(The link to the original Accountants’ Exemption paper is here)
Self-Managed Super Funds are big business – and still so after the Accountants’ Exemption
The number of SMSFs continues to increase. According to the ATO there were just over 528,000 SMSFs. There is $529 billion in assets. It is a big market. The war over who controls the SMSF industry neither starts nor finishes with the current ‘reforms’.
Should SMSFs be treated as financial products?
ASIC Regulatory Guide 175 provides generic guidance on what factors are taken into account when recommending a ‘financial product’. This is for the Accountants’ Exemption. For SMSFs:
- Desire to minimise fees and costs
- Tolerance of the risk that advice (if followed) will not produce the expected benefits
- Existing investment portfolio
- Tax position, social security entitlements, family commitments
- Employment security and expected retirement age
Are SMSFs really ‘financial products’?
Perhaps (contrary to ASIC’s interpretation of the law) SMSFs are not truly financial products in their own right. However, are they a structure that holds ‘financial products’? The Accountants’ Exemption does not sit well. A SMSF may contain not financial products. It may only own direct residential property and art. Perhaps real estate agents and art dealers should be registered as financial planners. Who among us can claim expertise in buying and selling a family home and art?
Putting aside asset protection (and there are better structures than Super for this purpose); no one would voluntarily lock their money away for a ‘life-time’. That is unless it was for the tax advantages. Does every voluntary contribution into Superannuation breach the taxation anti-avoidance in Part IVA Income Tax Assessment Act.? Perhaps the Accountants’ Exemption should have continued.
What is the Accountants’ Exemption now?
The Accountants’ Exemption allows a ‘recognised’ accountant to:
- recommend the establishment; or
- closure of a Self-Managed Superannuation Fund (SMSF)
This is without possessing an Australian Financial Services (AFS) licence. From 1 Jul 2013 until 30 June 2016, a limited AFS licence arrangement replaced the original Accountants’ Exemption.
Previously, under the Accountants’ Exemption, members could only provide advice on the setup and closure of SMSFs. There were a number of deficiencies and limitations to the service offerings that accountants could provide to clients under this scheme.
However, on 23 June 2012, the Government announced that the Accountants’ Exemption is removed from 1 July 2016. From this date, accountants who are wanting to provide ‘financial advice’, including advice relating to SMSFs, need to hold an AFS licence, of some sort.
The limited AFS licence permits the accountant to provide a broader range of financial advice than before. This includes:
- Recommend and establish an SMSF
- Advise on an SMSF investment strategy
- Client Advice as to whether the client should hold insurance cover directly or through a superannuation fund
- Advise concerning simple managed investment schemes that would be in the best interests of a client, e.g. cash funds versus equity funds; and
- Advise whether shares are an appropriate investment option given a client’s tolerance for risk and whether alternative classes of product might be more suitable.
However, accountants cannot give advice that involves a specific product recommendation on superannuation, securities, simple managed investment schemes, general and life insurance, and basic deposit products.
For example, you cannot:
- Advise your client to buy BHP shares through their SMSF because it is a specific product advice
- Arrange your clients to trade shares because this is dealing in relation to securities
- Advise your client about the underwriting process for a particular product because this is a specific product advice
- Advise your client to switch their insurance product to a different product because this is a specific product advice
However, the following advice for SMSFs is not ‘financial advice’:
Taxation advice and services
- Prepare SMSF accounts and tax returns
- Track member account balances and components
- Organise annual audit and liaising
- Prepare and maintain trustee minutes and records (but not prepare “Deeds”)
- Track and maintain investment valuations and CGT records
- Monitor SMSF compliance with relevant legislation (including reading, but no amending the Trust Deeds)
- Track and Monitor contributions made to SMSFs against limits
- Monitor and track pension payments out of the SMSF against limits
- Provide general advice about the administrative aspects of running your SMSF and ensuring compliance with applicable laws
Can the accountant compare the tax consequences of two different investments and recommend the investment from that tax position?
Accounting and administration advice or services
Can the administrator provide pro-forma investment strategy templates?
- Audit and testing
Can an auditor comment on investments which the Auditor feels are not in keeping within the law or spirit of the legislation? What about the fund buying cigars and claiming insurance when they are burnt? Does the auditor need to keep his mouth shout – or risk breaching the financial product advice rules?
- Information regarding compliance with laws and regulations relating to SMSFs
What if a member wants to transfer residential property from himself into his fund (we all know that is not permitted). Can the accountant comment on that ‘investment’?
Mum & Dad: Can I top up my SMSF before 30 June?
Accountant: I am not a licenced financial planner. However, your concessional contribution cap is $35k.
Mum & Dad: Sure, but how much have I contributed already?
Accountant: You paid in $20k
Mum & Dad: Great, can I top up another $15k?
Accountant: You need to speak to a licenced adviser for that advice.
Which if these Contributions require a financial licence as of 1 July 2016?
Yes Recommend a specific amount of contributions (concessional or non-concessional)
Strong Yes Recommend a salary sacrifice arrangement
Yes Recommend a re-contribution strategy
Yes/No Recommend and implement a contributions reserving strategy (our lawyers were 50/50 on this one)
No Track contributions make to the SMSF against contribution caps
Strong No Advise on the tax implications of contributions
No Liaise with the ATO is cases of excess contributions
Strong No Prepare contribution minutes or section 290-170 forms
No Discuss tax benefits regarding the small business CGT concessions
Which of these Pensions require a licence as of 1 July 2016?
Yes Recommend you start pension (account based or transition to retirement)
Strong Yes Recommend a transition to retirement strategy with a salary sacrifice arrangement for the same take home pay
Yes Recommend you draw a specific pension amount from your SMSF
Yes Recommend you make lump sum payments
No Provide information on minimum pension drawdown requirement
No Track pension payments against minimum and maximum annual pension limits
Strong No Prepare the documents to start a pension
No Provide information regarding the taxation consequences of taking a lump sum rather than a pension payment (prior to that payment being made)
No Obtain an actuarial certificate for your SMSF
Which of these investments for a SMSF require a licence to give advice on after 1 July 2016?
Yes Recommend putting money into a cash management account
Yes Recommend the purchase of real estate
Strong Yes Recommend a Limited Recourse Borrowing Arrangement (LRBA)
Yes Recommend you sell an asset to for a capital loss
Yes Document an investment strategy of the SMSF
Strong Yes Document the investment strategy based on a Statement of Advice from a licensed financial adviser
No Advise of the tax implications of the buying or selling of a specific investment owned by the SMSF
No Discuss the types of investments that an SMSF can acquire under applicable legislation including what can be acquired from a related party.
Strong No Prepare forms to transfer assets between parties or accounts including off-market transfer forms
No Report on the investment performance of your SMSF where there is no recommendations made regarding underlying investments held by the SMSF
So let’s get a licence
The limited AFS licence require members/practices to apply for a licence through ASIC. Applicants must satisfy the following criteria:
- Relevant practical experience
- Training requirements
- Compliance requirements
- Professional indemnity insurance requirements
- Being a member of an external dispute resolution scheme e.g. FOS
For example, Chartered Accountants holding a current Certificate of Public Practice (CPP) satisfies the ‘relevant experience’ element to apply for a limited AFS licence. This is subject to their compliance with the relevant training requirements prescribe in the Regulatory Guide 146.
Where to now?
From July 2016, accountants wanting to provide any financial advice, including advice relating to SMSFs, must hold a full AFS licence or operate under a limited AFS licence.
CPA Australia has set out recommendations once the Accountants’ Exemption is removed, and we think their approach is well thought out. All accountants and practices may:
- Refer all SMSF, superannuation and financial planning related queries to a licenced financial adviser
- Become an authorised representative of another entity’s AFL licence
- To provide financial produce advice, while the AFS licensee is responsible for ensuring compliance with the licence obligations
- Obtain your own limited AFS licence
- To provide a range of SMSF advice and ‘class of product’ advice and maintain your professional independence
- Obtain your own full AFS licence
- To provide financial product advice, including product recommendations, not just SMSFs
- Recruit/Joint Venture
- To provide a complete financial planning solution to clients without personally providing financial product advice
- This is an alternative if you wish to stop providing SMSF advice
The objective of this reform is to ensure Australian consumers and businesses are obtaining reliable advice from trusted advisers. It seeks to promote integrity, accountability and assurance for all persons involved. However, it in our view it is just another mess in a long line of messes when it comes to SMSF and superannuation.
Applying for a Limited AFSL licence – you can do it yourself
From what we are seeing, about half the applications from accountants for a limited AFSL are rejected first time by the Australian Securities and Investment Commission (ASIC). We believe that this is because not enough effort is being put into the ‘responsible manager’ section of the application.
The responsible manager(s) is authorised and obliged to manage day-to-day business that involves taking decisions regarding your licenced services.
One of the requirements imposed on responsible managers is to show that they have enough time to manage that responsibility. ‘Ghosting’ is very prevalent in the industry. Other requirements such as minimum training and experience are found in Regulatory Guide 105 (RG105).
Secondly, responsible managers are also required to assure Regulatory Guide 146 (RG 146) training requirements are met for all persons acting under the licence.
When applying for a limited AFSL it is important to ascertain the level of your licensing from the list of available options:
- Provide financial product advice
- Self-managed super funds (SMSFs)
- Arranging – SMSF set up, apply for, acquire, vary or dispose)
- Life Insurance
- A person’s existing holding in a super product
- Class of product advice
- Basic deposit products
- General insurance
- Simple managed investments.
To choose all available options, you probably need to complete additional training – so choose wisely.
ASIC also sets out a list of application requirements specifically for the responsible manager:
- Bankruptcy check
- Police check
- Reference check
- Credit check
- Two business references (Our Partners at Legal Consolidated are honoured to do these for accountants that we have worked with)
If you follow the outlined instructions and ensure your responsible managers comply with all requirements, there is a great chance your application will be successful, first time. Contrary to the spruikers of this work, most applications are being successfully done by accountants without the aid of lawyers and other ‘experts’. Most accountants are doing it themselves.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
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