The regulation of self-managed super funds (DIY funds) shows no signs of easing. Given their importance in terms of the total superannuation sector, perhaps that is not surprising. But regulation changes may catch some DIY fund trustees out if they are not aware of what’s coming.
Most recently, the federal government has released draft regulations proposing to require trustees of self-managed superannuation funds (SMSFs) to:
- value the assets of the fund at “net market value” for reporting purposes;
- consider whether to hold a contract of insurance for one or more of their members;
- “review regularly” and document the investment strategy; and
- keep money or other assets of an SMSF separate from money and assets held by a trustee personally or by a standard employer-sponsor (or an associate).
These are important changes and once the regulations are finalised they would apply from July 1, 2012, only a few weeks away. So what do the changes mean?
Net market value
The draft regulations propose to require trustees of SMSFs to value the assets of the fund at “net market value” for reporting purposes from the 2012-13 year of income i.e. from July 1, 2012.
“Net market value” will be defined to mean the amount that could be expected to be received from the disposal of an asset, in an orderly market, after deducting the costs expected to be incurred in realising the proceeds of such a disposal. This definition of “net market value” is the same as that used in Australian Accounting Standard AAS 25 which requires large APRA-regulated superannuation funds, as reporting entities, to value their assets at net market value as at the reporting date.
Currently, SMSFs are generally able to choose either historical cost or market valuation accounting methods to value their assets when preparing a statement of financial position and an operating statement in respect of each year of income. SMSFs in pension phase (and in-house assets) are already required to value assets at “market value” (defined in s 10(1) of the SIS Act) each year. Note that a person commits an offence if they contravene the laws regarding preparing a statement of financial position and an operating statement with a maximum penalty of $11,000.
Separation of assets
A proposed new operating standard in the super regulations will require a trustee to keep money and other assets of an SMSF separate from any money or assets held by a trustee personally or by a standard employer-sponsor (or an associate).
This requirement is currently established by way of a covenant under the law which is deemed to be incorporated into the governing rules of the fund. However, the Tax Office is currently unable to enforce compliance with covenants and relies on voluntary compliance by trustees.
The proposal to make this requirement an operating standard will mean that a person who intentionally or recklessly contravenes the new regulation will be guilty of an offence punishable on conviction by a fine up to $11,000.
Investment strategy review
SMSF trustees will also be required to “review regularly” the fund’s investment strategy. Trustees will be able to substantiate compliance of this requirement to “review regularly” by documenting decisions in the minutes of trustee meetings that are held during the income year.
Many SMSFs may only have what could be described as a very “loose” investment strategy that is not even documented. They will need to be aware of the changes and the need to have a properly documented strategy that is reviewed regularly and documented in the minutes of trustee meetings.
Other funds may already be properly documenting their investment strategy reviews, so the changes may have less impact on them.
Either way, from July 1, 2012, there will be no choice in the matter. Funds must have an investment strategy and it must be reviewed and documented regularly.
The draft regulations also propose to amend the investment strategy operating standard in the superannuation regulations to require SMSF trustees to consider whether to hold a contract of insurance that provides insurance cover for one or more of their members. SMSF trustees will be required to consider whether to hold insurance for their members when they formulate, regularly review and give effect to the fund’s investment strategy.
The government expects trustees of SMSFs to be self-reliant in determining the type and level of insurance cover their funds’ members might require whether within or outside their SMSFs.
As the investment strategy requirement is a prescribed operating standard, a person who intentionally or recklessly contravenes this standard is guilty of an offence punishable on conviction by a fine up to $11,000.
SMSFs are facing increasing regulation. The days are gone when someone could set up such a fund almost on the back of an envelope. The SMSF sector now holds growing billions of dollars in funds, so it’s not surprising the government is keen to see those funds properly managed. SMSF trustees will have to get used to that.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.