Melbourne SMSF Group – Submission the Super System Review

THE MELBOURNE SMSF GROUP\Mr Jeremy CooperChairman of the Super System Review Panelinfo@supersystemreview.gov.au 15 th February 2010Dear Sir,Re: Submission to Super Review Panel regarding Self Managed Super- FundsThe Melbourne SMSF Group is a non profit, self help organization providing a regularforum for SMSF Trustees to exchange information and ideas regarding the operation ofSelf Managed Super Funds. The group has been operating for six years, and in that timehas grown, by word of mouth, to over 150 members.We believe we fulfil a valuable role in fostering Trustee involvement and learning, andencouraging responsible SMSF management.The key objectives of our group are to:• Promote compliance with the SIS Act and Tax Legislation.• Promote self education and sharing of information between SMSF Trustees• Gain educational assistance from the ATO, Centrelink and other organisations.• Promote clarity and simplicity in the practical operation of Self Managed Funds.• Promote sound investment practice, and the preservation of retirement savings.• Discourage the use of SMSFs where obviously inappropriate.In response to your request for suggestions aimed at improving the SuperannuationSystem, we wish to make the accompanying submission proposing reforms to improveand simplify management of Self Managed Super Funds.We believe that suggestions we have made will offer significant advantages to thoseAustralians prepared to fund themselves in retirement, and also produce benefits for theATO, as regulator - and ultimately the Government Purse.As far as we are aware we are the only organisation of our type in Australia. As a grouprun by SMSF trustees, for SMSF trustees, with no commercial affiliations, we are able toappreciate and present an informed view from the SMSF Trustee perspective.We would welcome the opportunity to provide further detail or comment to support anyaspect of our proposal, if required.Yours faithfully,Viv Elliston Wolfgang Waffler(Chairman) (Secretary)Issued 15 th February 2010

THE MELBOURNE SMSF GROUPSecretary: Wolfgang Waffler (email monika.waffler@bigpond.com, Phone 03 9762 7919)Chairman: Viv Elliston (vivell@melbpc.org.au, Phone 03 9803 4319)Submission Regarding Simplification of Self ManagedSuperannuation Funds1. Summary of Reforms Proposed in this SubmissionThe reforms suggested in this submission are proposed by experienced SMSF Trusteeswho actively manage their own Funds, and see a significant level of unnecessarycomplexity and cost, that could easily be reduced or eliminated. The reforms to becovered in further detail in this document include:• Addressing inappropriate promotion of SMSFs where it would not be in the bestinterests of the proposed members.• Elimination of the totally unnecessary requirement for a single member SMSF tohave a Corporate Trustee – especially where the member is in fact the soleCorporate Trustee.• Elimination of the requirement for preparation of complex Annual AccountingStatements, and their replacement with a simpler arrangement linked directly to theATO.• Elimination of the requirement for annual audits of SMSFs, and their replacementwith the simpler and more effective ATO Self Audit process, which in essencealready exists as part of the Fund’s Regulatory Return.• Elimination of the requirement for Actuary Certificates, and their replacement withkey information to be provided as part of the Fund’s Regulatory Return.• As an alternative to SMSFs, we are also proposing the introduction of much simplerand more accountable means of identifying Personal Superannuation Assets, whichcould be applied at an Individual Taxpayer level.We would urge the review team to give real consideration to the above proposals, and theadvantages they would offer to the Government, the ATO, and those worthy, andsometimes senior, Australians who have accepted the responsibility to fund themselves inretirement.2. IntroductionMany Australians have taken responsibility for funding their own retirement, using savingsheld in ATO supervised Self Managed Super Funds. These small funds are limited to fourmembers, and typically hold the retirement savings of individuals or couples.Issued 15 th February 2010

Many current requirements impose totally unnecessary cost and complexity, resulting inthe need to put in considerable ongoing effort, or engage expensive professionals, for noreal benefit to the Government, the ATO, or self funded Australians.It is clearly in the interest of the Government to assist and encourage those who havetaken responsibility for funding their own retirement, especially where such assistance isnon-financial in nature.It is also important to recognize that as Self Funded Australians move into old age, theyare faced with this unnecessary burden, in order to simply manage retirement savings.This should not be the case, and if we have any pride in the fairness of our country, theseunnecessary and unproductive requirements should be reformed.It should also be recognized that as the number of Self Managed Super Funds hasincreased rapidly in recent years, a small industry has evolved in order to service theseunnecessary complex requirements. In a free market system one cannot blame thisindustry for resisting reform, and some consideration needs to be given to managing anynecessary transition, in a constructive manner.This submission presents a set of initiatives that would simplify these small super funds, tothe benefit of self funded Australians, and ultimately the Government Purse, and thecommunity as a whole.3. Current Problems with SMSFs3.1 Inappropriate FundsSelf Managed Super Funds offer a number of important advantages to those wishing tofund their own retirement. Trustees (members) have full control over where savings areinvested, have greater strategic and investment flexibility, and do not have to payexcessive fees based on percentage of capital.However there are cases where a SMSF may not be the best strategic or financial option.Some Trustees may not have the interest or the aptitude to run a SMSF, and may payexcessive operating costs, or may lack even the most basic of investment skills.We believe that the SMSF Service Industry is in a good position to address this issuewhen applying their expert knowledge in assessing the best options for individual clients.Our policy is to encourage our members to analyse their own situation and decide whethera SMSF is in fact their best option. We do not wish to pursue this issue further - but simplyhighlight the problem and encourage the Review Team to consider ways to minimise anyblatantly inappropriate application of SMSFs.3.2 Unnecessary Regulatory ComplexityUnder superannuation law, the trustee of a SMSF is required to comply with significantregulation, including the following:• Administration of the fund in compliance with the SIS Act, SIS Regulations, andother tax law.Issued 15 th February 2010

• Operation of the fund in full compliance with the fund’s Trust Deed.• Preparation of detailed Administrative Records for the fund.• Preparation of detailed and assessable Accounting Records.• Preparation of an annual Operating Statement and Statement of Financial Positionfor the fund.• Annual lodgement of a combined income tax and regulatory return, and a number ofother reports, for the Tax Office.• Audit of all fund records, accounts and financial statements of the fund, each year,by an approved auditor.• Provision of a Complying Certificate for complying pensions by a certified actuary.• Provision of Tax Certificates by a certified actuary (for exempt current pensionincome) for funds that have a mixture of liabilities for pension and accumulationphases.• Preparation of and compliance with the fund’s Investment Strategy.• Retention of fund records in accordance with the requirements of the SIS act andthe ATO.• Maintaining up to date calculations and records for the Tax-Free Component foreach member account.While we recognise the need for sensible regulation, we can see many opportunities toremove unnecessary, and non productive requirements, thereby reducing complexity fortrustees, as well as eliminating unnecessary costs.Unproductive complexity diverts trustee effort from the main goal of managing retirementsavings. Simplification would benefit self funded Australians, at no cost to theGovernment. It would help to extend savings, and ultimately reduce the need for financialsupport by Government3.3 Unnecessary “Self Imposed” ComplexityWhile some unnecessary complexity has arisen from legislation, further unwarranted detailhas also been introduced. This results in over servicing, for a fee – further erodingretirement savings.This is a secondary effect caused by a lack of understanding by SMSF Trustees regardingwhat is required by legislation, and what is not. The perception of complexity deters manyTrustees from breaking through the knowledge barrier, and leaves them vulnerable tounnecessary charges.As well as being a drain on the savings of Self Funded Australians, this unproductiveeconomic effort contributes nothing to our nations useful output or wealth.We suggest that most of this unprofitable effort could be removed without anydisadvantage, and also make the lives of Self Funded Australians a great deal easier.Issued 15 th February 2010

3.4 Uninvolved TrusteesOur Group strongly promotes active involvement of Trustees in the operation of theirSMSFs. Many members first joining our group show evidence of significant underinvolvementin the management of their Funds.Based on experience, we believe that many more Trustees would have greaterinvolvement, achieve better compliance, and better preserve their retirement savings, ifthey had ready access to good information.The ATO, as regulator, provides excellent information for Trustees of Self Managed SuperFunds in a number of clear, and simple booklets, which are readily available. The ATOalso supplies considerable information on their website, and runs informative SMSFseminars. We actively promote the use of these and other reliable sources of informationfor Trustees.Because of the volunteer effect, we believe that a tiny input from government couldproduce a large benefit, by encouraging the establishment of other information sharinggroups like our own.4. Details of Proposed Reforms4.1 Simplification of Compliance Rules4.1.1 Elimination of Corporate Trustee RequirementWe believe that the current requirement for a single member SMSF to have a CorporateTrustee has no logical basis, and imposes an unnecessary and unfair level of complexityand cost. It also results in unnecessary ABN and TFN registrations on ATO ManagementSystems.The current rules result in many single member funds having to set up a company with thesole SMSF member as director, and for this company to then fill the role of the trustee. Sothe member is effectively filling the role of trustee anyway.This structure makes no logical sense, is costly, and offers absolutely no benefit to theGovernment, the ATO, or those willing to fund themselves in retirement.We believe that a single member SMSF with the member as the sole trustee is a simplerand perfectly acceptable structure. There is no sensible purpose for the currentarrangement.In many cases the surviving member of a self funded retired couple will face the issue ofsetting up this pointless and costly structure, on the loss of their partner. We strongly urgethat this totally unnecessary and discriminatory requirement be abolished for singlemember funds, as soon as possible.Issued 15 th February 2010

4.1.2 Elimination of Complex Accounting Paperwork.The requirement for funds to produce annual Operating Statements and Statements ofFinancial Position appears a simple measure, but in fact has lead to a major accountingexercise more appropriate to large corporations. In reality SMSFs are generally dealingwith the modest savings of couples or single individuals.This requirement has led to the preparation of a great deal of complex and unnecessarypaperwork, which is usually well beyond what is required to simply identify SuperannuationAssets and Income. We believe that there are far simpler and better ways to satisfy theneeds of the regulator (the ATO), as well as those of the members/trustees.The Fund Regulatory Return for SMSFs has recently been substantially revised, and nowcaptures most, if not all, of the data required to meet this objective. If there were anyadditional requirements, these could easily be included in future revisions of the Return.We would like to see a Fund Return which completely satisfies the needs of the ATO aswell as trustees/members, and for the requirement for extensive accounting to beeliminated. This would provide the regulator with readily available, more useful, and moretransparent data, and at the same time drastically simplify fund paperwork for self fundedAustralians.Funds would still need to keep records of all assets and transactions, as is currently thecase. In order to simplify ATO audits of SMSFs, the types and format of such recordscould be standardised by the ATO to ensure uniformity of layout and content.4.1.3 Elimination of Unnecessary Annual AuditsThe obligation to conduct an annual independent audit for a small SMSF adds cost andcomplexity, and offers little or no benefit to self funded retirees, or the ATO. We believethat the audit requirement should be replaced with a simpler and more effective ATObased system for the following reasons:• Annual audits are an excessive requirement for such small entities, generallyholding the retirement savings of an individual, or couple.• Similar entities including Private Companies, Private Trusts, Partnerships andIndividuals, are not required to have their accounts audited annually.• Auditors take no responsibility for the fund’s compliance with regulations, ordeliberate abuse of rules. Audit reports typically have the following “disclaimer”:“The fund’s trustee is responsible for the financial report and ensuring compliancewith the requirements of the SIS Act and SIS Regulations”, and“Because of the test nature and other inherent limitations of an audit, together withthe inherent limitations of any system of internal control, there is an unavoidable riskthat some material misstatement, fraud or irregularity will remain undiscovered”.Current audits offer little value to the Fund, because the trustee still remains solelyresponsible for compliance, and for the accuracy of all fund records and reports.• Audits are not needed to protect the interests of SMSF Members. Members mustalso be trustees and as such are unlikely to act against their own best interests.Issued 15 th February 2010

• Audits add to the already significant annual compliance requirements and costs forSMSFs, and erode the savings of self funded retirees, potentially resulting in theirearlier dependence on government support.• The ATO, as regulator, has a number of very helpful and effective checks andbalances, and typically conducts at least 3,600 audits on SMSFs per annum.We suggest that the current ineffective audit system is now largely redundant, andcould be replaced by the ATO Tax and Regulatory Return. The latest Return nowincludes a set of compulsory questions designed to target SMSF rules and particularaudit issues, with suitable penalties for deliberate supply of misinformation. This couldbe further developed, if found necessary.4.1.4 Elimination of Pension Actuary CertificatesThe requirement to obtain Actuary Certificates for SMSF pension streams also involvesunnecessary complexity and cost, and offers little or no benefit to self funded Australiansor the ATO.We believe actuary requirements should be discontinued for the following reasons:• The requirement for Trustees to maintain accurate records of the value of pensionentitlements for each member would not be diminished, and compliance can beverified at any time by ATO Audit.• Actuary Certificates are not needed to protect the interests of SMSF Members. Thefund trustees are also members and as such have no reason to deprive themselvesof pension entitlements.• The Actuary Certificate is simply a reflection of information which has already beenestablished and provided by the Trustee, and as such provides no additionalinformation or benefit.• The ongoing longevity and sustainability of a pension depends on the performanceof investments chosen by the trustees. The existence of an Actuary Certificate inno way guarantees the performance of these investments.• Actuary Reports and Certificates also add to the already significant annualcompliance costs for SMSFs, and erode the savings of self funded Australians,potentially resulting in their earlier dependence on government support.4.2 Personal Superannuation Accounts4.2.1 The ConceptIn addition to considering the above reforms we invite the Review Team to consider theconcept of superannuation savings from a new perspective.As an alternative to SMSFs, we are proposing the introduction of much simpler and moreaccountable means of identifying Personal Superannuation Assets, which could be appliedat an Individual Taxpayer level.Issued 15 th February 2010

We propose the introduction of the concept of simple ATO based “PersonalSuperannuation Accounts” for Individuals. We suggest that these accounts could have thefollowing features:• Australians would be able to establish ATO Personal Superannuation Accounts.Such an account would apply to an individual taxpayer only.• Assets held in Personal Super Accounts would need to be separately identified fromother assets, as is currently the case for SMSF assets• Superannuation savings would be reported under an individuals existing Tax FileNumber, in the Supplementary Section of their Personal Tax Return.• Superannuation assets would simply be attributed to an individual, and as suchwould be readily identifiable, and accounted for.• The need for trust deeds, trustees, and complex accounting would be eliminatedalong with much other unnecessary complexity, and the associated expense.• Personal Super Accounts would allow investment in cash, shares, property, andany other asset class currently available to SMSFs.• The ATO could define the format in which personal super records are to be kept toensure uniformity. These standardised records would be auditable at any time bythe ATO.• A simple rule booklet should be available to anyone wishing to run a PersonalSuperannuation Account, and participants should be required to possess a copyand be familiar with its contents• The ATO Tax Return could include compulsory questions designed to targetparticular rules or audit issues, with suitable penalties for deliberate supply ofmisinformation.4.2.2 Summary of BenefitsWe see major benefits from such an arrangement including:• It provides a viable alternative for individuals wanting a simple structure foridentifying and managing their own retirement savings.• SMSF costs, which especially penalise those with modest savings, would beeliminated.• Many of the current compliance problems associated with the more complex SMSFoption could be avoided.• ATO Auditors would not need to pour through complex and unnecessarydocumentation currently produced for SMSFs.• Self Funded Australians would be freed up to concentrate on managing theirsavings instead of involvement in a great deal of unnecessary and non productivecompliance effort.• We believe that Many Self Funded Australians would choose this simpler option,resulting in reduced SMSF compliance effort by the ATO.Issued 15 th February 2010

5. Long term Impact of ongoing costs5.1 Basic Compliance CostsTo put our concerns regarding costs in perspective, we estimate the basic annualcompliance costs for the running of a Self Managed Fund to be as follows:Accumulation Phase Pension PhaseTypical Cost ($) Typical Cost ($)Accounting 2,000 2,000Audit 600 600Tax and Reg. Return 200 200Misc Service Costs 400 400Actuary Certificate (ea) 0 250Complying Certificate (ea) 0 450ATO Supervisory Levy 150 150Totals $3,350 $4,050Where required, the cost of setting up a corporate trustee arrangement for a single personSMSF would be between $700 and $1,000, plus an ongoing annual ASIC fee.5.2 Long term impact on retirement savingsOngoing annual regulatory costs can seriously impact on retirement savings over the life ofa SMSF. It is not only the impact of the leakage of capital, but also the cumulative loss ofearnings this lost capital would have generated.If the effect of these costs is modelled from age 65 to age 85, the total cumulative costwould be about $170,000 – in real terms.This is based on an average annual compliance cost of $3,800, with allowance for loss ofearnings on deducted expenses at a rate of 8% above inflation. This figure is the “real”amount expressed in today’s dollars. We believe that this represents a significant erosionof an individual’s retirement savings.5.3 Overall impact on national SMSF retirement savingsThere are currently about 420,000 SMSFs operating in Australia. Based on the abovefigures the total erosion of retirement savings for these funds over the 20 year periodwould be a staggering $70 billion, or $3.5 billion per year. We believe that these figuresare substantial and justify a re-think of the current compliance requirements.We also believe that over time Centrelink must ultimately make up for much of this loss asretirement savings are eroded.Issued 15 th February 2010

6. SummaryIn summary we believe that the current SMSF regulatory requirements we havesubstantially contributed to higher costs which erode savings, and discourage greaterdirect involvement by Trustees.In addition we believe that these requirements offer little value to the Government, theATO, or self funded Australians, and eventually have a financial impact on theGovernment Purse.It is also important to recognise that many of those Australians who take responsibility forfunding their own retirement do so into old age, at which stage they do not deserve to befacing totally unnecessary complexity or bureaucracy in simply managing basic retirementsavings.We therefore recommend that these proposals be given serious consideration as part ofthe current effort to simplify and improve Australia’s Superannuation and Taxationsystems.Viv Elliston Wolfgang Waffler(Chairman) (Secretary)Issued 15 th February 2010