My blog site is moving

As of 2 June 2011, all my new blogs will be posted in the Institute’s new myCommunity section.

To follow my blog at its new location, I invite you to login to this exciting new online resource for Institute members and finance professionals.

I look forward to hearing your views on future blog posts in myCommunity.

Regards, Liz Westover.

Continuing with collectables

In his 2010 recommendations to the federal government, Jeremy Cooper suggested banning self-managed super funds (SMSFs) from investing in collectables and personal use assets. Fortunately, the government didn’t take up this recommendation, but felt it wise to put some parameters around how SMSFs could continue with such investments.

Following consultation, the government has now released an exposure draft detailing what those parameters will be. From 1 July this year, it is proposed that assets that are categorised as collectables and personal use assets cannot be leased to related parties, cannot be stored in private residences of related parties and certain items cannot be used by related parties (though interestingly, wine wasn’t one of them!) Other measures include trustees documenting decisions, holding insurance in the name of the fund and valuations on transfers to related parties.

In the past, unforeseen outcomes have resulted following changes in legislation (such as the excess contributions tax) so I’m keen to know if anyone can anticipate any problems in the implementation of these draft regulations. One person advised that, in his case, the insurance is already undertaken, albeit by another party, and questioned the need for additional insurance in the fund’s name (in a gallery holding artwork for his SMSF which already had insurance over the asset). Are there any other examples you are aware of? Now is a good time to raise any concerns, before the regulations are finalised!

What are your thoughts? Feel free to comment below or email me at superannuation@charteredaccountants.com.au

Excess Contributions Tax - getting fairer

In the lead up to the Federal Budget announcement, a hot topic in the superannuation industry has been the ugly, unfair penalties that exist for those who breach the superannuation contributions caps.

Fortunately, the federal government took its first steps towards addressing this issue in its Budget announcement last night.

The government announced it will provide a one-off opportunity for people who make excess concessional contributions of less than $10,000, to have those contributions refunded. As a result, many of these people will no longer incur excess contributions tax, which could have been as high as 93%.

This is a positive step in making the superannuation system fairer and will assist Australians who are trying to save for their retirement within the current rules. For many people making minor, inadvertent breaches of their concessional caps, the proposed legislation will provide relief where they might otherwise have suffered significant tax penalties.

It is important to note, however, that the measures will not assist everybody – more significant breaches will not be eligible for correction and individuals will only be given one opportunity to correct one breach of the concessional cap. There are still a number of people who will continue to be unfairly impacted by this onerous tax.

The legislation will also only apply to excess contributions made from 1 July 2011.

It’s been a long time coming, but I am pleased that the government has taken this important step in making the superannuation system a little bit simpler and fairer for Australians saving for retirement – even if there is more work to do.

Accountants and financial advice: fitting round pegs into round holes

With the release by Minister Shorten this week of announcements dealing with the Future of Financial Advice (FoFA) reforms, it was encouraging to see that the federal government has acknowledged the important role that professional accountants play in the provision of financial advice to Australians.

In April 2010, the FoFA reforms discussed the removal of the “accountants’ exemption”, which had allowed accountants to advise on the opening and closing of self-managed super funds. There was concern that without an appropriate replacement, the role of accountants could be eroded, despite their status as trusted advisers.

Minister Shorten’s announcement, however, supports what we have always known – that it is in the best interest of our clients for accountants to be able to ‘consider a broader range of financial issues, particularly in relation to the establishment of self-managed superannuation funds’.

Consultation continues on exactly how professional accountants will fit into an overall regime that deals with the provision of all types of financial advisory services to Australians. As discussions continue, it will be important to ensure that square pegs are not shoved into round holes. We cannot simply try to fit accountants into a licensing regime in exactly the same way as financial planners – they offer different services, have different skill sets and different experience. Most accountants do not want to give financial product advice (and if they did, they would need to operate under a full Australian Financial Services License). They do, however, want to talk about a broader range of non-product issues. A new regulatory framework must be workable, sustainable and meet the needs of accountants and their clients.

As Minister Shorten recently said, ‘accountants are the trusted advisers of many Australian families’. In this capacity, clients ask their accountants questions on non-product issues that will not be asked elsewhere – the solution to the accessibility of financial advice for Australians must include an appropriate framework in which accountants can operate in order to answer those questions.

SMSF Auditors – striking the balance

The Commissioner of Taxation, Michael D’Ascenzo, recently described auditors as the ATO’s ‘eyes and ears’ for the self-managed super fund (SMSF) market, making an important contribution to the integrity of the system. I agree – SMSF auditors play a vital role in the success of this growing sector of the superannuation industry.

As the Stronger Super reforms are progressing, the measures for SMSF auditors around registration, competency and independence are being addressed. Because of their essential role, the government will want to maintain appropriate levels of competence for SMSF auditors.

The challenge for government and its advisers is to strike the right balance between determining the appropriate minimum requirements for auditors to operate, and ensuring that we still retain and attract adequate numbers of auditors to the industry.

The SMSF working group that is reporting to government on the Stronger Super reforms in the SMSF sector is currently discussing this very challenge, debating how much education and experience is necessary to qualify as an SMSF auditor.

While the bar cannot be set so low that underqualified and inexperienced auditors are able to operate in the industry, it is not in our best interests for the bar to be set so high that no one is willing to go through the qualification process. This could result in an insufficient number of auditors to audit the 440,000 SMSFs that now exist.

So what is the right balance? Consider these:

• What is the appropriate level of education; degree, diploma, specific SMSF audit course (or all of the above)?


• How many hours of SMSF audit experience should a person have before they can register as an SMSF auditor (suggestions have ranged from 100 hours to 1,000 hours)?


• How many audits should a person be undertaking per year for them to be considered ‘experienced’ enough to register as an SMSF auditor?

What do you think? How much education and experience do you think an SMSF auditor should have?

Complicating concessional caps

I recently started writing the Institute’s submission to Treasury on the implementation measures to make permanent the higher concessional contributions caps of $50,000 per annum for those over the age of 50. The catch now is that the increase will only be available where the person has a superannuation balance of less than $500,000.

I found, however, that before I could even get into the detail of the submission, the broader issues of the impact of this legislation were becoming more apparent and it worries me.

Firstly, it concerns me that the $500,000 balance limit (which will not be indexed) could send a message to Australians that once you meet this level of superannuation savings, you have enough to live on when you retire. We are an ageing population; individuals will be spending more years in retirement than ever before. It is a dangerous message for Australians to be receiving that this will be enough.

Secondly, including a maximum superannuation balance adds yet another hurdle for people to jump over in saving for retirement. It worries me that the new rules are going to exacerbate an already growing problem of people being subjected to excess contributions tax. The consequences of the concessional contributions caps legislation are already causing major problems for people – adding another factor (the $500,000 balance limit) will cause more people to falter and I believe that many more will be receiving excess contributions tax assessments as a result.

At a time when we have undergone a major review of our superannuation system in order to simplify and restore confidence in it, we should be thinking very carefully before bringing in new rules that will add complexity, cost and confusion and undermine other efforts to restore the confidence of Australians in their super.

Excess Contributions Tax – getting uglier

The latest ATO figures show that more Australians are breaching their concessional super contributions caps than ever before and are being slugged with extreme excess contributions penalties as a result. In fact, 65,733 people breached the cap in 2009-10 - more than twice the number of people who breached the cap in the previous financial year. The situation is getting worse and many of these breaches are unintentional errors by Australians wanting to save for their retirement within the current rules. So why are they being so severely punished?

I wonder why the government is so reluctant to remove this ugly tax, particularly when many alternatives have been suggested to fix the problem of people putting ‘too much’ money into super. The longer the government waits to solve the problem, the more it looks as though the tax is a revenue raiser!

If the government is going to impose limits on the amount people can contribute to their super, then they also need to be realistic about imposing appropriate penalties for making a mistake. In order to prevent too much money going into a concessionally taxed environment, excess contributions should simply be refunded.

This is a flawed tax and is detrimental to the retirement savings of many people who are genuinely trying to do the right thing. It’s time for the government to commit to change.

Reporting super – are employers getting it right?

I was working on a submission to Treasury this week on amendments to the legislation for Reportable Employer Superannuation Contributions (RESC). While the changes aren’t particularly controversial, the submission raised a bigger issue – are employers getting their reporting obligations right?

RESC are super contributions employers make for employees where the contributions are in excess of the superannuation guarantee of 9%. They must be reported on an employee’s annual payment summary.

Why is RESC required to be reported?

The law exists so that an employee’s entitlement to government assistance programs can be determined. There was a concern that people could salary sacrifice their earnings into superannuation and become eligible for various government handouts as a result of their reduced salary and wages component.

Some Chartered Accountants have expressed concern that employers may not fully understand their obligations about what to report, or the implications of getting it wrong. Some, they say, are reporting the compulsory 9% superannuation guarantee amounts (which they are not meant to do) and others are not reporting any amounts at all!

The result is that some people are being overpaid on their government entitlements, and others are missing out!

I would be very keen to hear of other people’s observations – as an accountant, as an employer or as an employee. Would you know how to determine if the right amount was on your payment summary?

Is the answer as simple as more education for employers or is it all just too complicated?

The realities of life when saving for retirement

The Institute lodged its 2011-12 Federal Budget submission to Treasury this week. It included a number of important recommendations for superannuation.

Two of our headline recommendations in super were changes to:

1. Concessional contributions cap rules
2. Excess contributions tax.

The level of concessional contributions caps at $25,000 (for those aged under 50) and $50,000 (for those aged over 50), is simply too low. More than that, however, the current system does not adequately address an individual’s changing capacity for saving for retirement. The caps were introduced to encourage Australians to save consistently over their working life, but let’s face it; very few people have the capacity to save at each stage of life. At various times in life, we have costs like mortgages, children to feed and clothe, or school fees to pay.

It would be preferable if a person could, for example, pay less super at a stage in life when their expenses are high and more super when their expenses are lower.

The system needs to better accommodate the realities of life as a home owner, a parent or someone whose life choices necessitate lower incomes. A better option would be a carry forward provision for those caps to enable people to ’catch up’ later when they are more able to do so.

The excess contributions tax continues to cause angst for many people and the government seems reluctant to act on it. A tax this onerous, imposed as a penalty for those trying to save for their retirement within the existing rules, contradicts the government’s claims to be encouraging greater superannuation savings!

The government could implement fairer ways to ensure people only contribute within the contribution caps, such as refunding the contributions back out of the system, including any earnings on the excess contribution amounts.

This tax should not exist in its current format. Measures are needed to ensure people stay within their caps, but a system in which a person who, making an inadvertent error, contributes over their cap can be subjected to a whopping 93% tax is simply wrong.

SMSFs and the practicalities of real estate investment

Here we go again – ready for another big year in superannuation. Already, unfortunate events this year have highlighted some areas of concern. Not least of all, the flood crisis around Australia that has caused untold damage and heartbreak.

While the full extent of destruction to property and infrastructure is still being determined, flood affected communities are rallying together to rebuild and repair the damage. But as property owners assess their repair needs, the trustees of self-managed super funds (SMSFs) that have invested in ‘real property’ through limited recourse borrowing arrangements, have run into some issues.

Currently, the rules around these arrangements limit the ability of owners to fund repairs to their property; many SMSF investors with flood-damaged property are likely to be affected.

The SMSF industry, including the Institute, has for some time been highlighting the practicalities for real estate investment to the Australian Tax Office (ATO) as they work through the limited recourse borrowing arrangements legislation. We have been arguing that without the capacity to repair a property, SMSFs are unable to appropriately deal with the realities of property ownership. It has now taken the unfortunate, large-scale damage caused by the floods to provide a significant and practical illustration of this legislation’s shortcomings.

If the limited recourse borrowing arrangements are not meant to apply to real property investment, then this type of investment should simply be disallowed from the arrangements. If, however, common sense prevails, the legislation needs to be changed or given a meaningful interpretation to truly accommodate the realities of property investment and ownership which, by their very nature, will include repairs.

Do you know of anyone who has been recently caught out by this legislation? Feel free to comment below or send me an email. We need to make it very clear to government and the ATO that there is still much work to be done!