The Super System Review Panel made a number of recommendations to the Goverment which have led to Stronger Super SMSF measures receiving Royal Assent or being registered and are now law, including:
- Stricter rules for investing in collectables and personal use assets
- The requirement for trustees to consider insurance
- The requirement for regular review of a fund’s investment strategy (including insurance)
- The requirement for valuation of assets at ‘market value’
- Sanctions for separation of assets.
Stricter rules for investing in collectables and personal use assets
Laws were introduced into the Superannuation Industry (Supervision) Act 1993 (SIS Act) for SMSF investments in collectables and personal use assets. These measures were designed to ensure the investments do not give rise to a current day benefit and are instead made for genuine retirement purposes.
These laws have key practical implications for SMSF trustees.
Collectables and personal use assets cannot be leased or used by a related party.
Which means that you are prohibited from leasing, for example, a piece of artwork to or from related party.
From 1 July 2011, all new fund investments in collectables and personal use assets needs to be managed in accordance with the new laws that prohibit these assets being:
- leased to a related party, or
- Stored or displayed in a private residence of or used by a related party.
In addition, trustee needs to ensure:
- they have a written record of the reasons for the decision on where to store any collectables and personal use assets, and keep the record for 10 years
- these assets, other than membership of a sporting or social club, are insured in the name of the fund within seven days of acquisition
- Any transfer of ownership to a related party must be done at a market price determined by a qualified independent valuer.
Trustees must obtain insurance cover for all collectables and personal use assets held within the SMSFs and it must be in the fund’s name and you’ve got to do that within seven days of acquiring the asset,’ he said.
It is important to note that other Stronger Super measures, set to take effect in 2013/14, will give the ATO power to force SMSF trustees to dispose of uninsured collectables and personal use assets.
Did you know?
According to the ATO’s Self-managed super funds statistical report – September 2012 released on 18 January 2013, artwork, collectables, metal, or jewels total $758 million dollars. This represents less than 0.17% of total SMSF assets.
Although these rules are already law, there is a transitional arrangement in place for SMSFs that held collectables and personal use assets prior to 1 July 2011. Hence, if you already held an asset, these new rules don’t apply, but they will apply in five years. So, those clients who have existing collectables need to look at the new rules and ask “can I meet them with my old assets?” If they can’t [meet these rules] by 1 July 2016, they will have to dispose of those assets.
Requirement for trustees to consider personal insurance for the individual member
The Stronger Super measures include an operating standard that requires a trustee to consider whether the fund should hold insurance cover for one or more members of the SMSF as part of an SMSF’s investment strategy.
Did you know?
Less than 13% of SMSFs held insurance for members, the Super System Review noted.
Nothing in the law actually says you have to have insurance, just as nothing in the law said you had to diversify your assets.
It just says you have to consider the use of insurance and there would be good circumstances when you will think [insurance] is appropriate i.e. when considering gearing to purchase an asset.
To ensure compliance with this operating standard, SMSF trustees consider:
- circumstances for which insurance on a member may be put in place, which would include enhancing the size of the death, terminal illness, permanent incapacity or temporary incapacity benefit paid from the SMSF in respect of a member
- other possible uses for insurance on a member ,such as funding to extinguish debt, providing liquidity or financing anti-detriment payments upon the death of a member
- that if a basis for insurance is reasonable, then the level of cover needs to be determined, taking into account the impact on the SMSFs cash flow and liquidity to cover the premiums
- Selecting and applying for policies with the appropriate insurer.
As a trustee, you will need to look at the fund, the membership and at any potential liabilities the fund may need to consider and decide what type of insurance is appropriate.
Document insurance considerations
It is recommended that if a trustee does not want insurance, then it is important to document this decision and show that insurance has been considered.
This documentation can be either incorporated in an SMSF’s investment strategy or done through its minutes of meeting’ prepared by an administrator in conjunction with either the trustee or their adviser.
Requirement for regular review of a fund’s investment strategy
In addition to the insurance consideration with an SMSF’s investment strategy, the Stronger Super reforms include another operating standard that requires trustees to regularly review an SMSF’s investment strategy.
Trustees are going to have to look at the investment strategy, including the appropriateness of the insurance cover, more frequently than once every two to four years.
It would be more prudent to look at the insurance in conjunction with the investment strategy on an annual basis, as this will capture changes in not only the superannuation fund but also the member’s life cycle and health as we all become older each year and both our circumstances and health can change from one year to the next.
This [operating standard] will require SMSF trustees to provide evidence of investment strategy reviews by documenting decisions in the minutes of trustee meetings that are held during the income year.
Requirement for valuation of assets at ‘market value’
SMSF trustees will be required to value fund assets at market value when preparing financial accounts and statements for the financial year to 30 June 2013 and beyond.
There was previously no requirement, at least in terms of SMSFs, to actually value assets at market value. So, theoretically, you could have them in your accounts at the cost you paid for them and you could change that value as and when to whatever you decided.
The rest of the industry has always used market value because most of them have to do certain reporting … as a consequence, the Government thought to make it more comparable.
For more information, please contact Chan & Naylor Wealth Planning on 1300 99 77 34 or send us an email using the form below
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Disclaimer: the above information is for general knowledge purposes only. Please take advice for your specific situation before investing in property. Every person’s personal situation is different and requires a different solution.
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