Should your SMSF own your business premises? The pros and cons

More SME owners will focus much more closely in coming months on the pros and cons of buying and gearing their businesses premises through their self-managed super funds.

Specialists in superannuation, investment and business advice expect SME owners to consider accelerating any existing plans to gear their business premises through their self-managed super funds. This follows renewed debate about whether to bar future gearing.

The interim report of the Australian government’s inquiry into the financial system calls for views about whether superannuation gearing should be prospectively prohibited because it “may create vulnerabilities for the superannuation and financial systems”.

Here are 10 critical points to consider when deciding whether your SMSF should acquire business premises, typically through gearing, to rent to your family business:

PROS

1. FAMILY BUSINESSES MAY MAKE EXCELLENT TENANTS

Sue Prestney, a partner at PwC Private Clients, says that in her experience, family businesses tend to make “excellent” tenants for their SMSF-owned business premises.

Again speaking in regard to her own clients, Prestney says their family businesses typically pay their rent on time to their SMSF. “They look after the premises like it was their own.”

Martin Murden, a director of SMSF consulting and auditing with the Partners Wealth Group, says family businesses make “great” tenants provided the business is successful.

And Murden says dealings between a family SMSF as landlord and a family business as tenant can be smoother – regarding such things as rent reviews – than with an arm’s-length tenant.

2. EXCEPTION FOR BUSINESS PROPERTY

Business real estate is one of the limited types of assets that SMSFs are allowed to acquire from related parties including members.

And business real estate is one of the few types of assets that SMSFs can lease to related parties, including the members’ businesses, without a limit on its value under the in-house asset rules in superannuation law.

3. CONCESSIONAL TAX TREATMENT

During an SMSF’s accumulation or saving phase, rents are taxed at 15% within the fund while capital gains are taxed at an effective 10% if the property is held for more than 12 months.

And once the business premises are backing the payment of a superannuation pension, fund income and capital gains are tax-free. This means that the SMSF may eventually be able to sell a property in the pension phase without paying CGT on any profits

SMSFs in the accumulation phase can claim the same types of tax deductions as individual investors who buy properties in their own names including negative-gearing deductions for the shortfall between the deductible expenses, including interest payments, and rental income.

4. BUSINESS SUCCESSION AND ESTATE PLANNING

SMSF trustees aim to keep the premises of their family businesses in their super fund through generations, with the aim of gaining greater security of tenure for the business as well as business succession and estate-planning benefits.

Under this strategy, an SMSF will need sufficient other assets to pay member superannuation benefits when necessary for older members such as a business’s founders.

5. ASSET PROTECTION

Business premises held in an SMSF are generally out of the reach of creditors if individual fund members are declared bankrupt – subject to claw-back provisions in the Bankruptcy Act.

CONS

1. POTENTIAL CONFLICTS IF FAMILY BUSINESS STRUGGLES TO PAY RENT

While the principals of a troubled family business may need the premises to keep trading, the family SMSF’s trustees – who are often the same people – must maintain the fund for the core or sole purpose of paying member benefits.

Additionally, funds are prohibited from providing financial assistance to members, says Murden. This includes giving rent relief to family businesses in financial difficulties.

2. HIGH-COST BUSINESS PREMISES CAN DOMINATE AN SMSF’S PORTFOLIO

This can make it to diversify a fund’s portfolio to spread investment risks and opportunities.

When preparing their mandatory investment strategies, SMSF trustees must consider such factors as investment risk, portfolio diversification, liquidity of investments, ability to pay member benefits and the members’ circumstances.

Peter Crump, superannuation strategist for ipac South Australia, says that super funds are not legally required to diversify their investments but emphasises that trustees must consider diversification when preparing their investment strategies.

Indeed, some fund trustees specifically decide to have SMSF portfolios dominated by a single property asset, such as the premises of their businesses, perhaps after considering the diversification of their other super and non-super investments.

3. IT MAY BE MORE TAX-EFFECTIVE TO GEAR BUSINESS PREMISES OUTSIDE SUPER

Much will depend on the circumstances.

First, the superannuation tax rate is much lower than most personal marginal tax rates, thus providing potentially lower tax deductions for negative gearing. Second, lenders usually require a much higher deposit for SMSF gearing, which means a property is likely to remain negatively-geared for a relatively short period – if at all.

As well, SMSF trustees should be cautious about relying too much on the possibility that the business premises will eventually be sold when the asset is backing the payment of a pension and thus becomes exempt from CGT.

Crump suggests that trustees recognise that the fund may well sell the property before it becomes exempt from CGT.

4. POTENTIAL COSTLY TRAPS IN CONDITIONS FOR SUPER GEARING

SMSFs should gain quality professional advice to ensure compliance with the strict conditions allowing funds to borrow. Mistakes can be costly.

SMSF Trustees must enter a limited recourse borrowing arrangement and a geared asset must be held in a separate trust until the load is repaid. Lenders cannot make a claim against any other assets of the super fund in the event of a default on the loan.

5. SMSF COULD FACE SEVERE FINANCIAL SETBACK FOLLOWING LOAN DEFAULT

Despite the requirement for a limited recourse loan, an SMSF that defaults on a loan to buy business premises could lose its sizeable deposit plus capital repayments and payments of interests and costs.

Upon a property’s forced sale, a defaulting fund would be paid whatever is left after the lender recovers any outstanding amounts including the cost of a forced sale and the discharge of the mortgage.

SELF-managed superannuation funds attacked from all sides

 

 

SELF-managed superannuation funds have been attacked from all sides in recent times, coming under fire for supposedly being used as tax avoidance schemes for the rich and powerful.

As a result, the Australian Taxation Office has taken the unprecedented step of coming out in support of the nation’s fastest growing super group.

This event all but ensures that the self-managed fund movement will become by far the dominant force in Australian superannuation. The anti-SMSF aggressors must now back off and halt their attacks.

In his keynote address at the Chartered Accountants Australia and New Zealand National SMSF Conference, the Australian Tax Office’s deputy assistant commissioner of superannuation, Stuart Forsyth, said that Australia’s 534,000 SMSFs and their one million members contribute significantly to the overall success of the superannuation sector and should be “celebrated”.

Forsyth declared that overall the compliance of self-managed funds was high and was improving.

And he went further: “Self-managed super funds are here to stay. We can see one million SMSFs, down the track”.

Unlike the large super funds, which are regulated by the Australian Prudential Regulation Authority, SMSFs are regulated by the tax office, which ensures they comply with both tax and superannuation regulations.

In supporting SMSFs and their overall compliance with the rules, the ATO has put paid to the negative sentiment of the anti-SMSF brigade, who like nothing more than to sprout its criticism of the fast-growing sector. The organisers of the press campaign against SMSFs remain a secret but it is believed Treasury plus the retail and industry funds engineered it.

The anti-SMSF campaign often portrays SMSFs as a tax avoidance strategy for the wealthy, but the simple fact is that the tax rules for self-managed funds are the same as for all super funds.

While most SMSFs are compliant, there will naturally always be a few bad apples. That’s no different to anywhere else.

If Forsyth is right about SMSFs, then the movement could be set to grow significantly.

When the sums were last calculated, self-managed super funds had one third of the $1.5 trillion superannuation pie (total $495bn). They were well ahead of retail and industry funds, and growing fast. Forsyth revealed that SMSFs now control $557bn worth of assets, a rise of $62bn, or 12.5 per cent in a year.

The self-managed super fund market share will continue to increase because they have well over half the superannuation pool being used to pay retirement pensions.

There have also been inaccurate suggestions that self-managed funds are moving rapidly into residential property. While there is no doubt self-managed funds are a force in the residential market, the investment represents a tiny part of the $557bn in SMSFs overall. Some $8.7bn is held by SMSFs under Limited Recourse Borrowing Arrangements. The LRBA growth rate is much less than the overall SMSF growth, again showing that the anti-SMSF brigade has its facts wrong.

The campaign against SMSFs is a devious attempt by bigger players to try to get money flowing back into the big retail and industry funds. It won’t work. SMSFs are the future of superannuation and growth in the self-managed sector will continue at a rapid pace.

A “walk through” of a typical accountant’s SMSF advice, including tips & traps for the unwary.

 

 

This is the third in a 4 part series, in which our Head of Financial Services, Cristean Yazbeck, explores the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients. The “line” is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

 

For the purposes of this series, we’re assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

 

Typically, an accountant providing any form of assistance to a client in relation to an SMSF is likely to be asked to give at least some of the following (and probably, all) in relation to their clients’ SMSF:

  • Strategic advice
  • Tax & structural advice
  • Asset allocation advice
  • Investment advice
  • Execution advice/services.

Each of the above services has potential AFSL implications. In part 1, we discussed the “accountant’s exemption” and the scope under which an accountant could provide SMSF advice without an AFSL. In part 2, we canvassed the fine line between “financial product advice” and “factual information”. In this article, we’ll walk through the “typical” SMSF-related services that an accountant may be asked to provide, and the licensing implications (if any) of each of those services. We’ll look at some tips and common traps that accountants may fall into, and consider some potential opportunities to restructure existing advice templates to ensure no potential adverse AFSL implications arise.

 

Let’s examine each of the above “typical” SMSF-related services.

 

Strategic Advice

 

Invariably, an accountant will wish to discuss their clients’ strategic objectives, including on matters such as wealth creation, wealth preservation, income needs, risk appetite, and estate planning. These discussions will likely take place at the start of the engagement and as part of the initial client dialogue, and to assist the accountant in determining the scope of his or her engagement.

 

To what extent do these discussions constitute the provision of “financial product advice” which require an AFSL, or to which an exemption applies?

 

To the extent that the initial client dialogue merely serves to scope, understand and restate the clients’ objectives and is documented accordingly, and that dialogue in itself contains no recommendations, then there is unlikely to be any financial product advice given which would necessitate an AFSL. Refer to part 2 for further information on the distinction between a “recommendation” and “factual information”.

 

Tax & Structural Advice

 

No accountant-client interaction will be complete if “tax” wasn’t discussed. Indeed, tax is likely to be a key motivating factor for investing through an SMSF.

 

Typical “tax” advice in relation to an SMSF will include at least the following:

 

  • Tax rates that apply
  • Contributions caps and excess contributions tax
  • Restructuring of assets or creation of entities to minimise tax.

 

Surely such advice is financial product advice?

 

Fear not! Accountants should consider the following:

 

  1. Tax Agents’ exemption under the Corporations Act 2001 (Cth) (Corporations Act)
  2. “Exempt” services under the Corporations Act as they apply to tax advice.

 

We talked about each of the above in part 1, but we’ll consider them again here.

 

Tax Agents’ Exemption

 

Section 766B(5)(c) of the Corporations Act 2001 (Cth) (Corporations Act) provides that advice given by a registered tax agent, which is given “in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities“, is not financial product advice.

 

“Exempt” services under the Corporations Act as they apply to tax advice

 

In part 1, we identified s766A(2)(b) of the Corporations Act, which provides that the Corporations Regulations 2001 (Cth) (Corporations Regulations) may set out the circumstances in which a person is taken not to provide a financial service (and thus not require an AFSL covering the provision of that service). This takes us to Reg 7.1.29 of the Corporations Regulations, which provides that a person who provides an eligible service in the context of conducting an exempt service is taken not to provide a financial service.

 

“Eligible service” is defined by reference to the definition of financial service in s766A(1) of the Corporations Act. It includes (as is relevant for accountants) providing financial product advice in relation to SMSFs.

 

“Exempt service” includes (as relevant to accountants giving advice in relation to SMSFs) the following (Reg 7.1.29(5)(a) and (b) of the Corporations Regulations):

 

  “…advice in relation to the establishment, operation, structuring or valuation of a superannuation fund…[where] the person advised is, or is likely to become…a trustee…or director of a trustee…or a person who controls the management…of the superannuation fund.”

 

However, Reg 7.1.29(5)(c)(ii) of the Corporations Regulations also requires that the advice does not include a recommendation that a person acquire or dispose of a superannuation product. The “accountant’s exemption, though, kicks in (Reg 7.1.29A of the Corporations Regulations) to enable a recognised accountant to provide such advice.

 

In addition, Regulation 7.1.29(4)(a) of the Corporations Regulations provides that “advice to another person on taxation issues including advice in relation to the taxation implications of financial products“, is also an exempt service. However, to be able to rely on this exemption, further conditions need to be met:

 

  1. The accountant must not receive a benefit such as a fee or commission (other than from the client) as a result of the client establishing the SMSF.

 

  1. The advice must be accompanied by a written statement that the accountant is not licensed under the Corporations Act to provide financial product advice, and that tax is only one of the matters that must be considered when making a decision, and that the client should consider taking advice from someone who holds an AFSL before making a decision on the SMSF.

 

Asset Allocation Advice

 

Once an SMSF is established and funds are either contributed or transferred/rolled over to the SMSF, decision making will of course turn to investing those funds. Accountants will invariably be asked for advice on how funds could or might be allocated: should the client purchase property using a limited recourse borrowing arrangement? What about shares? Managed funds? Should the client hold insurance within their SMSF? And so on…

 

It’s not uncommon for accountants to recommend that their clients speak with a licensed financial adviser to deal with such questions. Accountants should bear in mind, however, that there is some scope to advise on such matters without it constituting financial product advice.

 

Regulation 7.1.33A of the Corporations Regulations provides that a circumstance in which a person is taken not to provide a financial service under the Corporations Act is “the provision of a service that consists only of a recommendation or statement of opinion provided to a person about the allocation of the person’s funds that are available for investment among 1 or more of the following“:

 

  • shares
  • debentures;
  • debentures, stocks or bonds issued, or proposed to be issued, by a government;
  • deposit products;
  • managed investment products;
  • investment life insurance products;
  • superannuation products;
  • other types of asset.

 

The Regulation covers “superannuation products”, which would include SMSFs.

 

The note to Regulation 7.1.33A also provides, though, that the exemption “does not apply to a recommendation or statement of opinion that relates to specific financial products or classes of financial products.

 

In essence, this regulation exempts what is often referred to as “broad asset allocation advice” from being a “financial service”. So long as it deals with the asset type as a whole, and does not refer to specific financial products or classes of financial products, then the exemption can apply.

 

Investment Advice

 

Investment advice in relation to a specific financial product or class of financial product will invariably require an AFSL authorisation.

 

Execution Services

 

As we know, persons generally need to hold an AFSL to cover the provision of a “financial service”. We’ve discussed “financial product advice” so far, which is one type of “financial service”. Another “financial service” under the Corporations Act is what is referred to as “dealing” in a financial product.

“Dealing” is defined in s766C of the Corporations Act to include (among other things):

  • applying for or acquiring a financial product;
  • issuing a financial product;
  • disposing of a financial product.

Where a person arranges for a person to engage in any of the above, that will also constitute “dealing”.

Accordingly, execution-type services provided by an accountant in relation to their clients’ SMSFs will need to be examined to determine whether they constitute a “dealing” which requires an AFSL.

Here are some specific examples of common advice/recommendation scenarios involving SMSFs which may fall within some of the exemptions discussed above, and how they might cross the line and require AFSL authorisation.

 

Category Common Question Exempt From AFSL  AFSL Authorisation Required
Strategic Advice Can you review my existing investments and determine whether an SMSF is appropriate for me? If the review serves to scope, understand and restate the clients’ objectives and is documented accordingly, and that dialogue in itself contains no recommendations, then there is unlikely to be any financial product advice given which would necessitate an AFSL. If, in the course of the review, recommendations are made, for example, that other investments may be more appropriate, an AFSL may be required (unless an exemption applies)
Tax & Structural Advice Should I contribute additional funds to my SMSF to tax advantage of concessional contributions caps? If the advice is given by a Tax Agent in their ordinary course of business, and/or the advice is limited to the tax implications of contributing to super, the advice will likely be exempt. 

Note the disclosure obligations which apply.

 

If the advice goes beyond merely considering the tax implications of contributing to super, it may fall outside the statutory exemptions are require an AFSL authorisation.
Asset Allocation Advice How can I structure my holdings within my SMSF? Broad asset allocation advice, which does not identify specific financial products or classes of financial products, will not be a “financial service” (eg if it refers to “shares” or “superannuation” generally).  AFSL authorisation required if the advice is in relation to a financial product or class of financial products (eg XYZ managed fund). 
Investment Advice Where should I invest my SMSF assets? No AFSL authorisation required unless the advice is in relation to a financial product or class of financial products. AFSL authorisation required if the advice is in relation to a financial product or class of financial products (eg shares, managed funds). 
Execution Services Can you set up my SMSF for me? Advising a client to establish an SMSF, or on how to establish an SMSF, should be exempt from being a “financial service”.  Setting up an SMSF on the client’s behalf will likely constitute “dealing” in a financial product.

 

Conclusion

 

To the extent that advice-related services are to be provided in relation to a client’s SMSF, accountants should be aware of the specific AFSL implications of each of those services, and the available exemptions. In addition, advice documentation should be drafted in such a way which is reflective of the exemption on which the accountant is relying.

 

For example, if relying on the “Tax Agents’ Exemption” on the basis that the advice is given by the agent in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities, the factual bases to support such reliance should be clear from the advice. This would entail, for instance, making it clear that the advice is in relation to liabilities, obligations or entitlements which may arise under tax law. Such matters would objectively be seen as being within the ambit of the ordinary course of business of a tax agent.

 A walk through of a typical accountants SMSF advice, including tips & traps for the unwary.

Cristean Yazbeck

Head of Financial Services

+61 02 8263 6663

E cyazbeck@ro.com.au

© Copyright in this content and the concepts it represents is strictly reserved by Rockwell Olivier, Pty Ltd

Divorce, Tax, the Family Company and Section 109J

 

 

When the real life upheavals of relationship breakdowns come face to face with complex business arrangements and even more complicated tax rules it can be almost impossible for the parties to know which way to turn.

Business owners often have significant wealth sitting in the Family Company for a whole range of good reasons, including the lower company tax rate. One of the many challenges at Family Law property settlement time is to work out a way of dividing up the pie without triggering unnecessary tax bills.

In recent times the Australian Tax Office has adopted the practice (at least in many private rulings it issued on the operation of section 109J ITAA 1936) that taking cash out of the Family Company pursuant to Family Law orders would not trigger the usual tax costs that arise under Division 7A of the Income Tax Assessment Act. Those rules basically say that if you take money out of the Family Company it will be taxed as a “deemed” dividend. The ATO practice meant that because Division 7A didn’t apply there was the potential for very large tax savings.

Unfortunately, the Tax Commissioner has now changed his mind and says that money or property coming out of the Family Company as part of Family Law property settlements will be taxed as dividends. This “new” taxation treatment will generally apply where Family Law orders are entered into from 30 July 2014.

This is a major change to the tax considerations that need to be taken into account when working out Family Law property settlements. Professional advisors and parties to Family Law proceedings should take extra care to ensure they don’t inadvertently trigger a tax nightmare by overlooking this important change, or not understanding the maze of other tax rules that need to be considered when they are dealing with family business assets and other property.

If you are a detail person, you can read the Commissioner’s new position on Section 109J and some other tax consequences of Family law property settlements in Taxation Ruling TR 2014/5, on the ATO website

If you need practical advice about how to navigate the tax issues that arise in relationship breakdown property settlements, the team at Rockwell Olivier are here to assist.

Written by Damian O’Connor, Tax Principal at law firm Rockwell Olivier.  For practical advice about tax issues relating to your SMSF, please contact Damian on +61 3 8673 5523 or email doconnor@ro.com.au.

Dividend washing – Is your SMSF at risk?

 

 

Over the past few months the Australian Tax Office (ATO) has been scrutinising “dividend washing”, with a focus on self-managed super funds (SMSF).

Dividend washing is a fancy name for a relatively simple arrangement where taxpayers, including SMSFs try to claim two sets of franking credits on what the Australian Tax Office says is a single parcel of shares.

How is dividend washing supposed to work?

Dividend washing aims to take advantage of exchange rules that allow shares to be traded ex-dividend and cum dividend during the same period. The seller (eg, the SMSF) of a share ex dividend gets the benefit of the dividend and the franking credits attached to it. The SMSF, as buyer of the cum dividend share, also aims to get the benefit of the dividend and franking credits attaching to the newly bought share so they get two lots of franking credits – at least that is the plan. This cum dividend market may be attractive to foreign sellers who would not be able to benefit from franking credits in any case.

The Taxation Commissioner does not like these arrangements and says that existing anti-avoidance rules prevent the double franking credits benefits from arising in the first place, but just to be sure the Government has changed the law for distributions made after1 July 2013.

Whether or not the ATO position is technically correct is another question, but given the ATO’s strong public statements, taxpayers, including SMSF trustees, should carefully consider their positions and if they decide to take action to undo franking benefits they may have received from dividend washing transactions they should act within the relatively short time frames the Tax Commissioner has given before he puts these transactions under further scrutiny.

Taxpayers who have undertaken dividend washing transactions but self-modify their tax returns will escape penalties if they amend their tax returns by 22 September 2014 or by the deadline specified in any correspondence sent to them by the ATO.

As with any difficult tax or superannuation problem, it pays to consult with your professional advisors before you engage with the ATO.

Written by Damian O’Connor, Tax Principal at law firm Rockwell Olivier.  For practical advice about tax issues relating to your SMSF, please contact Damian on +61 3 8673 5523 or email doconnor@ro.com.au.

When a recommendation by an accountant constitutes financial product advice, and where to draw the line.

 

 

This is the second in a 4 part series, in which Rockwell Olivier’s Head of Financial Services, Cristean Yazbeck, explores the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients. The “line” is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

 

For the purposes of this series, we’re assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

 

In part 1 of this series, we commented that, to the extent a person gives an opinion or a recommendation which is intended to influence another person to make a decision in relation to an SMSF (or could be seen to be so intended), that will constitute financial product advice, and hence a financial service for which an Australian Financial Services License (AFSL) is required (unless exemptions apply, such as the “accountant’s exemption”).

 

Conversely, it must be the case that if a communication falls short of being an opinion or a recommendation, it must not be financial product advice which would necessitate an AFSL (putting aside whether an exemption applies).

 

Communications which are merely the provision of factual information are generally recognised by the regulators as falling short of being an opinion or recommendation.

 

So, what’s the difference between a “recommendation” and “factual information”?

 

Recommendations

ASIC takes the view that (Regulatory Guide 36 (RG 36), para. 23):

 

If a communication is a recommendation or a statement of opinion, or a report of either of those things, that is intended to, or can reasonably be regarded as being intended to, influence a client in making a decision about a particular financial product or class of financial product (or an interest in either of these), it is financial product advice. Communications that consist only of factual information (i.e. objectively ascertainable information whose truth or accuracy cannot be reasonably questioned) will generally not involve the expression of opinion or recommendation and will not, therefore, constitute financial product advice.” (emphasis added)

 

The key aspect of “factual information” (from ASIC’s perspective) is that the communication consists of objectively ascertainable information whose truth or accuracy cannot be reasonably questioned. In the context of SMSFs, this would probably include things such as the following:

 

  • how to establish an SMSF
  • information about tax rates that apply with SMSFs
  • what “salary sacrifice” means when it comes to SMSFs

 

ASIC does, however, offer the following caution (RG 36, paragraph 24):

 

…in some circumstances, a communication that consists only of factual information may amount to financial product advice. Where factual information is presented in a manner that may reasonably be regarded as suggesting or implying a recommendation to buy, sell or hold a particular financial product or class of financial products, the communication may constitute financial product advice (e.g. where the features of two financial products are described in such a manner as to suggest that one compares more favourably than the other).”

 

ASIC takes the view (RG 36) that a communication is likely to be “factual information” where there is no value judgement about the communication. “Value judgements” would include things such as:

 

  • the merits of salary sacrificing into an SMSF
  • whether an SMSF is more desirable than other investments for tax purposes.

 

In this regard, ASIC comments that (RG 36, paragraph 31):

 

Factual information may be likely to be advice if it is presented in a way that is intended to, or can reasonably suggest or imply an intention to, make a recommendation about what a client should do.”

 

Sounds simple in theory, but in reality most communications between an accountant and their SMSF clients will draw close to the line on whether a value judgement is being made by the accountant in relation to their clients’ circumstances, even where factual information is being provided. Moreover, could it be also be said that the mere fact that the accountant sets out “factual” matters about various investment options (for example, an SMSF versus an alternate investment), is itself an implication of what the client should do, and therefore a recommendation? The line is thinner than most people think.

 

ASIC does offer some assistance in this regard. In one of its “frequently asked questions” (QFS 123), ASIC comments as follows in the context of accountants giving SMSF advice:

 

Merely setting out options and discussing the benefits and disadvantages of each option will not necessarily involve a recommendation…It is more likely that a recommendation may be inferred where an option is presented as the only option, or other options are described in terms that indicate that the adviser considers that they will not be suitable for the investor.

 

For example, the regulations allow a recognised accountant to give financial product advice in relation to the establishment of an SMSF where the client has already decided to set up the SMSF and dispose of interests in another superannuation fund…in order to do this. In this instance, you would only be asked for advice on administrative issues in establishing the SMSF and arranging for the rollover of funds from the…fund to the SMSF. You would not be providing a recommendation about disposal of the client’s interest in the…fund.

 

However, if the client has not yet made the decision to dispose of interests in the…fund, and you explain the superannuation options available, and the general benefits of the different types of fund, you should be careful that you do not imply that it would be appropriate for the client to dispose of their interests in the…fund in order to set up an SMSF. In this instance, you could be making a recommendation about the disposal of interests in the…fund, and would require an AFSL to engage in that conduct.

 

Let’s look at a hypothetical example of an accountant’s advice to their client about an SMSF, and the differences between a recommendation and factual information.

Mary, a “recognised accountant”, is Peter’s accountant. She sets up the business structure for Peter and prepares the accounts and tax returns of the business. She reminds him that the law requires certain payments to be made for superannuation. Peter asks whether she can recommend what to do. Mary says that there are a number of options open, including establishing an SMSF or contributing to a public offer fund, and there are a number of considerations in deciding what to do. For example, SMSFs may suit people who have the capability and interest to play an active role in decisions about the assets underlying their superannuation interests (subject to compliance with investment restrictions) and public offer funds may suit those who want to rely on professional management expertise for those decisions.

Mary says that, as she is not an AFS licensee, she cannot make a recommendation about what kind of superannuation fund Peter should arrange for contributions to be made to, and suggests he speaks to a holder of an AFSL. However, as a recognised accountant, Mary can recommend whether Peter should or should not establish an SMSF.

Mary informs Peter that she knows an AFS licensee named Paul who is able to provide financial advice. Mary informs Peter that she does not receive any commissions or other benefits from Paul. Peter then goes to see Paul for advice about retirement planning. After a detailed analysis of Peter’s personal circumstances, Paul recommends that Peter should establish an SMSF. Peter is concerned that he will not have the time or the skills to run an SMSF. Paul informs Peter that an SMSF does require time and effort on the part of the trustees and that all members of the SMSF must be trustees. Peter and Paul agree that Paul will advise Peter on the underlying investments of the SMSF, but Peter will get taxation and accounting advice from a suitably qualified person. Peter decides to retain Mary as his accountant and tax adviser.

Peter asks Mary to set up an SMSF for him, and provide accounting and taxation advice in relation to establishment and operation of the SMSF. Peter explains that Paul has advised him to set up an SMSF and that he is satisfied that an SMSF is the best option for his superannuation. Mary, as a recognised accountant, also recommends that Peter establish an SMSF and informs him of his obligations as a trustee. She does not give advice about what investment strategies the SMSF should adopt.

 

“Recommendation” vs “factual information”

The provision of factual information about the features of different kinds of superannuation products or the skills needed to be a director of the trustee of an SMSF will also not, of itself, be financial product advice. Mary may also give her opinion about the advantages and disadvantages of different kinds of superannuation products or about what qualities a trustee director should have, provided this opinion is reasonably necessary to, and an integral part of, advice about the establishment, operation or structure of the SMSF (see part 1).

If Mary had recommended that Peter should not set up an SMSF, Mary could still provide factual information about the different types of superannuation fund structures, but could not make any recommendation about which type of superannuation fund Peter should join.

 

What if Peter does not consult Paul?

Peter may decide that he does not wish to see Paul about retirement planning. He may make his own decision to establish an SMSF. If Peter has decided himself to establish an SMSF he can still ask Mary to set up the SMSF and provide accounting and taxation advice in relation to the establishment and operation of the SMSF. Mary does not need an AFSL to provide these services if she makes no recommendations about what investment strategies the SMSF should adopt.

 

Conclusion

Accountants should be aware of the differences between a “recommendation” and “factual information”, the latter usually falling short of requiring an AFSL authorisation. However, and as ASIC warns, factual information may be likely to be considered financial product advice if it is presented in a way that is intended to, or can reasonably suggest or imply an intention to, make a recommendation about what a client should do.

 When a <em>recommendation</em> by an accountant constitutes <em>financial product advice</em>, and where to draw the line.

Cristean Yazbeck

Head of Financial Services

+61 02 8263 6663

E cyazbeck@ro.com.au

© Copyright in this content and the concepts it represents is strictly reserved by Rockwell Olivier, Pty Ltd

Who should act as the trustee of your SMSF?

 

 

If you are thinking about establishing a self-managed superannuation fund (SMSF), one of the most important factors to consider is who will act as trustee of the Fund.

Most people think the easiest option is to appoint themselves as trustee or another individual with them, in the case of a sole member fund, because they think that using a corporate trustee seems too expensive.

The cost of establishing a company is in the range of $500 to $1000 which includes the ASIC registration fee.  A corporate trustee for a SMSF is a special purpose company, therefore the annual review fee charged by ASIC is approximately $45.

These fees are relatively modest compared with the benefits of appointing a corporate trustee of the Fund.  Let’s explore some of the benefits.

The most important concern for most people is who will remain in control or take over control of the Fund when they are no longer able to act.

In the case of a sole member fund, you don’t need to involve another person either as a member of the Fund or to be in control of the Fund. But, if you appoint the wrong person as a co-trustee, they could make decisions about the payment of your benefits against your wishes after your death.

The case of Katz v Grossman [2005] NSWSC 934 shows what can go wrong.  The father, Mr Katz, appointed his daughter as co-trustee of his SMSF after his wife died.  After Mr Katz’s death, his daughter appointed her husband as co-trustee of the Fund.  Her brother challenged the appointment but the Court held that the appointment was valid.  The superannuation benefits of the Fund were then paid directly to the daughter, rather than according to Mr Katz’s wishes, which was equally between his son and his daughter.

If, after the death of his wife, Mr Katz had used a company as the trustee of his Fund, where he was the sole director and sole shareholder then his daughter would not have been left in control of the Fund after his death.  Mr Katz’s Will appointed both his daughter and his son as Executor, and as the legal personal representatives of his estate, both his son and his daughter would have been in control of payment from the Fund instead of the daughter alone.

These unplanned outcomes can arise in a range of circumstances. In the case of Wooster v Morris [2013] VSC 594, Mr Morris had two daughters from his previous marriage that he wanted to receive his superannuation benefits from his SMSF.  Mr Morris and his “new” wife were members and trustees of the SMSF.  Approximately two years before his death, Mr Morris made a binding nomination for the payment, on his death, of his superannuation benefits to his two daughters.

After his death, his “new” wife appointed her son as co-trustee of the SMSF.  After seeking advice that the binding nomination was invalid, they subsequently appointed a company controlled by the wife, and this company as trustee of the Fund, made a decision to pay Mr Morris’ superannuation death benefits to the “new” wife.  After extensive litigation, his daughters succeeded in arguing that the binding nomination was valid.

If Mr Morris retained his superannuation benefits in a separate Fund, in which he was the sole member, and appointed a company as trustee of the Fund, where he was the sole director and sole shareholder then his “new” wife would not have controlled the Fund after his death.  As Mr Morris had prepared a Will that appointed both of his daughters as his Executor, and as the legal personal representatives of his estate, they would have been in control of payment from the Fund in these circumstances.

There can be other benefits of appointing a corporate trustee.  On the death of one spouse/partner, the surviving spouse/partner does not need to consider who to appoint as a replacement/co- trustee, or to change the ownership of assets, as the ownership will remain registered in the name of the company, which continues as trustee.

The Katz and Wooster cases tell us that something as simple as the choice of an appropriate trustee can have very expensive consequences, if appropriate advice is not obtained when estate plans are being made.

Melissa Krajacic is a Senior Associate at Rockwell Olivier practising in estate planning, estate litigation and estate administration. For further enquiries please contact 8673 5500.

Accountants, SMSFs and financial advice: drawing a (thin) line?

 

 

What advice can accountants give in relation to SMSFs without needing an AFSL?

This is the first in a 4 part series by Cristean Yazbeck, Head of Financial Services at Rockwell Olivier. In this series Cristean explores the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients. The “line” is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

First up, we’ll explore what types of advice accountants can give in relation to Self-Managed Superannuation Funds (SMSFs) without needing an AFSL. Follow-up articles will cover:

  1. When a recommendation by an accountant constitutes financial product advice, and where to draw the line.
  1. A “walk through” of a typical accountant’s advice, including tips & traps for the unwary.
  1. What is the accountant’s “limited AFSL”, how it works, and what will change from 2016.

For the purposes of these Bulletins, we’re assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

 

Financial Advice

As a general rule, a person who provides “financial services” in Australia (as defined under the Corporations Act) is required to hold an AFSL. “Financial services” includes providing financial product advice. An SMSF is itself a financial product, so to the extent that a person gives an opinion or a recommendation which is intended to influence another person to make a decision in relation to an SMSF (or could be seen to be so intended), that will constitute financial product advice, and hence a financial service for which an AFSL is required.

Sounds pretty glum if you’re an accountant, right?

The Corporations Act and the Corporations Regulations 2001 (Cth) (Corporations Regulations), however, provide some relief, particularly to accountants, though there is some complexity to navigate. What follows is a brief explanation of what has otherwise been referred to as the “accountant’s exemption”.

Part 4 of this series will look at the forthcoming removal of the “accountant’s exemption” from 1 July 2016, and the new “limited” AFSL that can be obtained in the meantime.

 

Accountant’s Exemption

Section 766A(2)(b) of the Corporations Act provides that the Corporations Regulations may set out the circumstances in which a person is taken not to provide a financial service. This takes us to Reg 7.1.29 of the Corporations Regulations, which states that a person who provides an eligible service in the context of conducting an exempt service is taken not to provide a financial service.

“Eligible service” is defined by reference to the definition of financial service in s766A(1) of the Corporations Act. It therefore includes (as is relevant to accountants) providing financial product advice in relation to SMSFs.

“Exempt service” includes (as similarly relevant to accountants giving advice in relation to SMSFs) the following (Reg 7.1.29(5)(a) and (b) of the Corporations Regulations):

“…advice in relation to the establishment, operation, structuring or valuation of a superannuation fund…[where] the person advised is, or is likely to become…a trustee…or director of a trustee…or a person who controls the management…of the superannuation fund.”

However, Reg 7.1.29(5)(c)(ii) of the Corporations Regulations requires that the advice does not include a recommendation that a person acquire or dispose of a superannuation product.

So, if we were to stop there, we’d see that a person cannot – without an AFSL – recommend that someone establishes their own SMSF or dispose of their existing superannuation interest (perhaps to transfer the benefits to an SMSF), even if that advice is given in the course of providing advice on the “establishment, operation, structuring or valuation” of the SMSF. The establishment of an SMSF would be considered the acquisition of a financial product.

The “accountant’s exemption” kicks in, however, as follows:

Reg 7.1.29A of the Corporations Regulations provides that Reg 7.1.29(5)(c)(ii) (ie the regulation outlined above which prohibits a person giving advice (without an AFSL) that someone establishes their own SMSF), does not apply if the advice/recommendation is given by a recognised accountant in relation to an SMSF.

“Recognised accountant” is defined to include members of CPA, ICAA or the Institute of Public Accountants.

This last regulation is the one which will be removed from 1 July 2016, but we’ll say more about that in part 4 of this series.

To be able to properly rely on Reg 7.1.29 and the corresponding “accountant’s exemption”, there are other requirements which need to be met.

  1. The client is, or likely to become, a trustee or director of the trustee (and therefore a member of the SMSF), an employer-sponsor or a person who controls the management of the SMSF.
  1. No advice is given which relates to the acquisition or disposal by the SMSF of specific financial products (as defined in the Corporations Act) or classes of financial products, unless the advice is given for the sole purpose of ensuring compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act) or Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations), and is reasonably necessary for that purpose.
  1. No recommendation is made in relation to a client’s existing holding in a superannuation product to modify an investment strategy or contribution level, unless the advice is given for the sole purpose of ensuring compliance with the SIS Act or SIS Regulations, and is reasonably necessary for that purpose.
  1. Any advice which constitutes financial product advice is accompanied by a written warning that the accountant is not licensed under the Corporations Act to provide financial product advice and that the client should consider taking advice from someone who holds an AFSL before making a decision on the SMSF.
  1. The advice is not for inclusion in an exempt document or statement under s766B(9) of the Corporations Act (for example, an expert report).

If the advice is being provided in the course of providing advice on the tax implications of SMSFs, the following additional restrictions apply:

  1. The accountant will not receive a benefit such as a fee or commission (other than from the client) as a result of the client establishing the SMSF.
  1. The advice is accompanied by a written statement that the accountant is not licensed under the Corporations Act to provide financial product advice, and that tax is only one of the matters that must be considered when making a decision, and that the client should consider taking advice from someone who holds an AFSL before making a decision on the SMSF.

What about accountants who are also tax advisers?

Invariably, advice by an accountant in relation to a person’s SMSF will lead to a discussion of tax, in particular the taxation implications of investing via an SMSF and other related matters such as contributions caps and excess contributions tax risks.

So, to what extent does such tax advice constitute financial product advice, and are there AFSL exemptions under the Corporations Act or Corporations Regulations?

 

Tax Agents’ Exemption

Section 766B(5)(c) of the Corporations Act 2001 (Cth) (Corporations Act) provides that advice given by a registered tax agent, which is given “in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities“, is not financial product advice.

 

“Exempt” services under the Corporations Act as they apply to tax advice 

As noted above, s766A(2)(b) of the Corporations Act provides that the Corporations Regulations may set out the circumstances in which a person is taken not to provide a financial service. This takes us to Reg 7.1.29 of the Corporations Regulations, which states that a person who provides an eligible service in the context of conducting an exempt service is taken not to provide a financial service.

Regulation 7.1.29(4)(a) of the Corporations Regulations provides that “advice to another person on taxation issues including advice in relation to the taxation implications of financial products“, is also an exempt service. This would cover things such as:

  • Tax rates that apply in relation to SMSFs
  • Contributions caps and excess contributions tax.

However, to be able to rely on this exemption, further conditions need to be met:

  1. The accountant must not receive a benefit such as a fee or commission (other than from the client) as a result of the client establishing the SMSF.
  1. The advice must be accompanied by a written statement that the accountant is not licensed under the Corporations Act to provide financial product advice, and that tax is only one of the matters that must be considered when making a decision, and that the client should consider taking advice from someone who holds an AFSL before making a decision on the SMSF.

 

Conclusion

The various AFSL exemptions available to accountants in relation to their clients’ SMSF dealings no doubt provide significant opportunities. However, not only do the legislative complexities need to be navigated, but accountants should also be aware of the conditions and restrictions which apply to particular exemptions, especially where client disclosures are required.

 Accountants, SMSFs and financial advice: drawing a (thin) line?

Cristean Yazbeck

Head of Financial Services

+61 02 8263 6663

E cyazbeck@ro.com.au

© Copyright in this content and the concepts it represents is strictly reserved by Rockwell Olivier, Pty Ltd

Insurance cover changes are here

 

 

When setting up a SMSF, insurance is not usually the item on the top of the ‘to do’ list.

As of July 1 this year however, new rules came into force for insurance inside super.

SMSF trustees need to be aware of these rules, if for no other reason than changing insurance now could mean a forced reduction in the quality of cover that can be taken out.

Superannuation funds, including SMSFs, now can’t offer insurance that won’t pay claims in line with the Superannuation Industry Supervision Regulations. That means that insurance offered inside superannuation must meet the conditions to be paid out of super under the “condition of release” rules.

There are no great changes to life (death) insurance cover. Qualification for a payout doesn’t change and no insurers have signalled any major changes to their policies as a result. However, some of the smaller ancillary benefits offered by insurers will have to be dropped.

The issue with total and permanent disability insurance has always been that insurance companies have been able to offer claim conditions based on market pressures. As a result, insurance companies have competed to offer more generous policies regarding payouts.

Super funds can no longer offer the higher standard of “own” occupation. All TPD insurance contracts must now be “any” occupation policies. This occasionally (in less than 5 per cent of cases) has led to situations where an insurer has paid out a claim to a super fund but the super fund then has been unable, according to the SISA, to make the payout to the member.

For example, a member has taken out a $2 million TPD insurance policy with an “own” occupation definition. The member’s current occupation is as a brain surgeon, but before that they had worked as a general practitioner. The member suffers an injury that means he cannot work as a brain surgeon. However, the accident was such that he could continue to work as a GP (“any occupation for which the member was reasonably qualified by education, training or experience”).

The insurer would pay out to the super fund the $2m. However, under the new regulations, because the member could still work as a GP the payout would have to remain in superannuation until another condition of release was met.

TPD contracts offered inside super will now have to meet the definitions of “permanent incapacity”, as defined by the Superannuation Industry Supervision Act, so that if a TPD contract is paid out, it will also qualify to be paid out of the super fund to the member under a condition of release.

If you have an existing TPD contract with, for example, an “own” occupation condition, at some stage you may need to weigh up whether you keep the contract, with the possibility of having a payout by the insurer that may have to stay in the fund (for potentially decades) until another condition of release is met.

Another immediate change is that trauma insurance can no longer be taken inside super. Trauma insurance is generally designed to cover major illnesses, such as heart attack, cancer and stroke. Income protection is another area where competition has meant that policies inside super have often been more generous than could actually be paid out to the member under SISA restrictions.

Income protection policies are more complex (and are generally best taken outside super), but the benefits payable under a super policy have been reduced, because the policies will need to be able to be paid out under the “temporary incapacity” definitions in the SIS Regulations.

Insurance arrangements that were in place as at June 30 this year will be grandfathered.

SMSF Snapshot

 

 

The ATO recently released the latest SMSF numbers up until the end of the March quarter. The following infographics highlights some of the key takeaways.
SMSF Snapshot
SMSF Snapshot
As can be seen above, there are now nearly 1 million SMSF trustees in Australia across more than 500,000 funds.
SMSF Snapshot
Asset allocation remains heavily weighted towards listed shares and cash.
SMSF Snapshot
Total assets are now reaching close to $600 billion.
SMSF Snapshot
SMSF Snapshot
SMSF Snapshot
SMSF Snapshot
Australian Tax Office (Self-managed super fund report) Last modified: 29 May 2014