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Reversionary pensions v BDBNs: Advisers’ risks

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There has been a number of commentators suggesting that if a pension reversion nomination conflicts with a binding death benefit nomination (BDBN), the pension reversion nomination prevails.

While we acknowledge the answer is not necessarily black and white, as it depends on a careful examination of all the relevant documentation and each supplier’s documents differ in certain respects, we recommend that advisers should be mindful that they are comfortable with the way the documents they use are drafted and that they understand the legal risk and implications of using those documents entails.

In particular, advisers should ensure the strategies in the documents they supply their clients are legally effective and are supported by relevant legislation, case law or similar authority. An adviser procuring a document, for instance, from a web-based supplier is implicitly warranting that it is suitable for their client’s use. Hence why advisers need to be careful on what document supplier they use. Naturally, merely using a non-qualified supplier (that is, not a law firm) exposes an adviser to risk.

Indeed (pun intended), if the SMSF deed is silent, there is a strong argument to say that the BDBN overrides any conflicting pension reversion nomination.

However, there are certain SMSF deeds that expressly specify that a pension reversion nomination (e.g. a resolution in pension commencement resolutions) prevails over any conflicting BDBN. In that circumstance, there is a fair chance that a pension reversion nomination may prevail over a conflicting BDBN.

 

This article focuses solely on this issue. More specifically, this article asks whether you actually want a situation where a pension reversion nomination prevails over any conflicting BDBN.

This article concludes that — unless you are a lawyer — a pension reversion nomination overriding a BDBN is risky and that you should not use this type of documentation as there are more practical options available (more about this soon).

Why is there, on first glance, an appeal for reversionary pension nominations overriding BDBNs?

We have heard from some accountants and financial planners (which we will refer to from here on as “advisers”) that they favour reversionary pension nominations overriding conflicting BDBNs. When we ask why they have that preference, they typically maintain that it will allow them to implement the following sort of situation:

  • they can document a pension that, upon death, reverts to a spouse, for example; and
  • they can then document a BDBN to cover the remainder of the member’s SMSF benefits, which the BDBN might direct to be paid to, say, the estate or perhaps to a child.

However, there is a risk that recommending this arrangement could amount to a crime and give rise to other risks.

Recall the rules about ‘engaging in legal practice’

Each jurisdiction prohibits non-lawyers engaging in legal practice. In Victoria, for example, the Legal Profession Uniform Law Application Act 2014 (Vic) (the “Act”) provides that (sch 1 s 10(1)):

An entity must not engage in legal practice in this jurisdiction, unless it is a qualified entity.

Penalty: 250 penalty units or imprisonment for 2 years, or both.

We note that the Act defines “entity” to include individual, an incorporated body and a partnership. Accordingly, if you are, for example, an adviser, this prohibition applies regardless of how your business is structured.

This then raises the question of what it means to “engage in legal practice”. Section 6(1) of schedule 1 to the Act provides that “engage in legal practice” includes practise law or provide legal services.

There is no “bright line” demarcating with exact precision where “practising law” begins and ends, and where the “provision of legal services” begins and ends. However, we are of the view that there is a real chance that an adviser is practising law and/or providing legal services if:

  • he or she determines how a client’s death benefits should be structured (e.g. a pension that automatically reverts to a spouse and the balance to a child or the estate); and
  • he or she documents such a strategy (e.g. drafting the pension documentation and completing a template BDBN for the client).

We are particularly of this view as implicit in the above is that the adviser probably has led their client to believe that there is no need for the input of a lawyer. Indeed, an adviser who has not recommended that their client have all the relevant documents and advice reviewed by the client’s lawyer to check they are legally effective and are consistent with the client’s legal and estate planning position, would have provided legal services as the documents affect the client’s legal rights and obligations.

What else can commonly go wrong in practice?

Consider an accounting or financial planning firm that provides pension commencement documentation.

Now assume that the adviser provides such documentation to SMSF members of a particular SMSF whose deed states that a pension reversion nomination will override any conflicting BDBN. The pension commencement documentation states, among other things, that the pension is reversionary in favour of the member’s spouse.

Now assume that one such member did in fact have a BDBN in place, which was in favour of their legal personal representative (i.e. estate). The member then dies.

The SMSF trustee wishes to pay the deceased’s death benefits to the spouse, based on the pension commencement documentation. The executor of the estate might assert that the adviser is liable to the estate as the deceased did not properly understand the effect of the pension documentation. The adviser could try to counter this by responding that they advised the member of all relevant rights and liabilities and then drew up the documentation accordingly. However, if this indeed occurred, there is a real chance that the adviser has contravened the Legal Profession Uniform Law Application Act 2014 (Vic). Again, this is a serious crime.

Alternatively, the adviser may claim that they did not advise the deceased of all relevant information, rights and liabilities but nevertheless drafted the pension documentation. If so, the adviser may well have breached its duty of care owed not just to the deceased, but also to the deceased’s dependants, executor and any beneficiaries of the deceased estate (see Hill v Van Erp (1997) 188 CLR 159 where a lawyer was liable in negligence to potential beneficiaries of a deceased client’s will). The adviser may be liable to them under, among other things, the tort of negligence for any loss, damages and costs suffered.

We also note that some have asserted that since SMSF members typically also consent to various information in order to be trustees, they are taken to know all relevant information. We consider it high-risk to place much confidence in such an assertion based on cases like Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502, which illustrate that a judge may not hold a member/trustee/director to having a sophisticated level of SMSF knowledge. Also, there is no information regarding succession planning in trustee declarations.

Naturally, each of the above two choices is an unfavourable outcome.

If advisers wish to rely on a deed that provides priority to a reversionary pension nomination, they should undertake sufficient due diligence to ensure that they do not cross a prior BDBN or interfere with their client’s succession planning. This analysis also attracts the risks that the adviser engages in legal practice.

A practical solution

DBA Lawyers has long considered that there is a simpler practical solution, which is to have a deed that expressly states that a BDBN overrides any conflicting pension documentation. This overcomes the immediate need for an adviser to undertake the due diligence discussed above, which is associated with an SMSF deed that provides the reversionary pension nomination priority. Simply stated, documenting a pension under this type of SMSF deed does not impact a BDBN.

Moreover, BDBN templates typically come with new deeds or deed updates and product disclosure statements. Thus, members can prepare and finalise their own BDBNs without adviser input. Accordingly, if a member wishes to make a BDBN under an SMSF deed providing a BDBN with priority, it is more likely that a member would expect that to impact their estate planning and be more informed as:

  • there is usually a product disclosure statement or other relevant material that comes with a template BDBN, and
  • the formalities that accompany the execution of a BDBN (e.g. two independent adult witnesses).

If you are not a lawyer, you do assume risk if you prepare a BDBN without recommending the client obtain a lawyer’s input. We anticipate that some readers might roll their eyes at this comment and think “typical lawyers — trying to create ‘jobs for the boys/girls’”. However, it is a simple fact that each profession has its limits and professional indemnity cover typically excludes advisers acting outside them.

Thus, it is best practice for advisers to always recommend that their clients have their BDBNs and similar documents impacting their legal rights and obligations, especially their succession planning, reviewed by a lawyer.

Conclusions

There is — if the deed is silent — a sound argument under many SMSF deeds that the default position is that a BDBN will override a conflicting reversionary pension nomination. However, if the deed expressly states that the opposite will occur (i.e. a reversionary pension nomination will override a conflicting BDBN), this may be the case. However, if your SMSF clients have a deed that stipulates that a reversionary pension nomination will override a conflicting BDBN, each time you prepare pension documentation there is a real chance that you could be “engaging in legal practice” and exposed to other legal risks.

The safer solution is to have a deed that expressly provides that a BDBN overrides a conflicting pension reversion nomination. This avoids these risks when documenting a pension.

Manage your risk and do not expose yourself or your firm where your professional indemnity insurance cover is not available.

Written by: Bryce Figot, special counsel, DBA Lawyers
Source: SMSF Adviser

Morrison dumps associations on code monitoring

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The federal government will introduce a single disciplinary body for financial advice, forcing the FPA and AFA to abandon their attempts to become a code monitoring body for the industry.

On Friday, the Morrison government announced that it is accelerating the establishment of a new disciplinary system and single disciplinary body for financial advisers, as recommended by the royal commission.

The government will work towards establishing the new body in early 2021, subject to the passage of legislation that will be introduced into the Parliament next year.

A long-term sustainable solution based on commissioner Kenneth Hayne’s recommendations will replace the role of code monitoring bodies, which were due to be established by industry associations under professional standards reforms.

Following the government’s announcement, the FPA wrote to members informing them that it has withdrawn from code monitoring following concerns about member cost and compliance duplication

“Despite receiving conditional in-principle approval from ASIC, the FPA has made the decision to withdraw the application for Code Monitoring Australia (CMA),” FPA chief executive Dante De Gori said.

The FPA had been working on a joint initiative with five other professional associations to establish CMA. Following 18 months of development, a final application was lodged with ASIC on 16 August 2019 for CMA to become an approved code monitoring scheme for the FASEA Code of Ethics.

“The driving force behind CMA was our strong belief that it’s in the best interests of the profession and consumers to have one compliance scheme run by financial planners for financial planners, rather than a commercial provider,” Mr De Gori said.

“However following recent discussions, the government has now confirmed that it will progress a single disciplinary body as recommended by commissioner Hayne in the financial services royal commission in place of code monitoring.

“Given this, we do not think that it is prudent to establish CMA as a new monitoring scheme that will be superseded within a short period, resulting in a duplication of costs and compliance obligations for our members and the financial planning profession broadly.

“Though we are extremely disappointed that code monitoring will not proceed with CMA, we continue to strongly support the introduction of a comprehensive, compulsory Code of Ethics for financial planners to ensure consumer protection.”

The AFA also informed its members that it was important to avoid uncertainty and unnecessary duplication of costs.

“Financial advisers and their clients have been subjected to enormous demands and uncertainty. We need to avoid adding complexity, further duplication and cost to the regulation of financial advice,” AFA CEO Phil Kewin said.

“The AFA continues to have concerns about the current wording of the FASEA Code of Ethics as it stands, and has voiced those concerns to both FASEA and the government. We are expecting further guidance from FASEA in this regard.”

While the FPA and AFA expressed their disappointment, AIOFP executive director Peter Johnston praised the decision, saying that the association never attempted to be a code monitoring body.

“Our board thought the AIOFP should be acting in the best interests of members and their clients at all times. The royal commission debacle over Sam Henderson clearly demonstrated that associations are not equipped to become a code monitoring body. It was embarrassing,” Mr Johnston said.

Written by James Mitchell 

SMSF numbers triple in 20 years

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SMSF numbers have tripled over the past two decades and assets held within them now represent a third of Australia’s total superannuation pool, according to new ATO statistics.

The data, released to mark 20 years of the ATO regulating the SMSF sector, revealed that SMSF numbers had grown from 197,000 in October 1999 to 600,000 in June 2019, while SMSF membership had more than tripled in that time from 387,000 members in 1999 to 1.125 million in 2019.

SMSF assets were now valued at $748 billion, or approximately a third of Australia’s $2.76 trillion super sector, according to the office’s statistics.

The data also looked at the ATO’s recent regulation performance, revealing that it had referred 145 auditors to ASIC over the past six years, with 51 of those having been referred in the 2019 financial year.

The office had also seen an upsurge in voluntary disclosures of breaches by super trustees, with 353 having come forward in the 2019 financial year compared to 246 in 2018 and 265 in 2017.

ATO assistant commissioner Dana Fleming said the office would continue to take its role as an SMSF regulator seriously.

“The importance of good governance in the SMSF sector cannot be underestimated. As the sole regulator of SMSFs, we are conscious of the significant responsibility of safeguarding 1.1 million Australians’ retirement savings,” Ms Fleming said.

“Our aim is to help trustees to be able to make informed decisions by understanding their responsibilities and, of course, where necessary we will take action to maintain the integrity of the SMSF sector for all other SMSF members.”

Source: SMSF Adviser

Retirement alliance endorses government review

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The Alliance for a Fairer Retirement System (the Alliance) has welcomed the federal government’s Review into the Retirement Savings System and has put forward five questions the process should answer.

The first question the Alliance would like answered as part of the review is how can the retirement income system include incentives to encourage Australians to save enough for an independent retirement without introducing savings disincentives along the way.

“At present, only 30 per cent of the population over 65 is independent of government support. The remaining 70 per cent is comprised of 42 per cent on the full age pension and 28 per cent on a part age pension,” Alliance spokesperson John Maroney noted.

“As the superannuation system reaches maturity and balances at retirement increase, reliance on the age pension will reduce. Over the same time period, the number of people and the proportion of the population, in retirement will increase,” he added.

“The Alliance calls on the Review to consider the adequacy of super to support retirees into the future.”

Another question the Alliance has asked of the government in its review is what the defined objectives of superannuation and the age pension are and how can these two elements complement each other to ensure sustainability and intergenerational equity in the retirement system.

To this end the Alliance pointed out constant change to the system erodes confidence in it and can result in unintended consequences that threaten the retirement income system’s viability.

As such the group has called for any future changes to the system be made only after a full regulatory impact statement has been prepared that will consider the effects the change will have on the other components of the system and assess appropriate grandfathering provisions that will allow retirees to change their strategies over a reasonable timeframe.

Other questions the Alliance would like to addressed during the review are:

  • What is an adequate level of retirement income commensurate with their pre-retirement standard of living that older Australians should seek to attain?
  • How can retirement income policy settings ensure the maximum degree of certainty for those planning for retirement over decades?
  • Where are there gaps or issues that indicate a lack of fairness in terms of either horizontal (between people with similar circumstances) or vertical (between different generations) equity in the existing three-pillar retirement system?

The Alliance also took the opportunity to congratulate its former spokesperson Deborah Ralston on her appointment as a review panellist.

The federal government formally announced its intention to hold a review of the current retirement savings system and revealed the terms of reference to be used late last week.

The Alliance is made up of 11 industry bodies being the Association of Financial Advisers, SMSF Association, Australian Investors Association, Self-managed Independent Superannuation Funds Association, Gold Coast Retirees Inc, Association of Independent Retirees, Listed Investments Companies and Trusts Association, Australian Shareholders Association, National Seniors Australia, Stockbrokers and Financial Advisers Association, and WA Self Funded Retirees.

Written by Darin Tyson-Chan
Source: smsmagazine.com.au

ATO releases updated guidelines on SMSF changes

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The ATO has released updated guidelines for trustees around how to make changes to their SMSFs within a compliant framework.

The new guidelines contain details around what to do if members or member details change within an SMSF, when an SMSF needs to be restructured or wound up, and how trustees or directors can be removed or reinstated.

The ATO stated that it needed to be notified by trustees within 28 days if there was a change in trustees, corporate trustee directors, members, fund status or the contact number and address of the key person to which fund notices could be sent. It reminded trustees that they could not use their annual SMSF return as notification.

Trustees could notify the ATO of these changes online using the corporate key for their SMSF, through a registered agent, over the phone or manually using a change of details form.

The ATO also reminded trustees that they needed to ensure their fund remained within the legal definition of an SMSF, and if the fund no longer met this definition, it would either need to be restructured or wound up within six months. 

Inaction on the part of trustees could result in the ATO issuing a notice of non-compliance or disqualifying the relevant trustee.

If a trustee became a disqualified person, the ATO stated, they must immediately resign as a trustee and inform ASIC if they were a director of a corporate trustee, or face penalties.

The other trustees in the fund had six months from the disqualified trustee’s resignation to either roll the trustee’s benefits into an APRA-regulated fund, appoint an APRA-licensed trustee or wind up the fund entirely.

Trustees who had been disqualified due to a dishonesty offence could apply to have their conviction waived, while those disqualified by order of the ATO could apply for a review of the office’s decision.

Trustees disqualified due to being insolvent could not have their conviction waived but could be reinstated once they were no longer insolvent, the ATO said.

Source: SMSF Adviser

SMSF investment strategies and diversification

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The ATO has sent letters of concern to approximately 17,700 SMSFs that hold 90 per cent or more total investments in a single asset or asset class. The SMSFs’ auditors have also been contacted by the ATO, emphasising the need to consider the fund’s compliance with regulation 4.09.

What are the next steps for these trustees?

The ATO’s recent action regarding SMSF investment strategies has sparked discussion and controversy within the SMSF community. Important questions are being asked:

  • Is the ATO able to instruct SMSF trustees as to the adequacy of their investment mix?
  • Is it appropriate to hold 90 per cent of an SMSF’s value within a single asset class?
  • Does a financial adviser need to prepare an SMSF’s investment strategy?
  • What does it mean to “consider the risks of inadequate diversification”?

The answers are within regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994. Let’s start with the law and dispel some uncertainty.

Regulation 4.09(2) states: 

The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:

(a) the risk involved in making, holding and realising, and the likely return from, the entity’s investments, having regard to its objectives and expected cash flow requirements;

(b) the composition of the entity’s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;

(c) the liquidity of the entity’s investments, having regard to its expected cash flow requirements;

(d) the ability of the entity to discharge its existing and prospective liabilities;

(e) whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

These are the minimum requirements for an investment strategy. In simple terms, this means that the strategy must be prepared and revisited often to ensure that it:

  • Is targeted to support the trustee’s objectives in running the SMSF, both in terms of the investment risk members are comfortable with and the return they hope to secure;
  • Prescribes an investment mix that is appropriate to the members’ needs;
  • Monitors solvency and balances the fund’s ability to liquidate assets against the need to pay superannuation benefits;
  • Conducts a check on whether the members are satisfied with the insurance they have in place.

In substance, the requirements are not complicated. They are grounded in common sense.

However, the regulation’s language is difficult to translate in everyday pen to paper. Many trustees give up trying to prepare their own investment strategy. They rely instead on their accountant’s software to generate a compliant document. This is unfortunate, as trustees frequently don’t bother reading an investment strategy they have not written. And the “compliant document” (while saying all the right things in the right places) often has little relevance to a particular SMSF and no value as an investment planning tool.

The ATO is aware of this and is alarmed that a large amount of retirement savings may be afloat in rudderless ships.

So, let’s revisit these questions:

Is the ATO able to instruct SMSF trustees as to the adequacy of their investment mix?

Absolutely not. An SMSF by definition is “self-managed”. Provided the investment rules are complied with, an SMSF trustee can invest their retirement savings as they choose. The ATO is not going to tell a trustee that they cannot invest 90 per cent of investment value in cryptocurrencies, gold bullion or real estate.

However, the ATO will assess (via SMSF auditors) whether the trustees have properly documented their investment decisions in the investment strategy. This applies to all SMSFs, but those with a high concentration of value in certain assets are now on the radar.

Is it appropriate to hold 90 per cent of an SMSF’s value within a single asset class?

This may be appropriate, yes. Regulation 4.09 requires that the investment strategy consider diversification. There is no requirement to be diversified.

It is not for the ATO (or the SMSF auditor) to comment upon the suitability of SMSF investments. But if your SMSF’s value is concentrated in a particular asset class, the auditor will be looking to see the rationale for this investment decision in your fund’s investment strategy. If a financial adviser has been consulted, the statement of advice should also be provided to the auditor.

Does a financial adviser need to prepare an SMSF’s investment strategy?

No. Regulation 4.09 does not require the involvement of any professional in preparing the investment strategy. In fact, it is the trustee who must formulate, review and give effect to the strategy. Your auditor will check that the investment strategy is executed by the trustees. The trustee may obtain whatever guidance they choose — but they must be involved in strategy preparation on a personal level.

What does it mean to “consider the risks of inadequate diversification”?

In explanation of their recent concerns, the ATO stated:

We’re concerned some trustees haven’t given due consideration to diversifying their fund’s investments… Lack of diversification, or concentration risk, can expose the SMSF and its members to unnecessary risk if a significant investment fails.

In its letter sent out to SMSFs with highly concentrated assets, the ATO reminds trustees to provide evidence in their investment strategies of having considered the risks of inadequate diversification.

SMSF auditors are tasked to evaluate this evidence.

Evidence is tangible proof.

It is not just a statement confirming “we have considered the risks of inadequate diversification”. Most strategies already include this phrase, and it does not demonstrate any real consideration.

To show that they have considered these risks, the trustees need to record consideration of risk specific to their own SMSF and the member’s personal circumstances. Evidence will appear as an answer to the questions:

What could a lack of diversification mean for THIS fund, invested in THIS particular asset?

Notwithstanding, why is the investment appropriate in THESE circumstances?

Discussions with a financial adviser may be of great assistance in exploring and documenting these risks. From an auditor’s viewpoint, some of the best investment strategies are handwritten documents that set out the members’ goals for their SMSF and how specific investments suit those needs. The investment plan is usually reviewed annually. It is a down-to-earth, practical tool that works the way the legislation intended.

That being said, many homegrown investment strategies require fine-tuning to ensure the right words are used and can be “ticked” against the regulation. Trustees do not usually get it right the first time. It’s time-consuming and most trustees look for help. Many rely on their accountant’s specialised software to generate an investment strategy. However, any such template requires customisation for fund-specific circumstances — particularly if the SMSF has a highly concentrated investment mix.

The auditor will assess an SMSF’s investment strategy for this detail. At Peak Super Audits, we recommend that trustees explain their investment rationale and consideration of risk to their accountant or financial adviser, who can then assist by incorporating this within an acceptable investment strategy format. Accountants must be watchful of providing advice and take care that this line is not crossed.

The ATO’s investment strategy offensive must not be taken out of context. No SMSF trustee will be fined for a lack of diversification. However, the days of a cookie-cutter approach to investment strategies for these types of SMSFs are over. Trustees must become personally involved in preparing this document.

After all, they are operating a self-managed superannuation fund.

Written by Naomi Kewley
Source: SMSF Adviser

Tips and traps of DIY super

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Recent market volatility and the aftermath of the royal commission has prompted many Australians to look a little closer at their superannuation fund and their options.

With more than 1.1 million Australians taking control of their superannuation by having their own self-managed super fund (SMSF), we explore the tips and traps to be aware of when considering this option.

A bid to save costs

Self-managed super funds are more cost-effective the more you have in them and while the Tax Office reports that the average size of an SMSF is about $600,000, many consider one when their balance is much less. Nearly half of all new DIY funds come from members aged between 25 and 44. Regardless of age, establishing an SMSF should be considered based on your stage of life and ability to contribute to the fund. For example, if you are a young couple with $300,000 in super and earning a good income where you are contributing $50,000 per year, you might consider an SMSF sooner, knowing that your balance is going to continually increase substantially each year. This is very different to someone who has reached retirement with the same amount of money and will draw down on their super over the next five to 10 years, reducing their balance substantially in a short period of time. When it comes to cost, ensure you have someone objective to look at your own personal situation and be wary of companies advertising to set up an SMSF for little or no fees.

Investment preference

Having your own super fund does give you a broad range of investments to consider but a common trap is to concentrate on only one major investment. While it might make financial sense for a business owner to consider their business premises as an option to hold in their super fund, having a sole investment, such as a residential property, can be dangerous, particularly when it comes to the liquidity of the fund. Diversification is key in any portfolio and your own super fund shouldn’t be treated any differently. Regardless of which super fund option you choose, it is prudent to ensure your investments are professionally managed and investment choices are run passed your adviser to ensure your fund stays compliant but is also diversified to mitigate risk.

Your responsibility

As a controller of your super fund, you are responsible for running it, so it is important you understand your responsibilities and obligations. Some of these responsibilities are to ensure your SMSF lodges a tax return, reports member contributions and other regulatory information along with ensuring the financial statements are audited each year. While there are more duties with an SMSF, many trustees will partner with an accountant and financial adviser to help ensure the fund meets its obligations. Keep in mind that not all professional advisers are licensed to advise on SMSFs, so find one who has the expertise to run you through all your options when deciding on the best superannuation solution for you.

SMSFs are not appropriate for everyone but in the right circumstances can offer the many benefits that one million Australians are enjoying today.

Written by Olivia Maragna. Please note that Olivia’s advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Source: Sydney Morning Herald.

Financial planning customers want more SMSF advice

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A new ASIC report has highlighted demand for further advice on the specifics of SMSFs among the Australian population, particularly among those who have a financial planner.

The report, titled Financial advice: What consumers really think, found that 25 per cent of consumers who had recently received financial advice wanted more guidance around SMSFs.

Around 50 per cent of financial advice customers also wanted advice on retirement income planning, while around 45 per cent wanted guidance on growing their superannuation, highlighting the potential value for accountants in establishing a referral partnership with advice businesses to tap into this demand.

Within this group of consumers who had seen a financial adviser, 45 per cent chose their adviser based on their level of experience, while about 43 per cent chose them based on their ability to understand the consumer’s personal goals.

An additional 43 per cent selected their adviser as they were someone the consumer was comfortable talking to.

However, demand for SMSF advice was not limited to those who had seen a financial planner, with 15 per cent of the broader consumer population also indicating a desire for guidance around self-managed funds.

This broader group selected their adviser based primarily on their reputation (38 per cent), their experience (41 per cent) and their ability to talk to the consumer in a way they could understand (36 per cent).

Across all respondent groups, the majority indicated that the adviser would need at least five to 10 years in the industry to be trustworthy, the report said.

Source: SMSF Adviser

ATO investment strategy crackdown

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ATO warns trustees with poor diversification to review strategy.

After announcing that it will be writing to SMSF trustees with a high concentration of one asset in their fund, the ATO has said it will be asking these funds to review their investment strategy and document the reasons behind their investment decisions. 

Earlier this month, the ATO announced it would be writing to 17,700 SMSF trustees who have more than 90 per cent of their assets in a single asset class and their auditors.

In an online update, the ATO said it will be contacting the 17,700 SMSF trustees and their auditors at the end of this month where its records indicate the SMSF may be holding 90 per cent or more of its funds in an asset or a single asset class.

The ATO stated that it will be asking these trustees to “review their investment strategy and clearly document the reasons behind the investment decisions”.

“We’ll also ask trustees to have their documentation ready for their SMSF’s approved auditor for their next audit to help the auditor form an opinion on the fund’s compliance with these requirements,” the ATO stated.

The ATO said it is concerned that some of these trustees haven’t given due consideration to diversifying their fund’s investments; this can put the fund’s assets at risk.

“Lack of diversification or concentration risk can expose the SMSF and its members to unnecessary risk if a significant investment fails,” it said.

Source: SMSF Adviser

Bankruptcy and SMSFs

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The impact of a trustee/member of an SMSF becoming bankrupt is significant for the individual, the SMSF and other members of the fund, yet little is generally understood about this unfortunately common occurrence. When bankruptcy occurs, the focus centres on the personal assets of the individual who has become bankrupt, their business assets and structures they control or have an interest in, while the impact on their SMSF is often ignored.

So what is the effect of an SMSF trustee becoming personally bankrupt?

Bankruptcy and the superannuation legislation

When a trustee/member of an SMSF becomes bankrupt, they fall under the provisions covering ‘disqualified persons’ in the Superannuation Industry (Supervision) Act (the SIS Act). A person is a disqualified person if they are an undischarged bankrupt, that is, insolvent under administration.

This has particularly serious consequences for the bankrupt individual and action must be taken as soon as the issue is identified.

This is because the individual commits an offence if they act as trustee of their SMSF knowing they are a disqualified person, and a failure to resign immediately as a trustee of the SMSF exposes them to penalties that range from the most serious, being two years’ imprisonment, to a strict liability offence, or ‘on the spot fine’ of 60 penalty units, currently worth $10,800.

What happens to their SMSF?

While an individual bankrupt must resign as trustee, they do not immediately need to cease to be a member of their SMSF. By resigning as trustee, their SMSF will no longer technically satisfy the definition of an SMSF for the SIS Act. However, that definition gives such an SMSF a period of six months where it is deemed to satisfy the definition.

During this six months, the bankrupt individual and any other trustees must address the trustee structure of the SMSF and bring it back in line with the definition. This is most obviously achieved by the bankrupt individual rolling over their SMSF money into another superannuation arrangement where they do not have any obligations to act as trustee.

Can someone act as trustee on behalf of the individual bankrupt?

The SIS Act envisages that someone other than the member can act in that member’s place as trustee in specific circumstances. So, for example, a parent or guardian can act as trustee in the place of a child (who is under a legal disability). A person who has been granted and accepted an Enduring Power of Attorney (EPOA) by a member of an SMSF can act in the place of that member, for example, where they have lost capacity due to illness or old age.

However, the SIS Act is equally prescriptive when it comes to members who are disqualified. The legislation specifically prohibits a person with an EPOA of the disqualified person acting as trustee of the SMSF on behalf of that person.

The bankrupt individual has no option but to remove themselves as a member of their SMSF within the six-month period.

When does the six months start?

The SIS Act sets out that the six-month grace period, where the SMSF is deemed not to fail the definition of an SMSF, starts from the time it no longer satisfies the definition and so would otherwise cease to be an SMSF.

In these circumstances, this would be from the time the bankrupt individual resigns as trustee of their SMSF. At this time, they are still a member of their SMSF but are no longer a trustee.

Can anyone else be treated as a disqualified person?

There is a range of other circumstances which spell the end of an individual’s involvement with their SMSF, regardless of whether the person is an individual trustee or a director of a corporate trustee.

Indeed, the problems for other members of an SMSF are even worse for an SMSF with a corporate trustee, as any director who is individually found to be a disqualified person and so is ineligible to continue as a director of the corporate trustee, also taints the corporate trustee. Under the definition of a disqualified person, the corporate trustee itself becomes a disqualified person, even where the majority of directors are not disqualified persons.

A change in the trustee structure is forced upon the whole SMSF because of the disqualification of only one director. The disqualified person must cease to act as director of the corporate trustee immediately.

In addition to an undischarged bankrupt, a disqualified person in the case of an individual includes where:

  1. A person has been convicted of an offence of dishonest conduct
  2. A civil penalty order has been made in relation to the person under the SIS Act, or
  3. The Commissioner of Taxation has made an order that the individual is not a fit and proper person to be a trustee of an SMSF.

A disqualified person in the case of a corporate trustee includes a company where:

  1. A responsible officer (including a director) of the corporate trustee is a disqualified person
  2. A receiver has been appointed in respect of property owned by the company
  3. A provisional liquidator has been appointed in respect of the company, or
  4. It has begun to be wound up.

A disqualified person must notify the Commissioner of Taxation immediately and in writing that they are a disqualified person. Failure to do so can result in an additional fine of 50 penalty units, currently $9,000.

Fixing up the trustee structure

Apart from removing the disqualified person from acting as an individual trustee or as a director of a corporate trustee, and also removing them as members of the SMSF within the six-month window, there are limited options available to a disqualified person to remedy or have their disqualified status waived.

A person who is a disqualified person due to an earlier conviction for dishonest conduct can apply to the Commissioner of Taxation to have their disqualified status waived in particular circumstances. The Commissioner will consider where the offence is of a less serious nature involving a custodial sentence of less than two years’ imprisonment or a fine of less than 120 penalty units (currently $21,600), the length of time since the offence occurred and the age of the applicant at the time.

There is, however, no opportunity to waive the disqualified status in circumstances where the person is an undischarged bankrupt or has had a civil penalty order made against them under the SIS Act.

Equally, a company which has had a receiver or liquidator appointed or has began to be wound up has no opportunity to remedy that situation other than to be removed as trustee of the SMSF.

Once a person is a discharged bankrupt and so is no longer insolvent under administration, they are free to again act as an individual trustee or director of a corporate trustee of an SMSF.

Bankruptcy of an SMSF member must be addressed

A member of an SMSF cannot ignore becoming a disqualified person, and they must act to avoid a custodial sentence or fine. With only limited options to address the situation, the best course of action is to resign immediately as trustee or director and roll over to alternative superannuation arrangements which do not involve any trustee obligations.

Written by Peter Hogan, head of Technical at the SMSF Association

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