In the previous edition of smstrusteenews, the lead story informed readers about the superannuation-related legislation that was recently passed. Since receiving royal assent, the majority of attention was given to the headline aspects of the Treasury Laws Amendment (Your Future, Your Super) Bill 2021 involving the mandatory performance review of MySuper products and the ability for individuals to ‘staple’ one superannuation fund to themselves for the entirety of their working life.
The discussions about the aforementioned aspects of the bill have centred on what they mean for public offer super funds and this may have led participants in the SMSF sector to think the new laws didn’t really have any implications for them.
This thought is understandable, but incorrect. One aspect of the Your Future, Your Super legislation that has not generated much dialogue is the duty it has now imposed upon super fund trustees to act in the best financial interest of fund members, and I can confirm SMSF trustees are definitely bound by this obligation.
Now you might think logically this would go without saying in an SMSF, seeing more often than not the trustees of the fund are also the members. As such, how could it be possible the trustees wouldn’t act in their own best financial interests?
The ATO certainly agrees with this sentiment, coming out this week to say this should not translate into a huge imposition for SMSFs.
But the problem is I don’t think most people have taken a close enough look at how the definition of ‘best financial interest’ will be applied and the time frame that could be involved.
As an example, let’s take an investment in Google in the mid-1990s when the worldwide web was born. Back then Google was but one search engine available to internet users and was interspersed among other providers that didn’t become a household name, such as Alta Vista and Ask Jeeves.
If an SMSF trustee had bought shares in Google back then, it would have been a speculative bet at best. And let’s not forget it took a while for founders Larry Page and Sergey Brin’s brainchild to establish its dominance.
However, if we apply the Your Future, Your Super obligation to the trustees who hypothetically bought Google shares back then, we must ask at what point in time could this investment be considered in the best financial interest of SMSF members. After one year? After five years? Or would it be after 20-plus years when the company has evolved into the behemoth it is now?
More importantly, it is too early to know how auditors will measure this duty. They too will be cognisant of having to police this obligation during the annual fund audit. So how patient will they be in allowing a speculative stock to come good?
We know many SMSF trustees employ a core/satellite approach to constructing the share component of the fund investment portfolio. What implications will this new legislated duty have on satellite stocks, which can be speculative in nature?
The illustration I used involves shares, but it could just as well apply to a speculative property investment in a suburb the SMSF trustees are confident will experience gentrification that will in turn drive its value up significantly.
It is too early to know the answers to all of the relevant questions I have posed here, but it is definitely an area you as trustees need to keep a close eye on.''