Thursday, 25 December 2014

SMSF Trustees and Investments

A one sovereign coin minted in 1866 issued by the Sydney Mint.

In Australia, the capacity of people to fund their retirement was enhanced by the establishment of compulsory superannuation for employees in the 1980s. It was a system that quickly created large pools of investment funds, which are invested in the share market and in large commercial real estate developments. boosting the country's economy. Those funds are also a source of taxation revenue for government, and of fees for advisers and fund managers, and have become something of a battleground for taxation and regulation despite the fact that frequent changes to the rules governing superannuation make it more difficult for people to rely on superannuation as a long-term investment, which is the whole purpose of the system.

If you are interested in learning about the history of superannuation in Australia, ABC Radio has put together a program on the subject.

Within the superannuation system, an important development was the invention of Self-Managed Superannuation Schemes, or SMSFs. An SMSF, as the name indicates, is a fund where the managers (the trustees) are also the members. the Australian Taxation Office provides information about SMSFs on its website. Over time, a lot of SMSFs have been set up. There is a time lag with statistical reporting. In January 2013 the Australian Government (APRA) reported that there were over half a million such funds, managing over AUD$500 million in assets. By now those numbers would have increased significantly.

While being a trustee of a SMSF gives individuals a greater range of options than being a member of a retail superannuation fund - for example, it is not unusual for an SMSF to purchase premises which are then leased to a business operated by the members, or in which the members have a stake - it also exposes those person to greater risks. Large retail superannuation funds are staffed by people with years of financial experience, and have access to advice from stock analysts and economists and other experts. In contrast, SMSF trustees have to assess investment opportunities themselves.

Not surprisingly, there is a growing peripheral investment-advice industry aimed at SMSF trustees. Which brings us to the issue that this post wishes to highlight. In Australia, the law makes a distinction between different "grades" of investors: retail, sophisticated and professional. Depending on which category a person falls into, an entity offering them an investment may be required to make comprehensive disclosure of the background and risks of the investment, or reduced/limited disclosure. CMC Markets explains the "sophisticated investor" test on their website.

One of the criteria for qualifying as a "sophisticated investor" is that the investor holds at least AUD$2.5 million in assets. That is not a large sum, by today's standards, when applied to SMSFs.  One safety feature is that an accountant is required to certify that the investor meets this criterion. Many SMSF trustees may be eager to submit this certificate in order to have access to low-disclosure investments that are also higher-yield ones. "Special deals' if you like, not available to the average retail investor.

Now, none of this should be a problem if proposed investments are carefully reviewed by an adviser. The chances are, however, than in many cases busy SMSF trustees may buy into low-disclosure documents without bothering to get that type of expert assistance.

As lawyers, we at IRVING LAW are often consulted by clients after a problem arises, by which time any available solutions may either be very difficult, involve a large amount of time and expense - such as litigation -  or be only partially successful.We have a network of professional business partners that includes accountants, financial advisers and business advisers. Our standard advice to our clients never changes: you must get the right advice before you make any important business decisions.

Important information: IRVING LAW is a law practice regulated by the laws of Western Australia, Australia. Liability limited by a scheme approved under Professional Standards Legislation. This article is offered only as an educational and informational discussion of current topics and is not intended as legal advice to any person. No lawyer/client relationship is created merely by you reading this article. If you require legal advice specific to your situation on any matter, whether covered by this article or otherwise, please consult a lawyer.

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