SMSF Advice

Guidance for Licensed Accountants

© Licensing for Accountants Pty Ltd developed and is the owner of this document. Licensing for Accountants is the owner of copyright of this document and licenses the purchaser to use this document for their benefit. This document is provided to accountants who have a Limited Licence. The contents of this document does not constitute legal, financial or commercial advice, or a recommendation of any services or products. You should consider obtaining independent advice before making any investment, financial or legal decision.

An SMSF is one superannuation structure clients can consider to save for their retirement. They are often also used by accountants as part of broader structuring advice. However, as an SMSF is a financial product, it is important that when an SMSF is recommended, tax and cost are not the only considerations.

This policy outlines what Libertas Financial Planning Pty Ltdexpects when one of its representatives/authorised representatives recommends a Self-Managed Superannuation Fund (SMSF). Importantly, it also addressed how we as a licensee expect our advisers to address the Best Interest Duty requirements.

One of your Best Interest Duty requirements (expertise to advise) has been addressed by the granting of your authority. All our representatives/authorised representatives:

  • are RG146 compliant in SMSFs
  • have at least five years experience advising clients on SMSFs,

To determine if an SMSF is appropriate for your client, you need to consider the following factors:

  1. Does the client meet the legal requirements to be a member of an SMSF?
  2. Isthe client suitable to have an SMSF?
  3. Is an SMSF appropriate, given the clients goals, objectives and preferences?
  4. How does an SMSF compare with the client’s existing superannuation fund(s) – and will it put them in a better position than their current fund?
  5. Any potential conflicts of interest have been addressed?

1.Is your client legally able to be a member of an SMSF?

Before considering the appropriateness of an SMSF, it is important to ensure that the person you are advising is eligible to be a member of an SMSF, both now and in the foreseeable future. A person is not eligible to be a member of an SMSF if:

  • They are under 18 years of age;
  • They are a non-resident for more than 2 years;
  • They are a disqualified person (ie: bankrupt); or
  • The ATO has declared the person a disqualified person.

For further information regarding disqualified persons, refer to

2.Is your client suitable for an SMSF?

SMSFs are far more complex superannuation options than retail or industry funds. Therefore, before considering if an SMSF is appropriate, you should make an initial assessment to determine if your client is a suitable candidateto have an SMSF or not. In particular, do they:

  • Have sufficient time and expertise to understand their obligations as a trustee
  • Understand that an SMSF is not for personal use (ie: the sole purpose test)
  • Understand that benefits such as access to compensation measures will no longer be available

There is no one test to make this assessment. Rather, this decision is part of the broader ‘know your client’ requirements. Factors you could take into account include:

  • Age
  • Level of education
  • Level of business acumen
  • Number of other professionals engaged by the client, and their level of sophistication of dealing with these providers
  • Any disabilities
  • Whether the person is Australian, or from another country (and used to different investment markets or dealings with professionals, or the ability to understand the English language is not high)
  • The degree to which the person is willing to place too much trust in a professional person
  • Understanding of basic financial concepts (inflation, time value of money, compound interest etc.)
  • How they manage debt, including their credit cards

If they are an existing accounting client, you may feel comfortable making this assessment based on your existing knowledge of the client. If they are a new client, you will need to make suitable inquiries to make this assessment.

Regardless of how you make the assessment, you will need to indicate on your fact find that you have considered the client’s suitability to have an SMSF.

3. Is an SMSF appropriate?

If a client meets the suitability test, you will then need to determine if it is in fact an appropriate structure for them by assessing this against their needs and objectives. The table below outlines the circumstances where Libertas Financial Planning Pty Ltd believes it would be appropriate to recommend an SMSF. At least one of these reasons needs to be present – but preferably 2-3.

Control over the structure / Your client may be seeking a SMSF as it allows for more control over structural aspects of the fund such as:
-The tax treatment of investments, including CGT
-The timing and allocation of distributions
-The timing of contributions and pension payments
-Segregation of assets
Control over the investments / Another area of control your client might be seeking with their superannuation is in relation to their investments. An SMSF would be appropriate if your client are:
-Looking to be a self-directed investor
-Seeking to actively trade their own share portfolio
-Looking for alternatives to investing through an institution
Investments better suited/ only permitted in an SMSF / While you are not authorised to make recommendations about how an SMSF should be invested, your client may have some set views about how they would like their money to be invested. An SMSF would be appropriate if the client:
  • Intends to invest in direct property, business real property, private equity or other investments not available through any other structure (eg: direct shares)
  • Are looking to make in specie transfers into their super fund
If your client does not know how they intend to invest their money, then this cannot be a valid reason for recommending an SMSF for your client
Intention to borrow / If your client intends to borrow in their super fund via a Limited Recourse borrowing arrangement, a SMSF will be needed to implement this strategy.
Succession planning / If your client is looking to transfer a business, or specific assets to someone (ie: children, spouse), an SMSF may be appropriate as it will provide you with control over pooled -v- segregated assets, the timing of sale of investments etc.
Cost / A more detailed cost comparison will need to be undertaken to compare an SMSF with the client’s existing fund. However, as a general rule of thumb, SMSFs need a minimum fund balance of $200,000 before they start to become cost effective.

Notes:

Poor investment returns areNOT an appropriate reason for recommending a SMSF. There are many retail and industry funds that allow the client to switch investments options, even if the client’s current fund does not allow for this.

‘Control’ is often cited by clients and advisers as a reason for recommending an SMSF. Control in and of itself is not sufficient to recommend a SMSF. You will need to be more specific when selecting ‘control’ as a reason for your recommendation, as detailed above.

Accountant authorities, by their very nature, do not permit specific investment recommendations to be made. That said, understanding how the client intends to invest the funds can be valid reasons for recommending a SMSF (see control over investments, investments better suited to a SMSF). Investigating how your client intends to invest their money does not constitute investment advice.

4.Comparing an SMSF with their existing superannuation fund

(including rollover advice)

An important consideration in recommending an SMSF is demonstrating why their existing fund is not appropriate. In addition to the reasons identified above, you will need to undertake a direct comparison on the SMSF to the client’s existing fund.

The statement of advice must explain in clear and simple terms, the costs, benefits and significant consequences for your client if the advice is acted upon.

You can do this manually, or use the Midwinter ‘Super to Super’ comparison tool, or any other recognised comparison tool.

Or

An important consideration in recommending an SMSF is demonstrating why their existing fund is not appropriate. You will need to refer this advice to para-planning as this is beyond the scope of your authority.

To complete the comparison, you will require the following information.

Inputsneeded for current fund / Inputsneeded for SMSF
One off costs / Set up costs for the SMSF / Exit costs
CGT implications of transfer
Ongoing costs / Administrative costs
You can source this:
-Directly from the fund itself
-Using financial planning comparator software (eg: Midwinter)
Investment costs
Use the Management Expense Ratio (or MER) of the fund. This can be sourced:
-Directly from the fund itself
-using financial planning comparator software (eg: Midwinter) / Administrative costs
This should be an estimate of the costs you expect to charge for accounting, administration and audit of the SMSF.
Investment costs
Option 1 – Assume the same MER as the current fund
Option 2 – Client directed asset allocation. In this case, assume the following costs:
Direct property –2%
Shares – 0.05%
Managed funds – 1.5%
Cash and term deposits – 0%
Projected returns / For modelling purposes, projected returns should be based on the client’s risk profile. Use the client’s existing investments to determine the most appropriate risk profile (and projected returns), using the categories below.
Unknown: 2%
Defensive (30% growth, 70% defensive): 5.99% return
Moderately defensive (45% growth; 55% defensive): 6.85% return
Balanced (65% growth; :35% defensive): 7.63% return
High growth (90% growth, 10% defensive): 8.64% return / Option 1 – Current profile
Use the same risk profile you calculated for the existing fund.
Option 2– Client directed allocation
If the client has indicated how they will be investing their funds, you can use this information to adopt a different risk profile.
If authority allows asset allocation
Option 3 – Complete a risk profile for the client
Complete risk profiling exercise and adopt that risk profile
Features and benefits gained / See above – ‘Is an SMSF Appropriate?’
Features and benefits lost / Identify if any of the following features and benefits will be lost.
If thefeatures and benefits below are lost, you should not recommend an SMSF
-Ability to accept UK transfers
If the features and benefits below are lost, you will need to explain why the advice is still appropriate and seek specific approval from our Compliance Committee
-Access to an in-house adviser (for industry funds)
-The fund is a defined benefit fund
Insurance assessment / As a minimum, you must check to see if the existing fund has insurance.
If the fund does not have insurance, you do not need to take insurance into account and need to scope this appropriately in your SOA
If the fund does have insurance, the attached an insurance advice waiver signed (see attached)

5. Addressing any conflicts of interest?

It is a legal requirement that address any conflicts of interest that you may have. While it is unlikely that there will be any conflicts of interest if your client contributes to super, there could be a conflict if you are recommending your client re-direct funds that could otherwise have been contributed to superannuation into another investment where you do receive a benefit.

For example, if you have recommended a self-managed superannuation fund and it will be more expensive than their existing fund, and you are receiving part or all of those fees, this could be described as a conflict of interest.

In this instance, you would need to explain further why the client will be in a better position by taking your advice and only contributing the minimum. For example, the client may be seeking to invest in direct property and this is not possible with their existing fund.

Any statement of advice that discloses a conflict of interest must be sent to the Licensee for approval before it is issued to the client.

Rollover advice – sample waiver letter regarding insurance advice

I ______(client) understand that my existing superannuation fund includes the following insurance:

(delete as appropriate)

-Life insurance

-Total and permanent disability insurance

-Income protection insurance

I have been advised to seek further advice on my insurance before rolling out my funds as I may not be able to seek replacement cover, or cover for the same costs/benefits.

 / Ihave sought advice will maintain a small balance in my existing superannuation fund so that I can retain my insurance policy.
 / Ihave sought advice and am currently applying for new insurance cover to replace the cover in my existing super fund. Once that cover is in place, I wish to rollover my existing superannuation fund into my SMSF.
 / I wish to rollover my existing superannuation fund into my SMSF. I have sought advice elsewhere regarding my insurance cover and do not wish to retain this cover.
 / I wish to rollover my existing superannuation fund into my SMSF. It has been strongly recommended that I seek advice on my existing insurance before we roll our funds over and we have declined to seek that advice. We understand that we may not be able to obtain insurance in the future, or with the same terms and conditions. [delete if you do not want to provide clients with this option]

Signed______Date______

<[Client.FullName]>

Signed______Date______

<[Spouse.FullName]>

Signed______Date______

<[Adviser.FullName]>

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