The Cooper review: Where SMSFs stand, and other highlights

7 July 2010 –  The just-released Cooper review of superannuation has given the self managed superannuation fund sector an overall tick of approval. Of SMSFs, the Cooper review said: 'The SMSF sector is largely successful and well-functioning. Significant changes are not required, but measures relating to service providers, auditors and the regulatory framework are recommended.'

The review makes no recommendations about business real estate held in SMSFs – even if rented to the members' own businesses – which will be welcomed by many small business owners. In fact, business real estate is expressly excluded from being classified as an 'in-house' asset of a SMSF.

A common strategy for small business owners is to hold their business premises in their SMSF, with their businesses paying the fund a commercial rent. In turn, the rental income is concessionally taxed within the funds. This practice is acceptable under present legislation.

Other specific proposals for SMSFs include a re-visiting of the measures that relaxed borrowing provisions in 2007. The review holds that the government must re-examine these provisions in two years' time to ensure that borrowing will not become, and will not look like becoming, a significant focus of SMSFs.

It is also recommended that legislation be amended to prohibit the acquisition of 'collectables' and personal use ,or 'in-house', assets by funds, and that SMSFs that already own such assets be given five years in which to either dispose of these or convert to an APRA-regulated fund (with no buying up of such assets permitted over that five year transition).

The wider super market

The Cooper review has recommended a basic superannuation product be made available. Dubbed 'MySuper', the proposed super fund is a simple, low-fee, unbundled, diversified investment product that, if it meets a range of requirements, would be permitted to be classified as the default super fund available to emplyees. As proposed, no other products would be permitted to be used as default funds.

The review also proposes greater transparency and comparability of funds, and suggests another initiative already flagged, 'SuperStream', which would reduce back-office costs. Superannuation Minister Chris Bowen, commenting on this piece of the Cooper proposals, said: 'If you walk into the back office of a superannuation fund in Australia it's like walking into 1982 - cheques flying everywhere [and] paper-based systems.'

SuperStream would use greater reliance on tax file numbers, greater use of online communication and e-commerce, greater consistency of information-gathering processes and reduction in required 'paperwork' to significantly cut administrative costs.

The review argues the combined impact of the proposals would be to reduce system costs, cutting fees by 40% for an average member and lifting their final super balance by around $40,000 over the life of the fund.

The Investment and Financial Services Association, which represents the financial planning industry and wealth management companies, including the major banks, rejects these calculations and said it would campaign against the changes. The group's chief executive, John Brogden, said of the MySuper proposal: 'It dumbs it (super) down and it basically entrenches people's disinterest in their superannuation.'

Cooper's review said that if members wanted to pursue the choice of other investment options, they should be encouraged to, but one of the review's central tenets is that people are disengaged from superannuation. 'Members should not have to be interested, financially literate, or investment experts to get the most out of their super,' the review said.

'If members want to engage and make choices, then the system ought to encourage and facilitate them doing so. If members are not interested, then the system should still work to provide optimal outcomes for them.'

To access Taxpayers Australia's news archive, click here