Super delays, but property is hot

PORTFOLIO POINT: A reprieve on the in-specie transfer ban? In any case, SMSF trustees are moving on ... and moving pretty smartly.

There appears to be a pattern. The government announces sweeping changes to superannuation policy. And, just as it’s due to come into force, something gets in the way and the changes are postponed.

Take the 50-50-500 rule, which was supposed to come into force on July 1, and would have allowed older Australians with smaller super balances the ability to put extra (up to $50,000 a year, instead of the new global limit of $25,000) into super as concessional contributions. It’s now scheduled for 2014.

Or FoFA (the Future of Financial Advice reforms), which was also due to start on July 1, 2012. The reforms come into force from that date, but they are voluntary until July 1, 2013, as there wasn’t enough time to implement them.

The next delay, it would appear, is going to be the rewriting of the rules on in-specie transfers of assets into SMSFs.

I’ve written much about this recently (see columns on 11/4/12 and 13/6/12), urging those who are particularly considering transferring shares to their SMSF, to beat the June 30 deadline.

But the Self-Managed Superannuation Funds Professional Association of Australia (SPAA) understands the government is going to push back the changes by a year.

SPAA technical director Peter Burgess believes an announcement will be made by the end of the month that the proposed new rules will be delayed.

Burgess says Treasury is struggling with some technical issues in relation to drafting the bill.

So, with just two business days to go until the end of the financial year, it is all but too late to have transfers go through this year. However, it might be the case that you’re still allowed to make in-specie transfers into the new financial year.

Under the new rules, in-specie transfers will technically disappear, as you won’t be able to be on the “other side of the trade”. Instead, the shares are sold on market, then can be repurchased once the market has decided the price.

It will effectively kill off in-specie transfers.

If you want to get, for example, 1,000 BHP shares from your personal name into your super fund, without being out of the market for a few days, it would probably make more sense to sell the shares in your personal name and, at around the same time, use cash in the SMSF to purchase 1,000 BHP shares.

Then transfer the cash from the sale in your personal name into the SMSF to replenish the cash that you’ve just used.

This assumes that you have sufficient cash in the super fund to make the purchase. And the ATO would need to give some guidance as to whether that sort of action might be seen as a “wash sale”.

And if you don’t have the cash sitting around in the super fund, it might require selling the shares and then transferring the money into super to purchase the shares again. However, with this option, you’re likely to be out of the market for a few days.

Personally, I don’t understand why the new process is going to be so difficult. Computershare and Link Market Services already perform these actual sorts of transfers and charge a fee for it – they just don’t determine the price at which it goes through.

They could determine the price it passes through at, say the previous day’s closing price to when it was received by them, and inform the individuals and trustees of the price of the transfer with the forms that detail the change of ownership. Anyway, it’s in Treasury’s hands.

But, it would appear that issues with drafting the rules are going to lead to a temporary reprieve. SPAA believes the announcement of the delay will be made by the end of this week.

SMSFs diving into the property market
But it would appear that there’s nothing holding SMSFs back now from purchasing property inside their super funds.

After a slow take-up of the SMSF gearing rules introduced in 2007, reports suggest that trustees have now pinned their ears back.

The fact that property markets have been gently falling for around 18 months across the country suggests that there aren’t too many buyers out there in the market.

But part of the slack is being picked up by SMSFs, who are coming into the property game. It would appear that the stars have been lining up for trustees.

How does geared property in super work? See this column (8/2/12), which also contains links to other related property columns.

Sure, interest rates are low and look like they could be for a while. And lower property prices are more appealing than higher prices. But that’s the same for everyone, so what’s encouraging SMSFs in particular to take the plunge?

Firstly, I think it’s the realisation that ownership of property in super, particularly geared property in super, has two incredible benefits that are not available in non-super ownership options.

The first is the tax-free nature of capital gains in superannuation once a pension is turned on. If you own a property for 20 years and during that time the property has doubled and doubled again (say from $200,000 to $800,000), then the whole gain is tax free if it’s an asset of the pension fund.

The second is tax-free income. If you continue to hold the asset, the property itself will be considerably positive geared by that stage. But if the fund’s in pension phase, the positive income will not be taxed.

Real estate agents are suggesting that SMSFs are becoming a noticeable part of the purchasing market, often being less nervous because they have an ultra-long-term time frame to invest for.

Some figures out recently suggest that the percentage of funds being held by SMSFs in unlisted property has been on the rise, but I haven’t been able to locate anything that shows the trend to be convincing yet.

Crashing through the million-dollar mark
But SMSFs are continuing to buck the trend when it comes to size. According to a survey by index fund manager Vanguard and research house Investment Trends, the average size of a SMSF has topped $1 million for the first time.

This seems surprising, given recent falls in investment markets. However, SMSF trustees are more likely to make use of their maximum concessional contributions limit of $25,000, but even more so the $150,000 non-concessional limits.

Super funds are still holding on to excess cash. While about $130 billion, or 28% of SMSF fund assets are sitting in cash, about $48 billion of that is considered “excess cash” that was most likely waiting for a home in other assets including equities.

The survey said the rate of SMSF start-ups is in excess of the five-year average, suggesting the move to SMSFs, far from waning, is actually increasing. Vanguard’s Robin Bowerman says this has become far more about wanting control of the investment assets than fees.

Accountants gain advice exemption
Superannuation Minister Bill Shorten has also flagged new rules in regards to allowing accountants to be able to provide limited financial advice.

This will result in the setting up of a new licensing regime through which accountants can provide basic advice. This particular licence will not allow accountants to provide product-specific advice, but will allow them to provide general advice on issues such as super funds, insurance and general investment advice.

The new licences will be rolled out over three years from July 1, 2013.

Parts of the industry, including myself, has held concerns that accountants are just as conflicted when it comes to the setting up of SMSFs. While there is no inherent product bias when recommending clients set up SMSFS, which they have been allowed to under an exemption for some time, the fees that they will generate through accounting and audit fees is considered enough of a potential conflict for them to recommend the setting up of a SMSF.

Shorten says that he expects around 10,000 accountants to take up the new licences, allowing potentially millions of Australians to be able to get low-cost, basic, financial advice.

The self-managed super sector received a major shake-up today, as AMP announced the purchase of SMSF specialist Cavendish Superannuation. The funds management giant will create a new division, AMP SMSF from July 2, specifically focussing on the self-managed sector and also incorporating Multiport, Ascend and Cavendish’s SuperIQ stake. AMP chief executive Craig Dunn said they were “creating a new way of doing business”. “We have established a new business unit with the remit to quickly take a leadership position in the highly fragmented SMSF market,” Dunn said. Cavendish executive chairman John Row said it was an exciting time. “Cavendish will continue to provide the same service, offerings and support,” he said. “Over time our ambition is to use the scale of the AMP group to develop new offers with highly competitive pricing.” The combination will create a client base of more than 10,000 funds. SMSF auditors will need to be registered with the Australian Securities and Investments Commission from July 1, 2013. Financial Services and Superannuation Minister Bill Shorten announced the changes this week, which will require SMSF auditors to hold relevant tertiary qualifications, meet a fit and proper test, and pass a competency exam. Applications for registration open January 31, 2013, and exams will be sat subject to ASIC and industry consultation from July 1, 2013 to June 30, 2014. Cavendish Superannuation head of education David Busoli said: “Additionally, existing SMSF auditors who have signed off an SMSF audit within a 12-month period will be exempt from the hours based experience requirement when registering. Registered auditors will be required to meet ongoing professional obligations including undertaking a minimum amount of Continuing Professional Development (CPD) training every three years.” Fewer people are establishing self-managed super funds, according to statistics from the Australian Taxation Office. From a peak of 10,434 in the September quarter last year, establishments of new SMSFs have fallen in successive quarters, to 8,786 in the December quarter and 7,152 in the March quarter. Net establishments (minus windups) are in roughly the same territory, dropping from 10,273 in September last year to 7,094 in the most recent March quarter. There are now just under 470,000 SMSFs in Australia according to the latest data, for a total of just under 900,000 people. SMSF advisers and trustees have been warned not to get caught out by the Australian Taxations Office ruling on concessional contributions – ATO ID 2012/16. SMSF Academy head Aaron Dunn says that “the facts of this interpretive decision effectively allow for the taxpayer to 'double dip’” tax deductions. However he warns that while many see this as an 'open door’ to bring forward contributions in June, before the end of the financial year, there are very strict and specific interpretations regarding partial allocations. “It is important to understand the application of surrounding contribution and allocation requirements within both superannuation and the tax laws to issues to ensure that you don’t get caught double dipping,” Dunn writes.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are highly complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.