SLAB hits self-managed funds

Self managed super funds are facing some of the biggest legislated changes in their short history. Grant Abbott takes a look at the progress of SLAB 3 and SLAB 4 legislation and the effect it will have on your clients.

Self managed super funds are facing some of the biggest legislated changes in their short history. Grant Abbott takes a look at the progress of SLAB 3 and SLAB 4 legislation and the effect it will have on your clients.

In March this year, draft laws dealing with changes to the prudential management and operation of self-managed superannuation funds (SMSFs) were released. The draft laws incorporated changes to the trustee/member rules and the handover of the administrative responsibility of SMSFs from the Australian Prudential Regulation Authority (APRA) to the Australian Tax Office (ATO). The proposed rules are broader than previously expected.

Last Tuesday, a supplementary explanatory memorandum (SEM) to Superannuation Legislation Amendment Bill No. 3 (SLAB 3) was released by the Senate. The SEM contains an amendment to be moved on behalf of the Government; altering the commencement day from 1 July 1999 to the day on which the Bill receives Royal Assent. It will therefore prevent the Act having any retrospective effect to 1 July 1999.

The second amendment made by the Seante removes the requirement in the Bill for all members of a SMSF to have a family or business relationship; while preventing employees from becoming a member of their employer’s SMSF, except where they are relatives.

The SLAB 3 legislation containing the Senate’s amendments will now be presented to the House of Representatives (HoR) for final passing before receiving Royal Assent and being passed as an Act. It is anticipated that it will take a few days to have the HoR pass the Bill. After this time, the Bill will sit in Parliament for a couple of weeks before receiving Royal Assent.

Issues that Financial Planners should heed include:

Harsher Penalties

The proposed Section 121A of the SIS Act provides that “a person must not be, or act as, a trustee of a superannuation fund with less than five members (other than a SMSF) unless the person is an approved trustee.” Should a person be found to be in breach of this section, subsections 121A(2) and (3) provide for a mandatory six month jail sentence — a strict liability offence. The Commissioner has no ability to exercise discretion to remit this penalty.

Funds with fewer than five members that fall outside the SMSF definition must appoint an approved trustee within six months of failing the SMSF definition. This usually entails the forced removal of the existing trustees and the appointment of an approved trustee. (This procedure should be incorporated into the trust deed).

Timing of Changes

Existing excluded super funds will be deemed to be SMSFs for the purposes of the new laws until 31 March 2000. If a fund ceases to be a SMSF and moves from the regulation of APRA to the ATO, under section 106A of SLAB 3, the fund is required to notify the Commissioner of Taxation as soon as practicable and no later than 21 days after the trustee becomes aware of the change of status of the fund. This requirement commences on 1 July 2000. Failure to comply with this requirement is an offence punishable on conviction by a fine of up to $11,000.

Further to this, under section 252A of SLAB 3, APRA and the ATO have the ability to serve a notice to a fund requesting information as to the whether the fund is an APRA regulated fund or a SMSF. The reason for the notice is to allow the ATO and APRA to determine both the complying status of the fund and who will be the regulator for the fund. The notice also allows a fund to notify the ATO or APRA of an intention to change its status (and hence who will be the regulator.)

A strict liability offence will apply where a fund has failed to comply with the notice. The liability offence can be enforced through the issuing of a contravention penalty notice — section 252B. The prescribed penalty will be $200 per month, for the period over which the contravention continued.

Do Trust Deeds Need to be Changed?

Existing trust deeds may require significant amendments. In cases where changes are required, these need to be completed by no later than 31 March 2000. Whilst seen as an administrative headache, deed amendments should be viewed as an opportunity for advisers and their clients to upgrade their trust deeds. Many deeds have not been updated to cater for various amendments that have occurred since the inception of the SIS Act in 1994. Such strategies include the use of complying pensions, flexi-pensions and reserves. As a minimum, deeds should allow for the following:

All trustees to be members of the fund (subject to limited exceptions)

All members must be trustees of the fund (subject to limited exceptions)

References to excluded fund should be changed to “self managed super fund”

Where the fund has an individual trustee who is the sole member of the fund, then another person — who is linked to the trustee, must be appointed

Where the trustee is a company, all of the directors of the company are members of the fund unless the director is standing in for a member who is under a legal disability

In the event of the death of a member, the member’s legal personal representative may occupy a position as trustee of the fund until such time as death benefits commence to be paid from the fund

If the fund is no longer a SMSF, the trustee must notify the ATO of this fact within the time specified under the rules

If the fund is no longer a SMSF and the fund intends to stay as such, the trustees must resign and be replaced with an approved trustee. If the fund intends to remain a SMSF, the trustees must be given power to ensure that the fund returns to this status. This may require the forced removal of an existing member from the fund.

Furthermore, some client’s SMSF deeds may need to be restructured. Those that need immediate attention include funds with:

? single trustee — single member

? dual purpose corporate trustees

? business partners as members

? accountants as trustees

? in-laws and children.

Tax Office Takeover

The ATO’s approach to SMSFs is expected to differ from the philosophy adopted by APRA. APRA has a more prudential standpoint, often counseling fund trustees, and only rarely holding funds to be non-complying. In contrast, the ATO may not be a passive administrator. www.financetv.com contains an interview with David Diment, Assistant Commissioner of Taxation, Superannuation, on the proposed ATO approach to SMSFs. APRA’s comments are available from their website at www.apra.gov.au/iands/Superannuation/atoqa.htm

Grant Abbott is the Founder and Co-Director of Grant Abbott Consultants. This information is current as of 22nd September 1999. Advisers should seek expert advice before relying on the information contained within.