Investment plan requires yearly review

Trustees of self-managed superannuation funds must review their investment strategies regularly, following a recent change to super regulations.

Trustees have always been required to write an investment plan but now they must take a fresh look at it each year to make sure the strategy continues to reflect the purpose and circumstances of the fund and its members.

The new rule, Superannuation Industry (Supervision) Amendment Regulation 2012 (No.2), states the review must also consider whether life insurance is appropriate for members as part of the strategy.

This is the first time self-managed fund trustees have been asked to look specifically at insurance.

The third requirement in the new regulation is that a market value must be assigned to the fund's assets each year.

The Australian Taxation Office (ATO) has issued valuation guidelines to help trustees with this task.

The director of education and professional standards at the SMSF Professionals' Association of Australia, Graeme Colley, says the regulation took effect from July 1, even though the ATO only announced the changes in August.

Colley says that as a result of the timing of the announcement, many SMSF trustees are not yet aware of their new responsibilities.

Investment plan

An investment plan is a two-part document. It must set out a broad objective for the fund and then describe how that objective will be met. The broad objective might be to achieve a long-term annual rate of return above the rate of inflation, and this might be met by investing in a diversified portfolio of assets.

Colley says there is no requirement in the rules for a fund to hold any particular asset or group of assets. Nor is there any requirement to diversify.

"In some funds the major asset is the building in which the trustees conduct their business," he says.

"Provided you can justify it, you can have a fund with a single asset.

There are some funds with a lot of collectables and others that use hedge funds and derivatives."

However, most funds have a reasonable level of diversification. According to the ATO, 32 per cent of self-managed fund assets are in shares, 28 per cent in cash and term deposits, 14 per cent in trusts, 11 per cent in non-residential real estate and 4 per cent in residential real estate.

The annual review would look at such things as the change in member's age and whether the portfolio needs adjusting to reflect that change. It would consider any changes necessary to cater to members entering retirement.

The senior technical and research manager at Bendigo Wealth, Julie McKay, says other issues that need to be considered in a review of the investment plan are the fund's need for liquidity and whether it has appropriate cash holdings, and whether the risk profile of the assets of the fund reflects the risk tolerance of the members.

McKay says these new rules make a trustee's job more demanding and some administration services have developed templates for trustees who want to hand the job to someone else. However, it is the norm for trustees to write their own investment plans.

Colley says there is no data available on the level of insurance - death cover, total and permanent disability and income protection - in self-managed funds. However, there is no reason to think the high level of underinsurance in the community generally would not be reflected in the SMSF sector.

Insurance checklist

Trustees will have to weigh up the pros and cons of buying insurance through a fund. Premiums on some types of policies are tax-deductible. Death cover premiums are tax-deductible if the policy is held inside a super fund but not tax-deductible if held outside super.

Premiums for total and permanent disability cover inside super may be deductible, but not in all cases. Premiums for TPD cover outside super are not deductible. Premiums for income protection policies held inside super may be deductible, but not in all cases. Premiums for income protection held outside super are deductible.

When it comes to paying out benefits, death benefits paid to dependents from policies held either inside or outside a super fund are tax-free (death benefits paid from a policy held outside super to any beneficiary are tax-free).

Death benefits paid to a non-dependent beneficiary from a policy held inside a super fund are taxed up to 31.5 per cent.

Payment of a total and permanent disability claim from a policy held in a super fund will be taxed, while the payment of claims from a TPD policy held outside super are tax free. Payment of income protection claims from policies held either inside or outside super are subject to tax.

When it comes to paying premiums, if the policy is held by the super fund the payment comes out of the fund. This frees up the member's household cash flow.

However, this has a potential drawback. Premiums will reduce retirement benefits and premiums also use up part of the concessional contribution cap.

Trustees who intend their funds to borrow to acquire assets should think about insurance as part of their strategy.

If the member of the fund became permanently disabled or sick and was no longer able to make contributions needed to repay the loan, a total and permanent disability or an income protection policy could be used to fill the gap.

On the issue of market valuations, Colley says a lot of trustees already do that each year. He says there was already a requirement that collectables be valued regularly.

Shares do not present a problem because market values are published on a daily basis.

He says that when it comes to land and buildings the ATO will be satisfied with a real estate agent's assessment.

More power to the tax office

As self-managed superannuation fund trustees are being asked to take on greater responsibilities, the government is giving the industry regulator, the Australian Taxation Office, greater enforcement powers.

In September, Treasury released draft legislation for industry consultation. The new laws would give the ATO greater power to direct trustees to rectify contraventions, require they undertake education programs and impose a range of fines for non-compliance. The government is proposing the new rules take effect from July next year.

The ATO already has the power to make a fund non-complying, which strips it of its tax concessions, it can apply to a court for penalties to be imposed and it can disqualify a trustee.

The review warned the consequences of these penalties could be disproportionately high. It found the ATO was unlikely to use these powers, unless there was significant non-compliance, and that graduated penalties were required.