Note that the alternative to using any of these below is to use your local accountant. The difference will likely be in price, the personalised service of your accountant, advisory services they may be able to offer, and any other services that they may package up with your SMSF work.

Click here for a complete breakdown of various service providers.

In addition to addressing auditor contravention reports and issues found in the SMSF annual return, Bambrick also outlined the ATO’s SMSF hit list for the 2014/2015 financial year:

• Oversees Seminars
• Illegal Early Release
• Exempt Current Pension Income
• Timely Lodgement of SMSF Annual Returns
• Dividend Washing
• Dividend Stripping
• Home Loan Unit Trusts & Residential Property

For the full story, click here.

From July the ATO will be able to levy individual fines of up to A$10,200 on fund trustees who breach superannuation law, a step up from the previous environment where breaches could only result in making a fund “non-compliant”, or a referral to a court for penalties.

But many superannuation industry representatives want more regulation of self-managed super funds, with calls to the current financial system inquiry ranging from regulating the funds as a financial product, to forcing fund trustees to use a financial planner when the fund borrows money to invest in property.

The current benefits of SMSFs

SMSFs are perceived as giving tax advantages to their members, but they are taxed at the same (concessional) rates as other superannuation funds, and must comply with similar regulatory requirements: the main technical differences are in the administration of the fund, and the control that the member/trustees of an SMSF have in devising an investment strategy. The tax advantages that members of SMSFs do obtain are largely through the characteristics of the structure and the profile of SMSF members.

However there are some regulations that apply specifically to SMSFs; and others that in practice are more relevant to SMSFs than other types of superannuation funds.

A SMSF is a superannuation fund that has fewer than five members, and these members are also the trustees of the fund. This gives the member/trustees the flexibility to devise and control an investment strategy that meets the needs of its members, as required.

One of the key reasons that many members of SMSFs give for choosing an SMSF as an investment vehicle is the level of control it gives them over their investments. However this places a high level of obligation on the trustees, and also exposes the members of the SMSF to risk which the trustees must manage.

SMSFs are not eligible for financial assistance where the fund has suffered loss due to fraud or theft, and do not have access to the Superannuation Complaints Tribunal to resolve disputes.

Funds must already pass the sole purpose test

All superannuation funds are required to meet the sole purpose test, which requires that the purpose of a superannuation fund must be to provide benefits to members in retirement and, in the event of their death, their dependants. The regulatory framework for all superannuation funds is designed to support this core purpose, but SMSFs are particularly impacted: for example the law prohibits a fund from intentionally acquiring an asset from a related party, or loans or other financial assistance to the members of a fund.

But there is room for bias…

There are long-standing exclusions from the non arms-length rules that allow a SMSF to pay market value to purchase business real property from or lease it to a related party. This allows a person establishing a SMSF to transfer business premises to their superannuation fund and lease the property back from the superannuation fund, a strategy frequently used by business owners to provide an income stream to the fund.

One of the issues around SMSFs is ensuring that the trustee/members properly recognise the separation of superannuation assets from assets that are personally owned and controlled, and the regulations are designed to preserve that separation of assets. For example, from 2011 investments by SMSFs in certain collectibles, including artwork, wine, antiques or memorabilia were subject to regulations regarding these investments that regulate the use of certain collectible assets by members so that they cannot be used by or stored in a member’s residence.

The other exclusion that has gained much coverage during the recent property boom is the rule which overrides the prohibition on borrowing. In principle the trustees of a superannuation fund are not permitted to place members’ retirement funds at risk, thus the power to borrow is restricted. This restriction was eased in 2010 to allow borrowing by any regulated superannuation fund where the borrowing is linked to a specific asset. The provision is particularly relevant to SMSFs due to the structures used to comply with the requirements and the relative scale of the funds held by SMSFs.

This is where the flexibility and investment strategies of SMSFs become relevant. If the members have a bias toward investing in real property, then they may devise an investment strategy incorporating borrowings; whereas other investments with lower capital requirements, such as property trusts, could be funded without borrowing.

However the biggest tax advantage that SMSF members obtain flows from the profile of the SMSF investor. Members of SMSFs typically have higher income levels than members of other superannuation funds across all age groups, and their account balances are correspondingly higher. Further, the nature of the fund makes it attractive to investors who take an active interest in their superannuation strategies, despite the risks.

In the meantime the rapid growth in the sector, combined with the level of control that trustees have over the assets of the fund, raises the risk that trustees will make poor decisions: either through not being sufficiently informed in respect of an investment or through pushing the boundaries of the SMSF structure.

There seems to be something inconsistent in a system that mandates savings but then allows those savings to be put at risk through insufficient regulation. It is time for the sector to be examined more closely.

This article was originally published on The Conversation.

These are the sorts of questions that the Funding Australia’s Future project launched by the Australian Centre for Financial Studies seeks to answer. Of course, forecasting the future is hazardous. While some might call it a mug’s game, if you’re wrong at least that won’t be found out for some time.

But there are some clues to what might happen, which can be found by examining recent trends and asking whether they are likely to continue. And while the recent history of the financial sector has been tumultuous — more so overseas than here — there are several fundamental changes that will help shape the future evolution of the sector.

A major one, on which I will focus here, is the growing importance of the superannuation sector and the potential changes that may bring or necessitate. Compulsory super (and other tax incentives) mean that household savings are being channelled away from banks and into super. That is a long-run trend affecting the composition of household asset portfolios, but one which is somewhat hidden in the short run because of the role of bank deposits as money. (For example, if part of my wages is paid into a super fund the super fund holds those funds temporarily in a bank deposit rather than them being in my bank deposit account). And the nervousness induced by the global financial crisis (GFC) certainly caused short-run disruptions to longer run trends – and diverted our attention from those trends.

The long-run growth of super relative to bank deposits has several significant implications. We tend to think of banks as facilitating wealth creation and creating new financial assets by making loans and assisting businesses to raise funds through issue of debt and equity securities. Super funds, on the other hand, have tended to be investors in existing financial assets.

But if banks are getting are fewer funds by way of deposits, how will they create the financial assets needed for super funds to invest their growing pool of savings in? What adjustments to the roles of banks and super funds and what new financing techniques might we see?

One possibility might be for banks to reverse the post-GFC trend and raise more funds from wholesale financial markets, including overseas. However, both regulatory developments (the Basel 3 capital and liquidity requirements) and greater recognition of the risks in such strategies are likely to inhibit such a development, suggesting a decline in traditional intermediation (banks taking deposits and making loans) relative to other financing techniques.

Another possibility is for banks to raise the funds needed for making loans from super funds, either via offering new deposit-type products or other investment options, such as debt and hybrid securities or covered bonds). This will happen, particularly in dealing with the rapidly growing self-managed super funds sector. But recent regulatory developments regarding bank liquidity requirements (albeit still subject to change) militate against banks relying on deposits from institutional super funds because they are seen as a less stable source of funding.

However, such “traditional” intermediation seems likely to decline in importance relative to capital market alternatives for facilitating financing – partly because of the impact of regulatory changes, but also because advances in technology and information are likely to reduce past advantages of the intermediation approach. So, we should expect to see some of the following. Banks will take on a larger “investment banking” role – taking business customers to the capital market to raise funds via equity or bond issues. Banks will also originate loans, but on-sell them as capital market instruments (such as what occurs in securitisation) to investors.

And a more fundamental change is possible. Superannuation funds could move more into the business of creating new financial assets for their own investments by, for example, making loans. That could be done either by developing in house expertise, or partnering with other specialists. Indeed, it could be asked whether super funds might not become home mortgage lenders.

Except in the case of small business relationship lending to customers it is not clear what absolute advantages banks retain in this activity over other potential providers of such loans, given developments in technology and information.

Possibly the greatest development that is yet to play out is prompted by the fact that super savings represent a very large and growing pool of illiquid savings. Traditionally, one of the economic functions of banks has been seen to be the provision of liquid deposits for savings, which are then used to make illiquid loans. But now we have the large supply of illiquid super savings which, paradoxically, is invested primarily in liquid investments. While there are reasons for super funds to need some liquidity, this anomaly warrants attention and presents opportunities.

That is particularly so, given that one of the major perceived areas of inadequate economic investment is in infrastructure – long run illiquid assets with return characteristics arguably suitable for super fund portfolios. Identifying ways of facilitating funding of such illiquid investments via illiquid savings in super funds, and capturing the “illiquidity premium” on such investments for superannuants, without reducing expected super fund returns or increasing risk, is one of the challenges to be taken up in the next stage of the Funding Australia’s Future project.

Author:  Kevin Davis, Research Director at Australian Centre for Financial Studies

Disclosure statement: Kevin Davis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation is funded by Gordon and Betty Moore Foundation, Howard Hughes Medical Institute, Robert Wood Johnson Foundation, Alfred P Sloan Foundation and William and Flora Hewlett Foundation. Our global publishing platform is funded by Commonwealth Bank of Australia.