Exotic assets to be banned and costs to rise under new rules for DIY super funds

Investors would be banned from holding so-called exotic assets such as art, wine, yachts and exotic cars in self-managed super funds under new rules proposed by a panel reviewing the operation of Australia’s superannuation system.

The review, headed by former ASIC commissioner Jeremy Cooper, handed down its third-phase report yesterday, specifically addressing the DIY super fund sector.

While Cooper’s panel found that the SMSF sector “generally works well”, the panel made several recommendations around improving the integrity of the sector and particularly the opportunity for unscrupulous behaviour by fund trustees.

“Whichever way we look at it, SMSFs are here to stay, but we want them to focus more on investing for retirement savings, rather than related party transactions, collectables and leverage,” Cooper said yesterday.

While the panel acknowledged these exotic assets can appreciate in value and can be appropriate for DIY trustees who are experts in those areas, it argued “people who want to own such assets are free to do so outside the SMSF environment in a way that does not involve special concessions from the tax system”.

But the Self-Managed Super Fund Professionals’ Association of Australia has taken issue with the exotic assets recommendation, arguing the issue is so small it does not need specific attention.

“The practical reality is that very few SMSFs hold these types of investments and those that do normally have some expertise in relation to that particular investment class,” SPAA chair Sharyn Long says.

The financial services industry is also concerned with a proposal from Cooper to make auditors of DIY super funds register with a new body that will set qualifications and eligibility standards.

Accountants who provide other advice services to a DIY super fund would be barred from providing audit services to that fund to beef up the overall independence of auditors.

Sharyn Long has described that proposal as “unnecessarily heavy-handed” and argues it would mean auditors of SMSFs are held up to higher standards than APRA regulated super funds or public companies.

“We believe many firms that provide a range of services to SMSFs currently have adequate controls that ensure full audit independence.”

The Institute of Chartered Accountants was similarly unimpressed.

“The importance of auditor independence is not unique to the SMSF sector and therefore legislating independence exclusively for SMSFs is not required given that relevant accounting professional and ethical standards are already in place,” the Institute’s head of superannuation, Liz Westover, said.

Daniel Butler, director of SMSF specialist law firm DBA Lawyers, said the push towards audit independence – like a number of the changes suggested by Cooper’s review panel – would lead to higher costs for fund trustees.

“The Government keeps overlooking the fact that it’s hard to get people to do an audit. It’s going to lead to more expensive audits,” Butler says.

“Businesses just can’t keep bearing the brunt of all this change without passing it on.”

Butler says that other recommendations that will lead to an increase in compliance costs include proposals that independent valuations are for related-party transactions and that assets are valued at their “market” value.

“Reflecting market value does require more work and that means costs,” Butler says.
Cooper has also proposed that in-house assets – that is, a loan to or an investment in a related party of a fund – be banned. Currently, SMSF trustees may have up to 5% of total fund assets invested in in-house assets. SMSF trustees that already have investments in in-house assets will have 10 years to dispose of those assets.

Butler says that the “unwinding” process – that is, the disposal of in-house assts – could mean big costs for trustees, including stamp duty.

“I don’t think it’s fair for the Government to unwind without some relief from transaction costs. The Government should provide some relief for those transaction costs in my view.”

Butler is pleased to see that Cooper has accepted that borrowing in SMSFs is here to stay, although he has recommended that this issue be reviewed further in two years.

Butler has also flagged a need for trustees to improve their estate planning around the issue of death duties within DIY funds. Under a proposal from Cooper, disputes around these issues would be able to be heard by the Superannuation Complaints Tribunal, rather than in the Supreme Court.

“This is an area where people will very carefully tie down their estate planning.”