subject: The Cooper Review - Preliminary Report [print this page] It is important to remember that the Cooper Review is still in progress - the report released on 29 April only provided preliminary views from the Panel and these might not form part of the final recommendations to Government. Nonetheless, trustees and practitioners will have been heartened by the generally positive views expressed about SMSFs and their place in the superannuation landscape in the preliminary report.
The report runs to some 60 pages but most SMSF trustees would be largely unaffected if the recommendations were implemented in their current form. However, the recommendations do have an impact on many SMSF professionals. There is little practitioners can or should do in response at this stage. We have, however, set out some of the highlights below to give some insight into what may be on the horizon.
PRINCIPLES & VISION FOR SMSF REGULATION
The report starts by identifying 10 principles which the Panel believes should underpin the regulation of SMSFs and articulating a vision for the SMSF sector. These make interesting reading but insofar as they affect the recommendations, the key points can perhaps be summarised as follows:
a 'light touch' approach is generally appropriate for SMSFs - essentially leaving people who have chosen to opt out of large funds to manage their own destiny and allowing the sector to innovate quickly;
while regulation is still important, it should focus on:
* ensuring that service providers are adequately controlled (so that trustees can be sure that professionals from whom they seek advice are equipped to help); and
* ensuring trustees are focused on saving for retirement rather than deriving personal benefits from their super.
Many of the recommendations simply preserve the status quo. For example, the report recommends that:
fund size continues to be limited to 4 members but with no minimum limit on fund asset size;
there should be no requirement for SMSF assets to be held by an external custodian;
no compulsory trustee education for existing trustees; and
no changes to most investment rules (subject to some points on related party transactions below).
Importantly for many advisers, the report did not advocate the prohibition of borrowing (although it did express some concerns and suggested that the Government monitored the extent to which borrowing became common in self managed funds over the next two years), nor did it recommend removing the various exemptions applicable for funds investing in business real property. It does, however, recommend some changes.
ATO PENALTY REGIME
The Review recognises that the ATO currently has two powerful weapons in its armoury - disqualification of trustees and removing a fund's complying status (resulting in an immediate tax impost of 45% on most of the Fund's assets). Because these penalties are so draconian, they are rarely used. The report therefore recommends that the ATO is granted:
a scale of administrative penalties (fines) which would be paid personally by the trustees rather than from the fund; and
the power to issue directions to trustees - including a direction that the trustee attends training.
OTHER ISSUES ON LEGAL FRAMEWORK
The report recommended that SMSFs be granted access to the Superannuation Complaints Tribunal (SCT) in limited circumstances - disputes relating to death benefits. It also suggested that the Superannuation Industry (Supervision) Act 1993 and regulations (SIS) be rewritten to clearly identify which provisions are relevant for particular types of superannuation funds (such as self managed funds) and which are not.
SERVICE PROVIDERS
It was in the area of service providers that the report provided the greatest number of recommendations for change. The proposals include:
For Advisers - Greater rigour around the assessment of competency.
Essentially this would be achieved by developing an SMSF specialist knowledge component within the existing licensing regime and ensuring that this included comprehensive knowledge of SIS. For advisers who already have significant expertise, this would largely represent an additional compliance / accreditation exercise rather than a major obstacle to continuing in practice. The report also notes that advisers to SMSFs will be subject to the same rules on remuneration as other sectors (ie, the ban on commissions announced by the Government in its 'Future of Financial Advice' package).
For Accountants - Removal of the "accountants' exemption".
Currently, most people who recommend the establishment of a self managed fund must be authorised under an Australian Financial Services Licence. Historically accountants have been exempt from this requirement but the Cooper Review proposes to remove the exemption. If the proposal is implemented, accountants would be subject to the same licensing requirements as any other professional group. This recommendation has no impact on other aspects of an accountant's work. For example, accountants who chose not to become licensed would still be able to advise on tax and compliance matters, prepare accounts etc. They would simply not be able to advise a client to establish a self managed fund. Note also that if the recommendation was implemented, accountants would not need to become fully fledged financial advisers. Rather, those wishing to recommend the establishment of self managed superannuation funds would need to operate under a licence that allowed them to do so, even if that licence did not cover broader areas such as investments, insurance etc.
For auditors - Registration and mandatory independence.
Professional and ethical standards issued by the accounting profession require auditors to be independent of their clients both in the way they act and in the eyes of the client. The preliminary recommendations released by the Cooper Review propose that independence instead becomes a legislative requirement and that auditors (and the firms they work for) are prohibited from providing any other service to their audit clients. The Review also recommends that auditors are registered so that it is clear to the regulator, consumers and professional accounting bodies who is actually carrying out SMSF audits.
IN-HOUSE ASSETS, RELATED PARTY TRANSACTIONS
The preliminary recommendations are as follows. Note that these only apply to SMSFs - APRA funds would be exempt:
in-house assets should be banned (the 5% limit would be reduced to nil%, with an appropriate transitional period);
in specie transactions should be banned where there is a market through which they could occur. For example, the in specie transfer of listed shares would be prohibited as they could instead be sold on the market and re-purchased; and
collectables should be banned (with a suitable transition period) - regardless of whether or not they are also in-house assets.
OTHERS
Mandatory market valuation of assets and additional information on member statements;
Additional registration requirements and identity checks to protect against fraudulent rollovers from APRA regulated funds. This would seek to address some of the current problems with relying on Super Fund Lookup.
Creation of a Government funded on-line SMSF resource centre. The objective of this resource centre is to provide a means for Government to assist SMSF trustees by providing information well beyond the material currently available from the ATO.
Editors note: the creation of The SMSF Review largely eliminates the need for this last one. We have since made the panel aware of the existence of our site (which has only recently been launched) so it will be interesting to see if they proceed with this recommendation.
NEW FUNDS
One area the report leaves open for debate is how to minimise the risk of small SMSFs being created inappropriately. The report examines a number of possible solutions (minimum fund size, compulsory use of an adviser etc) but ultimately indicates a preference for additional trustee education.
Disclaimer:
While Heffron believes that the information contained herein is reliable, no warranty is given to the accuracy and persons who rely on it do so at their own risk. This information is intended to provide background information only and does not purport to make any recommendation upon which you may reasonably rely without taking specific advice. In particular, it should not be considered financial product advice for the purposes of the Corporations Act. If you would like more information on this aricle or any other SMSF information provided by Heffron, please contact them on 1300 172 247 or by e-mail heffron@heffron.com.au.
by: Graham Parkes
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