Regulation of SMSFs: updates by ASIC and ATO

Recent updates by the ATO and ASIC as well as mention in the Financial System Inquiry Interim Report show that SMSFs are the target of increasing regulatory focus.

A recent speech by Greg Tanzer, Commissioner, Australian Securities and Investments Commission focussed on the following issues:
•the limited AFS licence for accountants and SMSF auditor registration
•misleading and deceptive conduct, including misleading advertising of SMSFs
•ASIC’s focus on SMSF ‘one stop shop’ operators, and
•unlicensed financial services conduct.

The one-stop shop business model
He identified a ‘one-stop shop’ as one providing advice to clients on the establishment of SMSFs, rollover of existing superannuation funds into an SMSF, sourcing and purchase of investment properties, property management, insurance and taxation services.

He said that a feature of these business models is a ‘one size fits all’ approach where all investors who use their multiple services receive the same suite of products and services – that is, they end up with an SMSF, a property investment and a limited-recourse borrowing arrangement.

ASIC is exploring whether commissions are being paid within these business models and whether these commissions are consistent with the restrictions on payment of commissions for advice under the FOFA reforms. He noted that even where commissions are permitted, they must still be clearly disclosed to retail clients.

Licensing issues
In respect of licensing, he noted that providing financial product advice includes making a recommendation or a statement of opinion to a person to set up an SMSF or use an existing SMSF to purchase property through that SMSF. This is because the vehicle through which the underlying investment is made is an SMSF, and an interest in an SMSF is a financial product even where the underlying investment – property, in this case – is not a financial product.

ASIC is concerned that, with the increased popularity of SMSFs and property investment, real estate agents and property advisers may not realise that they may be carrying on a business of providing financial product advice and may need an AFS licence, or authorisation under an AFS licence, when making recommendations or statements of opinion to a person to use an SMSF to invest in property.

He said that where an AFS licence is required, unlicensed entities must immediately cease offering and providing financial services or advertising the provision of financial services until such time as an AFS licence is obtained or they become a representative of an AFS licence holder.

ATO update
Separately Matt Bambrick, Assistant Commissioner, Self-Managed Superannuation Funds Segment has given a speech outlining the ATO’s concerns:

  • Dividend washing, which is a share trading strategy that enables a taxpayer to access double the franking credits attached to fully franked dividends even though the taxpayer effectively holds only one parcel of shares
  • claiming deductions for overseas conferences which contain minimal training related to SMSF activities.
  • a potential home loan unit trust arrangement which involves the purchase of a residential property by a non-geared trust whereby units are purchased by the SMSF, related family trust and SMSF members.
  • dividend stripping which involves a private company with retained earnings distributed by way of a franked distribution to an SMSF in circumstances where the SMSF is entitled to a refund in relation to the franking credits attached to the distribution.

Financial System inquiry

The Financial System Inquiry Interim Report specifically considered the use of leverage (borrowings) in superannuation funds

It identified restoring the general prohibition on direct leverage of superannuation funds as a policy option.

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