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Newspaper reports indicate that the Federal Government is planning to restrict the ability of independent contractors to own and control their own self-managed super funds (SMSFs). Click here for The Age article.
Background
The SMSF system has been designed over the last decade specifically for the self- employed. Independent contractors (self-employed) are not covered by the Superannuation Guarantee arrangements and can make provisions for their super retirement through SMSFs.
An SMSF must have fewer than five members and each individual trustee of the fund is a fund member. That is, independent contractors both own and operate their super funds. The rules covering fund operations are administered by the Australian Taxation Office. In the last federal budget, considerable changes were made to tax rules giving independent contractors much fairer and more equitable treatment on superannuation arrangements which brought them closer to the treatment received by employees.
But it appears that the big industry and retail super funds want to get their hands on independent contractors' super money. Independent contractors put more than $14 billion a year into their own self-managed super funds. Total assets in SMSFs' are around $300 billion---about a quarter of the total money in Australian super funds.
The battle over who controls super funds started when superannuation was first introduced under the Keating Government. The initial rules heavily favoured union-run industry super funds. The ability for independent contractors to control their own super funds was developed over the last ten years and is a great benefit to them.
And it's not the rich who are the big beneficiaries of running their own super funds. 39 per cent of SMSF members earn less than $40,000 a year and 33 per cent earn between $40,000 and $80,000 a year. It's the average independent contractor who makes the most of SMSFs. In addition, an ATO survey found that more than 70 per cent of these people understood that their fund was for retirement purposes and that 85 per cent had clear investment strategies.
The current proposals
Newspaper reports suggest that the Federal Government is considering restricting the ability of independent contractors to control their own super funds. The suggestion is that they won't be allowed to have their own fund if they don't have at least $200,000 in the fund. Further they will have the same reporting obligations as the giant union and retail funds. This would impose a massive new range of complicated red tape on independent contractors.
It's estimated that the proposals would force about one-third of all independent contractors to close their super funds and put their money with union industry and retail funds where they could not directly control their own money. This would significantly disadvantage independent contractors.
Federal Government's position
ICA contacted the Government seeking clarification on these issues. We received helpful information promptly.
Click here for the relevant speech by the Minister for Superannuation and Corporate Law, the Hon. Nick Sherry which explains most of the government's review process.
Issues highlighted in the speech include concerns that the government has that some SMSFs:
- Could be targeted by promoters of scam investment schemes;
- Need to be aware of their legal obligations;
- May have excessively high administration costs.
ICA Comment: The right to be financially independent
Independent contractors have a right to control their own retirement funds if they wish and to decide how those funds are invested. This is particularly important given the global financial crisis. Evidence is repeatedly accumulating about the unethical practices of many in the funds management business. The bulk of funds managers would generally be considered ethical, but independent contractors should not be forced to place their money with fund managers---even if this is done under the sham excuse of protecting independent contractors. Financial independence is the key to being independent. And red tape should not neuter this independence.
- It is appropriate to educate owners of SMSFs about their current legal obligations, but ATO evidence is that the bulk of SMSFs are already complying. Additional education to increase the level of compliance would be appropriate.
- It is also important that people are offered protection from scam financial schemes---here as elsewhere. Ensuring clear transparency of proposed financial schemes is critical to this goal. But the biggest con would be to pretend that protection from scams can be delivered by forcing SMSFs to close down and shift their money to large retail or industry super funds. Experience and history teaches that large financial institutions are just as exposed to scams and collapse as small investors are. The only difference is that the scams are bigger! The recent sub-prime crisis has again taught us this lesson.
- That some SMSFs appear to have higher administration costs does not justify closing them down. As long as transparency is present, costs are a matter for each individual SMSF to deal with. And remember, SMSFs' are controlled by the same people who are the beneficiaries---ie, they have a vested interest in keeping costs down.
It is good that the government is reviewing SMSFs with a view to improvement. But, there are strong grounds for suspecting that industry super funds have substantial behind-the-scenes political clout in the ALP and would dearly love to monopolize the money of SMSFs. The detail of any proposed government changes will need to be considered with great care in this regard.
ICA Comment: ALP election commitments
In the 2007 election campaign, the ALP made strong commitments to the continuation of the legal rights of independent contractors to retain their independence. ICA is not aware of any ALP election position that discussed the capacity of independent contractors to control their own super funds. However, this independence should not be whittled away or destroyed via backdoor arrangements. To do this would significantly damage small business/independent contractors' independence.
Self-Managed Super Funds: Links to key information
If you run, or are thinking of starting, your own SMSF, click here for some useful links that provide good, basic information. [Members only]
For a series of more particular rules for running your SMSF (sourced from the ATO), click here [Members only]
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