SMSFs: trustees, advisers face new concerns

SMSF trustees and advisers are now faced with the task of understanding the new rules for SMSFs and how they impact on investment decisions.

Last year saw the biggest changes to the superannuation sector in a decade, and navigating the new rules has thrown up new concerns for SMSF trustees.

By Rachael McKinney

The Australian love affair with self-managed super funds (SMSFs) doesn’t look set to end anytime soon. Almost 30,000 funds were set up in 2016, bringing the total to nearly 600,000, data from the Australian Prudential Regulation Authority shows. In March 2017, more than 1.1 million trustees were administering a massive A$674.7 billion in retirement assets, close to a third of all Australia’s superannuation money. 

It’s not all blue skies, however. In years past, when you asked SMSF trustees and their advisers their number-one source of pain, compliance issues and making investment decisions battled it out to be top of the list. Now, thanks to rule changes in Australia’s 2016 federal budget, the biggest headache for SMSF trustees and advisers is understanding the new rules and how they impact on investment decisions. 

The new lifetime balance cap of A$1.6 million for superannuation accounts is a big issue. In addition, the annual cap for concessional (before tax) contributions has been reduced to A$25,000, and the after-tax contribution cap has nearly halved, dropping from A$180,000 to A$100,000. 

“This is the biggest change to the super rules in a decade,” explains Mark Ellem, executive manager of SMSF Technical Services at SMSF services provider SuperConcepts

Nerida Cole, managing director and head of advice at Dixon Advisory, adds: “For a lot of trustees, this has meant understanding the new rules, working out what they may need to do, and recording decisions in accordance with the Australian Taxation Office (ATO) and legislative requirements before key deadlines.” 

The loss of the segregated asset method for some SMSFs (see “What has changed”, below), where specific assets in an SMSF could be assigned to a pension stream with no income or capital gains tax liability, has also changed the landscape. In addition, earnings from assets supporting a transition-to-retirement income stream, previously tax-free, are now taxed at 15 per cent. 

“For trustees right now, it’s a challenging environment. Not only are they facing challenges in the form of regulatory change, they’re also continuing to find difficulties with investment selection,” says King Loong Choi, senior analyst at Investment Trends

A lack of advice and trust

While SMSF holders are keen for advice, they’re not always finding it. The 2017 SMSF Investor Report, released by Vanguard and Investment Trends in August 2017, found a record number of trustees reported they had unmet advice needs. 

“Many trustees were aware of the changes,” says Choi, “but what they really wanted to know was how these trends impacted them.”

Top areas of concern were inheritance and estate planning, closely followed by the impact of the regulatory changes. Specifically, trustees wanted to know what tax, super and investment strategies they should now adopt.

“The lifetime balance cap of A$1.6 million for superannuation accounts is a big issue.”

The report reveals another problem: a lack of trust. More than a quarter of the 3020 SMSF trustees surveyed in early 2017 listed a lack of confidence in adviser expertise as the number-one barrier to seeking advice. Finding an adviser who can advise across all areas was also a struggle.

“There’s no doubt … when there are major changes that makes the job harder for the SMSF holders and their advisers,” says Marcus Evans, the Commonwealth Bank’s head of SMSF Customers. 

“There is a very clear need to address the unmet advice needs and understand why they are unmet.” The model will have to change and adapt to meet those needs, he adds. 

New technology and new products 

Part of that paradigm shift is the rise of low-cost SMSF administrators and the emergence of new technology that is lifting some of the day-to-day administrative burden. This is freeing up advisers to offer more value-added services. 

“Automatic data feeds from bank accounts, brokers, the ASX and wraps can significantly reduce the time spent on manually entering data, and focus time on compliance monitoring and having more face-to-face time with clients,” says Ellem. “This technology can also provide SMSF trustees and their advisers with access to information and reports … so they can be making strategic and investment decisions with more relevant and up-to-date data.”

New technology is also driving product innovation, which adds more choice and more complexity to investment decisions.

Professional Development: Pensions - the $1.6m transfer balance cap. This recorded webinar will focus on the Government’s changes to the pension rules that came into effect on 1 July 2017.

“Twenty years ago, if you wanted to invest in international shares you had to buy a managed fund; now you can buy an ETF (exchange-traded fund), you can buy a listed investment company, or you can buy direct,” says Evans. “Ease of access … has really changed the ability of self-directed investors, including SMSF trustees, to be able to build diversified portfolios really easily and cheaply.”  

This is both a challenge and an opportunity. Advisers play a key role in explaining how the different technology works, and how trustees can take advantage of cheaper access and more range. 

Roboadvice is in its early stage but it’s going to grow to be a major game changer, and it’s not just a threat … it’s an opportunity,” says Evans.

The human factor

Advisory businesses also need to train staff to do their job effectively, says Cole. “The industry needs to keep focused on what SMSF [trustees] want and continue to lift standards and invest in developing the expertise of their advisers,” she says. 

Traditionally, accountants established relationships with SMSF holders in the initial set-up process. The emergence of low-cost administrators, however, has seen a drop in the number of new funds being set up by accountants, says Choi. Trustees still turn to accountants and financial planners for advice in roughly equal measure, he notes, but the nature of the trustee-adviser relationship is changing. 

“There’s a lot of information, but people find it hard to understand, or it’s conflicting. Advisers need to look at how to specialise in those areas of SMSF advice,” adds Evans. 

Even if they don’t use all the services offered by an adviser, DIY trustees may still want help navigating the maze of new rules. 

Many SMSF holders are open to using multiple advisers, says Choi, and more than half of the 945 accountants surveyed for the 2017 SMSF Investor Report had someone in-house who could provide financial planning and advice. The third of accountants who said they had no in-house capability had a referral relationship with a financial planner.  

The new superannuation reforms reinforce the benefit of having a trusted adviser for SMSF clients, says Ellem, but it’s just the start. The prospect of annual reporting to the ATO being replaced by event-based reporting – for example, on transfer balance account transactions, and the commencement or commutation of a pension stream – will be a game changer for trustees and advisers, and signals the start of a new era of SMSF compliance. 

What has changed

  • There’s a A$1.6 million cap on the total amount that can be transferred into the tax-free retirement phase for superannuation account-based pensions. 
  • The concessional (before tax) superannuation contribution annual cap has been reduced to A$25,000; the non-concessional (after tax) contribution annual cap has been reduced to A$100,000.
  • Individuals with annual income above A$250,000 pay 30 per cent tax on concessional contributions.
  • Transition-to-retirement income streams are now taxed at 15 per cent.
  • SMSF funds that are in the pension phase, and have a member with more than A$1.6 million (in total) invested across the superannuation system, cannot use the segregated method to be exempt from income tax and capital gains tax. The SMSF will have to use the proportional method and get an actuarial tax certificate to qualify for a tax exemption.
  • The Australian Taxation Office is introducing event-based, rather than annual, reporting for SMSFs. Commencement of a pension needs to be reported within 28 days of the end of the quarter; commutation of a pension must be reported within 10 business days after the end of the month in which it occurs. Transfer balance account reports will be used to administer the A$1.6 million cap on superannuation accounts.

Read next: SMSF trustees want more from their advisers

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