The future for SMSF auditors

The die is now cast – following the government’s response to the Cooper Review, ASIC will be appointed as the registration body for self-managed super fund (SMSF) auditors. Having a registration body for SMSF auditors is good for the industry and consumers, although I believe the ATO is better placed to undertake this function by building on and improving the existing reporting framework. Despite who the registrar is, a formal registration will enhance the integrity of the audit function and, regardless of registration requirements for individuals, will encourage auditors to evaluate their own suitability to undertake SMSF audits, (i.e. ‘Is it worth registering when I only undertake a few audits per year?’)

A lot of SMSF service providers will be wondering if they will have to change the way they do business, so the million dollar question is: ‘How did the government respond to Jeremy Cooper’s view on mandatory outsourcing of all SMSF audit services to address auditor independence issues?’

The answer is that the government didn’t specifically address mandatory outsourcing. What it did say was that approved auditors would need to meet independence standards as part of their ongoing registration and directed ASIC to examine existing auditor independence standards that may be applied.

As I have been saying for a long time (and to everyone that will listen), mandatory outsourcing of audits will NOT ensure independence. In fact, it may even facilitate attempts to circumvent independence! Robust professional and ethical standards, which cover independence issues, already apply to 95% of SMSF auditors - those who are members of one of the three professional accounting bodies. ASIC now needs to make sure those standards apply to 100% of SMSF auditors.

The journey into super reform is just beginning...

After nearly six months of anticipation, this morning, Assistant Treasurer Bill Shorten responded to the recommendations of the Super System (Cooper) Review.

While there were no surprises in the government’s response, the overall announcement on super reform is momentous in its implications, and this morning I had a chat to Carson Scott on Sky Business News on some of the highlights.

I mentioned that people are reluctant to commit to super because they are concerned the rules surrounding it won’t be the same when they retire. There have been so many changes to the super system in the last 20 years that many Australians either lack confidence in the system or are simply disengaged from it.

The reforms – designed to reduce fees, address lost super, provide a simple, cost-effective default fund product, and deliver access to meaningful and comparable information on super accounts – will be a great first step in ensuring Australians regain their confidence in super.

But despite the positive start to super reform, there are still some loose ends if you look at the bigger reform picture. Choosing to link the super guarantee (SG) increase with the package of reforms that includes Minerals Resource Rent Tax (MRRT) is one example. Because the process around implementation of the MRRT is far from certain, there is a risk of the whole thing falling through.

However, there are other ways of achieving the same objectives of an SG increase. You might remember that the Henry tax review report suggested leaving the SG rate at 9%, and instead adopting a number of other reforms which would have the same net effect on retirement savings as raising the SG rate to 12%.

One real win in today’s announcement, though, is the consultative approach the government is taking by involving industry experts in the technical detail of the changes.

While there is still a lot of work to be done, the government’s commitment to superannuation reform in the best interests of working Australians will go a long way to boosting and protecting retirement savings. The journey into superannuation reform will not be short, but it is a worthy initiative – I believe we are taking steps in the right direction.

If you’re interested, our media release has more information.

2011: A year for ‘decision and delivery’

I attended a Committee for Economic Development of Australia (CEDA) breakfast recently at which Prime Minister Julia Gillard was presenting.

Ms Gillard said 2011 would be a year of ‘decision and delivery’ for the government. Certainly, with the number of reviews and enquiries the government has launched over the last two years, ‘decision and delivery’ will be a welcome approach in the new year, if only to provide clarity around where certain industries are heading, and allowing industry participants to prepare accordingly.

Interestingly, Ms Gillard only noted two action items for superannuation in her speech: increasing super guarantee levels and addressing government contributions for low income earners. Given the super industry is eagerly anticipating the government’s response to the Cooper Review – due out before Christmas – I thought that was a rather minimalist inclusion by the Prime Minister.

With that in mind, I thought I would outline a few items on my own wish-list for ‘decision and delivery’ in superannuation for 2011:

1) Respond to the Cooper Review report decisively – strive to set the right policy settings by applying practical solutions to identified issues. Open and honest consultation will be imperative, and remember: more rules and greater regulation will not necessarily solve the problems.

2) Abolish the extreme penalties from the excess contributions tax – Australians should not be punished for trying to do the right thing and save adequately for their retirement.

3) Raise the concessional contributions caps to a more realistic level that will enable Australians to save more for their retirement.

4) Allow all Australians to top up super guarantee amounts by claiming a tax deduction for personal super contributions (not all employers let their employees salary sacrifice to top up super guarantee contributions). Then, address the anomalies in super guarantee payments that allow an employer to satisfy their obligations with an employee’s own salary sacrifice amounts.

5) Resolve to stop tinkering with super – fix it and then leave it alone! (See my last blog). This alone will do wonders for engagement with super in Australia.

The decisions the government is about to make in superannuation will be momentous for the industry and for Australians striving to save for a comfortable retirement. And they are decisions that will be felt for years to come. The government, charged with the critical task of making the right decisions, is about to create its legacy in policy-making, not just around super, but around tax and financial services too.

It’s a big task, but with open and honest consultation, effective decisions and delivery are within reach.

Planning for the retirement tsunami

I recently read an editorial in The Australian by Peter van Onselen entitled ‘Mexican standoff over super serves no one.’

It identified some of the more controversial issues in super at the moment, including the increase in the super guarantee rate to 12% from 9%, the low concessional contribution cap and the heavy tax penalties for exceeding the contributions caps.

Of interest were the author’s comments about superannuation in Australia in the context of the fiscal pressures that will be caused by our ageing population. As Mr van Onselen notes, if the government doesn’t fix super, ‘it is the equivalent of warning about an approaching tsunami without planning for its arrival.’ How right he is.

I would add to this that in formulating a plan for superannuation, we are only hurting ourselves when we make frequent changes to the system. Taking the tsunami analogy further, if people become confused about the latest plan of action when the tsunami hits – or they lose confidence in the latest plan – they simply adopt a ‘let’s worry about it when it arrives’ response. Clearly, this can’t be the approach for superannuation if the objective is a comfortable retirement for all Australians.

For super, the plan for the arrival of the retirement tsunami needs to be right – and the time to get it right is now. Superannuation has been subject to more than its fair share of tinkering by various governments over the years and this has eroded the confidence of Australians saving for their retirement through superannuation. More changes in recent years have resulted in many people being slugged with severe excess contributions tax penalties when they were simply trying to save for their retirement following the ‘new rules.’ Who wouldn’t lose confidence in the system?

So, as the government finalises its response to the Cooper Review into Australia’s superannuation system (we’re expecting a response before Christmas), one would hope that both sides of politics use this last opportunity to get it right. The message is simple: fix super in the best interests of Australians, and then leave it alone.

We have an obligation to overlook political short-termism for the benefit of Australia’s retirement savings in the future. After all, tomorrow’s budget balancing act will be acutely felt when the largest cost to government comes from supporting retirees via the aged pension and the health system. Indeed, the Mexican standoff over super serves no one.

More than an exemption

The last couple of months have seen many Chartered Accountants become increasingly engaged with the Institute as word spreads about the removal of the accountants’ exemption. It is an issue that certainly has many members “hot under the collar”. However I was surprised by the number of Chartered Accountants who weren’t fully aware of exactly what the accountants’ exemption is and the limitations it has in its application. (Yes, it still “is” – the removal is not due to take effect until 1 July, 2012.)

The accountants’ exemption refers to the ability for recognised accountants to recommend the setup or closure of a Self-Managed Superannuation Fund (SMSF) without the need to operate under an Australian Financial Services License (AFSL).

Interestingly, the only reason we need the accountants’ exemption is because SMSFs are considered or viewed as a financial product, which would otherwise require an adviser to operate under an AFSL.

My view is if SMSFs were more appropriately classified as a structure, not a product, the accountants’ exemption wouldn’t be required at all – it is the underlying investments that are financial products, not the SMSF itself.

The other difficulty with the legislation is that it doesn’t talk about an accountant advising a client NOT to set up an SMSF; nor does it allow accountants to explore alternatives for superannuation savings. In terms of structural, tax and asset protection advice, accountants need to be able to talk about SMSF as a viable alternative to other structures, such as companies and trusts, to potentially hold and grow assets.

Clearly, accountants need to talk about SMSFs with their clients but they also need to talk about a whole lot more! Accountants, as trusted professionals, are well placed to provide simple, affordable, non-product financial advice and have a significant role in ensuring Australians are able to gain access to advice when they need it.

This issue has had quite a bit of attention in the public domain – you may have seen an article I wrote in the recently released Spring 2010 edition of SMSF Magazine, entitled ‘Exempt No More’.

What kind of advice do you think accountants should be allowed to provide their clients? I would love to find out more about what our members think about this issue – please feel free to share your thoughts.

Re-engaging youth: a ‘super’ problem

Throughout the Cooper review process, the issue of disengagement with superannuation was frequently raised and debated. It was widely acknowledged across the industry that younger Australians tend to be particularly disengaged. The reasons for this appear to be varied:

‘Super is too complex.’
’I’m not retiring for another 50 years.’
‘I’ve only just started my career, why would I think about retirement?’
‘I don’t earn enough to worry.’
‘I’ve got better things to spend my money on!’

Anyone involved in superannuation and the broader accounting and financial services industries understands the benefits of starting early to save for retirement. Older Australians often regret their late consideration of superannuation. The question is, how do we get the message of early saving in superannuation through to younger people? Just as importantly, how do we get them to care?

Education is a large part of the answer. Students should be taught about financial literacy in schools. This is important to ensure students understand basic financial concepts, including superannuation. Younger Australians need to be aware of the benefits of starting to save for their retirement from early in their working lives.

However, education can only go so far. Let’s face it - I can teach my kids about all the great benefits of broccoli; it doesn’t mean that they will eat it!

I’m curious to know what others have to say on this issue. In an age of instant gratification, does there need to be a more immediate and relevant incentive to start saving? (Tax incentives to a low income earner may not be very appealing.) With an ageing population, we cannot over-emphasise the importance of superannuation. Unfortunately, if Australians don’t start to engage with their super early in their working life, it may be to their detriment in retirement.

Superannuation: ‘leaking revenue’?

I recently read the “red book” - a document that Treasury provided for the returning Gillard government. The red book’s purpose is for Treasury to identify the economic pressure points for the new government. While many of their points were interesting, I found the comments by Treasury on superannuation frustrating. They stated that “the superannuation system is increasingly leaking revenue, with Self-Managed Super Funds now the tax minimisation vehicle of choice”.

With SMSFs finally being ratified as a “largely successful and well-functioning” sector of the superannuation industry by the Cooper Review, it concerns me that the comments from Treasury may have a negative impact on the sector. With many of the misconceptions about SMSFs finally being put to rest, it is perplexing that Treasury would imply that those with SMSFs somehow have access to special rules or are otherwise abusing the system.

Let’s be clear - there are no special tax laws available uniquely to SMSFs that currently enable some sort of “tax rort”. SMSFs access the same tax laws as all types of superannuation funds, albeit that they are generally able to manage and utilise them more effectively than their larger counterparts. Furthermore, to refer to the use of legitimate tax laws that are available to any taxpayer as “leaking revenue” is inflammatory and misleading.

Early in 2010, the Cooper review identified SMSFs as a strong and robust sector of the super industry. After many years of public scrutiny, this greatly improved the perception of SMSFs. Any implication that SMSFs are somehow cheating the government of revenue will only encourage old prejudices and bias to resurface.

Why audit SMSFs?

The National SMSF Conference 2010 is continuing today and I’ve been having a great time attending sessions and meeting members. Feedback has been really valuable – members really appreciate the opportunity to hear from experts and build up their skills in the SMSF sector.

Yesterday, I attended a panel session on auditor independence. Interestingly, during the Q&A session, panellists were asked why do we need to audit SMSFs at all? While the answer may seem obvious to members, it may not be for some of your clients.

The first and most apparent reason to audit SMSFs is that it is required by law. However, while not all laws appear to stem from sound policy principles, I believe this one does. There are some good reasons for auditing SMSFs, not least of which is that it is in the public interest.

As you know, an SMSF has access to significant tax concessions. It is therefore essential for the public (and the regulator) to be comfortable that each fund abides by the law to ensure paying tax remains a fair and equitable process for all. An independent audit is an important part of this process.

What many people don’t realise, however, is that many SMSF trustees find a lot of value in the audit function. An auditor can provide independent and beneficial advice for trustees, extending their service beyond the role of compliance to one which helps trustees keep their fund on track and address any areas of concern as they arise.

The SMSF sector continues to show strong growth. The audit function is central to ensuring SMSFs can be used (not abused) effectively to maximise retirement savings for many Australians.

What do you think? Do you find auditing SMSFs a positive process?

National SMSF Conference - opening thoughts

What a great start to the National SMSF Conference this morning! It’s taking place at the beautiful Hilton Hotel in Sydney and over 300 members are participating.

Neil Olesen from the Australian Tax Office kicked the morning off with an update on the regulation of SMSFs. He pointed out that in 1999, there were 190,000 SMSFs in Australia and today that number has increased to 430,000. This suggests that Chartered Accountants will continue to work with more and more SMSF trustees and the opportunities in this sector are growing at a considerable pace.

David Shirlow, the Executive Director of Macquarie Bank gave us all an update on superannuation policy developments. Happily, he doesn’t think a change in government minister (from Bowen to Shorten) will slow down the implementation of the Future of Financial Advice reforms and expects it to be effective from 1 July, 2012. David said the Cooper Review recommendations around SMSFs were generally positive.

I don’t entirely agree with David – I think some of the Cooper recommendations need a lot more scrutiny. Let’s not forget there are different ways of achieving the objectives Jeremy Cooper is trying to achieve in the SMSF space. More on that later.

There are more exciting sessions to come today and tomorrow. I am enjoying the opportunity to meet with members and to hear their thoughts and ideas on superannuation. Please feel free to share your views about the conference or SMSFs in general, either in person, via this blog or by email.

Stepping up for the National SMSF Conference

The Institute is hosting its first National SMSF Conference on 23-24 September in Sydney. It’s a timely event given the announcement of our new federal government. Presumably, the Cooper review now remains on the government’s agenda and with it, the recommendations that may impact on many SMSF service providers.

Change is not new to the superannuation industry and it’s fair to say there will be more. This event will help arm practitioners with the right information so they can prepare for any changes on the horizon.

If you remember, Jeremy Cooper reported that the accounting profession is best placed to deal with competencies in the SMSF accounting and administration space – this conference illustrates the Institute’s willingness to provide quality training events for its members and the broader SMSF community.

I’m particularly looking forward to the panel discussion at the end of Day One of the conference. The panel, made up of luminaries from the audit world, are holding a session titled, Auditor independence – where do you draw the line of independence? This is topical because of Cooper’s suggestion that “true independence” is required in the SMSF sector.

As I have said before, competencies and independence are important in any audit – not just in the SMSF sector. But while Cooper’s objective to achieve high levels of competencies and independence is to be supported, the question is, will his recommendations meet the desired objectives?

The panel discussion promises to shed some light on this. There will also be opportunities for delegates to ask questions, so I am interested to hear what others think!

Other highlights from the Conference include ATO presentations on issues of concern to the regulator as well as some insights into “auditing the auditor”. Updates on major areas of interest for SMSF service providers including borrowing, deeds, tax and practical uses for SMSFs will be invaluable. Importantly, everyone will have opportunities to network with others working in the SMSF world.

So come along, this is an opportunity not to be missed.

Banning in-house assets – the right solution?

It occurred to me that the Cooper Review panel’s recommendation to ban in-house assets (IHA) for SMSFs has failed to get to the core of the issue and has not given due consideration to the impact of other recommendations in the Cooper report.

The review panel made a recommendation that SMSFs should no longer be able to invest in IHA. The main reason they give is that these investments “provide an avenue for potential abuse”.

The ATO has indicated that generally where trustees are breaching IHA rules, they are REALLY getting it wrong; that is, they are investing hefty portions of the fund’s assets in IHA, far in excess of the 5% allowed.

The panel does not appear to consider the fact that prohibiting IHA may not actually change trustee behaviour. If trustees are already breaching the existing rule to limit IHA to 5% of the fund’s assets, why would a new rule prohibiting these investments change that behaviour? In my view, some of the other recommendations may provide a better solution.

For example, one of the more commendable recommendations is for greater sliding scale penalties being available for the ATO to impose on SMSF trustees, including monetary fines, mandatory education and rectification orders. Because the penalties would be better aligned with the level of the breach, this would more likely succeed in changing trustee behaviour. Under the current regime, the upper end of the penalty scale is rarely imposed because of extreme implications for trustees and their retirement savings.

Another example is the audit function. Clearly, trustees are being reported to the ATO where they breach the IHA rules (16% of reported contraventions). While I don’t agree with the specific recommendations on SMSF auditors in the report (in fact, I strongly disagree with them), I do agree with the sentiment that auditor competencies and independence is important and that more can be done to enhance the audit service offering. To this end, an improved audit sector will see that trustees breaching IHA rules continue to be reported to the ATO.

Banning IHA was not the right solution for the potential or actual abuse of these rules – methods to modify trustee behaviours are.

Auditor competencies and independence

The sentiment coming out of the Cooper review around SMSF auditors is right – it is important to ensure that all professionals working in this sector are appropriately skilled and abide by independence principles. Can more be done to support this objective? Absolutely. Should ASIC be brought in as the regulator and standard-setter? No way.

There is a robust system in place already covering the quality of SMSF audit activity for the majority of these service providers. More than 95% of SMSF auditors, as members of the three professional accounting bodies, are obliged to adhere to competency requirements, auditing standards and professional and ethical standards.

Members are also subject to quality review and disciplinary action where appropriate. Recommendations for these measures to apply to 100% of SMSF auditors would negate the need for ASIC to issue a new set of standards.

The professional accounting bodies have always shown a willingness to constructively work with the government and regulators, including improving the integrity of the audit function for SMSFs. The introduction of mandatory auditor competency requirements in July 2008 was a significant step and we continue to see the positive impacts these are having on the industry.

There were many practical measures presented to the Cooper review panel for further improvements to the audit function; direct reporting by auditors to the ATO, enhancement of existing ATO online software and a register of auditors being provided by the ATO.

It is unfortunate that these were largely ignored in favour of recommendations for sweeping changes to be determined by another regulator to this sector. The result will be more complexity and greater costs, which goes against the very objectives Jeremy Cooper was trying to achieve.

Cooper: a super review?

The timing of my first blog couldn’t have been better. With the release of the Cooper report on Australia’s superannuation system last week, I have been canvassing members’ opinions on the recommendations. What did you think of the Cooper report?

Overall, I think there are some great ideas in there. MySuper and Superstream offer up some fantastic ideas for improving the super system for all Australians. The use of tax file numbers as an identifier to ensure people are correctly matched with their super savings – and stay that way – is a ‘no brainer’. Making super funds more comparable and transparent, and trustees more accountable, will go a long way to restoring confidence in our super system.

It’s a sad reality that MySuper was conceived because the majority of people – 80% – are disengaged with their super. But, in order to foster re-engagement, MySuper will need to be supported by other measures designed to educate Australians and grow their confidence in their retirement savings. Engagement should be a top priority for the government and hopefully that will be addressed in their response to the report.

My biggest concern with the Cooper report is that some of the recommendations – for example to increase regulation of SMSF auditors – reflect a misunderstanding of current systems and a failure to consider more practical measures that would achieve desired outcomes.

Other recommendations appear to have been made on assertions without supporting analysis, such as the proposal for ASIC to regulate auditor competency requirements.

The challenge for the government as it pursues a simpler, more efficient super system will be to weigh the benefits of increased regulation against the risk of strangling certain sectors of the industry.

I’m interested in your views. There will no doubt be much more discussion on these and other super issues as the government prepares its response to the Cooper review in this, an election year.