The Ugly Truth of Super Reform
The current era of unprecedented SMSF technological change has overwhelmed many SMSF advisers. And as we’re constantly being told to adapt or get left behind, how does that translate into everyday practice?
The ugly truth is that Super Reform will force SMSF advisers who are still sitting on the technology fence into action.
The impact of event-based SMSF reporting (EBR) requirements means that the new record-keeping requirements for an SMSF trustee are staggering.
Only a ‘brave’ SMSF adviser would continue to use an excel spreadsheet or general accounting software and manually keep track of member balances such as their transfer balance cap (TBC), total superannuation balance (TSB) and carry-forward balance of unused concessional contributions.
Add in the delay of obtaining member transactions after year-end and the scene is set for the ATO to apply penalties to SMSF trustees not complying with EBR.
Excess TBC Determinations
Where an SMSF adviser isn’t actively monitoring their client’s TBC position, it will be easier for them to inadvertently exceed the TBC and face an unexpected and increased tax liability.
Also, when an SMSF adviser continues to use manual systems, they won’t know their client’s TSB until some 10 to 11 months after the end of the financial year. This impacts their ability to advise clients as to whether they can make non-concessional contributions without exceeding their cap.
The ATO will only know if someone has exceeded their TBC once the relevant account information is reported to them.
To date, the ATO has already issued about 20 excess TBC determinations. Remember, too, that calculating the excess tax is from the time of the decision or the event, not the reportable date to the ATO.
And bigger delays will mean bigger fines.
There’s no doubt that one of the ATO’s intentions in setting up EBR has been to stamp out the industry practice of manipulating and backdating SMSF records to get a better outcome for clients.
One of the most common situations is where an SMSF trustee short-pays a member’s minimum pension (by more than one-twelfth). The result was a member’s pension for that year effectively ceased along with the fund’s ability to claim exempt pension current income (ECPI).
The pre-Super Reform solution would have been to commute the pension after the event ensuring that the pro-rata minimum was paid, allowing the fund to continue claiming ECPI during the year.
With EBR now in place, commutations are reportable within 28 business days after the end of the month in which the commutation occurs.
Where a member has been issued with an excess transfer balance (ETB) determination, they must report voluntary commutations within 10 business days after the end of the month in which the commutation occurs.
Technology Challenge
The flow-on effect of EBR, aside from eliminating documentation manipulation, will be primarily felt by SMSF advisers who can’t (or won’t) move away from their old systems.
The potential outcome will be widespread and unparalleled consolidation within the SMSF industry.
Once an SMSF trustee receives an ATO penalty, they will quickly learn their technological challenged SMSF adviser may be the weakest link and vote with their feet accordingly.
They will seek out practitioners who use automated platforms with data feeds that allow them to report EBR on a timely basis.
With roughly 50% of all funds in pension mode, it would be difficult for any business to survive if half their revenue stream walked out the door, possibly taking other fees with them.
Factor in that 50.5% of the 13,430 accountants working in the SMSF industry lodged ten annual returns or less in 2016, and it’s clear that a revolution is on the way.
SMSF auditors will also be in the firing line as those still using a green pen will have to re-evaluate their work processes to continue flourishing in their chosen field.
Ultimately, the Darwinian theory of evolution wins even in business: those who can adapt, compete and survive will prosper.
On the other hand, some practitioners won’t want to take the technology challenge on their own and will either outsource to an SMSF administrator or seek out a merger/takeover with a larger, established SMSF firm with the technological know-how.
Finally, some will find it all too much and try to sell their fees. Unfortunately, this realisation may come too late, and they could find themselves selling in a buyer’s market at rock bottom prices.
It’s not a bed of roses for the winners either.
An entirely new set of technological challenges and risks arise that will result in continuing and relentless investment and development to remain relevant and profitable.
Regulatory Compliance Challenge
One of the biggest challenges will be ensuring that professional standards and regulatory compliance continue to be met by all SMSF practitioners.
The quality of the software and the algorithms underpinning the programs in the technology will be of paramount importance.
It is up to the SMSF adviser to undertake their due diligence and ensure that the automated platform is in line with professional standards and SMSF compliance without accepting it at face value.
Technology should be an enabler, not a replacement, for the important role played by SMSF accountants, administrators, and auditors.
Ensuring a high-quality, compliant SMSF service using an automated platform will require SMSF advisers to develop a new skill set to use advanced tools such as data analytics, robotic process automation, and cognitive intelligence to manage processes, support planning and inform their decision-making.
The one constant is that while the SMSF industry continues to revolve around technological development, users will have to continue to adapt or get left behind.
That’s the ugly truth of Super Reform.
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