ASIC’s role in regulating SMSFs

In regulating SMSFs, ASIC considers contraventions of the Corporations Act, the SIS Act and the ASIC Act, and is responsible for regulating the following harms:

• dishonest conduct and fraud (see section 1041G of the Corporations Act)
• misleading and deceptive conduct (see sections 769C, 1041E, 1041F and 1041H of the Corporations Act and sections 12DA–12DC, 12DF–12DG and 12BB of the ASIC Act)
• unlicensed advice (see section 911A of the Corporations Act)
• contraventions of the relevant conduct and disclosure obligations, including the best interests duty and related obligations (see sections 961B, 961G–961H and 961J of the Corporations Act)
• contraventions of the Code of Ethics, and
• contraventions relating to SMSF auditors (see sections 128D–128H and 130F of the SIS Act).

For more information, see How ASIC regulates financial advice and ASIC’s role in super on the ASIC website.

What types of professional advice are appropriate?

Clients who are considering whether an SMSF is suitable for them may benefit from advice from various professionals.

A financial adviser can assist clients with making an informed decision on whether an SMSF is the right retirement savings vehicle for them. When providing SMSF advice, you must assess whether an SMSF is the right retirement savings vehicle for your client based on their circumstances before your client transfers their retirement savings from an APRA-regulated superannuation fund (APRA-regulated fund) to an SMSF.

Providing personal advice to clients about SMSFs requires specialist knowledge, so before providing SMSF advice it’s important that you have and maintain SMSF knowledge and expertise.

Other professional advice (including from an SMSF auditor, accountant or legal professional) may also help clients meet their SMSF trustee responsibilities. However, these professionals may be limited in their ability to provide financial product advice to clients about SMSFs.

Is an SMSF suitable for your client?

Examples of factors to consider when determining the suitability of an SMSF for your client may include:

• whether your client understands and accepts that although they may outsource their SMSF responsibilities to professional advisers, your client (as the SMSF trustee) is responsible for ensuring compliance with superannuation, corporations and taxation laws
• whether your client has the time, skills, general interest, and experience to meet their trustee responsibilities
• any relevant vulnerabilities your client may be experiencing (e.g. cognitive impairment, accessibility constraints or coercion/elder abuse)
• the cost-effectiveness of an SMSF considering your client’s existing arrangements and relevant circumstances (see How much will an SMSF cost your client?)
• whether your client has any future plans to move overseas as this decision may have an impact on the fund and its ability to meet the residency rules, and
• other arrangements that may still provide some of the benefits of an SMSF, such as ‘a member directed investment facility’ within an APRA-regulated fund.

For more information on setting up an SMSF, see Setting up on the Australian Taxation Office (ATO) website.

For more detailed guidance, see also RG 175 at RG 175.107 (on the basis for your advice) and RG 175.222, RG 175.247 and RG 175.320(c) (on providing complex advice and strategies).

What happens in the event of theft or fraud?

You must ensure that your client understands and accepts that in the event of theft or fraud, access to compensation will be different for an SMSF compared to an APRA-regulated fund.

Clients should understand that an SMSF does not have the same protections as an APRA-regulated fund and is not eligible for government compensation under Part 23 of the SIS Act. In comparison, members of APRA-regulated funds are generally eligible for government compensation under Part 23 in the event of theft or fraud.

SMSF trustees may alternatively have recourse to compensation through the Australian Financial Complaints Authority (AFCA) in the event of theft or fraud. AFCA is the external dispute resolution scheme for financial complaints in Australia.

Who resolves complaints made by SMSF trustees?

While complaints against APRA-regulated funds can be lodged with AFCA, complaints against SMSFs cannot. However, SMSF trustees can lodge complaints with AFCA against third-party financial firms – including AFS licensees and their representatives – that provided them with financial advice or services.

You must ensure your client understands that the complaints process for SMSF trustees is different to the process for members of APRA-regulated funds and that SMSF trustees may be required to resolve their own complaints.

Clients should be aware of situations where disputes may arise, including if:

• the trustee relationship breaks down
• member death benefits must be paid, or
• trustees consider they have received unsuitable professional advice.

You must ensure that your client understands that AFCA cannot resolve disputes between an SMSF’s own trustees: see Factsheet – SMSF complaints on the AFCA website for further information.

What are your client’s legal responsibilities as trustee?

You must consider whether your client understands and accepts that, as the trustee of their SMSF, they are personally responsible for running the fund according to its trust deed and ensuring compliance with superannuation, corporations and taxation laws.

These obligations apply even if they get help from a professional or another trustee of the SMSF. This includes the possible implications if things go wrong.

You must consider and ensure your client understands that:

• your client (as the SMSF trustee) is responsible for ensuring their SMSF complies with superannuation, corporations and taxation laws
• while trustees can use professionals to help run their SMSF, responsibility for SMSF compliance remains with the trustees
• all trustees share responsibility equally
• SMSFs are regulated by the ATO (see Self-managed super funds on the ATO website)
• professionals who provide tax agent services must be on the Tax Practitioners Board register
• companies are regulated by ASIC (see obligations when running a company)
• SMSF auditors must be registered with ASIC as an ‘approved SMSF auditor’ on the SMSF auditor register on ASIC Connect before they can sign off on SMSF audit reports, and
• all financial advisers who provide personal advice on SMSFs must be authorised by an AFS licensee that has the necessary licence authorisation and is registered with ASIC (see Information Sheet 276 FAQs: Registration for relevant providers (INFO 276) and the Financial advisers register on the Moneysmart website).

What are the penalties for trustees if things go wrong?

You must also explain to your clients the potential implications and consequences of non-compliance with superannuation, corporations and taxation laws, including:

• administration penalties
• enforceable undertakings
• disqualification
• civil and criminal penalties, and
• tax consequences.

For more information, see How we deal with non-compliance on the ATO website.

How much will an SMSF cost your client?

You must ensure your client understands the costs of an SMSF throughout its lifecycle. The costs of an SMSF for your client will vary based on your client’s relevant circumstances. Examples of factors to consider are set out in Table 1.

Table 1: Overview of costs for an SMSF

You may also consider and inform clients about SMSF costs using statistical information on SMSFs. The ATO website provides statistical information on SMSFs including data on expenses on its SMSF statistics webpage.

How much money does your client need to set up an SMSF?

The starting balance of an SMSF is one of a range of factors you should consider when recommending an SMSF for your client as this is relevant to the cost-effectiveness of an SMSF.

Statistical data on the ATO’s SMSF statistics webpage shows that fund expenses are proportionally higher, and net returns lower, for lower balance funds. However, there may be circumstances when an SMSF with a lower starting balance is consistent with your client’s best interests.

Examples include if:

• the trustee is willing and able to undertake much of the administration and management of investments to make it more cost-effective, or
• a large contribution will be made into the SMSF within a short timeframe (such as within a few months) after the fund is set up.

There may be circumstances when an SMSF with a higher starting balance is not in your client’s best interests because it does not meet your client’s objectives, financial situation or needs.

What information must be included in an SOA about SMSFs and insurance (if applicable)?

You must set out additional information in an SOA when your advice recommends replacing one product with another. Your SOA must explain the potential benefits that may be lost and any other significant consequences to your client.

For more information and compliance tips about ‘switching advice’, see INFO 182 and RG 175 at RG 175.99–RG 175.100, RG 175.256–RG 175.260 and RG 175.291–RG 175.295.

What trustee structure is suitable for your client?

You should advise your client about whether a corporate or individual trustee structure is suitable for their circumstances, including providing your client with a comparison of the risks and benefits of each structure.

Examples of factors to consider for your client may include:

• cost, including the potential cost of changing the trustee structure later
• compliance with the SMSF trust deed, superannuation, corporations and taxation laws, the company’s constitution and the Corporations Act
• administration and reporting requirements
• trustee succession planning for your client (i.e. ensuring arrangements are in place for trustees and directors who are unable to fulfil these roles in the event of illness or death), and
• SMSF asset ownership considerations.

This is not an exhaustive list when considering suitable trustee structures. Trustee succession planning should be considered alongside your client’s exit strategy (see Does your client have an exit strategy?).

For more information on trustee structures for SMSFs, see Setting up on the ATO website.

Does your client understand their investment strategy?

You must advise your client about the requirement and purpose of the SMSF’s investment strategy. Your client should understand their SMSF investment strategy provides the basis for the SMSF’s investment decisions and how members intend to increase their retirement benefits.

In relation to their SMSF investment strategy, you should also ensure your client understands:

• before they start making investments, they must have an investment strategy
• the investment strategy must be reviewed regularly
• they should consider whether to hold insurance cover (see What about your client’s insurance arrangements?), and
• the investment strategy should be in writing and any changes should be documented.

You can assist your client to develop their investment objectives and an investment strategy for the SMSF. However, you must ensure that your client understands that they are responsible for managing the investments in the best financial interests of its members and in accordance with the law.

When documenting the investment strategy, you should consider and discuss with your client:

• the fund’s investment objectives and types of investments the fund can make
• diversification (different assets and asset classes)
• the risk and likely return from investments
• liquidity of fund assets and ability to meet fund expenses as they arise (including retirement benefits)
• whether their investment strategy is consistent with the trust deed, and
• members’ tolerance for risk (capital loss, longevity risk, market risk and inflation risk).

When considering the investment strategy, it is also an opportunity to ensure your client has a valid death benefit nomination in place, that their death benefit nomination is reviewed regularly, and that they understand the implications of not having a valid death benefit nomination in place.

For more information about an SMSF investment strategy, see Investing on the ATO website.

How will your client’s investment strategy and recommendations be implemented?

Unlike other professional advisers your client may seek advice from, financial advisers are licensed to provide personal advice to your clients about SMSFs and implement their SMSF investment strategy.

You should ensure your clients understand that the fund’s investment strategy should be reviewed regularly to ensure it remains current. It is important that you adequately consider and inform your clients about:

• the benefits associated with diversification (different assets and asset classes)
• the restrictions that apply to SMSF investments
• whether to hold insurance cover (see What about your client’s insurance arrangements?), and
• the transactions that are prohibited, such as lending the fund’s money, or providing financial assistance, to a member of the fund or their relatives.

You should ensure your clients understand the costs associated with implementing your SMSF advice recommendations (including ongoing fees).

When you recommend a limited recourse borrowing arrangement, your client should understand the associated risks and why this arrangement is appropriate for their relevant circumstances and SMSF.

For more information about providing advice on investments: see RG 175 at RG 175.227 and RG 175.241–RG 175.269.

What about your client’s insurance arrangements?

An SMSF trustee will need to consider whether to obtain and hold insurance cover for members and assets. The lack of insurance cover may have significant consequences for a client depending on their relevant circumstances.

You must consider your client’s need for suitable and affordable insurance. In relation to their SMSF, you should consider and discuss with your clients:

• their need for life insurance (including total and permanent disability (TPD) and disability income insurance), and
• assets in the SMSF that may need insurance if applicable.

If your clients have existing insurance cover in their APRA-regulated fund, you must consider and inform them of the costs and benefits of their insurance options, including:

• maintaining insurance cover through their existing APRA-regulated fund (this will require keeping a sufficient balance to ensure that future insurance premiums are funded and the cost of retaining two superannuation arrangements)
• deciding not to hold any insurance, or
• replacing existing insurance with a new insurance policy taken out by the SMSF.

We expect that any factors involved for the client in replacing existing insurance with a new insurance policy will be considered, including any adverse consequences of a new insurance policy, such as exclusions and insurance premium loadings.

For more information about addressing out-of-scope advice needs or other advice needs in relation to other SMSF assets that may need insurance, see INFO 267.

Does your client have an exit strategy?

Trustees may want or need to wind up their SMSF for several reasons. These circumstances may not be relevant at the time of setting up the SMSF but may be relevant to the client in the future.

It is important that you assist your client with having an exit strategy from the outset to reduce the impact of ‘unexpected’ events. You should also consider your client’s trustee structure when developing their exit strategy.

It is helpful for clients to understand possible reasons why they may need to wind up their SMSF. These may include:

• the expected superannuation contribution does not occur (i.e. the client may need to wind up their SMSF because it is not cost-effective)
• the trustee responsibilities become too onerous or costly
• a trustee dies or becomes incapacitated
• trustee disputes arise, including relationship breakdowns or different opinions on investments or running the fund, and
• the fund no longer meets the residency rules because a trustee has moved overseas.

It is important that your client has a valid death benefit nomination in place in the event that a trustee dies. It is also important that your client’s death benefit nomination is reviewed regularly and that your client understands the implications of not having a valid death benefit nomination in place.

Winding up an SMSF requires a number of steps that you must ensure your client understands. It is important that you advise your clients about an exit strategy for their SMSF to make any exit as straightforward as possible.

For more information about winding up an SMSF, see Winding up on the ATO website.