SMSF and Liquidity Risks

Important Video Interview about new liabilities for SMSF Trustees

An interview with David Glenn Special Legal Counsel TAL Insurance and Drew Browne Senior Advisor at Sapience about the new and important issue facing Self Managed Super Fund (SMSF) Trustees

Important update for SMSF Trustees

In August 2012, the Australian Government made an amendment to the SIS Act in Regulation 4.09. ASIC has made it very clear that compliance with Reg 4.09 is a non—negotiable requirement for SMSF Trustees.

Read in this article

SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS 1994 - REG 4.09

(2)  The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:

(a)  the risk involved in making, holding and realising, and the likely return from, the entity's investments, having regard to its objectives and expected cash flow requirements;

(b)  the composition of the entity's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;

(c)  the liquidity of the entity's investments, having regard to its expected cash flow requirements;SMSF and Liquidity Risks

(d)  the ability of the entity to discharge its existing and prospective liabilities;

(e)  whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

SMSF legislation regularly changes so contact us to see if we can help you get certainty about your situation.

• See Legislation Online
• See the transcript below

Video Transcript

Drew Browne: In June 2013, the Australian Tax Office estimated that the total balances for all self-managed superannuation funds in Australia is now $495.2 billion dollars. It's clear to say now that self-managed superannuation funds are now not only the 'flavour of the month', they are the force to be reckoned with; as they now control so much of Australia's wealth. Today I'm here, with my colleague David Glen, special tax counsel for TAL, and we're talking about regulation 4.09, and how it relates to the trustee of the self-managed superannuation fund.

Drew Browne: David, thanks for talking today.
David Glenn: It's my pleasure, Drew.

Drew Browne: When did regulation 4.09 become amended, and what does it do now?

David Glenn: Well, regulation 4.09 came into effect in August 2012; and it requires trustees to consider the life insurance needs of their members. Many people don't consider getting life insurance in their self-managed fund, and often, they forget, when they transfer from a retail fund, that they need to transfer insurance as well.

Drew Browne: Why is that important?
David Glenn: Well, the risks change, and they use the benefit of the insurance cover they had in the retail funds. And it's interesting, that according to government statistics, only 13 percent of SMSF members have any form of life insurance cover within their SMSF.

The way the government has structured 4.09, and this amendment to 4.09, is a very interesting one. Firstly, this requirement to consider life insurance needs is an operational standard. A trustee who recklessly or negligently breaches an operating standard is up for a penalty of $17,000. Potentially. And not only that, this requirement of 4.09 is also a covenant.

Drew Browne: David, can I just interrupt you there, because you said the word 'covenant'; now that's an unusual word, but it has very significant legal ramifications. How does a covenant work with SMSFs?

David Glenn: Well, Drew, a covenant is an undertaking that the Trustee makes to the members of the fund. All right. And, if the Trustee is in breach of that covenant, then the members have a right of action against the trustee.

Now, in this situation, this is a covenant, and therefore, if the trustee fails to consider the life insurance needs of the members, those members can bring an action against the trustee for any loss they suffer as the result of the trustee's failure to consider the life insurance needs.

Drew Browne: So, David, if we're looking at the responsibilities of the self-managed fund trustee, you've got penalties imposed: is that just a penalty where money is taken from the super fund to pay the penalty; or is it something more personal?

David Glenn: Yes, it is something more personal. Because the trustee has to meet that liability from his or her own assets, rather than the assets of the SMSF.

Drew Browne: David, that's a significant change to the environment, and, I think, self-managed superannuation fund trustees need to be very aware of that.

David Glenn: Regulation 4.09 changes the environment, and imposes a personal obligation on the trustee. It's not something you can ignore. And trustees who ignore this new requirement under regulation 4.09, ignore it at their peril.

And, unfortunately, there is a myth going around in the marketplace, that you can simply address insurance needs by a one-line item in the investment strategy, saying that you've considered those needs.

My view, is that the regulation requires much more onerous due diligence by the trustee, in ascertaining the life insurance needs of members.

Drew Browne: David, but let's take the point one further: I've got a document from the regulator from ASIG dated April 23rd where ASIG states: 'The regulators' investigation has found that only a small number of investors have received an insurance recommendation before they established the fund. The regulator then went on to say; 'providing general or educational information in an advice document, is not a substitute, for providing appropriate financial advice.'

So, Dave, the next question is, when should a trustee of a SMSF start engaging, and actually thinking about what are the insurance needs of their members? Can they do it after the fund is established, when they have the first meeting? What's your recommendation?

David Glenn: Well, Drew, my view, is that the trustees should consider the life insurance needs of the members as soon as possible after the establishment of the fund, and this obligation is an ongoing obligation. This is not 'set and forget' stuff, every year, for example, the trustees should be re-examining the question of the life insurance needs of members.

Drew Browne: And David, why would they annually have to go back and re-asses those needs? Why is it not a set and forget option as so many people today, like to think it is?

David Glenn: I don't think it's a set and forget duty, simply because the obligation to consider life insurance is an ongoing obligation, and therefore needs to be considered on an ongoing basis. That means, regularly, regular reviews are required.

Drew Browne: Let's talk about the processes involved. If someone who is a trustee of a self-managed superannuation fund wants to 'do it themselves', what should they do to actually start complying with regulation 4.09?

David Glenn: Unless you, as a trustee, know the circumstances of your members, you cannot form a view as to what the life insurance needs are. So, therefore, the trustee needs to ascertain the circumstances of the members, and provide some sort of documentary evidence that shows the trustee has considered these circumstances.

Drew Browne: And, David, for people who want a professional solution, where an adviser would come, and actually do that investigation themselves, prepare the documents, and prepare the summaries; what would your suggestion be?

David Glenn: Drew, my suggestion, is that the trustee should engage a competent professional, a Life Insurance Adviser, in order to assist them in discharging this obligation under regulation 4.09.

Drew Browne: David, in relation to helping a trustee discharge their obligations, many of them use accountants, and of course, everyone has to have an auditor at some point. Are accountants caught in regulation 4.09? Are auditors caught by regulation 4.09? What level of advice or awareness does a trustee have to be moved towards?

David Glenn: Well, Drew, let's consider the auditor first: the auditor is required to ensure that the fund complies with all the SIS requirements; including regulation 4.09, and the obligation of the trustees to consider life insurance needs.

Therefore, the auditor should be considering whether or not the trustee has discharged its duty under this particular sub-regulation of 4.09.So, that's the auditor.

Now, the accountant is the broader professional adviser, providing support generally to the SMSF client, SMSF trustee. Now, those clients, I think, will be relying on the accountant, to guide them through all SIS regulations, including regulation 4.09, and the obligation to consider life insurance needs. This means that the accountant is very much going to be relied upon, to assist the trustee in complying with this sub-regulation of 4.09. Obviously, compliance is very important. But there is something more important, and that is the reality of that we are here dealing with the lives of the members, of the SMSF.

And these will change over time, and so should their insurance protection options be. This is the only way we could help people meet and off-load the risks that they meet in their day-to-day lives, of course, of death, of profound sickness, of losing their income for a period of time. Regulation 4.09 has changed the scenery: there's now a personal obligation and liability, on the trustee.

Drew Browne: David, thank you for your time today, in bringing some light on regulation 4.09, and the new personal liability for the trustee of an SMSF.

David Glenn: Only a pleasure, Drew, and we should see this as an opportunity to add value to our clients, so that we can help him manage some very important risks, they assume in their day-to-day existence.

 ---end transcript---

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.