28/07/2015

While there are a number of useful features of ASIC's new guidance papers on SMSF advice (Information Sheets 205 and 206),  in our view comments relating to the preferred minimum for an SMSF of $200,000 are not among them.

We quickly came up with seven reasons why ASIC's view that an SMSF with a starting balance of $200,000 or below is unlikely to be in the client’s best interests is fairly arbitrary and in our view ill-considered.

1. Certainty – particularly regarding what happens to their super when they die; they get the ability to make a specific type of BDBN that may not be allowed via a public offer fund (eg non-lapsing with multiple cascading classes of beneficiaries) and / or ensure that their death benefit (which may be well over $200k after a life policy payout) does not become subject to a public offer trustee’s payment policy (eg see case of Stock (as Executor of the Will of Mandie, Deceased) v N.M. Superannuation Proprietary Limited [2015] FCA 612 where the public offer fund trustee submitted that in general it would not pay a death benefit to an estate unless there are no dependants (including adult children of the deceased fund member as non-financial dependants), with the result that 2/3 of the death benefit went to estranged adult children).

2. Investment Strategy – given the current very strict rules about how much money you can contribute to super, there are certain strategies that are not available via public offer funds (as they lack the agility of public offer funds) that can give a massive boost to long-term retirement income such as LRBAs to buy direct shares and property, even where the starting balance is well under under $200k since that is just the deposit.

3. Estate Planning – there are many estate planning reasons for having a SMSF irrespective of balance, eg you can do a non-lapsing BDBN or a SMSF Will or impose specific conditions to reflect a blended family situation.

4. More Flexibility for Life Insurance – a SMSF offers greater flexibility than public offer funds when it comes to life insurance to support death benefits.

5. Long-term focus – it’s not about how much is in the fund now, it’s about how much will be in there long-term for retirement, plus where the fund holds life policies, clearly the balance of the fund on a member’s death is potentially going to be much more than the starting balance. ASIC’s focus on short term-costs is simply naïve – it effectively says it is better to pay 2% fees in a public offer fund that yields a 5% return in the long run compared to say 7% fees in a SMSF that yields 20% returns over the same period.

6. Client’s Best Interest – only via a SMSF can the client take advantage of certain strategies that are not practically available via a public offer fund, such as the ability to jointly invest in an asset portfolio with a related party via a reg 13.22C unit trust – the starting balance again is not relevant.

7. Control – most SMSF members go into an SMSF for the control (“I’d rather lose the money myself than pay someone else to lose it for me”).  They want that control irrespective of the balance of the fund.  That desire for control is as valid a reason for having an SMSF as any other.

Unfortunately, it is ASIC’s pronouncements about minimum balances that may not be in the client’s best interests.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.