24/02/2010

It’s called ‘the Nanny State’.  It refers to that political philosophy that says that everything can be fixed by the State regulating our behaviour. 

Australians have never bought it.  We may not stock up on guns and build bunkers in the back yard ready to do battle with any federal agents who come around, like many Americans.  But our voting patterns have clearly shown that we don’t believe that the government can or should try to solve all our problems with more and more regulation.

The current federal inquiry into the superannuation system (known colloquially as the Cooper Review) would do well to remember that when they come to consider how to improve the superannuation system, particularly self managed super.

If SMSFs need reform (and given the Review’s own figures on SMSF there is much data to suggest that the self managed sector needs little improvement really) the best way to achieve member focus in the SMSF environment (the Review’s so-called “enhanced architecture for super”) is through education not regulation. 

According to the Cooper Review’s published stats, as at 30 June last year there were 410,000 SMSFs in Australia.  During the year 99 lost their complying status.  99 out of 410,000!!  Suggestions that the SMSF sector is in need of major overhaul are clearly unfounded.  Those that make such suggestions normally have another agenda, often the diversion of funds from the SMSF sector to the industrial or retail sectors.

That’s not to say that the self managed sector is perfect.  Nothing is.  Improvements are possible in how SMSFs are managed; in how they achieve their ultimate goal of keeping their members off the aged pension system after their retirement.  But there isn’t any of that improvement that couldn’t be achieved through education rather than the heavy hand of regulation.

Who should be able to advise on SMSFs, accountants or financial planners?  Both. The jockeying for supremacy in this area by the two groups has been unhelpful to consumers and unseemly for the two professions.  Educate the consumer/trustee on what they should be looking for in an adviser and let them decide.  In particular make sure that the consumer/trustee appreciates the different requirements for operating the fund (tax, compliance, audit, investment etc) and that they should choose a suitably qualified and experienced adviser for each issue.  They will.  The current stats show that they are already doing so and further education should simply fine tune the process.

How can we improve compliance by SMSFs?  Education again, not regulation.  There have been a number of surveys in the past that have shown a substantial lack of understanding by consumer/trustees of their role in their SMSF.  But that lack of understanding has not converted into lots of major compliance failures – last year only those measly 99 funds. 

The fact that the trustee doesn’t fully understand SMSF compliance complexities is not relevant because they seek advice and assistance from their professional advisers who do it for them. Greater education will ensure even greater reliance on those advisers.  To misquote George W’s Defence Secretary Donald Rumsfeld: when you don’t know what you don’t know, you proceed in blissful ignorance; when you do know what you don’t know, you get help.

Take for example the problem of early release of benefits to SMSF members.  Although this is said to be in the top 5 of common non-compliance issues for SMSFs, statistically the numbers of funds which engage in it have been very small.  Education will reduce those numbers even further.  Nothing will ever stamp out intentional non-compliance.

Should SMSFs have corporate trustees?  Again the issue should be resolved through education rather than regulation.  If trustees understand that every time there is a resignation or addition of an individual trustee to the fund the title documents for all the funds assets will need to be amended at some cost to the fund,  if they understand the additional burdens on the fund following the death of a trustee and if they appreciate the greater ease and certainty of administering a fund with its own unique company as opposed to the constant need to keep precise records to separate an individual’s own assets from those they own on trust for the fund, they will see that the small cost of a corporate trustee is worth the effort.  Insistence by their advisers will help the right decision.

Education of SMSF trustees should not attempt to turn them into superannuation specialists.  It doesn’t need to.  It simply needs to encapsulate the basic parameters of self managed superannuation, the reasons why super is granted tax concessional status and the need for them to ensure that the fund is achieving its goal for the good of their retirement lifestyle.  That kind of education will be far more powerful than any externally imposed and costly system of further regulation.  

If you would like further information regarding SMSFs please contact Peter Townsend of TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222