The Cooper Review

The Cooper Review has spent many months analysing Australia’s superannuation sector and has started providing its views to the public and the Government.

During the process, the review completed the most thorough statistical analysis of the SMSF sector ever completed. The findings from the analysis were clear. The SMSF sector is the lowest cost sector of the superannuation market, the largest sector of the market and the highest performing sector in relation to investment returns.

As a result, there are no major changes recommended for the SMSF sector. There are some suggestions for changes at the edge in areas the review feels can be improved. We agree with most of the review’s suggestions except for some recommendations around new funds, which will unnecessarily make it harder to open a new fund and are clearly anti-competitive.

We summarise some of their findings below.

Minimum SMSF Asset Size

The Panel does not believe there is a need to mandate a minimum SMSF asset size; proposing within the choice architecture model, members have the right to choose.

SMSF Investor believes this is a positive move which allows superannuation members flexibility to choose the superannuation vehicle best suited to their personal circumstances.

Trustee Education

The Panel does not believe SMSF trustees should be mandated to undergo any form of initial or ongoing formal education, training or accreditation. The Panel recommends that the ATO be given the power to enforce mandatory education for trustees who have contravened SIS legislation.

SMSF Investor is not pleased that the Panel has not recommended mandatory trustee education, instead favouring the imposition of compulsory education where instances of non-compliance are detected. With the large number of breaches still being made by SMSF trustees, this approach is more like shutting the gate after the horse has bolted as not everyone can afford to access specialised advice from professional advisors when required.

SMSF Establishment - Gatekeeper Mechanism

The Panel is exploring some form of mechanism aimed at allowing new entrants to the SMSF sector to assess whether they would be suited to its unique features and responsibilities and understand the need for a certain size of fund to make an SMSF cost competitive with other types of funds.

Related Party Investments and In-house Assets

The Panel recommends the following investment restrictions in relation to SMSFs:

SMSFs should not be able to make related party investments;
The 5 per cent In-House Asset investment limit be removed so that no in-house asset investments would be allowed;
SMSFs with existing in-house asset investments be provided a transitional period, up to 30 June 2020, in which to dispose of their in-house asset investments (no new or further in-house asset investments are to be permissible during this transition period).

Acquisition and Disposal of Assets from Related Parties

The Panel recommends the following in relation to the acquisition and disposal of assets from related parties:

Where an underlying market exists, all acquisitions and disposal of assets between SMSFs and related parties must be conducted through that market (eg. listed shares should be bought and sold through the ASX);
Where an underlying market does not exist, acquisitions or disposals of assets between related parties must be supported by a current independent valuation from a registered valuer.

Business Real Property

The Panel has not recommended any changes be made to the business real property exemption.

SMSF Investor supports the Panel’s decision to maintain the Business Real Property exemption as it provides a valuable opportunity for small business owners to provide for their retirement.

Collectables and Personal Use Assets

The Panel recommends SMSFs should be prohibited from acquiring collectables and personal use assets (such as artworks, wine, exotic cars etc). The Panel also recommends SMSFs that own collectables or personal use assets be provided a transitional period, up to 30 June 2020, in which to dispose of those assets.

While not against tighter regulation surrounding SMSF investment in assets such as collectables or personal use assets, SMSF Investor is a strong advocate of SMSF investment choice remaining free from intervention.

Leverage

The Panel recommends that the 2007 relaxation of the borrowing provisions and the consumer protection measure that the Government has recently announced be reviewed in two years’ time to ensure that borrowing has not become, and does not look like becoming, a significant focus of superannuation funds.

SMSF Investor believes SMSFs should have the opportunity to engage in responsible borrowing strategies. Any doubt cast over the continued legitimacy of this strategy would retard the continued development of cost effective borrowing products in the industry.

Member identification

The Panel recommends:

Proof of identity checks be required for all people joining an SMSF, whether they are establishing a new fund or joining an existing fund; and
Identification measures should not apply retrospectively except for existing SMSFs wishing to organise rollovers from an APRA‐regulated fund.

The Panel has suggested additional and somewhat excessive steps in the registration process for new members and funds. In particular, the report suggests that bank accounts be frozen until the ATO obtains confirmation from the bank of a satisfactory 100 point ID check.

Introduction of this complex arrangement is not supported by instances of fraud in the SMSF sector, which currently represents substantially less than 0.01% of superannuation assets and acts as a means of slowing down the establishment of new SMSFs and imposes a potentially impractical freeze on fully operational SMSFs. If this measure is pursued, a strict timeframe of 7 days should be imposed to ensure the ATO and financial institutions act efficiently.

Membership size

While the Panel accepts the arbitrary nature of limiting SMSFs to a maximum of four members and sees some of the attractions for wider family participation, the Panel does not propose to recommend changing the existing membership limit.

Independence of SMSF auditors

The Panel recommends legislating full audit independence whereby an individual or firm providing any service in connection with an SMSF or its individual trustees or trustee directors in any capacity is to be expressly prohibited from auditing that SMSF.

Will this be implemented?

Only time will tell how much of the Cooper Review recommendations are made into law. In the case of the Henry Review, only 2 of the review’s recommendations have been taken on at this stage. We will keep you informed of any changes that may affect your fund.