Balancing the ledger on DIY super.

[by Annette Sampson, 14 February 2004, Sydney Morning Herald]

For most people, accountants and tax advice go together like strawberries and cream. Your accountant is a natural port of call when you have a looming tax problem, or you want to discuss how to structure your business or investments.

To that extent, this week's decision by the Treasurer to exempt accountants giving advice on self-managed super funds from the new financial services laws was a triumph of sense over bureaucracy.

The new laws are all about regulating advice on financial products. They are intended to ensure investors are given the information they need to decide whether or not to invest in a particular product and that people giving advice about investments are licensed to do so.

The problem was that, under the original plans, self-managed super funds were to be treated as a financial product and anyone recommending their use would need to be licensed as a financial adviser.

You can imagine how the accountants reacted to this. Many of them are quite happy not to have to recommend whether their clients invest in shares or funds. But the laws looked like they would have prevented them from recommending they set up their own DIY super unless they went to the expense and effort of gaining the necessary licence.

After intense lobbying from the industry, the Treasurer will allow recognised accountants to advise their clients on acquiring or disposing of an interest in a self-managed super fund without falling under the new laws.

The accountants won't be able to advise their clients on what investments the fund should hold, but they will be able to continue to do what they've always done in helping their clients structure their investments in the most tax-effective way.

The announcement has drawn the inevitable protests from financial planners but it makes sense. This doesn't mean the role of accountants in the fast-growing self-managed super fund sector should be accepted without question. They still need to be accountable for advice given.

As the popularity of self-managed funds continues to grow they are an inevitable magnet for sharp operators wanting to turn a quick buck. The Tax Office and the Australian Securities and Investments Commission have recently warned about promoters pushing schemes to give fund members early access to their super through self-managed funds. Such schemes are illegal and could end up costing fund members dearly.

But of just as much concern is the sometimes aggressive interpretation of the superannuation laws by accountants and other advisers wanting to "help" their clients.

Recent benchmarking exercises by the Australian Tax Office have found that compliance problems in self-managed funds tend to be more likely if a fund has more than $100,000 in assets, invests in a linked trust, or has more than half its assets in unlisted shares (among other characteristics).

In other words, funds that are likely to have sought some form of accounting help. (The other "risk character-istics" include the fund having been in operation more than five years, having trustees under 50, and being in the accumulation phase.) While not all - or even most - funds with these characteristics are doing the wrong thing, it does suggest some accountants are helping their clients stretch the regulatory envelope.

Of particular concern to the Tax Office is the failure of some funds to keep their assets separate from those of a related business. It found assets owned by self-managed super funds that were held in someone else's name, loans made to related parties at non-commercial rates (when even lending money to a member or relative is prohibited), and funds that did not follow a suitable investment strategy.

For fund members, these contraventions of the rules can be expensive. The Tax Office can deem a fund to be non-complying which means it loses the tax concessions that apply to legitimate superannuation funds. Members could then find their accounts taxed at the top marginal rate of 48.5 per cent.

The responsibility placed on accountants is also complicated by the requirement that all self-managed super funds be audited each year. Indeed, the super legislation focuses on the auditor as a key player in ensuring funds do the right thing.

As part of its compliance program, the Tax Office is reviewing 250 funds to gauge the proficiency and competence of their auditors. But it is concerned enough to have already issued new guides for auditors and questioned whether auditors should also be involved in the day-to-day running of the fund.

Mark Jackson, the deputy commissioner for superannuation, highlighted the problem of auditors potentially having to scrutinise decisions that they themselves had recommended. Not surprisingly, he said if those decisions were against the rules, it was unlikely they would be picked up in the audit and reported to the Tax Office.

For fund members the issue is simple. Many need to get advice from their accountant on self-managed super and don't want to be prevented from doing so. But they also need to feel assured about the quality of advice given. Perhaps that's the area that requires further regulatory attention.