SMSF specific advice, but this advice is non-binding on the parties.
8. Separation of assets remains - The law which provides that the governing rules of an SMSF are taken to include a covenant that the SMSF's assets must be separated from those held personally by the trustee , [iii] will now be an operating standard for an SMSF for the purposes of section 34 of the SIS Act. This means that the ATO has power to enforce the provision.  The ATO currently has no power to enforce compliance with covenants and relies on the trustees to comply with the terms of the fund's deed. [iv]
9. Limited recourse borrowing - The Government has announced that it will hold off on any decision making on limited recourse borrowing for a 2 year period.    At that time, it will review its position on limited recourse borrowing and whether it has been overused by the industry.  

Maddocks comment: The Government's approach here seems to be 'wait and see'.  It would be prudent for Government to revisit all these issues in light of prevailing industry practice.  The continued availability of borrowing and in-house assets seems to be in the hands of industry and how they make use of these strategies.

Asset valuation

10. Assets to be valued at market value - SMSFs will also be required to value assets to market value, if they don’t already do so.  Currently, SMSFs are generally able to choose either the historical cost or market valuation accounting method to value their assets; although SMSFs in the pension phase or those with in-house asset investments, must value assets at market value each year. [v]   The ATO will consult with the industry to develop valuation guidelines for a uniform valuation approach.

Related party transactions

11. Acquisitions and disposals - The Government has agreed in principle with the recommendation that the sections of the SIS Act relating to acquisitions and disposals between related parties in SMSFs should be amended so that either: [vi]

    • if an underlying market exists, all acquisitions and disposals of assets between SMSFs and related parties must be conducted through that market; or
    • if an underlying market does not exist, acquisitions or disposals of assets between related parties must be supported by a valuation from a suitably qualified independent valuer.    

    These restrictions do not apply to APRA funds.  The Government intends to consult with stakeholders to refine and manage the implementation of this recommendation.

The Government will establish an SMSF sub-group in early 2011 to progress the implementation of the SMSF reforms.

Supervisory levy

The Government has advised that SMSFs can expect an increase in the supervisory levy that they need to pay as part of their annual return.  Currently, the levy is $150.

What is MySuper?

MySuper is intended to be a simple, low cost default superannuation product provided by superannuation funds, which will replace those funds' existing default funds.  Default funds are types of super funds in which employers make compulsory superannuation contributions for employees who do not select a fund in to which they would like their employer to pay the required contributions. [vii] Superannuation funds will still be able to offer other products in addition to MySuper products. 

Although MySuper products will not be compulsory for employees, it is anticipated that the majority of employees will choose to use a MySuper product.  Eventually however, after a transition period, MySuper products will be the only products eligible to accept contributions from employers on behalf of employees who do not choose a fund. [viii]

My Super is intended to increase the transparency and comparability of default superannuation products.  This is achieved in part through a set of standardised features and reporting requirements that includes plain English reporting and a single investment strategy.

MySuper products will be required to meet legislative standards which will be enforced by APRA.  APRA's powers will include the power to revoke trustee licences.  Funds that do not operate as default funds, such as SMSFs or choice products, will not have to comply with these legislative standards. [ix]

The Government will establish a MySuper sub-group to implement MySuper. The early consultation stages will focus on detailed design and implementation issues, with later stages focusing on exposure draft legislation.

Maddocks comment: Essentially, these are consumer protection measures, but a step further on from the financial services reforms of 2002.  Those reforms focused on ensuring financial services organisations all made disclosures in the same way (using say, product disclosure statements).  This reform aims to clarify disclosure by requiring financial services organisations to design their products in the same way, which is a very interesting development.

What is SuperStream?

'SuperStream' refers to the package of measures designed to enhance the 'back office' of superannuation.  SuperStream will assist in reducing current administrative burdens associated with operating funds.

The Government has proposed that SuperStream will:

• improve the quality of data in the system;
• allow the use of tax file numbers as the primary account identifier;
• encourage the use of technology to improve processing efficiency; and
• improve the way fund-to-fund rollovers are processed and the way contributions are made. [x]

The Government has acknowledged that there will be short term costs associated with introducing electronic processing and common data standards.  Despite this, the long term benefits in streamlining administration processing will deliver a greater number of long term benefits for members and trustees.

The Government will establish a SuperStream consultative sub-group consisting of industry, employer and consumer representatives who will consult on data standards and the design and implementation of the SuperStream measures.

Maddocks comment: The measures are unlikely to impact significantly on SMSFs.  For those people in funds that are impacted by these changes, one would hope there are long term benefits for members and that savings are ultimately passed on to them.  In the meantime, members ultimately pay for the trustee's cost of compliance.

When do the key reforms take effect?

The following timeline is the proposed implementation dates for the reforms:

Date	Reform
Early 2011	Consultative committee to be formed
1 July 2011	New legislative standards apply for new investments in collectibles and personal use assets
1 July 2012	Most measures proposed to commence
1 July 2013	Review of leverage within super funds Anti Money Laundering/Counter Terrorism Finance requirements introduced for rollovers to commence
1 July 2014	Amendments to SMSF registration process to commence
1 July 2016	All collective and personal use assets to comply with new requirements

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.

More Cleardocs information on SMSFs

Order SMSF related document packages

• Set up an SMSF
• Update an SMSF deed
• Set up an SMSF pension
• Arrange SMSF borrowing lending docs:
  • for when the lender is a bank
  • for when the lender is a related party
• Set up an SMSF corporate trustee
• SMSF Death Benefit Nomination - binding or non binding
• SMSF Death Benefit Agreement - binding and permanent

Download

Download a checklist of the information you need to order a document package.

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[i] The Cooper System review was a review into the efficiency, structure and operation of the Australian Superannuation System which was conducted by Jeremy Cooper along with a panel of 7 part-time members.  A copy of the review is available here .

[ii] MySuper – Key Points, Treasury of the Australian Government, available at here .

[iii] See 52(2)(d) of the Superannuation Industry (Supervision) Act 1993 (SIS Act)

[iv] Super System Review Final Report, Chapter 8 Self-managed super solutions, pg's 259.

[v] Ibid at pg's 248 – 249. 

[vi] Stronger Super Report, Commonwealth of Australia, pg 53, available here .

[vii] MySuper – Key Points, Treasury of the Australian Government, available here .

[viii] Ibid.

[ix] Ibid. 

[x] Ibid.