Being the trustee of an SMSF can be challenging. But while many SMSF trustees turn to their accountant for assistance, they can only provide advice on some SMSF-related matters.
To keep your fund compliant, you need to ensure you are getting assistance from someone licenced and qualified to do so. But what matters can your accountant assist with?
To help SMSF trustees navigate this tricky area, Klear Picture has compiled a checklist to help you work out if your accountant is the right person to ask for help.
Before explaining who can do what, it’s worth understanding the background.
Until 30 June 2016, accountants could provide a range of services to SMSFs under the so-called accountants’ exemption contained in Regulation 7.1.29A of the Corporations Regulations 2001. This exemption allowed accountants to provide advice on the establishment and winding up of SMSFs without needing to hold an Australian Financial Services Licence (AFSL).
As part of the financial advice reforms (FoFA) introduced in 2016, the government removed this exemption and made accountants subject to the strict rules relating to financial advice.
The amount of SMSFs using financial advice has taken its largest-ever annual drop despite a surge in the number of funds that have unmet advice needs, according to Investment Trends.
In the last year, the number of SMSFs using financial advice dropped from 225,000 to 195,000, the biggest fall since the research firm began collecting data.
It’s not that trustees don’t think they need financial advice; an all-time high 335,000 SMSFs say they have unmet advice needs, an increase from 315,000 in 2019.
It’s a conundrum that Investment Trends chief executive Michael Blomfield called “problematic”. The reason behind it, he said, maybe that the advice trustees are receiving isn’t what they’re looking for.
“The number of people who want advice keeps growing, but it feels like the advice being given is not hitting the mark for them,” Blomfield said.
Presenting data from the 2020 Vanguard/Investment Trends SMSF Report, the CEO said during the pandemic trustees are mostly looking for help with an investment strategy review, followed by pension strategies and investing for a regular income.
Trustees may be receiving advice in these areas, Blomfield commented, but something is going wrong in the messaging.
“Planners still have a bit of work to do here to build out their value proposition to SMSF retirees,” he said.
The 2020 Vanguard/Investment Trends SMSF investor report found that 32% of Australia’s 600,000 SMSFs seek the assistance of a Financial Adviser. Yet, more than 50% of SMSF trustees report having unmet advice needs concerning their SMSF.
Australian’s generally love property ownership. The directly held property makes up approximately 19% of all Self Managed Super Fund (SMSF) assets, indicating that many trustees consider it an essential and significant part of a diversified portfolio. There are numerous strategies and ways for property to form part of an SMSF’s investments, and each must be carefully considered.
Who Can Provide Tax Advice To An Smsf?
If all this sounds rather complicated, you may be thinking the easiest solution is to go to a financial adviser for all your SMSF’s financial and tax advice needs – but it’s not that simple.
Since 1 January 2016, financial advisers offering advice on how the taxation laws (income tax, superannuation and SMSF laws) apply to a client’s personal circumstances must be registered with the Tax Practitioners Board (TPB) as a tax (financial) adviser. This means they need to meet the TPB’s ongoing education and experience requirements, plus remain a licensed financial adviser.
Many financial advisers are not registered as a tax (financial) adviser, so they are unable to provide advice about the tax implications of the products and strategies they recommend. Instead, they will refer you to an accountant or tax agents qualified to provide tax advice.
What Are The Advice Rules For Accountants?
Put simply, accountants can provide a wide range of advice and services to the trustees of an SMSF, however, if the financial advice and services involve personal advice, the accountant must hold an Australian Financial Services Licence (AFSL).
This is the same licence financial advisers required to hold to provide personal advice about financial products and services.
Suppose your accountant does not hold an AFSL. In that case, they can still assist you with basic SMSF administrative tasks (such as the paperwork for fund establishment and rollovers) and provide factual information about investments and strategies.
If you want advice and information about the suitability of an investment product or strategy for the SMSF, your accountant must hold an AFSL.
When Do You Need To Use A Licensed Accountant?
Only accountants holding an AFSL can provide personal advice such as:
- Establish or wind up an SMSF
- Advice on the appropriateness of an SMSF for your circumstances
- Explain the suitability of different super investment options and funds
- Recommend one superstructure over another
- Suggest consolidating or rolling over assets into a single fund
- Recommend additional super contributions
- Suggest establishing a salary sacrifice arrangement
Pensions and withdrawals
- Recommend starting a super pension or transition-to-retirement pension (TRIP)
- Calculate the super pension amounts needed to meet your income requirements based on your account balance, life expectancy and estate plans
- Organise an ad hoc lump sum withdrawal
- Recommend rollovers out of an SMSF
- Recommend purchasing property through your SMSF
- Prepare a tailored investment strategy for the SMSF.
- Recommend specific assets to buy when establishing an SMSF, including basic deposit products and cash management accounts
- Recommend establishing a Limited Recourse Borrowing Arrangement (LRBA)
- Organise a binding death benefit nomination
- Recommend appropriate beneficiaries for a binding death benefit nomination. (For more on death benefit nominations, read SuperGuide article Who gets your super when you die? A guide to death benefit nominations.)
A Flush Market
The 15th annual edition of the report, which canvassed almost 200 advisers and over 3000 SMSF trustees, revealed that the number of SMSFs continues to grow but at a consistently slower rate.
After peaking at a growth rate of 8.7 percent 42,033 new funds) in 2012, the SMSF growth rate had steadily declined and was 3.3 per cent (20,028 new funds) in the year to September 2019.
While a lot of this can be attributed to a relatively full market – most of the people that want an SMSF already have one – Blomfield said Labor’s ultimately unsuccessful bid to curb franking credit refunds as part of its election campaign might have triggered a wave of regulatory concern.
“SMSF trustees have been saying for a long time it’s just regulatory uncertainty that makes them think twice and three times if SMSFs are the right place to be,” he said.
An Apra-regulated Back-up Plan
An increasing number of SMSF trustees are opting to retain an APRA-regulated superannuation fund as a back-up, the report showed, with almost half of the people considering setting up an SMSF saying they will keep their old fund as well.
This year 48 per cent said they would keep their old fund, up from 44 per cent the year before and 34 per cent in 2018. Back in 2015, only 32 per cent of new trustees wanted to keep their old fund.
According to Blomfield, there are “a bunch of things” driving this trend.
“Number one is a personal insurance policy,” he said, referring to peoples’ inclination to spread their interests. “The second driver is a pretty logical one, which is that contributions are being paid into that account by their employer.”
Another driver is that people want to retain the group insurance in their APRA-regulated fund, he said, but this was “lower down the list”.
“The good thing is that it keeps diversification at the outset,” Blomfield said, adding that trustees are refraining from putting all of the responsibility for maintaining their own wealth in their own hands.
No interest in fixed income
On the investment side, the report revealed trustees have a stark disinterest in fixed income as a defensive asset and an alarming lack of awareness about the asset class overall.
Trustees profess a strong interest in safe income streams, Blomfield says, yet little interest in fixed interest investments. The reason for this discord is a combination of the tendency to chase yields and a lack of understanding, he explained.
“When we asked where they get their exposure… they said ‘equity fixed income’, [which is] not fixed income,” Blomfield recalled.
People are using the equity market to try and access fixed income-like returns, he said.
“That as a strategy needs to be separated from what we call real or pure fixed income,” Blomfield continued, adding that fixed income’s lack of penetration in SMSFs is a “problem”.
“And this comes back again to the notion of a slowing number of SMSF trustees using financial advisers,” he said. “[Trustees are] not getting an explanation and understanding of why you use different asset classes for different purposes.”
Advice You Can Get From Accountants and Financial Advisor
Investment strategy first!
Before any investment decision, it is imperative and a legal requirement that you, as an SMSF trustee, must consider your investment strategy. Your strategy framework should detail such things as how much exposure you would like to the property market, the form of exposure and how appropriate it is for your current circumstances. A well-diversified portfolio is essential to provide income for retirement and spread investment risk so that any single asset class, such as property, does not dominate your SMSF risk and returns.
A common form of property exposure is a direct investment into a property. This can be in the form of either a residential property or commercial property. When purchasing a property with an SMSF’s cash, some important considerations must be worked through, including:
- Your asset allocation and diversification.
- Potential rental income and property expenses.
- How close you are to retirement and the need for liquid assets to pay pensions.
- Unless the property is a real business property (BRP) you or your related parties cannot use the property:
- If the property is BRP, you may be able to work from the premises which are owned by your SMSF.
- You may also be able to utilise the small business CGT concessions and contribution limits.
Limited Recourse Borrowing Arrangements (LRBA)
SMSFs may also invest in property through an LRBA. These are complex borrowing structures which allow SMSF trustees to take out a loan from a third party lender. The SMSF trustee then uses these funds to purchase a property to be held on trust. The lender only has recourse to the property held in the trust – this is why the loan is “limited recourse”.
An LRBA should only be utilised when it is the right structure for your SMSF based on SMSF Specialist advice. Some essential considerations in addition to the ones above, include:
- Can your SMSF maintain the loan repayments over a long period considering asset returns, interest rates, liquidity, and contributions caps?
- Evaluating set-up costs and structures.
- Is your property valuation accurate?
- You cannot use borrowed money to improve the asset or change the nature of the property at any time.
- Do you meet the strict bank lending requirements?
- Typically, lenders require the SMSF to have a minimum of net assets of $200,000 or more and for the loan to have a loan to value ratio below 70%.
Another way to gain exposure to the property for SMSFs is through indirect investment. This can include listed invested vehicles such as listed investment companies and exchange-traded and unlisted property funds and syndication. Managed investment trusts are also a typical investment for SMSFs to gain exposure to property. Investing indirectly may suit your SMSF needs more than a purchase of a property because it is relatively simple and most likely will not require a large amount of capital. It also allows your SMSFs to get exposure to large value properties such as office blocks, shopping centres and industrial properties that would otherwise be out of reach.
Benefits Of Seeking Financial Advice
Investment Strategy Development and Implementation
More than 75,000 of the SMSF trustees interviewed by Investment Trends in its 2020 survey said they needed their SMSF investment strategy reviewed.
ATO data supports this. The average SMSF has more than 25% of its capital in cash and is overweight Australian shares while lacking exposure to the key asset classes of bonds, international equities and global REITs. The result is an inefficient portfolio that lacks diversification.
An adviser can lend some of their formal training and education to assist with building and investment strategy that:
- Takes into account your preferences and then helps you to build a robust, rules-based investment strategy to help you prudently manage your portfolio.
- Finds the ‘Goldilocks’ asset allocation for your needs in terms of risk/return.
- Integrates your SMSF investments strategy into a broader, holistic plan that considers all of your wealth (not just the super).
Experienced, professional advisers will consider portfolio construction from both a ‘top-down’ as well as a ‘bottom-up’ perspective. They can use their deep understanding of Modern Portfolio Theory (MPT) to help you establish a robust investment strategy that can act as a ‘safe harbour’ and prevent you from falling into many common investment pitfalls.
Integrating Your Smsf With Your Broader Strategic Plan
Suppose you are looking for assistance for more than your SMSF’s investment strategy. In that case, a financial adviser can help you work through your broader financial situation to ensure it is adequate to meet your future objectives. This may involve an exploration of the following:
- Where your SMSF fits in your broader financial situation
- How much will you need in retirement
- How much of this needs to be funded by your SMSF
- Whether you can move more of your wealth into the concessionally taxed environment within your SMSF
- How much investment risk you can afford to take, and how much do you need to take to meet your retirement objectives
- What your testamentary intentions are and how they fit with your SMSF
An ongoing relationship with a financial adviser who understands your needs and objectives can be beneficial on several levels. A financial adviser can hold you to account and act as a sounding board for big decisions.
Moreover, suppose they’ve worked with you to develop your SMSF investment strategy. In that case, they are well placed to ensure you stick to it through both the ups and the downs of the economic cycle when many of us fall victim to the common behavioural pitfalls. For example, in times of market sell-offs and rebounds.
The use of a financial adviser is an investment in freeing up time for yourself and dedicating resources to ensuring your portfolio is regularly rebalanced, monitored, and its performance appropriately tracked.
Time is money as they say, and as you move through life and your priorities change, you might prefer to outsource the time-consuming task of managing your portfolio and dedicate your time to pursuits that are more important to you.
Peace of Mind
Last but not least, the right financial adviser should provide you with peace of mind. This does not mean abdicating responsibility for the management of your SMSF.
However, working with a financial advisor should ease some of the worry associated with managing what might be your largest pool of capital. Knowing your investments are being handled by someone with expertise and experience can provide a great source of comfort.
things to consider before getting advice
The Cost of Advice
When you seek unconflicted advice from a professional, you should expect to pay for their skills and experience. The majority of advisers will charge a fixed fee for the development and implementation of your advice strategy. They may also charge a fixed or percentage-based fee for the management of your SMSF portfolio.
The costs of delivering compliant financial advice are typically linked to the time it takes to develop, implement and manage the client’s financial affairs and will be influenced by the level of economic complexity and assets a financial adviser has responsibility for.
An adviser will provide you with a detailed summary of the fees associated with seeking advice as part of your initial engagement.
The Adviser’s Business Model
Commissions for the sale of financial products were endemic in financial advice in the past. Recent changes to the Corporations Law have almost completely stamped out these practices. It is, however, always worth understanding whether an adviser’s business model involves you investing in managed funds owned by the advice practice or not. This will help you understand the true cost of advice and the potential business model of the advice practice.
One of the biggest benefits of establishing and maintaining an SMSF is that it allows you the ability to control when, how and who you invest with. If you appoint a financial adviser to manage your portfolio, you will likely relinquish some of this control. This may or may not be right for you and requires detailed consideration.
This list is by no means exhaustive. If you are thinking about reaching out for advice, it is best to think first about what services you want. This will help you ask the right questions of prospective advisers before you engage them and hopefully lead to a mutually beneficial relationship.