New Compliance Requirements for SMSF Trustees — Superannuation Industry (Supervision) Amendment Regulation 2012 (No. 2)

New superannuation regulations require SMSF trustees to:

• regularly review the SMSF's investment strategy;
• consider whether the fund should hold a contract of insurance for members of the fund; and
• value fund assets at 'market value'.

The new regulations also empower the ATO to require SMSF trustees to keep money and assets separate from money and assets held by the trustee personally.

The new regulations are contained in the Superannuation Industry (Supervision) Amendment Regulation 2012 (No. 2), and they commenced on 7 August 2012 (New Regulations). The New Regulations amend the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).

What are the key changes?

The New Regulations introduce 3 key changes:

• Investment strategy - they introduce further requirements relating to the SMSF's investment strategy, specifically:
  • an SMSF trustee must now 'review regularly' the fund's investment strategy; an
  • as part of the investment strategy, an SMSF trustee must now consider whether to hold a contract of insurance for one or more members;
• Keeping assets separate - they empower the ATO to require SMSF trustees to keep money and other assets of the fund separate from any money or assets held by a trustee personally; and
• Market valuation of assets - they introduce a new requirement for SMSF assets to be valued at their 'market value' when accounts and statements of the fund are prepared.

The SMSF's investment strategy: review regularly, and consider insurance

The New Regulations require an SMSF trustee to 'review regularly' the SMSF's investment strategy.[1]

To date, no guidance has been provided as to how often an SMSF trustee would be required to review its investment strategy. We take the view that it would be appropriate to review the investment strategy at least:

• annually, at the conclusion of each tax year; and
• after any material event such as a member joining or departing the fund.

An SMSF trustee must now also consider whether it should hold a contract of insurance for one or more members of the fund.[2] The trustee must do this when it formulates the investment strategy, and when it reviews the investment strategy.

This new requirement seeks to ensure that SMSF members consider their personal circumstances in relation to their need for insurance cover, such as life insurance.[3]

You will recall that in addition to the new requirement to consider insurance, an SMSF trustee must formulate and give effect to (and now 'review regularly'), an investment strategy which considers:

• risk and return: the risks involved in, and likely return from the SMSF's investments, having regard to its objectives and expected cash flow requirements;
• diversity: the composition of the SMSF's investments as a whole, including the extent to which they are diverse or expose the SMSF to risks from inadequate diversification;
• liquidity: the liquidity of the SMSF's investments, having regard to its expected cash flow requirements; and
• liabilities: the ability of the SMSF to discharge its existing and prospective liabilities.[4]

ATO to supervise requirement to keep assets of the SMSF separate from assets of the trustee

Haven't SMSF trustees always had to keep fund assets separate?

SMSF trustees have always been required to keep money and other assets of the fund separate from any money or assets which are held by the trustee personally.[5]

Now Parliament has made this requirement an 'operating standard', which gives the ATO power to enforce the requirement.[6]

So what does the ATO say trustees must do to keep fund assets separate?

The ATO has previously expressed a view on keeping fund assets separate, but has never been in a position to enforce its view.

The ATO's view is that assets should be recorded in a way that distinguishes them from a trustee's personal or business assets, and clearly shows legal ownership by the fund.[7] To show clear ownership by the fund, the ATO considers that fund assets should be held in the name of the trustee(s), noting its capacity, and gives the following examples:

• in the case of individual trustees, 'Bill and Penny Jones as trustees for the Jones Family Super Fund'; and
• in the case of a corporate trustee, 'ABC Pty Ltd as trustee for the Anderson Super Fund'.[8]

The ATO recognises that, in some states, it may not possible to record the name of the SMSF in the ownership of a particular asset (for instance, Land Victoria does not accept any reference to a trust or fund on a land title). In this case, the ATO considers that SMSF trustees should clearly document the fund's ownership of the asset with a caveat, legal instrument or declaration of trust.[9] In reality, these methods can present their own complications: overall, precise and accurate record keeping is the best way to evidence fund ownership of assets.

The view of Parliament, and the ATO, on separation of assets seeks to:

• ensure that fund assets are protected in the event of a creditor dispute; and
• prevent costly legal action to prove who owns assets.[10]

New requirement to value SMSF assets at their 'market value'

SMSF trustees must now value SMSF assets at their 'market value'. This is relevant when the trustees are preparing accounts and statements required by law (under subsection 35B(1) of the SIS Act), including a statement of financial position and an operating statement.[11]

An asset's 'market value' is the amount that a willing buyer of the asset could reasonably be expected to pay for the asset, assuming that:

• the buyer and seller were dealing with each other on an arm's length basis;
• the sale occurred after proper marketing of the asset; and
• the buyer and seller acted knowledgably and prudently in relation to the sale.[12]

Why has the Government introduced this change?

The change seeks to ensure:

• that all SMSF trustees value their assets uniformly - that is, using the same method;
• that all SMSF members have a more accurate picture of their fund's current financial position, and the member's entitlements - this follows from the trustees using market value rather than historical data; and
• that the ATO, as regulator, accesses more reliable and useful superannuation data.[13]

Why the changes?

On 16 December 2010, the Government announced the Stronger Super reforms. The Stronger Super reforms seek to make Australia's superannuation system stronger and more efficient, and to maximise retirement income for members.

As part of the Stronger Super reforms, the Government seeks to strengthen the governance, integrity and regulatory settings in relation to SMSFs. The New Regulations implement new obligations for SMSF trustees in accordance with this objective.

Commencement of New Regulations

On 7 August 2012, the New Regulations commenced.

The changes implemented by the New Regulations will apply in relation to the 2012/2013 tax year. SMSF trustees should consider the new requirements, and whether legal or financial advice is required.

More information from Maddocks

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

More Cleardocs information on related topics

You can read:

• an article on some other 'Stronger Super' changes to SMSF trustees' obligations by clicking here.
• articles on a wide range of SMSF topics, here.

Order SMSF related document packages

• Set up an SMSF
• Update an SMSF deed
• Set up an SMSF pension
• Arrange SMSF borrowing documents:
  • 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

[1]Regulation 4.09(2)(d) of the SIS Regulations.

[2] Regulation 4.09(2)(d) of the SIS Regulations.

[3] Explanatory Statement, Superannuation Industry (Supervision) Amendment Regulation 2012 (No. 2).

[4]Regulation 4.09(2) of the SIS Regulations.

[5] Section 52(2)(d) of the Superannuation Industry (Supervision) Act 1993 (SIS Act). A trustee is also required to keep money and assets of the fund separate from any money or assets belonging to an employer-sponsor, or an associate of the employer-sponsor. The concept of an 'employer-sponsor' in this context is not relevant to SMSFs.

[6]Regulation 4.09A(2) of the SIS Regulations; Explanatory Statement, Superannuation Industry (Supervision) Amendment Regulation 2012 (No. 2).

[7] Australian Taxation Office, Setting up self-managed super fund — what you need to know, August 2011.

[8] Australian Taxation Office, Setting up self-managed super fund — what you need to know, August 2011.

[9] Australian Taxation Office, Setting up self-managed super fund — what you need to know, August 2011.

[10] Australian Taxation Office, Setting up self-managed super fund — what you need to know, August 2011.

[11]Regulation 8.02B of the SIS Regulations.

[12]Section 10 of the SIS Act.

[13] Explanatory Statement, Superannuation Industry (Supervision) Amendment Regulation 2012 (No. 2).