The Federal Government released its response to the Cooper Report on 16 December 2010, and among the 139 recommendations it took on board from the Cooper Report, one of those recommendations could potentially be explosive for those SMSF
The Government recommends undertaking a review of leverage in two years time, covering all superannuation funds across the industry, and determining whether such arrangements should be permitted to continue.
The key words from the Government’s response are: “…whether borrowing by superannuation funds has become excessive, placing fund assets at risk…”
Although the Government doesn’t explicitly state that the borrowing rules will be removed in two years’ time, the wording of the recommendation hints strongly that major concerns are held within Government at the use of debt strategies within concessionally taxed
Quoting directly from the ‘Stronger Super’ website (the website publishing the Government’s response to the Cooper Review):
Recommendation 8.10 (from the Cooper Report)
The 2007 relaxation of the borrowing provisions and the consumer protection measures that have recently been announced should be reviewed by government in two years’ time to ensure that borrowing has not become, and does not look like becoming, a significant focus of superannuation funds.
Government response
Support
The Government agrees with this recommendation. However, a broader review of leverage will be undertaken that includes all superannuation funds across the industry. Leverage poses a risk to superannuation fund assets in both SMSFs and APRA-regulated funds because it can magnify investment losses and reduce liquidity. The review will enable consideration of whether borrowing by superannuation funds has become excessive, placing fund assets at risk, and whether such investments should be permitted to continue.
SMSF investment-related recommendations
The Government also published the following
- In-house assets. Retain in-house asset investment provisions (and 5% limit)
- Related-party purchases and sales. Where SMSF trustees buy or sell assets from related parties, that the relevant transaction occurs via an underlying market. Where an underlying market doesn’t exist, then the transaction must be supported by a valuation from a suitably qualified independent valuer.
- Collectibles and personal use assets. Introduction of tightened legislative standards for storage, to apply to new investments from 1 July 2011, and existing holdings from 1 July 2016.
- Net market value. SMSF trustees should value fund assets at net market value.
- Valuation guidelines. The ATO should publish valuation guidelines for SMSF trustees.
- Deed simplification. The Government intends to amend the SIS Act to deem that anything permitted by the legislation is deemed to be permitted by SMSF
- Keeping personal/employer assets separate from fund assets. Convert this trustee covenant into a full-blown SIS operating standard.
- Investment strategy. SMSF trustees should be required to consider life and TPD
You can read about the Federal Government’s broader response to the Cooper Review report in our article Cooper Review: Our Government’s four-pronged response, other SMSF-related recommendations in our article SMSF supervisory levy to increase from 2010/2011 year, or you can access the full report on the Stronger Super website (www.strongersuper.treasury.gov.au).
