Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 133

Ructions in the SMSF market

Two issues that are currently working their way through the SMSF market could have a profound impact on the way the market operates.

The first involves the way that the largest profession servicing this market, accountants, operates. The second involves an aggressive tax play used by SMSFs.

Let’s start with a reminder of how the SMSF market is regulated.

What’s happening to accountants?

While becoming a member of an SMSF technically is a dealing in a ‘financial product’, which would normally require the adviser to be licensed under the Corporations Act, accountants are, until 1 July 2016, exempt from those rules when advising on setting up or winding down an SMSF.

Now things are changing and accountants need, from that date, either a full financial services licence or a limited financial services licence, if they want to advise a client on setting up an SMSF and dealing with their existing superannuation interest.

The most obvious client example where this would be relevant would be an individual coming up to retirement having, say, $700,000 in a retail or industry super fund, who wants to manage it themselves using an SMSF, as they will now have more time on their hands. Usually, they would seek guidance from their trusted accountant, but what will happen in future?

If the accountant goes down the licencing route, either as a licensee or an authorised representative of a licensee, their world changes significantly as the business will differ greatly from an accounting practice. At a macro conceptual level, licensees and authorised representatives work on a ‘disclosure basis’, in that the potential investor has to have all the risks associated with a potential investment disclosed and then they decide whether to invest or not.

At a legal relationship level, there are a whole range of rules for managing conflicts of interest by licensees and authorised reps, such as acting in the best interest of the client and not being remunerated by commission.

At a practical level there is also the paper work. Licensees and authorised reps must tell clients what they can do in terms of financial services (a Financial Services Guide) and, more importantly, they must document their recommendations and reasons for them (a Statement of Advice).

Compare this formal and stylistic way of working with that of an accountant, which is largely the reverse, where clients rely on and trust decisions and recommendations made by accountants. Ultimately, clients rely on the membership of an accounting body subject to its ethical and professional conduct restraints.

(Note, there are a few alternatives for accountants who do not want to go the licensing option, such as providing execution-only services or co-venturing with a licensed financial adviser who does all the activity requiring a licence).

ATO closing a contributions loophole

The other issue that will affect the SMSF market involves income tax. To limit the amount of tax benefits anyone can get out of using a SMSF, there are limits on how much they can contribute, both concessionally-taxed and after-tax. These are called the contribution caps.

It was different prior to 2007, when you could put as much into a SMSF as you wanted (not all of which would be deductible of course), but if you took out more that was considered reasonable, you paid extra tax. These were called the Reasonable Benefit Limits. From 2007, the tax system reverted to the way that it had operated before 1997, when there were limits on the amount that could be contributed to a SMSF. Which is what we have now with the caps.

If instead of contributing to a SMSF and being limited by the contribution caps, you could lend all your wealth interest free, well, you have just driven a Mack truck through some pretty important integrity measures in the system, being those contribution caps.

As you are both the borrower, being a member of your SMSF, and the lender, why pay yourself interest? Indeed, that is what has been happening.

The ATO is now actively trying to resolve this serious integrity breach by reclassifying the income that the SMSF receives from the investment that it acquires with the funds that have been borrowed at zero interest from the member as “Non Arm’s Length Income”- NALI, in the trade (an unfortunate acronym for those involved). That type of income is taxed at the highest marginal tax rate and not the preferential super tax rates of 15% or 0% if in pension mode.

After a couple of false starts, the ATO has now put the SMSF market on notice of the risk of tax at 47% on related party non-commercial loans.

The SMSF advising market seems to have got the message and are now saying that all loans to SMSFs, including from related parties, should be on full commercial terms. Not just with respect to the interest charged, but also in terms of LVRs and payment schedules.

 

Gordon Mackenzie is a Senior Lecturer in taxation and business law at the Australian School of Business, University of New South Wales.

 

RELATED ARTICLES

How SMSFs are investing their money

Top 10 hints for SMSF trustees before 30 June

What exactly is the ATO’s role in SMSFs?

banner

Most viewed in recent weeks

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

The secrets of Australia’s Berkshire Hathaway

Washington H. Soul Pattinson is an ASX top 50 stock with one of the best investment track records this country has seen. Yet, most Australians haven’t heard of it, and the company seems to prefer it that way.

How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Latest Updates

Property

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

Exchange traded products

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

Retirement

The new retirement challenges facing Australians

A new report from Vanguard has found an increasing number of Australians expect to be paying off a mortgage in retirement, or forced to rent. A financially secure retirement is no longer considered a given.

Strategy

Why aren’t there more Warren Buffetts?

Warren Buffett is widely regarded as the most successful investor ever. Rather than keep his secret sauce hidden, he's shared his knowledge for decades, so why aren't more investors able to replicate his methods and success?

Retirement

Finding joy in retirement

Retirement can last more than 30 years, necessitating thoughtful planning. Many miss workplace friendships, identity, status, expertise, and routine, but these can be replaced with renewed activities and purpose.

Shares

Bull and bear case for Australian equities for FY25

ASX market bulls point to corporate balance sheets and earnings, while bears highlight company valuations and persistently higher inflation. It's best to ignore short-term noise and focus on investing in quality companies.

Gold

How gold can help diversify your portfolio

As inflation is likely to remain stubbornly elevated, the correlation between bonds and equities could remain high, reducing diversification within portfolios. A gold allocation may help to better protect your investments.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.