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!
Friday, January 21, 2011
Wednesday, December 22, 2010
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.
Thursday, December 16, 2010
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.
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.
Friday, December 3, 2010
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.
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.
Friday, November 26, 2010
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.
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.
Friday, November 5, 2010
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.
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.
Friday, October 22, 2010
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.
‘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.
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