IT IS generally accepted that the Cooper review of superannuation in general, and self-managed super funds in particular, produced valuable recommendations.
But one relating to SMSFs has hit a legal hurdle, and its introduction will now at least be delayed.
The recommendation accepted by the federal Labor government was to ban off-market transfers of investments between members and their SMSF.
Under superannuation law there are very few investments that can be bought by a super fund from its members. The two main exceptions are business real property, such as factories and offices, and publicly listed investments, such as shares.
When members want to transfer shares held in personal names into their SMSF this can be done by an off-market transfer. This involves assessing the market value of the shares at the date of the transfer.
A share transfer form is then lodged with the company's share registry, requesting ownership be transferred from the individuals to the SMSF.
These off-market transfers are subject to verification by the super fund's auditor, and any capital gain made by members, on the basis of the market value at the date of the transfer, is taxable in their hands.
Members wanting to save on brokerage fees have found this preferable to selling and buying shares on the stock exchange. Originally the government was going to ban off-market transfers between members and their SMSF from July 1, 2012, but this has now been delayed until at least July 1, 2013.
The reason for the delay is if the shares were sold on the market and then the SMSF buys the same shares immediately, it exposes the SMSF members to severe penalties as a result of them breaching rules under the Corporations Act.
Peter Burgess, technical director with the SMSF Professionals Association Australia, said: "These rules are there to prevent market rigging and the false or misleading appearance of active trading of the security, which clearly is not the intention or motive of an SMSF investor." This problem arose as part of the legislative process when formulating the amendments to the relevant section of the Superannuation Industry Supervision act.
Mr Burgess said: "This section of the act allows fund trustees to acquire listed securities from a related party without breaching the general prohibition on acquiring assets from a related party." Related parties include members and also associates of members such as relatives.
If Treasury cannot come up with a way of ensuring that members of an SMSF will not be subject to the penalties under the Corporations Act, and the SIS section was amended to ban off-market transfers, anyway, this would result in the banning of members transferring ownership of any listed securities to an SMSF. This would mean the changes would go far beyond what was originally proposed by the Cooper review.
With the banning of off-market transfers having originally been thought to be a simple change needing to be made to the SIS act, now bordering on a legislative nightmare that includes the Corporations Act, hopefully the Gillard government will see that this recommendation of the Cooper review is more trouble than it's worth.
Given that transfers by members of investments to SMSFs is so tightly regulated, and auditors of SMSF's check that off-market transfers are done at the correct values, banning them was more about a perceived problem, than fixing an area of SMSF administration that was actually being abused.