Another Tranche of the Stronger Super Reforms for SMSFs

Recent amendments to the SIS Regulations will require trustees of SMSFs:

• to consider whether insurance cover should be held by the fund on the lives of the members;
• to require SMSF trustees to regularly review the investment strategy of the fund;
• to keep money and assets of the SMSF from the trustees personal assets and the assets of employer sponsors; and
• to value fund assets at their market value when preparing the fund’s accounts and statements.

The amendments apply from 7 August 2012.  However, the change in valuation will apply for the 2012-13 and subsequent financial years.

To consider insurance cover

The obligation (which is set out in SIS Reg 4.09(2)(e)) simply requires the trustees to apply their minds to the issue of whether insurance cover should be taken out on the lives of the members of the fund.

It is not an obligation to take out insurance cover – the trustees must merely consider the issue.

To demonstrate (to the fund’s auditor as well as to the ATO) that the trustees have applied their minds to the issue, the trustees will have to prepare a minute/resolution which

• confirms that the trustees are aware of the obligation to consider insurance cover;
• that the trustees have considered the issue of insurance cover; and
• that the trustees have determined that insurance is or is not required.

It seems that this is an issue which the trustees will have to consider in respect of each member of the fund – that is on a member by member basis.  Further, the insurance is not simply life insurance – but would include other types of insurance cover which could be provided by superannuation funds – such as disablement cover and salary continuance cover.

It could be that the trustees’ conclusion is that no insurance cover is required in respect of a particular member for a variety of reasons – possibly:

• the member has sufficient insurance cover in other super funds;
• the member has sufficient insurance cover outside of the super system;
• that the cost of premium is too great for the cover provided;
• that the member has little need for insurance cover (eg member in pension phase);
• that the member is outside acceptable underwriting guidelines;
• that the member is unwilling to pay the premium; or
• that the member has indicated that they do not require cover.

It is an interesting issue, whether the trustees should briefly set out the reasons for their decision or whether a mere statement (or assertion) that they have considered and the conclusion reached is sufficient.

Giving reasons shows the trustees have fully discharged their duty, but the reasons could be found wanting or defective and thereby expose the trustees to claims that they have breached their trustee duties.  While the latter may be a remote chance, if the chance does come home, it will be a very significant issue.

For example, it may also show to a dependant of a recently deceased member that either the reasons stated were unsound or that they were based upon inadequate or incorrect information and, therefore, their conclusion is flawed, with the consequence that the trustees have failed to discharge their duty.  The argument then is that had the trustees properly performed their duties, they would have had in place insurance cover and, therefore, the benefit payable to or in respect of the member would have been significantly greater.

Possibly, the trustees should discharge their duty by involving each member and requesting from each member an indication whether the member wishes to have a particular cover in the fund.  If a member simply provided the trustees with a firm response that they do not wish to have, do not require, will object to the insurance premiums being debited to the member’s account and will not respond to or participate in any underwriting requirements, then the trustees would be in a position to claim that they either have discharged their duty or been prevented from discharging their duty by the actions of the person to whom the duty is owned.

As the new duty has been attached to the investment strategy operating standard of SIS Reg 4.09, it seems that the trustees will also have to apply their minds to the issue of insurance each time the investment strategy is reviewed or reconsidered.  Additionally, the trustees will have to consider the insurance requirements of a member upon the occurrence of relevant events relating to the member, eg admission as a member, when the member’s contribution flows are sufficient to bear insurance premiums, when the member accesses their benefits and when the contribution flows of the member materially decrease.

To regularly review the investment strategy and need for insurance cover

A minor amendment to SIS Reg 4.09(2) – which simply adds the words “regularly review” – will now require trustees to regularly review the investment strategy of the fund and (because of the previous amendment) to regularly review the need for insurance cover to be provided in the fund for members.

Regularly at least means “annually” and could mean “six monthly”.  It is highly unlikely that “regularly” would require a more frequent review basis.

Review does not necessarily mean a change – for example a salary review does not necessarily mean an increase in salary.  It could be that the current strategy is still appropriate as there has been no relevant changes in the circumstances of the fund, the members, markets or interest rates.

However, the fact that a review has been undertaken must be documented ideally by way of a trustees’ resolution.  Documenting the review will demonstrate to the fund auditor and to the ATO that the trustees have satisfied the operating standard.

To keep assets separate

A new operating standard for SMSFs has been introduced – as SIS Reg 4.09A.  The operating standard requires that the trustees must not mix their own assets with the assets of the fund.  Also, the operating standard will require the trustees not to mix fund assets with assets of a standard employer of the fund (or an associate of a standard employer sponsor of the fund).

This requirement currently operates as a covenant between the trustees and the members which is deemed to be included in the governing rules of the fund.  However, the ATO is unable to directly enforce the covenant as the ATO is not a member of the fund.  Now, by making the requirement an operating standard, the ATO will be able to directly enforce the requirement.

This requirement is primarily aimed at the mixing of assets.  For example, the situation where a bank account (or any other financial account) is used for both fund purposes and for private purposes.  Such arrangements are usually justified on the basis of economy or convenience.

The new operating standard means that such arrangements (even if expressly permitted by the trust deed) will have to be discontinued and unwound.

This requirement is different from the requirement that fund assets must be identified as fund assets.  However the Explanatory Memorandum issued in conjunction with the Regulations suggests that the new requirement is also intended to catch the situation where fund assets are not recorded in the name of all the trustees or not recorded in a manner which indicates that the assets are trust assets.

Market valuation of fund assets for SIS required financial statements and accounts

New SIS Regulation (Reg 8.02B) now requires trustees to value each fund asset at its market value when preparing the annual financial statements of the fund.

The term “market value” is defined for SIS Act purposes as

“the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

(a)    that the buyer and the seller dealt with each other at arm’s length in relation to the sale;
(b)    that the sale occurred after proper marketing of the asset;
(c)    that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.”

This provision will first apply to the statements of the fund in respect of the 2012/13 financial year.

It should be noted that a failure to use market value for the annual financial statements is an offence with a penalty of 100 units (ie $11,000).