Author: TAG Financial Services

When a Trustee is not solely responsible,
how does it impact Accountants and Auditors?

Two recent court cases, Cam & Bear and Ryan Wealth, each considered whether the actions of the SMSF auditor were appropriate in light of the investment activity that each SMSF undertook.

Cam & Bear saw the Fund provide money to a friend of the member to manage the SMSF investments.

Further, this close friend, via a company he owned, also acted as accountant/administrator for the SMSF. The friend’s investment company invested the fund assets in “cash and shares”. The SMSF accounts disclosed the cash assets as “Cash – LSL Holdings” in the financials. This cash asset was in fact an unsecured loan to LSL Holdings – a company owned by the friend.

Not sounding very friendly, and certainly should not have passed a “smell test”.

The SMSF auditor queried the entries but was told, via the Trustees friend (as accountant) that the Trustees were happy with the description. There was no direct communication between the SMSF auditor and the Trustee.

When the Trustee went to withdraw cash, they were unable to as LSL went into voluntary administration.

The auditor was sued for negligence, and found, after appeal, that responsibility for the losses suffered by the Fund be apportioned 90% to the auditor, and 10% to the Trustee.

The court found that the auditor was “clearly negligent” in that they did not make sufficient enquiry on the recoverability of the amounts.

Ryan Wealth again saw the auditor as being found negligent. In this case, the Trustee received financial advice from a licensed adviser. The adviser placed Fund monies into unsecured loans. Again, over a period of time a number of entities related to the adviser went into liquidation, with the ultimate result being the plaintiff suffered significant financial loss.

In both cases, the Trustees agreed to invest in private entities/loans with little or no understanding of the nature of the investments and provided significant reliance on others with respect to the investments.

It can be concluded that the auditors in each case did not make sufficient enquiry directly with the Trustees and it would appear they did not elevate their level of risk with respect to the investments.

Although it appears clear that in each case the SMSF was duped out of monies, this does not limit the culpability for loss to the fraudulent party – peripheral parties such as accountants and auditors are also capable of being assigned blame by the courts.

While these two cases highlight that auditors face a heightened level of risk, the same inference can be made of accountants and advisers, should they become aware of arrangements that don’t pass the “smell test”.

Practical Implementation – tips and traps:

• Auditors and advisers should consider the appropriateness of their engagements.
• Where assets are unable to be easily valued or verified, a heightened level of risk should be applied.
• Trustees should be made aware of the uncertainty of peculiar assets (be it recoverability, value or returns) and advisers/auditors should document these discussions with Trustees.
• The mere fact that a Trustee has engaged a financial adviser is not sufficient to rely on – the courts place emphasis on “direct” contact with a Trustee.

Unless you’re a millionaire, is a SMSF worth it for you?

There has been a lot of talk in the media recently, driven largely by the uncovering’s of the Royal Commission as well as the Productivity Commission findings, surrounding the appropriateness of Self-Managed Funds.

Do you need $1m in super to have an SMSF?

If you believe the Productivity Commission recommendations, then yes. But that would also have you believe that the data they used as part of their findings is consistent across sectors.

SMSF data, provided by the ATO, included items such as contributions tax and insurance in its net earnings figures, while APRA data did not.

If there is to be an accurate comparison across the superannuation sector, then consistent data must be used before providing statements as controversial as this.

A minimum account balance of $1,000,000 would also mean that far more superannuation wealth will be held by retail and industry funds, whose performances in acting in the interests of their members have globally been challenged via the findings throughout the ongoing Royal Commission into the sector.

So why would someone start a fund with a lower balance?

We note ASIC’s long held stance that an SMSF should have a minimum balance of at least $200,000 and would agree that, from a cost perspective, the costs to obtain advice, implement an establishment, and maintain the fund on an ongoing basis, would be higher under circumstances where a lower balance exists.

However, costs are not the only factor at play with our clients.

Many clients may have a contribution plan in place, or they may aspire to acquire direct property via their superannuation.

They may want to undertake a Limited Recourse Borrowing or hold a commercial property to lease to their business.

Many clients like the control that an SMSF provides them over their retirement wealth, and the additional asset types and classes that they can invest in.

These factors are important to consider, rather than placing a roadblock in front of individuals aspiring to grow their wealth.

As advisers, we must always act in our client’s best interests and by providing the full variety of options, allow our clients to make informed decisions.

Practical Implementation – tips and traps

• The amount available in superannuation should not be the only consideration when deciding whether a SMSF will be right for your clients. Costs do form part of the consideration but it is far from the only consideration.
• As well as the costs involved in maintaining a SMSF, other considerations, such as flexibility, wealth accumulation and retirement planning should also form part of the decision making process. All of these factors combined, will help your client’s determine what is the right structure for them.
• So that our clients can make an informed decision, it is important that the information they are considering is comparable. If considering what costs are involved in running an SMSF compared to leaving their superannuation in a retail or industry fund, it is vital that all costs are compared.

Disclaimer: The information contained in this document is general in nature only. Professional advice should be sought before acting on any aspect of this document. Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees . TAG Financial Services Pty Ltd (ABN 67 075 374 686).

The Federal Government, on 27 April and again on Budget night, announced a proposed increase to the maximum number of members permitted in an SMSF and small APRA fund from 4 to 6.  This proposal will take effect from 1 July 2019, if legislated.

This is an exciting development as it provides advisers and clients enhanced opportunities to use their SMSF as a broader family retirement vehicle.  Planning opportunities for live inheritances with this increased membership will help clients grow the retirement wealth of family members, and in addition provide support to SMSFs with lumpy assets, to counter requirements to pay out a death benefit.

Take the following example:

Paul and Mary have a SMSF.  They each have $2 million in the fund and their SMSF holds property worth $3.5 million and cash of $500,000.

They have 4 children, who each will have a balance of $100,000 upon Paul’s death.  Paul’s income stream is reversionary to Mary and to manage the transfer balance cap, Mary will need to withdraw $400,000 as a lump sum from the fund.  However, doing so will place increased cash flow stress on the SMSF,  to meet the pension requirements Mary has annually.

By admitting the 4 children as fund members, their rollovers can be used to fund the death benefit lump sum required.  The children could also ensure their super contributions are paid to the SMSF and provide additional cash flow buffer for Mary’s pension payments annually.  Any excess pension payments by Mary, subject to total super balances, could be used as non-concessional contributions for the children, which can also assist to ensuring the property asset can remain in super for future generations.

Similar to the above example, parents may consider live inheritances by assisting children with concessional contributions, with the removal of the 10% rule, and still have greater control over how these funds are invested.

For those looking to take advantage of the increase to 6 members, corporate trustees are likely to become even more attractive given extra signatories required, for administrative ease, and also to counter trustee penalty provision, although extremely rare.  A lot of control needs to be considered as mum and dad may be out voted by their kids.

While the devil is always in the detail, advisers should open the dialogue with clients who may be able to take advantage of these new rules.  Planning in advance will be crucial to creating the most proactive response possible.

Disclaimer: The information contained in this document is general in nature only.  Professional advice should be sought before acting on any aspect of this document.  Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees . TAG Financial Services Pty Ltd (ABN 67 075 374 686).

Happy Days for Super in the Budget

Why is the ATO concerned?      

The ATO recently outlined their concerns in the SMSF Regulator’s Bulletin SMSFRB 2018/1, with respect of the use of reserves by Self-Managed Superannuation Funds.

Why is the ATO concerned?

Essentially, the ATO is concerned that SMSFs will use reserves, such as investment reserves, to artificially suppress a member’s balance to ensure they are under the Transfer Balance Cap or Total Superannuation Balance.

Using a reserve to bring a member’s balance below a Total Superannuation Balance threshold may artificially allow a member to make a non-concessional contribution, or a catch up concessional contribution.

Example

Paul has a superannuation balance of $1.55m. His fund has $60,000 in earnings for the 2017/18 year. If Paul’s fund allocates this amount to Paul, then his balance will be above $1.6m as at 1 July 2018 and he will not be able to make a non-concessional contribution in the 2018/19 financial year.

By allocating to an income reserve, Paul’s total superannuation balance will remain below $1.6 million at 30 June 2018 and he would then become eligible to make a $100,000 non-concessional contribution after 1 July 2018.

Alternatively, Paul may be looking to commence an income stream and by allocating income to a reserve, Paul will be able to ensure his entire balance is within his Transfer Balance Account Limit.  It is these sorts of arrangements that concern the ATO.

‘Legacy’ Reserves

Many funds currently hold reserves because of actuarial calculations from complying pensions held by fund members.

Up until this point for these funds, Trustees have been able to allocate amounts from reserves to eligible members.  This can be done by either allocating an amount equal to 5% or less of all members’ account balances in the fund or be treated as concessional contributions for the recipient member. Note that the 5% allocation method does not carry the standard work test, or upper age limit restrictions, as this is not treated as a contribution.  Furthermore, the 5% allocation can increase a member’s account-based pension balance (this is the only way to increase an existing pension account).

In the Bulletin, the ATO have advised that they are planning to remove the ability for an allocation to be made to an existing account-based pension, under the 5% allocation method.  The result of this will be that it will not only take a much longer period to allocate amounts out of the reserve but in the longer term, if all members have died, the amount in the reserve essentially becomes forfeited money, as it does not belong to any members and therefore cannot be allocated to anyone.  It is forever ‘locked’ in the superannuation environment.

Example

Michael and Rachel have a SMSF.  They both have a lifetime complying pension and an account-based pension in the fund.  Their account balances at 30 June 2017 are as follows:

Under the previous rules prior to the announced changes in the Bulletin, Michael and Rachel would have had the ability to allocate $25,000 each from the reserve (and have this treated as a concessional contribution) or allocate $211,500 from the reserve (under the 5% allocation method).

Under the 5% allocation method, the $211,500 would have been allocated as follows:

Under the proposed changes, only $151,500 would be able to be allocated (i.e. the amounts to the account-based pension would not be able to be allocated).  Furthermore, if the complying pensions were commuted, no amounts would be able to be allocated, meaning an amount would remain in the reserve indefinitely. 

Practical Implementation – Tips and Traps:

• The ATO has confirmed they will not apply compliance resources to reviewarrangements that have taken place before 1 July 2017, where these arrangements are compliant with SIS section 115.
• Use of a reserve must be for a clear purpose, which is harder to identify in an SMSF.
• Creating new reserves will likely attract ATO scrutiny.
• How to effectively deal with ‘legacy’ reserves, or reserves that arise from a legacy styled income stream is vital as amounts allocated from a reserve may give rise to a concessional contribution for the fund’s member/s.
• Allocations from reserves may impact client’s Transfer Balance Caps and Total Superannuation Balances with clear upper limits and restrictions imposed on these thresholds, it is vital advisers understand the appropriate order of events, and the flow on consequences, before making recommendations to clients.
• Advisers should be careful to consider the interactions between a client’s age, income, spending and future goals and objectives before making recommendations that commit clients down a certain path.

If considering commuting lifetime pensions, advisers should careful consider any Centrelink implications, as benefits may be lost that cannot be recovered.

Final Deadlines Looming

Reminder 1 July 2018 is fast approaching. This is the final date by which all SMSFs must have lodged Transfer Balance Account Reports for fund members. In addition, the ATO’s nationwide lodgement extension for SMSF 2017 annual returns mean that the last chance to apply CGT Relief is fast approaching.

Disclaimer: The information contained in this document is general in nature only.  Professional advice should be sought before acting on any aspect of this document.  Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees . TAG Financial Services Pty Ltd (ABN 67 075 374 686).