In 2009 the Government commissioned an independent review of the governance, efficiency, structure and operation of the superannuation system (the Cooper Review). When the final report was received by the Government in June 2010, it contained a number of recommendations applicable to self-managed superannuation funds (SMSFs). A number of these recommendations have been recently given effect in the form of changes to the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) which have effect from 1 July 2012.
The purpose of the new Regulations is to amend the SIS Regulations to require:
- trustees of self-managed superannuation funds to consider insurance for their members as part of the fund’s investment strategy;
- money and other assets of a SMSF to be kept separate from those held by a trustee personally (and by a standard employer sponsor or an associate thereof); and
- SMSFs to value the assets of the fund at their net market value for reporting purposes and to allow certain transactions to take place at the appropriate value.
Although a number of the above requirements have been included in the SIS Act, they have only been considered covenants and deemed to be included in the governing rules of the SMSF. As a result the ATO, as the Regulator of SMSFs, has had limited powers of enforcement and relies on voluntary compliance by trustees. As the changes have become part of the operating standards, the ATO now has much fuller enforcement powers including the power to penalise non-compliant trustees.
The new Regulations now require trustees to “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:
- 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;
- 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;
- the liquidity of the entity’s investments, having regard to its expected cash flow requirements;
- the ability of the entity to discharge its existing and prospective liabilities;
- for a self-managed superannuation fund—whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.”
The inclusion of the latter point for the first time now gives rise to an obligation on the trustee to consider whether to hold insurance for the members of the fund – interestingly, less than 13% of SMSFs hold policies of insurance for their members. Whilst the original Review referred to Life and Total and Permanent Disablement insurance, the Regulation is more general in nature and refers to insurance only without being specific as the type of cover required. We note that there is no specific requirement for the trustee to hold insurance cover for the members, merely that the trustee considers whether to hold cover (and presumably such considerations would also include as to whether any cover would be better held outside superannuation). We would expect that trustees will need to evidence this requirement by documenting decisions in the fund’s investment strategy or minutes of the trustee meetings that are held during the year.
Once again the requirement to hold the assets of an SMSF separate from the money or assets of the trustee personally (and by a standard employer sponsor or an associate thereof) has been historically a covenant deemed to be included in the governing rules of the fund. The Review noted that contraventions of this covenant are one of the most commonly reported contraventions to the ATO. As the Regulation is now a prescribed operating standard the ATO’s powers of enforcement are significantly enhanced.
The Regulations now also require that for the 2012-13 year of income and later years of income, when preparing accounts and statements required by the Act, an asset must be valued at its net market value. The Regulations define “net market value” as “the amount that could be expected to be received from the disposal of an asset, in an orderly market, after deducting the costs expected to be incurred in realising the proceeds of such a disposal”. To assist in understanding the ATO’s view of “net market value” and the valuation methodologies that may be applied, the ATO has prepared a document “Valuation guidelines for self-managed superannuation funds” which may be located at http://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/Super-reform/Valuation-guidelines-for-self-managed-super-funds/
The Cooper Review also recommended restricting off market transfers between SMSFs and related parties and the Government subsequently announced that it would introduce legislative changes to give effect to this restriction from 1 July 2012. The Government proposed changes to the SIS legislation to ensure that:
- where an underlying market exists, all acquisitions and disposals of assets between SMSFs and related parties must be conducted through that market; or
- where an underlying market does not exist, acquisitions or disposals of assets between related parties must be supported by a valuation from a suitably qualified independent valuer.
On 13 July 2012, the Government announced a deferral of the commencement date of this measure to 1 July 2013.
Finally, we would like to remind you that the Concessional Contributions cap for the current 2013 financial year is $25,000. Please note that this is a global cap for all ages and includes any Superannuation Guarantee payments, salary sacrifice and personal deductible contributions you may receive or make. If you have been previously able to take advantage of the transitional $50,000 Concessional Contributions cap we strongly encourage you to review your contributions strategy to ensure that you do not breach the reduced $25,000 cap and incur excess contributions tax.
Please ensure that you contact your adviser should you have any questions with these matters or any other superannuation issues.