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Protecting your SMSF

Jeffrey Hutton  |  09 Mar 2012Text size  Decrease  Increase  |  
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Jeffrey Hutton is a Morningstar contributor.


John Kelly, managing director of Self Super Insurance, is betting that he is going to be in demand.

For a few hundred dollars a year, he says he is selling the country's only insurance that will indemnify self-managed super fund (SMSF) trustees against audits and civil penalties.

SMSFs already make up one-third of the $1.3-trillion superannuation sector and are expected to take a bigger slice of the market as more people take control of their investments.

But if new rules from the federal government that expand the Australian Taxation Office's (ATO) power go into effect later this year as expected, how much extra protection does Australia's booming do-it-yourself super sector really need?

"The self-managed super fund industry has grown so fast and so complicated and so disaggregated, it has caught the government a bit on the hop," Kelly says.

"If I said to any insurance company that I found an industry that was large, complex and disaggregated, they would be all over it because there's risk in the system.

"It's an opportunity for us to provide a residual solution to the risk that is clearly in this space."

Under new rules proposed by the Cooper review, slated to come into effect by 1 July 2012, the ATO will get a sliding scale of penalties, which range from fines to forcing trustees to take a course to make clear the rules governing the SMSF space.

That compares with its only real current power - the so-called nuclear option of making a fund non-compliant. Most see the new rules as sensible. But how much more vigilant will the ATO become?

One worry is the federal government will be increasingly keen to wind back some of the $30 billion it spends on tax concessions for superannuation funds, one-third of which goes to the 700,000 or so DIY super funds which on average are worth much more than those in industry and retail funds, that number some 8 million.

"Superannuation is going to become a political and tax issue," says Philip La Greca, technical services director for SMSF administration company Multiport.

"The ATO hasn't been in 'heavy enforcement' mode. It has been more about education. But no-one knows how far they will go."

During the financial year ending June 2010, the ATO made 185 funds non-compliant. It tends to audit about 2 per cent of SMSFs, ATO commissioner Michael D'Ascenzo said in a speech to the Self-Managed Super Fund Professionals' Association of Australia (SPAA) conference in Brisbane in early 2011.

In the year that ended last June, the ATO had expected to act on about 2000 auditor contravention reports.

"Making a fund non-complying or disqualifying a trustee are serious sanctions and ones that we do not impose lightly," D'Ascenzo said.

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